1 Restricted Confidential Confidential Internal Use Public October 2015

8th IOSCO AMCC Training Seminar, Zürich, Switzerland

Recent Trends in Market Surveillance - The Brazilian

Case

2

Evolution and trends of Capital Markets

The capital market has undergone enormous changes:

• Electronic communication networks

• Great number of complex orders

• Growth in trade volumes and cross border settlements

• New products – advanced derivatives products

• New practices – trading strategies

• New market structures (new venues. fragmentation)

• Systematic Internalization (SI)

• Competition/Fragmentation

• Lack of transparency

As a consequence...

“Recent market developments and advances in technology have allowed market participants to engage in a wider array of abusive market conduct that undermines investor confidence and financial stability”

K. Alexander – university of Cambridge”

Surveillance methods need to keep up with these changes

3

Trends and Impacts

• Big Data powering surveillance technology

• Changing trading behavior and patterns

• Dark pools growing to market-threatening proportions (1/3

American Market)

• Growing need for near real-time surveillance

• Increased use of order-level surveillance to counter new trading

strategies

• Emergence of cross-asset class, cross-market surveillance to detect

subtle market abuse

• Cross-communication channel surveillance acting as an extended

arm of market surveillance

• Emergence of cloud computing for capital market participants

4

Challenges to market surveillance – Categories

Structural and organizational issues

• Technological - storage capacity and processing (speed)

• Skills - ability/intelligence (qualified human resources)

• Jurisdiction and Cooperation (cross border trade)

• Increasing costs

Informational issues

• Aggregation of multiple trading platforms data

• Data quality and format issues

• Lack of a uniform entity identifier standard

• Large unstructured data volumes (handling)

5

Peculiarities of the Brazilian Securities Market

• Concentration of liquidity in a single market (equities and derivatives)

• Systematic Internalization - not allowed

• Final beneficiary identification (beneficial owner)

• HFT (16% cash and 17% derivatives)

Problems arising from Impacts/Solution

Structure (fragmentation, dark pools,

data aggregation, consolidated tape)Currently nonexistent

Cross-market and cross-asset trading

Monitoring of all markets managed by

BM&FBOVESPA

(cash/derivatives/OTC)

AT and HFTUpdated systems of oversight and

specialized human resources

Cross-border trading

MMOU signed by the Regulator.

Exchange of information subject to its

approval.

6

Listing (stocks, bonds, funds,

asset-backed securities)

Commodities certification

Trading and Services for issuers and commodities

Trading (stocks, ETFs, derivatives,

corporate and government bonds)

Central counterparty-CCP Clearing and settlement

(for all the products)

Central Securities Depository

(stocks and corporate bonds)

Securities lending (stocks and corporate

bonds)

Clearing and Depository activities

Other services

Custody (for funds and other

market participants)

Market data Index licensing Software licensing

OTC Derivatives Registration and

Collateral Management

BM&FBOVESPA Business Model

A Vertically Integrated Exchange

7

Annex I – Legal Base

8

Brazilian Regulatory Framework

Federal Law 6.385/1976

• Provides that exchanges are auxiliary regulatory entities responsible for surveilling market activities and

market participants

• Defines as crimes against the capital market the market manipulation, the irregular practice of the profession

and the use of insider information

Federal Law 9.613/1998

• Provides for the money laundering crimes or concealment of assets, rights and values

CVM Instruction 461/2007

• Regulates and governs regulated securities markets and makes provisions on the formation, organization,

operation and extinction of exchanges and organized over-the-counter markets

CVM Instruction 8/1979

• Regulatory treatment of market abuse

• Comprehensive categories: conceptualizes generically situations that set up operations or practices

incompatible with the regularity that is intended to ensure the securities market: artificial demand; price

manipulation on the securities market; fraudulent trading; unfair practice

ICVM 301/99

• Provides for the identification, registration, registration, operations, communication, limits and administrative

responsibility mentioned in Law No. 9,613 / 98, related to money laundering crimes or concealment of assets,

rights and values.

9

BSM – A mandatory SRO

Main responsibilities established by CVM Instruction 461/2007

• Oversee and supervise trades performed on the organized markets

• Investigate misconduct in compliance with laws and regulations

• Follow the Exchange and OTC activities

• Establish, prosecute and judge administrative cases

• Enforce penalties (administrative final decision)

Shared supervisory functions

• Listings requirements and real-time surveillance, conducted by BM&FBOVESPA Regulatory Department

10

Annex II – Market Surveillance Strategy and

Statistics

11

Monitoring 100% of offers and orders

Detection of abusive practices

• Market manipulation (interference free price

formation)

• Artificial conditions of demand, supply or price

(operations outside the interference-free

ordinances)

• Insider trading

• Evidence of money laundering

• Fraud

• Unfair practice (client privilege over another)

• Irregular exercise of position, profession,

activity or function

• Abusive practices (layering and spoofing,etc.)

Filters and Alerts

Penalties

Filing

Analysis(Team of experts)

Data BasesData mining and market

supervision solutions

BSM’s Market Surveillance

12

• Market supervision based on statistical

models, which produce indicators

related to illegal practices

Alerts

• Historical security data:

• price, volumes, client profile, profit/losses in day trade,

change of trading profile, concentrated

counterparty

Alerts Analysis

•Requests of information to market participants

•current account

•recordings of orders

•manifestation of the hypotheses

•exchange of information with other departament

Investigation and Decision

• consolidation of evidence

• build the report

• definition of the accused

Report

Market Surveillance – Approach

13

Market Surveillance – Dimensions of analysis

Behavior of security

(price fluctuation, volume variation,

etc.)

Behavior of investors

(investor profile, transactions, results,

etc.)

Material information

(relationship between information,

price and volume)

Unfair practice

Fraudulent trading

(front running, churning etc.)

Irregular exercise of profession

Evidence of money laudering

Misuse of privileged information

(insider trading)

Market manipulation

Artificial conditions

• Result ‒ Customer vs. his past

‒ Customer vs. market

• Changes in the investor profile ‒ Trading volume

‒ Securities

• Registration data

• Security’s volatility linked to a

fact

‒ Security vs. Its past

‒ Security vs. market

• Behavior of the business sector

• News

• Security’s volatility

‒ Security vs. Its past

‒ Security vs. market

• Behavior of the business sector

• News

14

Market Surveillance – Statistics

Market surveillance scope

(*) Cash Market

2012 2013 2014

Number of active investors (thousands) 538.4 560.1 555.3

Offers (hundred thousands) 2.4 * 3.5 4.3

Trades (thousands) 230.3 264.4 284.4

Alerts (market surveillance systems)

25,127 90,782 43,387

Analysis (specialists team) 3,174 1,995 1,485

Request for information 96 168 341

Reports (cases) 100 185 176

15

Market Surveillance – Statistics

Assertiveness degree - analysis

11.677

11,677

4,989

3,174 1,992 1,485

73 123 100 185 176

0.6%

2.5%

3.2%

9.3%

11.9%

0%

2%

4%

6%

8%

10%

12%

-

2.000

4.000

6.000

8.000

10.000

12.000

2010 2011 2012 2013 2014

Nº de análises Indícios de irregularidades(Relatórios)

Grau de assertividade (%)Analysis Evidence of irregularities

(Reports) Degree of assertiveness

12,000

10,000

8,000

6,000

4,000

2,000

-

16

Market Surveillance - Strategy

Detection (market abuse e operational risks)

• Market surveillance

– Updated systems: SAS/SMARTS

– Assertiveness degree

• Examinations

• Whistleblowing

Deterrence

• Preventive and incentive measures

• Enforcement actions

Intelligence

• Joint work with CVM

• International presence

17

Market Surveillance – Statistics

2014 results

100% of orders and trades

4.3 billions of orders 284.4 millions of trades

43,000 alerts

1.495 analysis

341 inquiries to brokers

176

Reports

18

Market Surveillance – Statistics

2012 2013 2014

Issued reports 100 185 176

Filed 61 128 115

Referral to CVM 21 23 30

Enforcement measures 18 34 31

9 3

62

43

91

18

2009 2010 2011 2012 2013 2014

Reports to COAF (AML Intelligence Unit)

19

Marcelo Cavalcanti Rabello Deschamps d’Alvarenga

Telefone: +55 11 2565-4763

E-mail: mdeschamps@bsm-bvmf.com.br

Contact