August 9, 2010 030/2010-DP CIRCULAR LETTER To: The BM&FBOVESPA (BVMF) Market Participants BOVESPA Segment Re: Access to the Electronic Trading System Implementation of Models 2, 3 & 4 and New Connection Structures. The purpose of this Circular Letter is to announce that, following the decision by the Brazilian Securities and Exchange Commission (CVM) to authorize the implementation of new modes of direct market access to the Bovespa segment, BM&FBOVESPA has decided to establish a new structure for access to the electronic trading system and a new structure for connections to the electronic trading system, thereby revoking Circular Letter 118/2005-SG, dated June 27, 2005. As of September 1, 2010, BM&FBOVESPA will authorize a new structure for access to the markets traded via the electronic trading system, comprising the following models: Model 1 Traditional Model 2 via a Provider Model 3 via a Direct Connection Model 4 via a Direct Connection Investor Co-location Traditional (Model 1) is already offered for the Bovespa segment, via the remote access provided by brokers to customers using automated connections. Examples of this model are the home broker solutions adopted by the vast majority of brokers. In addition, BM&FBOVESPA has redefined the structure of the automated connections provided for access to the electronic trading system, in order to standardize and simplify the models for access to the Bovespa segment. The rules, procedures and technical and operating characteristics of the new connection modes and structures are presented below.
030/2010-DP.2. 1. BM&FBOVESPA s Model The model enables customers to access the Exchange s electronic trading environment directly, authorized by a participating brokerage house and under its responsibility. Generally speaking, the model offered by BM&FBOVESPA is defined as follows: An exchange trading model whereby brokers use a specific technological solution to offer one or more customers the possibility of: (i) Viewing the electronic trading system s order book in real time; and (ii) Sending orders to the trading system for electronic registration, after they are submitted by the broker to pre-trading risk controls including the verification of operating limits and other parameters set by the broker and/or the Exchange. This definition allows for models with different characteristics. In all events, the broker remains responsible for granting customer access. 2. Authorization for Use of BM&FBOVESPA s Model 2.1 Authorization for Brokers Authorization to grant customers direct access shall be given only to brokerage houses that sign the Authorization Agreement for Services and file it with BM&FBOVESPA s Participant Registration Center. In addition, brokers must make appropriate adjustments or amendments to their financial intermediation contracts with customers who use the model. 2.2 Authorization for Brokers Customers Direct market access can be offered to any investor. Brokers are free to grant access at their own discretion and assume sole responsibility for doing so. Trading via direct market access occurs only in Sessions and Order Manager Sessions, in accordance with item 14.1 below. In all cases, brokers and customers must comply with the rules and regulations established by the Exchange, the Brazilian Securities and Exchange Commission (CVM), and regulators in the countries of origin of customers who do not reside in Brazil, where applicable.
030/2010-DP.3. 2.3 Market Data Feed Brokers and users of the service will receive as part of this service the Mega Bolsa market data feed, with real-time information on the conditions of the order book. For this purpose they must sign the corresponding Market Data Feed Contract. Brokers who offer the service to their customers must send a monthly report to the Department of Business Development stating the number of terminals used for trading via direct access. This information is subject to auditing by the Exchange. The Exchange reserves the right to change its commercial policy regarding market data feed at any time. 3. Access Models The authorized modes of direct access to the electronic trading system described below are not mutually exclusive. This means that brokers may offer any of the various access modes available, and they and their customers may choose those that best match their needs and interests. All modes entail a logical link between customer and broker. This logical link is a relationship whereby the broker maintains (i) the ability to influence the flow of orders, and (ii) responsibility for orders and for the positions deriving from them. To this end, brokers responsible for customers must be capable of the following, via the functionalities of the system: Authorizing and suspending customer access to the trading system; Setting customer trading limits, which will be verified before orders are accepted; and Monitoring in real time all orders sent and offers registered, with the ability to cancel them at any time, and monitoring the trades executed by customers. 3.1 Model 1 Traditional This model consists of the routing of orders via the broker s technological (physical) infrastructure. In other words, orders sent by the customer are transmitted through the broker s technological infrastructure before they reach the electronic trading system. The Traditional model includes remote access to the Mega Bolsa system via automated connections, currently available on ports/sessions 300, 400 and 500. The first two figures show how it works.
030/2010-DP.4. Figure 1 Traditional CUSTOMER BROKER BM & FBOVESPA Mega Direct Matching engine CUSTOMER Figure 2 Traditional via a Provider BROKER BM & FBOVESPA provider Mega Direct Matching engine Figure 1 illustrates the situation in which a customer connects directly to the technological infrastructure of the broker, which, in turn, connects to the Exchange. Figure 2 illustrates the situation in which a customer connects to a provider (vendor, ISV, etc). The provider is connected to a broker, which connects to the Exchange. This model requires brokers to have their own order management system (OMS) to manage and control customers orders.
030/2010-DP.5. 3.2 Model 2 via a Provider Under this model, orders are routed via the technological infrastructure furnished by an order routing service provider ( provider). The logical link between customer and broker is controlled by the Exchange s and provider s systems: messages sent by customers are not transmitted by the broker s infrastructure but by that of the provider. Model 2 is shown in the next figure. Figure 3 via a Provider BROKER BM&FBOVESPA CUSTOMER Mega Direct Matching engine Provider Provider As illustrated in Figure 3, customers connect to a provider, which connects to the Exchange. The provider s hardware and software may run in the Exchange s data center facilities, as shown in the figure. Brokers can authorize and suspend customer access, set customer trading limits for verification before orders are accepted, and monitor customers orders and trades in real time. All this is performed via functionalities offered by the Exchange s system. 3.3 Model 3 via Direct Connection This model consists of the transmission of orders via a direct connection between the customer and the Exchange without using an intermediary technological infrastructure. As in Model 2, there is a logical link between the customer and the broker responsible for authorizing access, setting trading limits, and monitoring transactions. Model 3 is illustrated in the next figure.
030/2010-DP.6. Figure 4 via Direct Connection BROKER BM & FBOVESPA CUSTOMER Mega Direct Matching engine 3.4 Model 4 via Direct Connection Investor Co-location Under Model 4, buy and sell orders are generated by software running on the customer s server, which is co-located in the Exchange s data center facilities. As in Models 2 and 3, the logical link between customer and broker is maintained. The customer accesses the server remotely for the purposes of monitoring, configuration of parameters, management and maintenance. Detailed rules and characteristics of Model 4 can be found in Circular Letter 028/2009-DP, dated May 18, 2009. The next figure shows how it works. Figure 5 via Direct Connection Investor Co-location BROKER BM & FBOVESPA CUSTOMER Mega Direct Matching engine Remote access for monitoring and maintenance Co-location application 3.5 Configuring the Models Due to technological evolution, models can be structured according to different configurations with regard to: The telecommunications structure utilized for interconnecting customers, brokers, providers, vendors and exchanges; Installation and utilization of order management systems (OMS); and Installation and utilization of automated trading systems (ATS). BM&FBOVESPA will analyze new configurations whenever necessary.
030/2010-DP.7. 4. Responsibilities of Brokers and Clearing Agents The adoption of any model does not change the current responsibilities attributed to brokers and clearing agents by the legislation and regulation in force. Therefore, brokers remain responsible for customer access to the trading system, for all orders sent, directly or indirectly, and for all trades originating from such orders. Broker responsibility for the orders sent by their customers applies regardless of the means used to send them (be it via the customer s own network, via a third-party network, ISV solution, etc). Being responsible for orders sent via, brokers may change or cancel them, and may even block customer access to the trading system completely. The Exchange may also suspend direct access by one or more customers of any broker for prudential reasons. 5. Risk Management by Brokers Brokers must take pre-trading risk management measures to assure adequate control of the risks associated with their customers transactions via the service. To this end, brokers may (i) use MegaLiNe, the operational limit control tool developed and offered by the Exchange; or (ii) use a different tool at their own discretion, provided it complies with the criteria, terms and conditions established by the Exchange. The limit control tool must perform the function of submitting each order sent to the trading system directly by the customer to the limits pre-defined by the broker for the customer concerned. The methodology underlying MegaLiNe is based on quantitative or trading limits, which brokers set for each of their customers. BM&FBOVESPA may also set supplementary limits. Orders are submitted to controls before registration in the order book, and may be rejected if the limits in place are infringed. The tool referred to item (ii) above must enable the broker to set at least the following parameters for each customer: Maximum risk for bids and offers per instrument; Maximum risk for short and long positions per instrument; and Maximum risk for short and long positions per group of instruments.
030/2010-DP.8. The maximum risk settings mentioned may be measured in alternative forms: by the number of securities or contracts, for example, or by financial exposure, financial risk, etc. Operationally speaking, the tool must enable the broker to: Set trading parameters directly using the application installed for this purpose in the broker s system; Monitor the use of trading parameters in real time; and Change trading parameters in real time. In the case of trading via Model 2 ( via a Provider), the pre-trading risk control solution must be supplied to the broker by the provider. For Model 3 ( via a Direct Connection) and Model 4 (Investor Colocation), MegaLiNe must be used. The use of a pre-trading risk control tool by the broker will be subject at all times to auditing by BM&FBOVESPA. Without prejudice of pre-trading risk control and trading limit control, brokers may also develop post-trading risk management models at their own discretion, provided these comply with the requirements of the Operational Qualification Program (PQO). 6. Risk Management by the Equities Clearinghouse for the BOVESPA Segment The adoption of the model does not imply any changes to the procedures, criteria and rules currently in use by the Equities Clearinghouse for the BOVESPA segment. Thus, there will be no differentiation between trades originated from orders sent via or another form of access for the purposes of calculating the participant s portfolio risk, the margin requirements, and controlling operational limits. 7. Other Procedures Relating to Trading and the Registration of Trades 7.1 Direct Market Access Orders transmitted via will be identified as such in order messages by the session code used to access the trading system.
030/2010-DP.9. 7.2 Customer Allocation Trades originating from orders transmitted via must be allocated upon their execution. To this end, such orders must contain a customer or order management account code. The following rules for allocation apply to trades resulting from orders sent via : The allocation system will allocate the trade: (i) To the account identified in the order, provided the account holder is duly registered and authorized by the Exchange; or (ii) To the broker s error account if it is not possible to allocate it to the account identified in the order. Once the trade has been allocated, it may not be reallocated except in the event of an operational error in the transmission of the order, in which case the new allocation may be made solely to the broker s error account. Exceptionally, until the master account structure is implemented by the Equities Clearinghouse for the BOVESPA Segment, trades resulting from orders sent via Order Manager sessions may be reallocated in accordance with a procedure defined by BM&FBOVESPA. Registration of the trade allocation account with the Exchange s systems is the sole responsibility of brokers, who must take all the actions required to effect such allocation in accordance with the procedure defined by BM&FBOVESPA. 8. Technology and Connectivity MegaDirect is the solution for connecting to the electronic trading system for trading purposes. In accordance with Circular Letter 057/2009-DP, dated October 1, 2009, the technological solutions used for connectivity between the electronic trading system and participants platforms must be certified by the Exchange. Such certification applies to the technological solution, not the participant who intends to use it. Therefore, a solution offered by a software company and certified by the Exchange may be used by market participants without requiring additional certificates per participant. Moreover, certification refers exclusively to the connection to the Mega Bolsa system. Thus, certification for the Mega Bolsa system is not waived for solutions certified to connect to other Exchange platforms, and vice-versa.
030/2010-DP.10. The list of certified software solutions is available on the Exchange s website (www.bmfbovespa.com.br), at Services / Trading Platforms / BOVESPA Segment / Certification (menu tab Certified Software Solutions). 9. Contingencies Brokers must use their own trading desks as an alternative in the event of problems that prevent customers from accessing the electronic trading platform via. The contingency structure for trading via direct market access is the sole responsibility of each broker. 10. Message Volume Policy To discipline the activities of market participants and control the volume of orders sent to the trading system, BM&FBOVESPA s policy of charging for excessive volumes also applies to the flow of messages. 11. BM&FBOVESPA Control Center (CCB) The BM&FBOVESPA Control Center (CCB), whose main function is to provide support and monitoring services for electronic trading, will work directly with brokers. It will also provide services to customers who use the system when authorized to do so by their respective brokers and by the Exchange. Its main activities are as follows: Monitoring the flow of trades, providing services to users of the electronic trading system in terms of status checks, and cancelling and tracking orders; Monitoring the technological environment related to electronic trading, which comprises the network, the matching engine, international order routing systems interconnected with the Exchange, processing capacity, message flows, etc; Notifying users of the system whenever exceptional situations or conditions arise; and Suspending direct access for one or more customers for prudential reasons. In addition, the CCB may cancel orders sent by a customer via in response to a direct broker request for such cancellation.
030/2010-DP.11. 12. Specific Characteristics and Procedures of Model 2 via a Provider 12.1 Authorization for Providers Institutions can be authorized to provide services if they have the following: A proprietary network (apart from the internet) with the capacity to connect at least 100 customers. The network must enable customers connected to it to send orders to the Exchange s trading systems and will be subject to auditing by the Exchange; Specifications or APIs for automated connections; An interface for supervising and acting on the flow of orders; A tool for controlling operational limits and pre-trade filters; and Drop copy functionality (for issuing copies of messages to brokers). Any company interested in providing an electronic trading order routing service must send the BM&FBOVESPA Business Development Department a document describing its business model, technology and risk management solutions, and how it authorizes brokers and customers, as well as any other items it deems relevant. Following this step, it must establish a technical and commercial agreement with BM&FBOVESPA and obtain certification for its order routing solution. The Exchange will publish from time to time the list of companies authorized to provide services, as well as any specific conditions applicable to the use of the services provided by each one. 12.2 Authorization for Brokers To offer direct access via a provider, brokers must: Schedule with the Department of Business Development an assessment of the pre-trading risk management tool supplied by the provider and its use by the broker in question; and Notify the Department of Business Development of its intention to start using a provider s order routing system by completing and returning the form (available only in Portuguese at www.bmfbovespa.com.br, Participantes > Documentação Cadastral > Bovespa). Before a broker may begin operating with Model 2, its provider must confirm its link to the broker by sending the Participant
030/2010-DP.12. Registration Center a written notice to this effect. 12.3 Suspension of Order Routing A broker may apply to the Department of Business Development to have the order routing service operated by a provider completely suspended, using the form specified in 12.2 above. The BM&FBOVESPA s Participant Registration Center will have the service suspended only after receiving such written request. 12.4 Supervision and Monitoring of Trading Brokers must supervise and monitor the flow of orders and trades via Model 2, using the technological solution furnished by their providers. 13. Specific Characteristics and Procedures of Model 3 via a Direct Connection Connectivity sessions for trading under Model 3 must be established by brokers for each customer. If the same customer or investor is authorized to trade under this model by different brokers, one session must be established for each broker representing such customer or investor. If a broker suspends its authorization for a customer to trade via Model 3, it must immediately block the customer s access to MegaLine and ask BM&FBOVESPA Control Center to suspend the connectivity session used by that customer. 14. New Connection Structure Implementation of the new models in the BOVESPA segment will entail changes to automated connections, which were originally organized into groups according to the category of investor. The main change in the connection structure is the segregation of orders sent. Access ports will no longer be linked to investor category. Instead, orders will be segregated according to whether they are sent (i) by a broker s trading desk; (ii) directly by an investor, using the system; (iii) by an order manager; or (iv) by order conveyors. In the new structure, automated connections will be known as sessions ( sessions) and will be grouped and classified as follows: Session: Accessed directly and exclusively by the customer, i.e. the investor to whom the trades originating from orders sent during the session are allocated. Current retail connection ports
030/2010-DP.13. 300-309 and 360-399 are now classified as sessions, as are institutional connection ports 500-509 and 559-599. Order Conveyor Session: Accessed exclusively by customers order conveyors. Current retail connection ports 310-359 and institutional connection ports 510-559 are now classified as Order Conveyor sessions. Order Manager Session: Accessed exclusively by order managers. Current connection ports 400-499 are now classified as Order Manager sessions. Trading Desk Sessions: Used exclusively for brokers trading desk staff to send orders, including orders for their own portfolio. This group covers current connection ports 800-899. Order Manager sessions will remain temporarily segregated, so that they can be accessed only by order managers. Once the master account has been implemented in the Bovespa segment, order manager sessions will be integrated into the session group. The following table shows how automated connections will be regrouped into sessions: Current structure New structure Connection Access ports Session Retail 300-309 360-399 Retail 310-359 Order Conveyor Institutional 500-509 560-599 Institutional 510-559 Order Conveyor Order Manager 400-499 Order Manager Trading Desk 800-899 Trading Desk 14.1 Session Use Session identification Numeric identification of new sessions will be determined by the Exchange, according to the type of session identified in the request form (, Order Conveyor, etc). No change will be made to the numeric identification of existing
030/2010-DP.14. (currently used) sessions. No change will be made to the method for identifying the session used to send messages to the Exchange: the session code must be entered into the message in Tag 49 (SenderCompID). Account identification Orders sent via sessions and Order Conveyor sessions must contain the customer account identification. Orders sent via Order Manager sessions must contain the code for a manager account or the respective customer account. Order types Orders sent via sessions may be of any kind among those available in the electronic trading system, regardless of the type of session. Trade reallocation Only trades resulting from orders sent via Order Manager sessions and Trading Desk sessions may be reallocated. Trades resulting from sessions and Order Conveyor sessions may be reallocated only in the event of an operational error in the transmission of the order, in which case the new allocation may be made solely to the broker s error account. Order conveyors The following are considered order conveyors: (i) Intermediaries authorized by the Brazilian Securities and Exchange Commission (CVM) and/or the Central Bank of Brazil, and not participant brokers, but linked to brokers in the Bovespa segment; and (ii) Self-employed agents as defined in CVM Instruction 434, linked to brokers in the Bovespa segment and not working physically at such brokers offices. Order managers The following are considered order conveyors: (i) Managers of investment funds domiciled in Brazil, authorized by CVM in accordance with Instruction 409, and portfolio managers authorized by CVM in accordance with Instruction 306; (ii) Local or foreign managers of international investment funds that operate in Brazil via National Monetary Council (CMN) Resolution 2689; and
030/2010-DP.15. (iii) Foreign intermediaries registered with the competent authority in their countries of origin and operating in accordance with CVM Instruction 419 on behalf of non-resident investors who access the Brazilian market under CMN Resolution 2689. The table below summarizes the above information on session types, users authorized to access each type, customer categories allowed to send orders via each type, and rules for specifying accounts in electronic orders and for trade reallocation: Bovespa segment access sessions Session Order Conveyor Order Manager Users authorized to access session Customers Order conveyors Order managers Type of customer whose orders can be sent via session Any Funds managed portfolios, foreign customers Account specification in orders and trade reallocation Order must contain customer account code. Trade reallocation allowed only in the event of operational errors and only to broker s error account. Order must contain code for manager account or respective customer account. Trade reallocation allowed. Trading Desk Brokerage house employees Any No need to specify customer account in order. Trade reallocation allowed. 14.2 Broker responsibilities Brokers are responsible for access to sessions they establish, for all orders sent via such sessions, and for all trades resulting from such orders. Brokers are also responsible for developing or outsourcing the necessary services and systems that enable them to treat, block, approve and send to the Exchange s trading system the orders sent via sessions. Brokers must have the appropriate technological infrastructure (hardware, software, network) to support session use. 14.3 Authorization and registration Requests to authorize session availability and liability statements must be sent to BM&FBOVESPA s Participant Registration Center. Order conveyors and order managers must be registered with the Participant Registration Center.
030/2010-DP.16. All forms and templates can be found in the kit available at www.bmfbovespa.com.br (only in Portuguese, Participantes > Documentação Cadastral > Bovespa). 14.4 Existing sessions Existing sessions may remain in use and do not need to be substituted. Because connections 300 and 500 will be integrated into the same session group (the group), while connections 310 and 510 will join the Order Conveyor group, brokers wishing to group into the same session the message flows currently sent via different sessions may do so at any time, in accordance with the following procedure: (i) (ii) Cancel remaining valid offers in sessions that will no longer be used; canceled offers may be retransmitted using the appropriate sessions that will remain active; and Ask the Service and Market Data Development (GDS) Area to disconnect sessions that will no longer be used. Further information may be obtained from the Department of Business Development by telephone at +55 11 2565-7102; from the Department of Operations by telephone at +55 11 2565-4106; and from BM&FBOVESPA Control Center by telephone at +55 11 2565-5333. Edemir Pinto Chief Executive Officer José Antonio Gragnani Chief Business Development Officer