RiskTech Forum

Brazilian Capital Markets: Evolution Demands Automated Compliance Solutions

Posted: 22 February 2013  |  Author: Magnus Almqvist  |  Source: SunGard

The Brazilian capital markets are continuing their exciting evolution into a high-liquidity, low-entry trading and investment space.

To date, Brazil’s BM&FBOVESPA has not shared its in-house clearing services with rivals, preventing the emergence of a competitive exchange landscape similar to what we see in the U.S. and Europe. In addition, buying equities is still a novelty for most individual investors in the country.

With trading largely focused on large-cap companies and executed by institutional traders, the emphasis on active, automated and near real-time market abuse and insider trading detection is just emerging on the Brazilian scene.

The above scenario clearly paints a picture where there is huge room for growth over the coming years, and to follow is an increased focus on market conduct from Brazil’s Commisão de Valores Mobiliários (CVM) and local exchanges. To tap into this growth potential, the CVM is seeking ways to increase the participation of individual investors in the nation’s capital markets.  This will be achieved by making it easier for small and mid-cap companies to enter primary and secondary markets through changes to regulation.

At a board meeting held in November 2012, CVM decided to communicate that it will assess on a case-by-case basis the possibility to grant an exemption (waiver) from the requirements of CVM Instruction No. 400, of December 29, 2003 (CVM Instr. 400/2003), which regulates the public offers for distribution of securities in the primary and secondary markets. This waiver intends to facilitate the access of small and medium-size companies to raise funds through the placement of shares with the investors in the Brazilian securities market.

With these developments inevitably follows the need to more closely govern and monitor market activity. This requirement spans the entire spectrum of investor protection, anti-money laundering, conflict management and staff dealing, as well as active monitoring and surveillance for potential market abuse at different levels in the transaction chain. Indeed, CVM and local exchanges are becoming much more active in their review of trading activities and have a clear message to market participants that improper trading activities will be fined appropriately.

It’s ultimately about risk mitigation. The increase of client trading activity not only brings a larger population of active traders to the markets (which means increased risk of market abuse), but banks and brokers also have a vested interest to ensure trading is conducted fairly and that markets remain transparent. Globally, we see a trend where a solid reputation is increasingly important in order to attract and retain private and retail customer flow.

The good news is that solutions and services providing market surveillance and monitoring are well developed and available as a result from lessons learned in the capital markets of the U.S. and Europe, placing Brazil’s market actors in a coveted position of being able to get things right from the start.