# CFTC Letter No. 08-18: The Division of Market Oversight issued a letter granting no-action relief to permit the Brazilian Derivatives Exchange, BM&F Bovespa S.A. – Bolsa de Valores, Mercadorias e Futuros (BM&F), to make its electronic tradi..

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/CFTC_L08_18

## Section

- **Citation:** CFTC Letter No. 08-18
- **Heading:** The Division of Market Oversight issued a letter granting no-action relief to permit the Brazilian Derivatives Exchange, BM&F Bovespa S.A. – Bolsa de Valores, Mercadorias e Futuros (BM&F), to make its electronic tradi..
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** CFTC Staff Letters (2008-present) / The Division of Market Oversight issued a letter granting no-action relief to permit the Brazilian Derivatives Exchange, BM&F Bovespa S.A. – Bolsa de Valores, Mercadorias e Futuros (BM&F), to make its electronic tradi...

## Text

Summary: The Division of Market Oversight issued a letter granting no-action relief to permit the Brazilian Derivatives Exchange, BM&F Bovespa S.A. – Bolsa de Valores, Mercadorias e Futuros (BM&F), to make its electronic trading and order matching system (GTS) available to persons that have been authorized to directly access GTS from the United States without obtaining contract market designation or registration as a derivatives transaction execution facility pursuant to Sections 5 and 5a of the Commodity Exchange Act, respectively. The relief applies, subject to conditions, to (1) persons located in the U.S. that have been authorized by the Chicago Mercantile Exchange (CME) to have access to a Globex terminal and that, pursuant to the BM&F-CME Order Routing Agreement, have been granted the right to directly access GTS through a Globex terminal; (2) futures commission merchants (FCM) that submit orders for execution to GTS using the GTS application programming interface (API) for proprietary accounts or from or on behalf of U.S. foreign futures and options customers; and (3) a foreign futures or options customer (authorized customer) of an FCM or a firm that is exempt from registration as an FCM pursuant to Commission Rule 30.10 (Rule 30.10 Firm) that is authorized by an entity with access rights to BM&F (authorized entity) to enter orders directly into the trading system using the GTS API; provided that the authorized entity has a clearing relationship with a BM&F Settlement Rights Holder (clearing member) and, as a requirement for and as a condition of the authorized entity’s permitting direct access to the BM&F GTS API by the authorized customer, the BM&F Settlement Rights Holder, among other things, guarantees and assumes all financial responsibility for all activity conducted through the authorized customer’s direct market access connection.
with a BM&F Settlement Rights Holder (clearing member) and, as a requirement for and as a condition of the authorized entity’s permitting direct access to the BM&F GTS API by the authorized customer, the BM&F Settlement Rights Holder, among other things, guarantees and assumes all financial responsibility for all activity conducted through the authorized customer’s direct market access connection.

U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5260
Facsimile: (202) 418-5527
www.cftc.gov
Division of
Market Oversight

CFTC Letter No. 08-18
September 26, 2008
No-Action
Division of Market Oversight

Paul M. Architzel, Esq.
Alston & Bird LLP
The Atlantic Building
950 F Street, NW
Washington, DC 20004-1404

Re:
BM&F Bovespa S.A. – Bolsa de Valores, Mercadorias e Futuros Sections 5 and
5a Request for No-Action Relief from Contract Market Designation and
Derivatives Transaction Execution Facility Registration Requirements

Dear Mr. Architzel:

This is in response to your letter dated May 21, 2008 to the Division of Market Oversight
(Division) of the Commodity Futures Trading Commission (CFTC or Commission).1 By this
correspondence, you request, on behalf of BM&F Bovespa S.A. – Bolsa de Valores, Mercadorias
e Futuros (BM&F Bovespa or BM&F or the Exchange) that the Division confirm that it will not
recommend that the Commission take enforcement action against BM&F Bovespa, its Trading
Rights Holders or Settlement Rights Holders, or persons located in the United States 2 that have
been authorized to directly access BM&F Bovespa’s electronic trade matching system, the
Global Trading System (GTS), if BM&F Bovespa does not seek designation as a contract market
(DCM) pursuant to section 5 of the Commodity Exchange Act (CEA or Act) or registration as a
derivatives transaction execution facility (DTEF) pursuant to section 5a of the Act or
Commission rules thereunder
hat have
been authorized to directly access BM&F Bovespa’s electronic trade matching system, the
Global Trading System (GTS), if BM&F Bovespa does not seek designation as a contract market
(DCM) pursuant to section 5 of the Commodity Exchange Act (CEA or Act) or registration as a
derivatives transaction execution facility (DTEF) pursuant to section 5a of the Act or
Commission rules thereunder. (no-action request).

Specifically, BM&F Bovespa wishes to make the GTS electronic trading and order
matching system directly available through the installation and use of the GTS application
programming interface (API) to entities that are so authorized. BM&F Bovespa requests that
this no-action relief apply with respect to trading by:

1
Letter from Paul M. Architzel, Esq., Alston & Bird LLP, to Richard A. Shilts, Director, Division of Market
Oversight, Commodity Futures Trading Commission (May 21, 2008).
2
For purposes of this letter and the relief provided herein, the term “United States” shall include the United
States, its territories and possessions.

Paul M. Architzel, Esq.
Page 2

(1) persons located in the United States that have been authorized by or under the rules of the
Chicago Mercantile Exchange (CME) to have access to a CME Globex terminal and that,
pursuant to the BM&F-CME Order Routing Agreement of which both BM&F and CME are
signatories, have been granted the right to directly access BM&F’s GTS through the use of a
Globex terminal (CME Access Holders);

(2) a futures commission merchant (FCM) registered with the Commission that submits orders
for execution to the trading system using the GTS API for its proprietary account or from or on
behalf of U.S. foreign futures and options customers;3 and
BM&F and CME are
signatories, have been granted the right to directly access BM&F’s GTS through the use of a
Globex terminal (CME Access Holders);

(2) a futures commission merchant (FCM) registered with the Commission that submits orders
for execution to the trading system using the GTS API for its proprietary account or from or on
behalf of U.S. foreign futures and options customers;3 and

(3) a foreign futures or options customer of an FCM or a firm that is exempt from such
registration pursuant to Commission Rule 30.10 (Rule 30.10 Firm)4 (authorized customer) that is
authorized by an entity with access rights to BM&F Bovespa (authorized entity) to enter orders
directly into the trading system using the GTS API; and through the clearing relationship
between such an authorized entity and a BM&F Settlement Rights Holder (clearing member),
and as a requirement for and as a condition of the authorized entity’s permitting direct access to
the BM&F GTS API by the authorized customer, the BM&F Settlement Rights Holder:

a
guarantees and assumes all financial responsibility for all activity conducted
through each authorized customer’s direct market access connection;

b.
assists BM&F in a timely manner in any investigation into potential violations of
BM&F Rules, the CEA, or the terms and conditions set forth in the no-action relief,

3
As it is defined in Rule 30.1(c), “foreign futures or foreign options customer” means any person located in the
U.S., its territories or possessions who trades in foreign futures or foreign options.
4
Rule 30.10 permits a person affected by the requirements contained in Part 30 of the Commission's rules to
petition the Commission for an exemption from such requirements
no-action relief,

3
As it is defined in Rule 30.1(c), “foreign futures or foreign options customer” means any person located in the
U.S., its territories or possessions who trades in foreign futures or foreign options.
4
Rule 30.10 permits a person affected by the requirements contained in Part 30 of the Commission's rules to
petition the Commission for an exemption from such requirements. Appendix A to the Part 30 rules provides an
interpretative statement that clarifies that a foreign regulator or self-regulatory organization (SRO) can petition the
Commission under Rule 30.10 for an order to permit firms that are members of the SRO and subject to regulation by
the foreign regulator to conduct business from locations outside of the United States for United States persons on
non-United States boards of trade without registering under the Act, based upon the person's substituted compliance
with a foreign regulatory structure found comparable to that administered by the Commission under the Act.
Among the issues considered by the Commission in determining whether to grant Rule 30.10 relief to a foreign
regulatory or self-regulatory authority are the authority's: (i) requirements relating to the registration, authorization,
or other form of licensing, fitness review, or qualification of persons through whom customer orders are solicited
and accepted; (ii) minimum financial requirements for those persons that accept customer funds; (iii) minimum sales
practice standards, including risk disclosures, and the risk of transactions undertaken outside of the United States;
ts relating to the registration, authorization,
or other form of licensing, fitness review, or qualification of persons through whom customer orders are solicited
and accepted; (ii) minimum financial requirements for those persons that accept customer funds; (iii) minimum sales
practice standards, including risk disclosures, and the risk of transactions undertaken outside of the United States;
(iv) procedures for auditing compliance with the requirements of the regulatory program, including recordkeeping
and reporting requirements; (v) standards for the protection of customer funds from misapplication; and (vi)
arrangements for the sharing of information with the United States. Interpretative Statement with Respect to the
Commission's Exemptive Authority Under § 30.10 of its Rules, 17 C.F.R. Part 30, Appendix A (2007).
On June 28, 2002, the Commission issued an order pursuant to Rule 30.10 granting an exemption to firms
designated by BM&F from the application of certain of the Commission’s foreign futures and option rules based on
substituted compliance with certain comparable regulatory and self-regulatory requirements of a foreign regulatory
authority. 67 Fed. Reg. 45056 (July 8, 2002).

Paul M. Architzel, Esq.
Page 3

including, but not limited to, requiring the authorized customer to answer questions from
BM&F, and/or appear in connection with the investigation; and

c.
suspends or terminates the authorized customer’s access if BM&F determines that
the actions of the authorized customer threaten the integrity or liquidity of any contract,
violate any BM&F Rule or the CEA, or if the authorized customer fails to cooperate in an
investigation.

As you know, the Commission, on October 27, 2006, issued a policy statement that
affirmed the use of the no-action process to permit foreign boards of trade to provide direct
access5 to their electronic trading systems from the U.S
er threaten the integrity or liquidity of any contract,
violate any BM&F Rule or the CEA, or if the authorized customer fails to cooperate in an
investigation.

As you know, the Commission, on October 27, 2006, issued a policy statement that
affirmed the use of the no-action process to permit foreign boards of trade to provide direct
access5 to their electronic trading systems from the U.S. (Policy Statement).6 The Division has
reviewed BM&F’s no-action request and the materials submitted in support thereof in
accordance with the Policy Statement and the June 2, 1999, Commission Order (June 2 Order)
which first directed the Commission staff to consider requests from foreign exchanges for
interim no-action relief to allow them to provide direct access to their trading systems from the
U.S.7

In connection with its no-action request, BM&F has forwarded the following to the
Division:8

• General information about BM&F, including its history, location and organization;

• Detailed information about the criteria governing access rights;

• Detailed information about various aspects of BM&F’s trading system (including the order-
matching system, the audit trail, response time, reliability, security, and adherence to the
IOSCO Principles);

• Detailed information about the terms and conditions of the contracts proposed to be listed;

• Detailed information about settlement and clearing;

• Detailed information about BM&F’s home country regulatory regime;

5
The term “direct access” as used herein refers to the explicit grant of authority by an exchange to an exchange
member or other participant to enter trades directly into that exchange’s trading matching system.
6
Boards of Trade Located Outside of the United States and No-Action Relief from the Requirement to Become a
Designated Contract Market or Derivatives Transaction Execution Facility, 71 Fed. Reg. 64443 (November 2,
2006)
in refers to the explicit grant of authority by an exchange to an exchange
member or other participant to enter trades directly into that exchange’s trading matching system.
6
Boards of Trade Located Outside of the United States and No-Action Relief from the Requirement to Become a
Designated Contract Market or Derivatives Transaction Execution Facility, 71 Fed. Reg. 64443 (November 2,
2006).
7
Order of the CFTC Withdrawing Proposed Rules Regarding Access to Automated Boards of Trade, 64 FR
32829, 32830 (June 18, 1999).
8
In support of its no-action request, BM&F also submitted, as attachments, numerous documents including,
among others, By-Laws, Instructions, Circulars, Letters, Laws, Rules and Rulebooks, Manuals, Listing Standards
and Agreements.

Paul M. Architzel, Esq.
Page 4

• Information regarding BM&F’s status in its home jurisdiction and its rules and enforcement
thereof (including market surveillance and trade practice surveillance);

• A description of current information–sharing agreements to which BM&F and its regulators
are parties; and

• Certification by an authorized representative of BM&F as to the truth and completeness of
the material facts set forth in the no-action request and undertaking to notify the Commission
staff if, prior to the issuance of the requested no-action relief, any material representation
made in such request ceases to be true and complete.

The Division also received separately from the Brazilian Securities and Exchange
Commission (Comissão de Valores Mobiliários) (CVM), BM&F’s regulatory authority, a
representation regarding information-sharing with the CFTC in connection with the granting of
direct access to BM&F’s trading system from the U.S. This representation is described below in
section VII
to be true and complete.

The Division also received separately from the Brazilian Securities and Exchange
Commission (Comissão de Valores Mobiliários) (CVM), BM&F’s regulatory authority, a
representation regarding information-sharing with the CFTC in connection with the granting of
direct access to BM&F’s trading system from the U.S. This representation is described below in
section VII.

Representations made by BM&F regarding the structure of BM&F, BM&F's activities in
the U.S., BM&F's membership criteria, BM&F’s electronic trading and order matching system,
the regulatory regime in Brazil, and the information-sharing arrangements applicable to BM&F
and its regulator are summarized in Sections I - VII below. For purposes of this response to the
no-action request, the Division has relied upon BM&F's representations and information
provided by BM&F and has not conducted an independent review to confirm their accuracy.9
Commission staff, however, did conduct an on-site visit at the Exchange to meet Exchange staff
and discuss issues relevant to the request for no-action relief with respect to BM&F’s activities.
Separately, Commission staff met with representatives of BM&F’s regulatory authority and
discussed, among other things, the Brazilian regulatory approach to exchange licensing, ongoing
oversight, and information sharing.

I.
GENERAL INFORMATION REGARDING BM&F

A.
History

BM&F S.A., located in São Paulo, Brazil, is the only futures exchange in Brazil and is
the largest in Latin America based on number of contracts traded. Primarily a derivatives
exchange, BM&F lists for trading and settlement both securities and derivatives products based
on interest rates, foreign exchange, equity and inflation indices, financial indicators,
commodities and energy prices
BM&F S.A., located in São Paulo, Brazil, is the only futures exchange in Brazil and is
the largest in Latin America based on number of contracts traded. Primarily a derivatives
exchange, BM&F lists for trading and settlement both securities and derivatives products based
on interest rates, foreign exchange, equity and inflation indices, financial indicators,
commodities and energy prices.

9
As stated below, the no-action relief provided herein is contingent upon the accuracy of the representations
made by BM&F in support of its no-action request. Any materially different, changed, or omitted facts or
circumstances may render the no-action relief void or cause the Division, in its discretion, to condition further,
modify, suspend, terminate, or otherwise restrict the relief.

Paul M. Architzel, Esq.
Page 5

BM&F was incorporated in July 1985 as a not-for-profit organization and began
operations in January 1986. In 1991, BM&F joined with the Bolsa de Mercadorias de São Paulo
(São Paulo Commodities Exchange), a traditional commodity exchange founded in 1917. It
subsequently acquired additional futures exchanges based in Rio de Janeiro and in 2002
launched a subsidiary, the Brazilian Commodities Exchange, which encompasses commodity
exchanges located in a number of states within Brazil and serves to integrate the agricultural
commodity market in Brazil. In 2007, BM&F initiated demutualization and was converted into a
for-profit company. Following its recent initial public offering, BM&F’s shares are publicly
traded on the Bolsa de Valores de São Paulo SA-BVSP (São Paulo Stock Exchange or
BOVESPA), primarily a cash equities exchange.

On May 8, 2008, BM&F and Bovespa Holding S.A. (the parent company of BOVESPA)
began a process to merge the two companies into a single company and to integrate their
structures
it company. Following its recent initial public offering, BM&F’s shares are publicly
traded on the Bolsa de Valores de São Paulo SA-BVSP (São Paulo Stock Exchange or
BOVESPA), primarily a cash equities exchange.

On May 8, 2008, BM&F and Bovespa Holding S.A. (the parent company of BOVESPA)
began a process to merge the two companies into a single company and to integrate their
structures. You represent that the integration of the two companies will most likely be a long
and complex process and that during this period, the BM&F market will continue to operate as it
did while administered by BM&F S.A.10 Under the restructuring plan, the new company will be
a publicly listed and traded company registered with the Brazilian Securities and Exchange
Commission (CVM), whose shares will be listed to trade on BOVESPA’s Novo Mercado.11 The
Boards of Directors of the two companies have set up a Transition Committee, consisting of the
chairmen of the boards of directors and the chief executive officers of both companies. This
Committee will be in place through December 31, 2008.12

The main derivatives contracts traded on BM&F are interest rate futures contracts
(interbank deposit futures, or ID futures), Brazilian Real/U.S. dollar futures contracts (U.S. dollar
futures), equity index futures contracts, and local U.S. dollar interest rate futures contracts
(U.S.dollar spread forward rate agreements or FRAs). The Exchange also offers its clients
futures and option contracts based on agricultural commodities including coffee, livestock,

10 You represent that the restructuring of the corporate entity is not expected to have any material effect on the
facts and circumstances detailed in the no-action request
ollar interest rate futures contracts
(U.S.dollar spread forward rate agreements or FRAs). The Exchange also offers its clients
futures and option contracts based on agricultural commodities including coffee, livestock,

10 You represent that the restructuring of the corporate entity is not expected to have any material effect on the
facts and circumstances detailed in the no-action request. However, to the extent that any future changes may
materially affect any of the representations made in the no-action request, or BM&F’s description of the facts and
circumstances surrounding its no-action request, BM&F will promptly bring such facts to the attention of the
Commission. Moreover, BM&F, on an on-going basis, will update the Commission with all relevant documentation
with respect to the integration of the two exchanges.
11 As discussed in greater detail below, the Novo Mercado designates those companies that meet enhanced listing
standards of BOVESPA with respect to corporate governance practices and corporate transparency.
12 Any proposed corporate restructuring of the exchanges must be submitted for approval by the CVM, the Central
Bank of Brazil and the Administrative Council for Economic Defense (Conselho Administrativo de
DefesaEconômica), or CADE.

Paul M. Architzel, Esq.
Page 6

feeder cattle, soybeans, corn, cotton, sugar and, more recently, ethanol.13 Clearing of derivatives
is accomplished through one of three integrated exchange clearinghouses.14

B.
Organization

As noted above, BM&F recently demutualized and is now a for-profit corporation. As of
March 31, 2008, BM&F’s total market capitalization was Brazilian Real (R$)16,172,572,800
(US$9,732,780,954). BM&F had 134,817 shareholders, all holding common stock, and the five
largest shareholders owned approximately 27 percent of BM&F’s shares
ntegrated exchange clearinghouses.14

B.
Organization

As noted above, BM&F recently demutualized and is now a for-profit corporation. As of
March 31, 2008, BM&F’s total market capitalization was Brazilian Real (R$)16,172,572,800
(US$9,732,780,954). BM&F had 134,817 shareholders, all holding common stock, and the five
largest shareholders owned approximately 27 percent of BM&F’s shares. None of BM&F’s
shareholders owns greater than a ten percent ownership interest of the company.15 The CME
Group is the largest individual shareholder.16

As of March 31, 2008, BM&F has a staff of 561 people divided into departments that
report to the Chief Executive Officer (CEO). These departments are headed by the following
respective Officers: (1) the Chief Clearinghouse Officer, to whom the clearinghouses (discussed
in greater detail below) report; (2) the Chief Financial Officer; (3) the Chief Market
Development Officer; (4) the Chief Corporate Officer, overseeing central corporate functions;
(5) the Trading Officer; and (6) the Audit Officer. In addition, a Risk Committee reports to the
CEO. As discussed below, the Self-Regulatory Department reports directly to the Self-
Regulatory Board and operates independently of the CEO and his staff.

As a corporate entity, BM&F is governed by Brazilian Law #6,404 (December 15, 1976),
which governs the formation and governance of corporations and joint stock companies. As a
publicly-traded company, BM&F must also abide by the listing standards of BOVESPA’s Novo
Mercado, the exchange on which BM&F’s shares are listed. Novo Mercado is a listing segment
that requires companies listing their shares to abide by corporate governance practices and
transparency requirements that are incorporated in the market segment’s listing standards
and joint stock companies. As a
publicly-traded company, BM&F must also abide by the listing standards of BOVESPA’s Novo
Mercado, the exchange on which BM&F’s shares are listed. Novo Mercado is a listing segment
that requires companies listing their shares to abide by corporate governance practices and
transparency requirements that are incorporated in the market segment’s listing standards. These

13 In addition, BM&F registers and settles over-the-counter (OTC) derivatives contracts consisting mainly of
interest rate swaps, exchange rate swaps, inflation rate swaps and equity index swaps, as well as exotic options
based on these assets. BM&F also provides trading and settlement systems for spot contracts, such as U.S. dollar
spot contracts (with physical delivery) and spot contracts based on government securities. BM&F offers a number
of trading-relating services, including (1) trade execution; (2) clearing and settlement; (3) registration of OTC
trades; and (4) custody systems for various assets and securities.
14 BM&F operates three clearinghouses: the Derivatives Clearinghouse, the Foreign Exchange Clearinghouse and
the Securities Clearinghouse, as well as a settlement bank, the BM&F Settlement Bank. The Exchange’s
clearinghouses and the BM&F Settlement Bank are integrated to ensure the integrity and effective functioning of the
Exchange.
15 Approximately 11 percent of BM&F’s shares are held by Brazilian individuals and 44 percent by Brazilian legal
entities (mostly former stockholders of the Exchange). The remaining shares are held by non-residents of Brazil:
U.S. residents constitute the largest percentage of non-resident shareholders with 38.52 percent of the overall shares,
followed by residents of the United Kingdom (1.31 percent) and Luxembourg (1.15 percent). The remaining
shareholders are residents of various jurisdictions, each of which represents less than 1 percent of ownership of
BM&F shareholdings
are held by non-residents of Brazil:
U.S. residents constitute the largest percentage of non-resident shareholders with 38.52 percent of the overall shares,
followed by residents of the United Kingdom (1.31 percent) and Luxembourg (1.15 percent). The remaining
shareholders are residents of various jurisdictions, each of which represents less than 1 percent of ownership of
BM&F shareholdings.
16
On February 26, 2008, BM&F shareholders approved an agreement with the Chicago Mercantile Exchange
Group (CME Group) wherein CME Group became the largest shareholder of BM&F with 10 percent ownership of
BM&F’s common stock.

Paul M. Architzel, Esq.
Page 7

practices are in addition to those required by Brazilian law and the CVM.17 BM&F designed its
bylaws pursuant to the Novo Mercado listing rules and, on November 7, 2007, signed with
BOVESPA the Novo Mercado membership agreement for adherence to the provisions of the
listing rules, which became effective on November 29, 2007.

BM&F is governed by a Board comprised of eleven individuals, five of whom are
independent members.18 The day-to-day management of BM&F is vested in the Officers that
comprise the Executive Board, who are appointed for two year terms by the Board of Directors.
BM&F’s bylaws provide that the Executive Board, at a minimum, be composed of the following
officers: (1) Chief Executive Officer; (2) Securities Clearinghouse Officer; (3) Foreign
Exchange Clearinghouse Officer; (4) Derivatives Clearinghouse Officer; (5) Trading Officer; (6)
Audit Officer; (7) Chief Financial Officer; and (8) Self-Regulatory Officer.19

Article 44 of BM&F’s bylaws provides that there shall be a Regulatory Committee. This
committee analyzes the compliance implications of new rules or legislation, recommends
amendments to, or opines on changes in, BM&F rules, policies or guidelines, and makes
recommendations with respect to improvements needed in BM&F’s self-regulatory program
al Officer; and (8) Self-Regulatory Officer.19

Article 44 of BM&F’s bylaws provides that there shall be a Regulatory Committee. This
committee analyzes the compliance implications of new rules or legislation, recommends
amendments to, or opines on changes in, BM&F rules, policies or guidelines, and makes
recommendations with respect to improvements needed in BM&F’s self-regulatory program.
The members of the committee are nominated by the Board’s nominating committee and elected
by the Board and are required by the bylaws to be knowledgeable with respect to rulemaking and
surveillance of the financial, capital and derivatives markets. At minimum, the Regulatory
Committee must have three members, two-thirds of which must be independent. Members of the
committee can only be removed for cause with a two-thirds vote of the Board.

BM&F’s self-regulatory programs are overseen by the Self-Regulatory Board, which is
composed of at least three members, at least two thirds of whom must be independent, who are
elected by the shareholders’ meeting for a three year term. The Self-Regulatory Board: (1)
oversees the activities of the Self-Regulatory Department; (2) issues recommendation to the Self-
Regulatory Officer; (3) decides on administrative proceedings carried out by the Self-Regulatory
Department; and (4) instructs the CEO to apply penalties in connection with the self-regulatory
functions of the Exchange, informing the CVM of such actions. The Self-Regulatory

17 Among these are the requirements that companies: (1) adopt offering procedures that favor widespread
ownership of shares whenever making a public offering, such as issuing only common stock; (2) maintain a
minimum free float equivalent to 25 percent of its capital; (3) maintain a Board of Directors (Board) with at least
five Directors serving two year terms of office, 20 percent of whom must be independent; (4) issue annual disclosure
of the company’s balance sheet calculated using U.S
spread
ownership of shares whenever making a public offering, such as issuing only common stock; (2) maintain a
minimum free float equivalent to 25 percent of its capital; (3) maintain a Board of Directors (Board) with at least
five Directors serving two year terms of office, 20 percent of whom must be independent; (4) issue annual disclosure
of the company’s balance sheet calculated using U.S. GAAP or International Financial Reporting Standards; (5)
comply with minimum quarterly disclosure standards; (6) disclose, on a monthly basis, all transactions made by
controlling shareholders involving securities issued by the company, including derivatives; and (7) provide for
various shareholder protection provisions with respect to change of corporate control.
18 A transitional Board comprised of 18 members, 10 of whom are independent and eight of whom are market
representatives, has been elected under the integration arrangement with BOVESPA. In addition to the boards and
committees described below, the Board is assisted by an independent Nomination and Compensation Committee and
an independent Audit Committee of the Board. The Board has also created a number of Advisory Committees,
including the Technical Committee for Standardization, Classification and Appeals and the Ethics Committee.
19
This structure, which currently remains in place, is expected to be modified as an effect of the arrangements
with BOVESPA.
independent Nomination and Compensation Committee and
an independent Audit Committee of the Board. The Board has also created a number of Advisory Committees,
including the Technical Committee for Standardization, Classification and Appeals and the Ethics Committee.
19
This structure, which currently remains in place, is expected to be modified as an effect of the arrangements
with BOVESPA.

Paul M. Architzel, Esq.
Page 8

Department, discussed in greater detail below, is responsible for supervising the Exchange,
access rights holders, and transactions carried out on the Exchange, as well as BM&F’s
registration, clearance and settlement systems.20

C.
Products

BM&F offers for trading on its markets futures contracts, options on futures and options
on physicals. Its product range includes contracts on agricultural commodities, gold, interest
rates, exchange rates, sovereign debt, and equity and inflation indexes. BM&F intends to make
available through GTS to persons located in the U.S. contracts in each of the above categories.

You represent that none of the contracts which provide for physical delivery have
delivery points outside of Brazil or draw on U.S. grown or produced deliverable supplies.
Accordingly, although some commodities that are traded on BM&F, like corn and soybeans, are
also traded on DCMs, BM&F’s contracts are not directly linked to a DCM’s prices. Thus, such
BM&F contracts would not create a need for enhanced market surveillance or additional
information sharing to address market integrity issues with respect to the Commission’s
oversight of DCM contracts.21

D.
Presence in the United States

BM&F currently maintains a representative office at 61 Broadway, Suite 2605, New
York, N.Y
ts are not directly linked to a DCM’s prices. Thus, such
BM&F contracts would not create a need for enhanced market surveillance or additional
information sharing to address market integrity issues with respect to the Commission’s
oversight of DCM contracts.21

D.
Presence in the United States

BM&F currently maintains a representative office at 61 Broadway, Suite 2605, New
York, N.Y. 10006, for the purpose of promoting and developing BM&F’s products in the U.S.;
carrying out representational activities with the Commission and the press; and providing
information to existing and prospective members and to others. Its activities in the U.S. are
limited to participation in various widely-attended industry conferences and trade shows for the
purpose of acquainting the futures industry generally with BM&F, responding to inquiries from
the press and the public, and providing information of a general nature to persons and industry
groups who might seek information with respect to obtaining access to BM&F. BM&F may also
conduct seminars and other educational programs relating to trading on the Exchange. You
represent that BM&F does not provide investment advice or technical support from the U.S. and
would not solicit, receive or direct orders with respect to the products traded on BM&F from a
representative office.22

20 You represent that although the self-regulatory functions will not change as a consequence of the integration
with BOVESPA, the formal structure under which self-regulatory functions are carried out likely will be modified.
In this regard, you represent that the new corporate organization includes an independent self-regulatory division,
segregating Exchange business-related activities from self-regulatory activities related to registration, trading,
clearing and settlement systems
of the integration
with BOVESPA, the formal structure under which self-regulatory functions are carried out likely will be modified.
In this regard, you represent that the new corporate organization includes an independent self-regulatory division,
segregating Exchange business-related activities from self-regulatory activities related to registration, trading,
clearing and settlement systems.
21
“Notice of Revision of Commission Policy Regarding the Listing of New Futures and Option Contracts by
Foreign Board of Trade That Have received Staff No-Action relief to Provide Direct Access to Their Automated
Trading Systems from Locations in the United States,” 74 Fed. Reg. 19877 (April 18, 2006).
22 BM&F does not conduct trade matching or clearing operations in the U.S. However, as detailed below, BM&F
Derivatives Clearing House and clearing participants and customers may hold collateral with respect to BM&F
products in U.S. banks, and certain U.S. banks or financial institutions may act as settlement facilities in connection
with those contracts and as custodians for collateral. The clearing of such positions, however, takes place in Brazil.

Paul M. Architzel, Esq.
Page 9

BM&F’s English language website is located at:
http://www.bmf.com.br/portal/portal_english.asp. BM&F’s website includes general
information relating to the Exchange, its corporate organization, the contracts traded thereon and
the operation of the trading system and of the market.23 In addition, BM&F’s website includes
the Exchange’s bylaws and the Clearing House Rulebook.24
II.
ACCESS TO THE TRADING SYSTEM

A.
Introduction

As a result of demutualization, the former BM&F memberships were converted into
shares (ownership interests) and access rights (the right to trade on the Exchange). In order to
ensure fair and efficient use of its market, as well as to ensure its financial integrity, BM&F
permits only those entities with access privileges to trade directly on the Exchange
RADING SYSTEM

A.
Introduction

As a result of demutualization, the former BM&F memberships were converted into
shares (ownership interests) and access rights (the right to trade on the Exchange). In order to
ensure fair and efficient use of its market, as well as to ensure its financial integrity, BM&F
permits only those entities with access privileges to trade directly on the Exchange. BM&F has
two types of access rights: Trading Rights (DN), which may be either full or restricted, and
Settlement Rights (DL). As discussed in greater detail below, BM&F requires that its access
rights holders be fit and meet financial soundness requirements. An applicant to become a
BM&F access rights holder must file an application with the Exchange and demonstrate its
compliance with the applicable minimum requirements. Individuals or entities that do not hold
access rights may trade on the BM&F market only through an entity having Trading Rights. In
order to act as an agent for a customer, the Trading Rights Holder must be a licensed broker,
designated as a “Commodities Brokerage House.” Individuals holding full or restricted Trading
Rights are denominated as “Locals.”

B.
Trading Rights

As stated above, Trading Rights are divided into full and restricted rights. Full DN rights
permit the holder to execute transactions in any Exchange-traded product and to register OTC
trades for all types of contracts and assets authorized by BM&F. Trading Rights may also be
restricted to categories of products as specifically authorized by BM&F. For example, access
may be restricted to, among others, derivatives on interest rates, foreign exchange, equity
indexes, grains, livestock, coffee, energy, and metals
ransactions in any Exchange-traded product and to register OTC
trades for all types of contracts and assets authorized by BM&F. Trading Rights may also be
restricted to categories of products as specifically authorized by BM&F. For example, access
may be restricted to, among others, derivatives on interest rates, foreign exchange, equity
indexes, grains, livestock, coffee, energy, and metals. Full and restricted Trading Rights may be
held by either individuals, who must be Brazilian and at least 21 years of age, or entities, which
must be incorporated in Brazil and duly authorized under a CVM Instruction as eligible to trade
for their own accounts and to intermediate for the accounts of customers.25

23 BM&F’s website provides the public with access to various market data, including daily volume, historical
archived volume information, open interest and settlement prices and monthly volume and open interest data. Its
archived price data is available dating back to January 1990, and archived volume data is available beginning from
October 1999.
24 As explained in greater detail below, the Exchange Rulebook is currently being consolidated. Once that process
has been completed, it is expected that the Exchange consolidated rulebook will also be available through BM&F’s
website.
25 Full and restricted Trading Rights Holders are not limited with respect to the number of GTS trading terminals
that they employ, although BM&F may impose a policy regarding the ratio of bids and asks entered into the trading
system and the number of executed trades by such Trading Rights Holders. In contrast, full Trading Rights Holders
book will also be available through BM&F’s
website.
25 Full and restricted Trading Rights Holders are not limited with respect to the number of GTS trading terminals
that they employ, although BM&F may impose a policy regarding the ratio of bids and asks entered into the trading
system and the number of executed trades by such Trading Rights Holders. In contrast, full Trading Rights Holders

Paul M. Architzel, Esq.
Page 10

In order to maintain their access rights, DN holders must meet minimum professional
standards with respect to their supervisory and compliance personnel, as well as desk, floor and
electronic traders, and others. Such personnel must demonstrate their competence through a
testing program administered by BM&F and by meeting minimum required documentation and
educational standards. BM&F, as part of this program, issues professional certifications, valid
for a period of two years, to persons found to be professionally qualified. New DN holders must
meet these minimum professional standard requirements within six months. In addition to
professional standards, DN holders must meet minimum technology qualifications, including
providing for adequate technical security, business continuity planning, testing and redundancy
of the IT systems, and must meet requirements with respect to reporting and storage of
information.

Trading Rights holders must also meet minimum financial requirements. Commodities
Brokerage Houses are required to maintain a minimum proprietary working capital
nology qualifications, including
providing for adequate technical security, business continuity planning, testing and redundancy
of the IT systems, and must meet requirements with respect to reporting and storage of
information.

Trading Rights holders must also meet minimum financial requirements. Commodities
Brokerage Houses are required to maintain a minimum proprietary working capital.
Commodities Brokerage Houses that are full DN holders must maintain working capital of
R$3.75 million (US$2,256,779); those that are restricted DN holders must maintain R$3 million
(US$1,805,423) for trading rights in interest rates, currency exchange rates and equity
derivatives and R$1 million (US$601,808) for trading in other types of derivatives. Further, as
discussed in greater detail below, Commodity Brokerage Houses and Locals must also pledge a
significant amount of collateral to the Operational Performance Fund (FDO).26 In furtherance of
their prudentiality requirements, DN holders are required to provide risk management limits on
the size of orders which may be entered by their customers in trading on GTS. These credit
filters or screens reside on GTS and are applicable to any non-DN trader with direct access to the
trading system that the DN holder guarantees. Finally, all DN holders are required to enter into a
formal agreement with a Settlement Rights Holder to guarantee their executed trades.

Pursuant to CVM Instruction, Commodity Brokerage Houses must be registered with the
CVM. Registration requires that the Commodity Brokerage House be incorporated as a joint-
stock company or limited company, be admitted as a Trading Rights or Settlement Rights Holder
of the Exchange, and appoint a qualified managing partner
ith a Settlement Rights Holder to guarantee their executed trades.

Pursuant to CVM Instruction, Commodity Brokerage Houses must be registered with the
CVM. Registration requires that the Commodity Brokerage House be incorporated as a joint-
stock company or limited company, be admitted as a Trading Rights or Settlement Rights Holder
of the Exchange, and appoint a qualified managing partner. When filing for registration with the
CVM, Commodity Brokerage Houses must provide documentation with respect to their
managing partners or officers, including making required representations that the individual
manager or officer, among other things, (1) is not subject to a disqualification from occupying a
position in a financial institutions which depends upon authorization by the CVM, the Central
Bank of Brazil or other regulatory authorities; (2) has not been convicted of any crimes; (3) has
not been the manager of an enterprise subject to control and surveillance by CVM or the Central

are entitled to 24 floor trading permits and restricted Trading Rights Holders are entitled to five floor trading
permits.
26 The FDO is a safeguard structure created for the Derivatives Clearinghouse after the demutualization of BM&F.
Commodities Brokerage Houses with full Trading Rights must deposit R$6 million (US$3,610,847) and Locals with
full Trading Rights must deposit R$1.6 million (US$962,893). Commodities Brokerage Houses and Locals with
restricted Trading Rights are required to post lesser amounts of collateral, but not less than R$3 million
(US$1,805,423) and R$1 million (US$601,808), respectively.
on of BM&F.
Commodities Brokerage Houses with full Trading Rights must deposit R$6 million (US$3,610,847) and Locals with
full Trading Rights must deposit R$1.6 million (US$962,893). Commodities Brokerage Houses and Locals with
restricted Trading Rights are required to post lesser amounts of collateral, but not less than R$3 million
(US$1,805,423) and R$1 million (US$601,808), respectively.

Paul M. Architzel, Esq.
Page 11

Bank of Brazil or subject to reorganization in bankruptcy; or (4) has not been the subject of an
adverse judgment for breach of the rules of the CVM, Central Bank of Brazil or other regulatory
authorities. The CVM must approve all new managing partners, officers and directors prior to
their investiture.

Commodity Brokerage Houses are required by CVM Instruction to make good and actual
settlement of transactions, to make bona fide deliveries of legitimate securities, to provide for
legitimate transactions under their power of attorney appointment from clients and to operate
generally with high ethical standards. Commodity Brokerage Houses must maintain the
confidentiality of client information, releasing such information only as authorized or pursuant to
law or regulation, and are required to inform CVM of any violation of the law or regulations by
the broker’s clients or of a client default. Commodity Brokerage Houses are prohibited from
funding, making loans, or advancing payments to clients, are required to meet the minimum
financial requirements established by the Exchange, and must be audited by an independent
auditor twice yearly.27

C.
Settlement Rights

Settlement Rights granted by BM&F enable the holders to use the clearing and settlement
systems managed by the Exchange, permitting the clearance and settlement of transactions by the
Derivatives Clearinghouse
clients, are required to meet the minimum
financial requirements established by the Exchange, and must be audited by an independent
auditor twice yearly.27

C.
Settlement Rights

Settlement Rights granted by BM&F enable the holders to use the clearing and settlement
systems managed by the Exchange, permitting the clearance and settlement of transactions by the
Derivatives Clearinghouse. All Settlement Rights Holders must be Brazilian legal entities with
their headquarters or offices in São Paulo and must be financial institutions whose operations are
authorized by the Central Bank of Brazil.

Settlement Rights are divided into three different types, depending upon the class of
transactions that may be settled. These include: (1) Type 1 DL, which are permitted to settle
only their proprietary transactions and those of affiliates; (2) Type 2 DL, which may settle the
same transactions as the Type 1 DL and transactions of customers of Commodity Brokerage
Houses that are under a common corporate ownership with the DL holder; and (3) Type 3 DL,
which may settle the same transactions as the Type 2 DL and transactions of customers of
Commodity Brokerage Houses that are not under common ownership with the DL holder, and
transactions of Locals. The requirements for holding Settlement Rights vary depending upon
whether the entity is a Type 1, Type 2 or Type 3 DL.

As is the case with DN holders, DL holders must meet minimum professional standards
with respect to their supervisory and compliance personnel and with respect to their back office
managers and employees desk. Such personnel must demonstrate their competence through a
testing program administered by BM&F and by meeting minimum required documentation and
educational standards
r Type 3 DL.

As is the case with DN holders, DL holders must meet minimum professional standards
with respect to their supervisory and compliance personnel and with respect to their back office
managers and employees desk. Such personnel must demonstrate their competence through a
testing program administered by BM&F and by meeting minimum required documentation and
educational standards. BM&F, as part of this program, issues professional certifications, valid

27 In 2005, BM&F launched a voluntary program to strengthen brokerages by establishing higher standards under
which brokerages could be certified by BM&F by meeting enhanced standards of excellent service within a
particular business segment. A full service brokerage could be certified as excelling in all business segments,
including the trade execution, carrying broker, agricultural, retail and web-based broker business segments.
Brokerages that specialize in one business segment could be certified in that segment. The first set of certifications
resulted in BM&F issuing 75 seals in August, 2007.

Paul M. Architzel, Esq.
Page 12

for a period of two years, to persons found to be professionally qualified. New DL holders must
meet these minimum professional standard requirements within six months. As with DN
holders, DL holders must meet technical requirements, including those of the CVM and the
Central Bank of Brazil. DL holders are also required to implement risk management systems
and procedures that are appropriate to the nature, volume and complexity of the positions that
they carry and to have an account with the Central Bank of Brazil or have a correspondent
relationship with such an institution.

Pursuant to the Rules and Operations Manual of the Derivatives Clearinghouse, DL
holders are responsible for the positions which they carry, including settlement of such positions
res that are appropriate to the nature, volume and complexity of the positions that
they carry and to have an account with the Central Bank of Brazil or have a correspondent
relationship with such an institution.

Pursuant to the Rules and Operations Manual of the Derivatives Clearinghouse, DL
holders are responsible for the positions which they carry, including settlement of such positions.
As a consequence, they must meet specified proprietary working capital requirements and must
pledge a specified amount of collateral to the FDO. Specifically, Type 1, 2 and 3 Settlement
Rights Holders must maintain working capital of R6 , 7 and 8 million, respectively,
(US$3,610,847, $4,212,655, $4,814,463, respectively) and must contribute R5.5, 6.5 and 7.5
million respectively, (US$3,309,943, $3,911,751, $4,513,559, respectively) to the FDO. In
addition, as a consequence of their status as Settlement Rights Holders, they must contribute to
the Clearinghouse’s clearing fund in the amount of R2, 3 and 4 million, respectively
(US$1,203,616, $1,805,423, and $2,407,231, respectively).

D.
Direct Access Through Globex

In addition to the BM&F Access Rights Holders discussed above, BM&F and CME have
entered into an Order Routing Agreement under which CME Globex terminal users may directly
access GTS through their Globex terminal connection. In the first instance, entities with a
Globex terminal will have satisfied CME access rules with respect to Globex. Entities with
access to a Globex terminal will also be required to satisfy BM&F policies and procedures for
granting permission to Globex terminal users to access BM&F’s GTS via their Globex terminals
minal users may directly
access GTS through their Globex terminal connection. In the first instance, entities with a
Globex terminal will have satisfied CME access rules with respect to Globex. Entities with
access to a Globex terminal will also be required to satisfy BM&F policies and procedures for
granting permission to Globex terminal users to access BM&F’s GTS via their Globex terminals.
This includes the requirement that all such market users have their direct market access rights
guaranteed by a BM&F Settlement Rights Holder with whom they are required to maintain a
contractual relationship.28 Thus, all positions that are entered into the BM&F trading system
through a Globex terminal will be required to be cleared by a BM&F Settlement Rights Holder.
In addition, each Globex user will receive authorization for the direct market access from a local
Commodity Brokerage House (a DN holder). The BM&F clearing member, through the clearing
relationship with the DN holder, and as a requirement for, and, as a condition of, the DN holder’s
permitting direct access to the BM&F trading system of the Globex user, is required to:

a.
guarantee and assume all financial responsibility for all activity related to BM&F
markets conducted through each Globex user’s (authorized customer) direct market access
connection;

b.
assist in a timely manner BM&F in any investigation into potential violations of
BM&F Rules, the CEA, or the terms and conditions set forth in the no-action relief, including,

28 Orders for execution on the BM&F market by Globex terminal users that have not satisfied BM&F’s access
requirements will be rejected by the trading engine.
rized customer) direct market access
connection;

b.
assist in a timely manner BM&F in any investigation into potential violations of
BM&F Rules, the CEA, or the terms and conditions set forth in the no-action relief, including,

28 Orders for execution on the BM&F market by Globex terminal users that have not satisfied BM&F’s access
requirements will be rejected by the trading engine.

Paul M. Architzel, Esq.
Page 13

but not limited to, requiring the authorized customer to answer questions from BM&F, and/or
appear in connections with the investigation; and

c.
suspend or terminate the authorized customer’s access if BM&F determines that
the actions of the authorized customer threaten the integrity or liquidity of any contract or violate
any BM&F Rule or the CEA, or if the authorized customer fails to cooperate in an investigation.

III.
OVERVIEW OF THE BM&F TRADING SYSTEM

At the outset, the Division notes that the description of BM&F’s trading system, GTS, set
forth herein is based upon representations made by BM&F or its representatives. The Division
has not performed an independent assessment of the security or soundness of GTS in connection
with this request. Nonetheless, Commission staff did observe GTS operations during a
demonstration conducted during the staff’s onsite visit.

A.
Introduction

BM&F’s original electronic trading system, launched in 2000, was based on the
ATOS/Euronext trading platform. BM&F’s new, internally developed trading system, also
referred to as GTS, became operational in late 2007 and includes all of the trading features that
were available on the original trading system. Currently, only BM&F contracts are traded on
GTS. Traders seeking to trade in mini-futures contracts can access an internet-based system, the
WebTrading system, and transmit purchase and sale offers directly into the system
oped trading system, also
referred to as GTS, became operational in late 2007 and includes all of the trading features that
were available on the original trading system. Currently, only BM&F contracts are traded on
GTS. Traders seeking to trade in mini-futures contracts can access an internet-based system, the
WebTrading system, and transmit purchase and sale offers directly into the system. The offers
accepted through the WebTrading system are automatically included in BM&F’s GTS, where
bids and offers are matched.

BM&F provides the central order processing facilities for its trading system, the Trading
Engine, in São Paulo. It also provides the API through which the authorized user’s front-end
trading application communicates with the Trading Engine through the Financial Information
Exchange (FIX) Protocol. Authorized users are required to supply their own workstations. They
may make use of BM&F trading application software, purchase front-end software supplied by
an Independent Software Vendor (ISV), or develop their own front-end trading application
software. Users are able to link their workstations directly to other systems (e.g., those dealing
with trade capture and order management) to facilitate more efficient processing.29

B.
Trading Engine

The Trading Engine provides the order matching service and is validated using a process
that requires, among other things, the completion of comprehensive business and technical
testing before the system is declared operational. Access to the Trading Engine is limited to

29 As discussed below, users can connect to GTS through a variety of methods, including dedicated link set up by
the user, the local Brazilian broker’s network, the Financial Community Communication Network, the web, or via
Globex or other vendors. This is possible because of the system’s reliance on the FIX Protocol
ading Engine is limited to

29 As discussed below, users can connect to GTS through a variety of methods, including dedicated link set up by
the user, the local Brazilian broker’s network, the Financial Community Communication Network, the web, or via
Globex or other vendors. This is possible because of the system’s reliance on the FIX Protocol. This interface is
known as by the acronym “BELL”, which stands for “BM&F Electronic Link.”

Paul M. Architzel, Esq.
Page 14

e
me prior to execution.

authorized users holding a relevant trading subscription which determines which contracts the
authorized Trading Rights Holder may trade. Each BM&F Trading Rights Holder is required to
place filters on the GTS Gateway that apply to the trades of each market participant at the level
of beneficial owner. If such a filter is set at zero, that market participant’s orders are
systemically prevented from entering the matching engine. Thus, BM&F is able to prevent any
and all U.S. persons from executing transactions in contracts which they are not permitted to
trade on the BM&F market by instructing its Trading Rights Holders to set a zero limit in such
contracts for U.S. persons.30 Moreover, the filter enables GTS to preclude Globex users that do
not have valid authorization from trading on the system.

A non-Trading Rights Holder may transmit orders directly to the Trading Engine if
authorized by a Trading Rights Holder. Authorized users of Globex may transmit orders directly
to the Trading Engine via Globex if a BM&F Trading Rights Holder has so authorized. Non-
access rights holders may also transmit orders using the automated order routing system (AORS)
of a BM&F Trading Rights Holder. GTS requires that Trading Rights Holders providing or
using an AORS must comply with certain order validation and recording requirements
rs of Globex may transmit orders directly
to the Trading Engine via Globex if a BM&F Trading Rights Holder has so authorized. Non-
access rights holders may also transmit orders using the automated order routing system (AORS)
of a BM&F Trading Rights Holder. GTS requires that Trading Rights Holders providing or
using an AORS must comply with certain order validation and recording requirements.

Orders processed by the Trading Engine generally are for two price types: (1) limit
orders31 and (2) market orders.32 BM&F recognizes the following order types: market; limit;
stop; stop limit; market if touched; and market with leftover as limit. With respect to duration,
orders can be left in effect for the trading session (all day); good till cancelled;33 immediate or
cancel;34 or fill or kill. Market-on-open (MOO) orders are also permitted to be entered during
the Pre-Open period and are executed at the calculated opening price.35 Order volume
parameters may also be specified. Minimum volume orders are cancelled if the minimum
volume cannot be executed immediately. For limit orders, cancellation parameters also may b
specified. The variables relating to resting orders may be modified, and orders may be
withdrawn at any ti

30 You represent that BM&F will issue an Advisory or another administratively binding action to require its
Trading Rights Holders to set such limits. Thus, U.S. market participants will be systemically blocked from
executing trades in contracts that are not within the no-action relief granted by the Division. Further, you represent
that if cash equities or equity options now traded on BOVESPA become tradable through GTS in the future, absent
relief or approval by the U.S. Securities and Exchange Commission, U.S. persons with direct market access under
the no-action relief provided herein would be systematically precluded from trading such equities or equity options
via BM&F’s GTS API.
31 Limit orders trade at the price stated in the order or better
ty options now traded on BOVESPA become tradable through GTS in the future, absent
relief or approval by the U.S. Securities and Exchange Commission, U.S. persons with direct market access under
the no-action relief provided herein would be systematically precluded from trading such equities or equity options
via BM&F’s GTS API.
31 Limit orders trade at the price stated in the order or better. Unfilled residual volume is maintained in the central
order book until filled, withdrawn or cancelled.
32 Market orders are executed consecutively at the best price available until all volume at that price has been
traded and until all the order volume has been filled.
33 Good till cancelled orders are held until a specified date, the contract expires or they are withdrawn by the
trader.
34 Immediate or cancel orders are executed against any existing orders, and any unfilled portion of the order is
immediately cancelled.
35
Residual volume converts to a limit order. If no bid or offer exists at market open, the MOO order is cancelled.

Paul M. Architzel, Esq.
Page 15

Orders on BM&F are matched by price/time priority. Lower offers take precedence over
higher offers and higher bids take precedence over lower bids. In the case of multiple bids or
offers at the same price, earlier bids and offers take precedence over later bids and offers
respectively. Thus, under price/time priority of market orders, a bid (offer) is filled at the best
price by the earliest entered offer (bid) at that price. If additional contract units are needed to fill
the bid (offer) then the next oldest offer (bid) at that price is matched until all of the liquidity at
that price has been exhausted. Then matches would commence at the next best price until the
order is filled. The time assigned to an order is the time that it arrives at the Trading Engine
ce by the earliest entered offer (bid) at that price. If additional contract units are needed to fill
the bid (offer) then the next oldest offer (bid) at that price is matched until all of the liquidity at
that price has been exhausted. Then matches would commence at the next best price until the
order is filled. The time assigned to an order is the time that it arrives at the Trading Engine.

Credit and order size restrictions that are controlled by the Trading Rights Holders filter
the orders of customers with direct market access before they reach the Trading Engine. Thus, as
previously noted, orders that exceed these limitations are rejected before entering into the
Trading Engine. Similarly, orders reaching the Trading Engine Gateway via Globex will be
rejected and not permitted to reach the Trading Engine if the Globex user has not been
authorized to access GTS. In addition, GTS has limits to prevent operational errors. Those
limits, which market participants are required to assign, are applied to quantity and price
information on every order, per instrument, per instrument class (group of instruments) or per
market (future or option for example). Price limitations also include restriction on variation
(percent or basis points) in relation to last traded price, close price (previous day) or settlement
price.

C.
Distribution Network

Authorized traders may be connected to the Trading Engine through a variety of
channels. First, the Financial Community Communication Network, RCCF, is an MPLS
network that connects all brokerage firms, as well as some distributor and other interested
clients, to BM&F. This network allows for specific Service Level Agreements and contingency
features and is used to receive market data and for order management. Clients within Brazil and
from the U.S. may continue to contact their Brazilian broker by telephone and the broker may
enter the client’s order into the Trading Engine through its RCCF connection
ome distributor and other interested
clients, to BM&F. This network allows for specific Service Level Agreements and contingency
features and is used to receive market data and for order management. Clients within Brazil and
from the U.S. may continue to contact their Brazilian broker by telephone and the broker may
enter the client’s order into the Trading Engine through its RCCF connection. Commodities
Brokerage Houses and banks that are Trading Rights Holders may also connect to the trading
system using a direct leased line. Alternatively, pursuant to the no-action relief provided herein,
customers in the U.S. which are guaranteed by a BM&F Settlement Rights Holder, and
authorized by an FCM or a Rule 30.10 Firm, could enter orders directly into the trading system
through an international network provider which carries the electronic message from the
customer to the GTS’s FIX Gateway.

Authorized U.S. traders (or their customers, if authorized) could also enter orders into the
trading system using their Globex terminals. Orders thus entered would be carried to a hub
location in São Paulo on CME-operated and maintained telecommunication circuits. Under the
BM&F-CME Order Routing Agreement, BM&F will provide the telecommunication circuits
between the São Paulo hubs and the Trading Engine. Eventually, BM&F will locate hubs in
major financial centers, including in the U.S., to connect with the Trading Engine in São Paulo.
You represent that orders of U.S. direct market users arriving at the GTS Gateway will not be
munication circuits. Under the
BM&F-CME Order Routing Agreement, BM&F will provide the telecommunication circuits
between the São Paulo hubs and the Trading Engine. Eventually, BM&F will locate hubs in
major financial centers, including in the U.S., to connect with the Trading Engine in São Paulo.
You represent that orders of U.S. direct market users arriving at the GTS Gateway will not be

Paul M. Architzel, Esq.
Page 16

treated any differently or disadvantaged by the Trading Engine from those of GTS Trading
Rights Holders.

D.
Audit Trail

The BM&F trading system captures a complete audit trail of all orders entered into the
trading system and all trades that are executed. In this regard, the following information is
required to be included on orders submitted to the trading system: (1) commodity; (2) contract
month; (3) purchase or sale; (4) customer account; (5) quantity; (6) limit price (except for market
orders, MOO orders and other similar order-types); and (7) strike prices, put or call (for options).
GTS automatically records the time of, and retains a record of, each entry into the system.
Resting orders that have not resulted in an executed trade may be withdrawn. However, the
entry and withdrawal of such orders is captured and a record thereof is retained. Thus, the
trading system captures and retains a complete and accurate audit trail of all activity on the
trading system. All relevant data are retained for a period of ten years in an electronic storage
medium. Confirmations of orders successfully entered into the trading system are automatically
generated and sent to authorized traders, as are confirmations of all matched trades. These
confirmations are also captured automatically and retained as part of the permanent audit trail.

E.
Data Dissemination

BM&F disseminates trading data (prices/quotes/market depth) to authorized market users
via the trading system and, more generally, through third party vendors, such as Bloomberg and
Reuters
ent to authorized traders, as are confirmations of all matched trades. These
confirmations are also captured automatically and retained as part of the permanent audit trail.

E.
Data Dissemination

BM&F disseminates trading data (prices/quotes/market depth) to authorized market users
via the trading system and, more generally, through third party vendors, such as Bloomberg and
Reuters. Authorized market users also have available to them a summary of the market user’s
activity during that session, including the market user’s orders entered during the current trading
session and completed trades. Additional information such as daily high, low, open interest and
volume is distributed publicly by BM&F. Such information is also available in an archived form
on BM&F’s website, on which BM&F also provides intra-day last sale, quote and volume
information on a fifteen minute delayed basis.

F.
System Reliability

The hardware specification for the Trading Engine server includes duplicate, back up
power sources, which also are provided for the datacenters where those servers are hosted. GTS
itself provides reliability functionality, making it possible for system administrators to configure
multiple instances of a matching engine for an instrument or group of instruments. In this way,
data processing is replicated and synchronized among more than one matching engine, so in an
event of failure, the trading system is not affected.

When connecting to GTS, BM&F provides fault tolerance to Trading Rights Holders
through distributed data centers and clustered services. All components of the BM&F trading
system are allocated in clusters, which in the event of a hardware failure fall over to a back-up
device. The back-up system is idle when the primary component is running. In addition, the
GTS system Gateway applies messaging throttling, which ensures that abnormal external activity
will not hinder system performance, availability and reliability. As necessary, the Trading
the BM&F trading
system are allocated in clusters, which in the event of a hardware failure fall over to a back-up
device. The back-up system is idle when the primary component is running. In addition, the
GTS system Gateway applies messaging throttling, which ensures that abnormal external activity
will not hinder system performance, availability and reliability. As necessary, the Trading

Paul M. Architzel, Esq.
Page 17

Engine can control the number of messages received per second and the log-on status from the
API (API session control). Thus, the trading system is able to make necessary adjustments to
remain operational in the face of varying computational demands.

You represent that there have been no trading problems or issues with respect to the
reliability, availability or operation of the new trading system since its introduction in late 2007
and that the new trading system has been operated with a Trading Engine availability of 99.9947
percent. Finally, all users who connect to GTS must go through a certification process to ensure
that nothing in their connectivity will degrade the reliability of the system.

G.
System Security

The trading system includes a security system that provides for user authentication,
confidentiality and information integrity. It ensures integrity by using features embedded in the
API that cannot be accessed externally. The security system is responsible for: (1) maintaining
the database of currently certified users; (2) authenticating certified users as they log on; (3)
distributing session keys as part of the login process; and (4) maintaining a list of currently
logged-on trading applications.

Only authorized users are allowed to access GTS and must first log in to the security
system. User authentication is through the use of passwords. Messages and data are exchanged
in the system through a private, encrypted network
ified users as they log on; (3)
distributing session keys as part of the login process; and (4) maintaining a list of currently
logged-on trading applications.

Only authorized users are allowed to access GTS and must first log in to the security
system. User authentication is through the use of passwords. Messages and data are exchanged
in the system through a private, encrypted network. This protects the confidentiality of such
information, including the password on the authentication messages. Passwords must meet
criteria established by BM&F and are required to be changed periodically.

New users are formally identified to BM&F by a registered market participant, which is
required to submit a form to BM&F for each individual authorized user to be granted direct
access to the trading system. The form includes the name, location, and the number and type of
trading access rights granted (in case there is a specific trading access right involved). Once an
authorized user has been registered by the Exchange, access keys and passwords are made
available.

The security of the system also depends on the actions of system users. Each registered
market participant is required by BM&F rules and policies to implement suitable security
measures to ensure that only those persons specifically authorized by the registered market
participant have access to the user’s passwords and security keys.

H.
Disaster Recovery

BM&F has business continuity plans, reviewed and tested continuously, in place as part
of its Exchange operations. The network, servers and storage are distributed in two data centers
that operate on an integrated basis in real time. Both centers providing services to BM&F’s
trading community in what is known as an Active-Active mode, which provides high
availability, scalability and performance. Although both centers are operating actively, the
available capacity is such that in an event of failure in one center, the other has sufficient
distributed in two data centers
that operate on an integrated basis in real time. Both centers providing services to BM&F’s
trading community in what is known as an Active-Active mode, which provides high
availability, scalability and performance. Although both centers are operating actively, the
available capacity is such that in an event of failure in one center, the other has sufficient

Paul M. Architzel, Esq.
Page 18

capacity to continue operations. The connection between these data centers is through an optic
connection of high-speed and large bandwidth. The data for disaster recovery are replicated in
real time to the alternate data centers. The two data centers are 30 kilometers distant from each
other. The backup media are produced in tandem and stored in appropriate tape storage on
different sites from BM&F data centers. Backup media are recycled (data are moved from
outdated media) as well as tested from business perspectives from time to time.

BM&F has also established general policies to respond to incidents affecting operation of
the trading system. These policies provide guidance for responding to possible operational
problems, assign responsibility to address various issues and include well-understood escalation
policies. Thus, BM&F has in place a business continuity plan which would enable the Exchange
to implement recovery procedures in the face of a disaster and to resume operations within a
commercially acceptable time frame. This plan is continually reviewed and updated. In
addition, BM&F periodically conducts disaster recovery tests to evaluate the adequacy of its
procedures and contingency planning.

I
us, BM&F has in place a business continuity plan which would enable the Exchange
to implement recovery procedures in the face of a disaster and to resume operations within a
commercially acceptable time frame. This plan is continually reviewed and updated. In
addition, BM&F periodically conducts disaster recovery tests to evaluate the adequacy of its
procedures and contingency planning.

I.
Adherence to IOSCO Principles

You represent that in developing, recently deploying and operating GTS, BM&F has
complied with, and will continue to comply with, the Principles for the Oversight of Screen-
Based Trading Systems for Derivative Products developed by the Technical Committee of the
International Organization of Securities Commissions (IOSCO Principles) adopted by the
Commission on November 21, 1990.36 In this respect, you represent that in constructing and
deploying GTS, BM&F has employed the expertise of industry specialists to ensure that the
resulting system infrastructure follows best industry practice and quality standards. BM&F has
satisfied the CVM, which has endorsed the IOSCO Principles,37 that BM&F satisfies the IOSCO
Principles in connection with its operation of GTS.

IV.
SETTLEMENT AND CLEARING

A.
Introduction

BM&F includes within its corporate organization three integrated clearinghouses and a
settlement bank. These clearinghouses and the BM&F Settlement Bank coordinate the
registration, clearing, settlement and risk management activities associated with trades executed
on the Exchange. The Derivatives Clearinghouse clears futures, options on futures and options
on actuals, and is the universal counterparty to all BM&F futures and options transactions.38

36 The Commission adopted the IOSCO Principles as a statement of regulatory policy for the oversight of screen-
based trading systems for derivative products. “Policy Statement Concerning the Oversight of Screen-Based
Trading Systems,” 55 Fed. Reg
ns
on actuals, and is the universal counterparty to all BM&F futures and options transactions.38

36 The Commission adopted the IOSCO Principles as a statement of regulatory policy for the oversight of screen-
based trading systems for derivative products. “Policy Statement Concerning the Oversight of Screen-Based
Trading Systems,” 55 Fed. Reg. 48670 (Nov. 21, 1990).
37 The CVM is a participant in IOSCO and on its website lists a number of resolutions that it has endorsed,
including the IOSCO Principles. See www.cvm.gov.br/ingl/indexing.
38 It also registers OTC derivatives transactions and clears OTC derivatives that are submitted for clearing. In
addition to the Derivatives Clearinghouse, BM&F’s Foreign Exchange Clearinghouse is responsible for the
registration, clearing, settlement and risk management of spot U.S. dollar transactions traded in the Brazilian

Paul M. Architzel, Esq.
Page 19

BM&F becomes the counterparty to each buyer and seller of transactions executed on the
Exchange through novation of the contracts, which occurs at the time the transaction is executed
on the trading system. As explained in greater detail below, the Derivatives Clearinghouse
settles transactions through multilateral netting, thereby reducing the number of payments
institutions are required to make, reducing transaction costs and related operational risks.

The risk management system of the Derivatives Clearinghouse measures position risks
every ten minutes, on average, and determines the collateral amount necessary to mitigate these
risks. To do so, it operates a margining system under which parties to a contract deposit a good
faith performance bond to assure that the party will fulfill its obligations under the contract
operational risks.

The risk management system of the Derivatives Clearinghouse measures position risks
every ten minutes, on average, and determines the collateral amount necessary to mitigate these
risks. To do so, it operates a margining system under which parties to a contract deposit a good
faith performance bond to assure that the party will fulfill its obligations under the contract. This
margining system includes the requirement that original margin be deposited and that positions
be marked-to-market on a daily basis in order to maintain required minimum margin levels.
Margins are due to the Clearinghouse in cash. However, the Clearinghouse, in its discretion,
may accept additional forms of collateral, including government bonds, gold, shares of stock of
companies included in the IBOVESPA Index, certain investment funds, U.S. treasury bonds,
bank letters of credit and such other assets as the Clearinghouse may permit. Haircuts are taken
against certain instruments used as collateral.

As of March 31, 2008 the Derivatives Clearinghouse held total margin pledged by market
participants in the amount of approximately R$74.02 billion (US$44.55 billion). BM&F also
maintains a Clearing Fund which is funded in the amount of R$315.67 million (US$189.97
million) and which is available in the event of a default of a Settlement Rights Holder. As of
March 31, 2008, the FDO, composed of deposits of DN Holders and DL Holders, stood at
R$1,097.40 million (US$660.42 million).

Customer funds/collateral are protected through a system of segregation which operates
by permitting customers to directly deposit their funds with the Derivatives Clearinghouse rather
than with their Commodity Brokerage House. In addition, BM&F maintains a separate
Guarantee Fund to make customers whole in the event of a customer loss resulting from a
Commodity Brokerage House’s wrongful use of customer funds or other similar loss
through a system of segregation which operates
by permitting customers to directly deposit their funds with the Derivatives Clearinghouse rather
than with their Commodity Brokerage House. In addition, BM&F maintains a separate
Guarantee Fund to make customers whole in the event of a customer loss resulting from a
Commodity Brokerage House’s wrongful use of customer funds or other similar loss.

Finally, the BM&F Settlement Bank performs a supplementary role in the Derivatives
Clearinghouse’s risk management. The Derivatives Clearinghouse can access the intraday
BACEN credit facility through the BM&F Settlement Bank, making it possible for BM&F to
promptly access customer collateral and/or liquidate government securities pledged as collateral.
In addition, the BM&F Settlement Bank facilitates contract settlement and collateral
management.

B.
Clearing Procedures

interbank market. It clears and settles local currency transactions through an account at BACEN and at
correspondent banks in the U.S. The Securities Clearinghouse is responsible for the registration, clearing, settlement
and risk management of transactions involving Brazilian government-issued securities. These two clearinghouses
are not involved in clearing and settlement of futures and related option contracts on BM&F.

Paul M. Architzel, Esq.
Page 20

The clearing systems were developed internally by BM&F and are fully integrated with
GTS. The clearing process of an electronic trade is initiated by GTS’ automatic entry into the
clearing system of details of an executed trade. Trades are accepted by the Clearinghouse when
a bid and offer are matched on the trading system. For clearing purposes, trades entered into
through GTS by the close of the day’s floor trading session are cleared overnight with daily
settlement made on a T + 1 basis. Trades entered into GTS after the close of floor trading are
included for clearing during the subsequent trading day
d trade. Trades are accepted by the Clearinghouse when
a bid and offer are matched on the trading system. For clearing purposes, trades entered into
through GTS by the close of the day’s floor trading session are cleared overnight with daily
settlement made on a T + 1 basis. Trades entered into GTS after the close of floor trading are
included for clearing during the subsequent trading day. However, if for daily settlement
purposes, such T + 2 positions would result in a debit amount in a customer’s account, the
amount will be included in the T + 1 margin requirement. Processing of trades is accomplished
overnight and reports are generated prior to the start of trading on the next trading day showing
open interest and required pays and collects, or as termed in the BM&F Clearing Operations
Manual, “cash settlement.”

All trades by each DN holder are subject to an intra-day risk limit. Depending on the
current obligations of the DN holder, BM&F can require that additional margin be posted in
support of such positions. Until the additional margin has been posted, BM&F can prevent the
DN holder from registering additional transactions. Trades are also subject to the rules and
policies of BACEN, CVM and the Council for Financial Activities Control and any trades that
violate rules or policies of any of these regulators can be cancelled within the T+0 period. Such
trades are subject to reversal if identified subsequently.

The Derivatives Clearinghouse nets open positions only at the customer level, although
settlement is netted at the DL holder level. The multilateral net amount with respect to DL
holders includes variation margin payment on positions entered into in both floor trading and on
GTS and includes reset amounts on cleared OTC positions, as well as the cash value of
physically-settled contracts. All transactions for customers must be identified to the
Clearinghouse as customer positions
tlement is netted at the DL holder level. The multilateral net amount with respect to DL
holders includes variation margin payment on positions entered into in both floor trading and on
GTS and includes reset amounts on cleared OTC positions, as well as the cash value of
physically-settled contracts. All transactions for customers must be identified to the
Clearinghouse as customer positions. In this regard, BM&F requires that customers be
registered with the Clearinghouse by the intermediary and that customer identifying information
must be updated in the BM&F systems at all times. If the customer registration information is
incomplete, the Clearinghouse will place the transactions in an error account and treat such
positions as unknown customers of the carrying intermediary.

The BM&F clearing system also accommodates give-up/take-up relationships. Give-ups
can be designated at the time of order entry through GTS and are provided a unique identifier
which represents an end customer-executing firm give-up relationship. Upon designation that a
trade is to be given-up, the take-up firm will receive notification of the trade and must accept or
reject the trade. If the take-up firm rejects the trade, the trade is carried by the executing firm.
Give-up relationships require that an agreement be entered into between the broker giving-up a
trade and the broker taking-up the trade. Certain position-related functions, such as providing
open/close or give-up/take-up instructions that were not included in the order when it was
entered into the trading system, can also be entered by intermediaries through the clearing
system as post-trade adjustments. These clearing-related functions are made through the BM&F
Serviços website, which provides secure, web-enabled access by intermediaries to the clearing
system and to position and other clearing-related information.
ns that were not included in the order when it was
entered into the trading system, can also be entered by intermediaries through the clearing
system as post-trade adjustments. These clearing-related functions are made through the BM&F
Serviços website, which provides secure, web-enabled access by intermediaries to the clearing
system and to position and other clearing-related information.

Paul M. Architzel, Esq.
Page 21

C.
Risk Management

BM&F has developed and implemented procedures to measure risk parameters of the
products listed for trading on the Exchange. It also monitors price trends in the futures and the
underlying cash markets, monitors price volatility and conducts simulations of the effect of these
risks on accounts carried by its members. Using these risk management procedures and
analyses, BM&F determines the appropriate level of margins which should be required and
whether extraordinary intra-day margin calls are appropriate. Margins are required to be paid to
the Clearinghouse on a gross basis, i.e., from each individual customer.

D.
The Margin System

In conjunction with the implementation of the Brazilian Payment System, which required
market participants to monitor their risk and cash flows for financial futures contracts, BM&F
adopted a new portfolio margining calculation system in May 2001. BM&F developed the new
system based on stress testing and analysis of the financial variables that directly influence the
prices of derivatives, including: (1) the cash or spot market prices; (2) the term structure of
interest rates (for BM&F contracts, term structures are taken into account both in Brazilian Reals
(fixed rate yield curve) and U.S. Dollars (ID x U.S. Dollar spread yield curve); and (3) the
market volatility level.

The margin calculation system uses a portfolio-based approach to overall risk
prices of derivatives, including: (1) the cash or spot market prices; (2) the term structure of
interest rates (for BM&F contracts, term structures are taken into account both in Brazilian Reals
(fixed rate yield curve) and U.S. Dollars (ID x U.S. Dollar spread yield curve); and (3) the
market volatility level.

The margin calculation system uses a portfolio-based approach to overall risk.
Accordingly, risks of various contracts in a customer’s account are combined; the risks of certain
positions may be reduced or off-set by other positions in the portfolio, yielding a calculation
based upon the over-all risk of the positions held in the account. The accounts are then subjected
to stress testing using a number of possible scenarios involving changes in the above factors as
determined by the Risk Committee, an executive-level management committee.39 These possible
scenarios can result from both technical/statistical analysis and subjective market evaluations.
The model then examines the hypothetical gains and losses of the portfolio in response to
changes in the identified factors. All of these scenario combinations are analyzed to obtain the
one leading to the highest hypothetical loss which determines the amount that will be required as
collateral for the portfolio. All scenarios used by the model are disclosed daily in BM&F’s Daily
Bulletin, enabling market participants to evaluate the amplitude of scenarios and the degree of
coverage they offer the Clearinghouse.

BM&F developed an application that allows brokers to simulate, in real-time, the effect
that buying and selling contracts has on margin requirements. This enables market participants
to anticipate the potential effect of the margin requirement on their cash flows. Risk calculations
are updated on an intra-day basis as new transactions are entered into
verage they offer the Clearinghouse.

BM&F developed an application that allows brokers to simulate, in real-time, the effect
that buying and selling contracts has on margin requirements. This enables market participants
to anticipate the potential effect of the margin requirement on their cash flows. Risk calculations
are updated on an intra-day basis as new transactions are entered into. Thus, it is necessary for
market participants to have or pledge collateral to maintain their operational limit with respect to

39 The Risk Committee, which is established in the BM&F bylaws and is composed of a number of executive
officers of the Exchange, defines the scenarios and sets the parameters to be used in the risk analysis. Typical
scenarios include: shifts in the yield curves, changes in foreign exchange rates, and increased implied option
volatility.

Paul M. Architzel, Esq.
Page 22

such intra-day trading. Free-balances, however, are determined and made available on a T+1
basis.

E.
Segregation of Customer Funds

As a general matter, the funds and securities amounts belonging to customers, the transfer
of which is ordered by these customers, are legally considered as segregated from the funds and
collaterals of the Commodity Brokerage Houses and DL Holders. This general rule is applicable
to collateral posted by the customers with Commodity Brokerage Houses and DL Holders. Thus,
securities that are deposited as collateral are held as assets that are specifically segregated for the
benefit of the depositing customer. Deposits of cash are made by the customer directly to a
BM&F account that complies with the requirements of Commission Regulation 30.7. The
Clearinghouse directly controls each customer’s cash balance. Accordingly, both collateral and
cash deposit amounts are recognized as segregated from that of the Commodity Brokerage
Houses and DL holders
ated for the
benefit of the depositing customer. Deposits of cash are made by the customer directly to a
BM&F account that complies with the requirements of Commission Regulation 30.7. The
Clearinghouse directly controls each customer’s cash balance. Accordingly, both collateral and
cash deposit amounts are recognized as segregated from that of the Commodity Brokerage
Houses and DL holders.

Apart from the Clearinghouse’s control of customers’ cash balances as a means of
complying with the requirements of Commission Regulation 30.7, any customer that meets a
specified threshold level of volume established by BM&F is able to establish a Special
Settlement Account (CEL) directly with the BM&F Settlement Bank.40 The CEL account
enables customers to settle their trades directly with the Clearinghouse. This bypasses the need
for the customer’s funds to be held by and forwarded to the Clearinghouse by the Commodities
Brokerage House and DL holders. In so doing, the customer’s funds are completely segregated
from those of the intermediaries. Bypassing the intermediaries in this manner has the
consequence that even if an intermediary had the unlawful intention of using customer
segregated funds for proprietary purposes, as a practical matter it cannot do so because it does
not exercise control over such customer funds.

The customer’s ability to directly deposit funds with the Clearinghouse through the CEL
account does not alter the legal responsibility for making payments. Thus, as a legal matter, the
Clearinghouse looks to the DL holder and the DL holder looks to the DN holder for satisfaction
of the obligations to pay. Thus, in the case of a shortfall in a CEL account, the Commodities
Brokerage House and in turn the DL holder would be obligated to pay the amount due to the
Clearinghouse. Operationally, the Commodity Brokerage House informs the customer of the
amount owed by the customer for that day’s settlement
DL holder and the DL holder looks to the DN holder for satisfaction
of the obligations to pay. Thus, in the case of a shortfall in a CEL account, the Commodities
Brokerage House and in turn the DL holder would be obligated to pay the amount due to the
Clearinghouse. Operationally, the Commodity Brokerage House informs the customer of the
amount owed by the customer for that day’s settlement. After verifying the receipt of the
amount from the customer, the Clearinghouse adjusts the DL holder’s multilateral net amount.

F.
Default Procedures

BM&F has made explicit the procedures that it would follow in the event of a default.
Should a default occur, the Clearinghouse may close out the positions held by the defaulting
participant; use the defaulting participant’s collateral to cover debit balances; notify the market

40 U.S. based customers are able to establish an account with one of the correspondent U.S. Settlement banks with
respect to dollar denominated contracts.

Paul M. Architzel, Esq.
Page 23

and competent authorities; transfer to other DL or DN holders, with prior agreement, customer
positions carried by the defaulting intermediary; transfer funds through another settlement bank,
or make use of other mechanisms to ensure the timely fulfillment of pending obligations.

Pursuant to the Clearinghouse rules, in the event of a default, collateral shall be used to
satisfy the shortfall in the following order: (1) collateral pledged by the defaulting participant;
t, customer
positions carried by the defaulting intermediary; transfer funds through another settlement bank,
or make use of other mechanisms to ensure the timely fulfillment of pending obligations.

Pursuant to the Clearinghouse rules, in the event of a default, collateral shall be used to
satisfy the shortfall in the following order: (1) collateral pledged by the defaulting participant;
(2) collateral pledged by the defaulting participant but issued by third parties; (3) collateral
pledged by the intermediaries; (4) collateral pledged by DL holders; and (5) guaranty funds.

The final line of defense to address the event of a default includes the various guarantee
funds. Pursuant to its bylaws, BM&F maintains a specific capital reserve that shall be used to
“ensure proper settlement and the refund of losses resulting from intermediation of trades
executed in BM&F’s auction systems.” In addition, DL holders have invested in the Clearing
Fund, the purpose of which is to guarantee transactions. The liability of each DL holder to the
Clearing Fund is joint and several, and limited to twice the value of the required deposit, which
is determined by access rights category. The total held in the Clearing Fund as of March 31,
2008, is R$315.67 million (US$189.97 million). In addition, as noted above, the Guarantee Fund
exists as a special purpose entity to refund customers for losses from the unauthorized or illegal
use of customer funds by intermediaries. As of March 31, 2008, the Guarantee Fund stood at R$
92.34 million (US$55.57 million).

V.
THE REGULATORY REGIME IN BRAZIL

A
learing Fund as of March 31,
2008, is R$315.67 million (US$189.97 million). In addition, as noted above, the Guarantee Fund
exists as a special purpose entity to refund customers for losses from the unauthorized or illegal
use of customer funds by intermediaries. As of March 31, 2008, the Guarantee Fund stood at R$
92.34 million (US$55.57 million).

V.
THE REGULATORY REGIME IN BRAZIL

A.
Overview

BM&F and its Access Rights Holders are subject to a comprehensive regulatory regime
administered and enforced by government entities that includes, among other things: financial
and other fitness criteria for industry participants; reporting and recordkeeping requirements;
procedures governing the treatment of customer funds and property; sales practice and other
conduct of business standards; provisions designed to protect the integrity of the markets; and
statutory prohibitions on fraud, abuse, and market manipulation. In addition, pursuant to the
Brazilian regulatory structure, BM&F, as a self-regulatory organization (SRO), has oversight and
self-regulatory enforcement obligations with respect to operation of the market in a financially
sound manner and free from trading, market or customer abuses. BM&F also carries out SRO
functions with respect to oversight of market intermediaries.

Oversight of the Brazilian financial markets is vested in three government entities: the
National Monetary Council (CMN), the Central Bank of Brazil (BACEN), and the CVM. The
CMN is the highest policy-making authority of the Brazilian financial system and is composed of
the Minister of Finance (chairman), the Minister of Planning and Budgeting, and the President of
BACEN. It was created to formulate the monetary and credit policies for the financial and
capital markets to address such matters as availability of credit in the system, form of
remuneration for credit transactions, operating limits of financial institutions, rules for carrying
nd is composed of
the Minister of Finance (chairman), the Minister of Planning and Budgeting, and the President of
BACEN. It was created to formulate the monetary and credit policies for the financial and
capital markets to address such matters as availability of credit in the system, form of
remuneration for credit transactions, operating limits of financial institutions, rules for carrying

Paul M. Architzel, Esq.
Page 24

out foreign investments in Brazil and rules for foreign exchange.41 To implement CMN
Resolutions, BACEN and CVM issue Circulars and Instructions, respectively.

BACEN is the federal agency under the Ministry of Finance responsible for
implementing the monetary and credit policies established by the CMN, regulating the foreign
exchange market and foreign investment flow in Brazil, authorizing admission of new financial
institutions to the market and monitoring operations of financial institutions. Regulation and
supervision of investment banks, securities brokers, securities dealers, and the commodities and
futures exchanges are shared between BACEN and CVM. BACEN, whose chief responsibilities
are centered on prudential and systemic regulation activities, also has the responsibility to license
certain financial institutions. Prior to receiving an operating license from BACEN, financial
institutions must submit a complete economic and financial statement demonstrating compliance
with standards (i.e., minimum capital, the competence and integrity of principals and directors,
etc.).42 BACEN is responsible to ensure that the members of BM&F that are under its
jurisdiction have sufficient working capital and that their monthly accounting information is
made available to the financial market. All audited financial statements are then submitted for
posting on the Brazilian Central Bank Information System
ital, the competence and integrity of principals and directors,
etc.).42 BACEN is responsible to ensure that the members of BM&F that are under its
jurisdiction have sufficient working capital and that their monthly accounting information is
made available to the financial market. All audited financial statements are then submitted for
posting on the Brazilian Central Bank Information System.

The CVM is a federal agency under the Ministry of Finance and is authorized to regulate
and supervise all activities relating to the securities and futures markets. Its chief focus is the
regulation of business conduct and trading activities. It is the main supervisory body of the
Brazilian capital markets, and has had oversight of the securities markets and the enforcement of
securities and corporation laws in Brazil since its powers and authority were defined when it was
formed in 1976. Financial institutions and other institutions authorized to operate by BACEN
are also subject to CVM supervision when conducting business in the capital markets. CVM’s
authorizing legislation was amended in 2001 to expand CVM’s authority by giving it explicit
statutory authority over all commodities and futures exchanges and over the OTC derivatives
markets. Under the provisions of that law, commodity futures exchanges and Commodity
Brokerage Houses are required to be authorized by the CVM.43 CVM has a total of 450
employees. Of these, 33 employees fall under the Superintendent of Market and Intermediary
Relations (SMI) and are responsible for overseeing the regulatory compliance of BM&F
Bovespa and 28 employees are directly involved with enforcement activities.

The Division notes that the Commission previously reviewed the regulatory regime
administered and enforced in Brazil
VM has a total of 450
employees. Of these, 33 employees fall under the Superintendent of Market and Intermediary
Relations (SMI) and are responsible for overseeing the regulatory compliance of BM&F
Bovespa and 28 employees are directly involved with enforcement activities.

The Division notes that the Commission previously reviewed the regulatory regime
administered and enforced in Brazil. On June 28, 2002, in response to a petition from BM&F,
the Commission issued an order pursuant to Commission Rule 30.10 that granted exemptive

41 Advising CMN is the Technical Commission on Currency and Credit, composed of the President of BACEN
(coordinator), the President of CVM, the Executive Secretary for the Minister of Planning and Budget, the Executive
Secretary for the Minister of Finance, the Economic Policy Secretary of the Minister of Finance, the Secretary of the
National Treasury of the Minister of Finance and four directors of BACEN, who are appointed by its President.
42 A financial institution must receive approval from BACEN prior to any significant change to its organization or
operations, including a merger, transfer of headquarters, or material alteration of its capital.
43 Pursuant to CVM Instruction 461, “Organized markets of securities are the stock exchanges, commodities and
futures markets and the organized over-the-counter markets.”

Paul M. Architzel, Esq.
Page 25

relief to designated members of BM&F from the application of certain of the Commission's
foreign futures and options rules based on substituted compliance with certain comparable
regulatory and self-regulatory requirements of a foreign regulatory authority.44 In the order, the
Commission concluded that the standards for relief set forth in Rule 30.10 generally had been
met and that compliance by the Rule 30.10 Firms with applicable Brazilian law and BM&F rules
could be substituted for compliance with certain provisions of the CEA and the Commission's
rules
comparable
regulatory and self-regulatory requirements of a foreign regulatory authority.44 In the order, the
Commission concluded that the standards for relief set forth in Rule 30.10 generally had been
met and that compliance by the Rule 30.10 Firms with applicable Brazilian law and BM&F rules
could be substituted for compliance with certain provisions of the CEA and the Commission's
rules set forth in the Commission's order.45

B.
Requirements Applicable to Exchange Operations

CVM’s program to oversee and monitor the exchanges that it regulates for their
compliance with applicable statutory and regulatory requirements stands on two main pillars: (1)
prior approval of all exchange rules and resolutions and (2) review of exchange compliance
through an on-going requirement of exchange self-reporting. CVM Instruction No 461 requires
the exchange to obtain CVM approval prior to making effective any exchange rule, bylaw, policy
or amendment thereto with respect to the operating rules of the market, the bylaws of the
operating entity, changes in the operating company’s organizations or changes to the
organization of the market, procedures followed by the Self-Regulatory Department or of the
Self-Regulatory Department’s management bodies, including any changes with respect to the
execution of its self-regulatory commitments, and the operation of the exchange’s loss recovery
mechanism.46 Pursuant to that Instruction, CVM conducts a thorough review of proposed
exchange rules or rule amendments and actively exercises its review authority and may request
changes even to relatively technical operating rules or procedures.

The second means by which CVM oversees exchange compliance is by requiring
exchanges to report on compliance and regulatory programs on a periodic basis
sm.46 Pursuant to that Instruction, CVM conducts a thorough review of proposed
exchange rules or rule amendments and actively exercises its review authority and may request
changes even to relatively technical operating rules or procedures.

The second means by which CVM oversees exchange compliance is by requiring
exchanges to report on compliance and regulatory programs on a periodic basis. These include,
among others, the following reports submitted to CVM by the Chief Officer of the Self-
Regulation Department: (1) immediate notification of each and every severe breach of CVM
rules; (2) a monthly report describing possible failure to observe any exchange rule during the
preceding month, including information on the violative transaction; (3) a monthly report on
audits that have been completed in the period; and (4) a monthly reports on the number of
administrative actions initiated by the exchange, including those referring to the use of the loss
reimbursement mechanism, with the identification of the persons interested and the respective

44 67 Fed. Reg. 45056 (July 8, 2002).
45 The Division notes that nothing in the no-action relief provided herein abrogates or otherwise alters the
obligations of FCMs or Rule 30.10 Firms under the CEA, Commission rules, or relevant Part 30 orders.
46
Pursuant to CVM Instruction, the managing entity of an exchange must maintain a loss recovery mechanism for
the purpose of ensuring that investors can recover their losses arising from an action or omission of a person
authorized to trade or the officers, employees or representatives thereof in relation to the brokerage of transactions
carried out on an exchange or to the custody services
46
Pursuant to CVM Instruction, the managing entity of an exchange must maintain a loss recovery mechanism for
the purpose of ensuring that investors can recover their losses arising from an action or omission of a person
authorized to trade or the officers, employees or representatives thereof in relation to the brokerage of transactions
carried out on an exchange or to the custody services. With respect to recordkeeping, the managing entity must,
among other things, keep a record of the transactions in the trading environments managed by the entity for no less
than five years or through the closing of investigations in the event that CVM notifies the managing entity of any
existing investigation procedure.

Paul M. Architzel, Esq.
Page 26

conduct. In addition, CVM has full access to the details of each transaction that takes place on
the Exchange through a daily report from the Exchange of transactions submitted to auction and
of transactions cancelled and the daily movement of transactions in each environment or trading
system, including information on persons authorized to trade and the beneficial owners of
accounts. Thus, CVM is able to follow trading on an individualized transaction basis and make
inquiries of the Self-Regulatory Department of any action that the Self-Regulatory Department
takes, or fails to take, in response to such trading activities.

In its role as regulator of BM&F, and in order to prevent or correct any market or
customer abuse, the CVM has authority to: (1) approve, suspend or cancel registrations; (2)
oversee operation of the commodities and futures markets, as well as the conduct of market
intermediaries; (3) disclose information or recommendations to provide clarification for market
participants; (4) prohibit market participants from engaging in acts that could be detrimental to
the operation of the market and its investors; and (5) impose penalties
, suspend or cancel registrations; (2)
oversee operation of the commodities and futures markets, as well as the conduct of market
intermediaries; (3) disclose information or recommendations to provide clarification for market
participants; (4) prohibit market participants from engaging in acts that could be detrimental to
the operation of the market and its investors; and (5) impose penalties. As noted above,
organized futures markets must be authorized by the CVM prior to beginning their activities.
Authorization depends on meeting a number of regulatory requirements, including net equity or
capital stock requirements, free trading of membership titles or shares that will be issued, and
providing access rights to its markets and systems of member companies or access rights holders
as provided for in the Exchange’s bylaws.

In its oversight role of organized exchange markets, the CVM is also authorized to: (1)
suspend adopted exchange rules if they are deemed to be inadequate for their operation, and
require adoption by the exchange of those rules that CVM considers to be necessary; (2) suspend
decisions taken by exchanges, either wholly or in part, particularly when protecting investors; (3)
cancel trades on exchanges or determine that clearinghouses suspend settlement of trades in case
of transactions that could characterize violations of legal and regulatory rules; (4) suspend
trading sessions on exchanges to prevent or correct abnormal market situations, as defined in
applicable regulations; (5) suspend or revoke, through an administrative proceeding, the
exchange’s authorization for operation in cases of material violations pursuant to applicable
regulations; (6) order, on a preventative basis, that exchange directors or officers be immediately
removed when there is evidence of a violation committed by such person that is incompatible
with the office to which they have been elected or designated; (7) order exchanges to suspend
activities of their members and entities authorized t
n in cases of material violations pursuant to applicable
regulations; (6) order, on a preventative basis, that exchange directors or officers be immediately
removed when there is evidence of a violation committed by such person that is incompatible
with the office to which they have been elected or designated; (7) order exchanges to suspend
activities of their members and entities authorized to operate in their systems; (8) order
restatements of financial statements of entities that manage exchanges that are not in compliance
with Brazilian corporate law and with applicable regulations; and (9) deny approval of rules or
procedures, or require their amendment, whenever these rules or procedures are considered to be
insufficient for proper operation of the market or in violation of applicable legal or regulatory
provisions. In addition, BM&F must subject its new futures contracts and its bylaws and
operational rules to the prior approval of the CVM.47

C.
Prohibition of Abusive Trade Practices and Financial Protections

47 Both CVM and BACEN require exchange rules to address the protection of investors’ rights, the accuracy and
transparency of price formation, observance of all trading standards and, in general, sound market practices.

Paul M. Architzel, Esq.
Page 27

Abusive trade practices are prohibited under Brazilian law. The CVM is empowered to
investigate any illegal act or unfair practice of a market participant by opening an administrative
inquiry that commences with a public investigation and ends with a decision by the Board of
Commissioners
of all trading standards and, in general, sound market practices.

Paul M. Architzel, Esq.
Page 27

Abusive trade practices are prohibited under Brazilian law. The CVM is empowered to
investigate any illegal act or unfair practice of a market participant by opening an administrative
inquiry that commences with a public investigation and ends with a decision by the Board of
Commissioners. A range of penalties may be imposed, to include: (1) warnings; (2) fines,
limited to R500,000 (US$300,904) or three times the amount of economic advantages gained, or
losses avoided, due to the violation; (3) prohibition (limited to 20 years) on appointment as a
Director or to the Board of Trustees of any corporation, particularly in the financial intermediary
industry; (4) suspension of registration with regulatory agencies; (5) cancellation of
authorizations granted by regulatory agencies; (6) prohibition (limited to 10 years) on trading
and dealing, directly or indirectly, on specific securities and particular markets; and (7)
prohibition (limited to 20 years) on work for any financial company or entity in the brokerage
industry. In addition, any case may be referred for criminal charges, as appropriate, to the
Federal Attorney’s Office.

Additionally, Brazilian law penalizes fraudulent transactions or other deceitful action
aimed at artificially changing the regular operation of the securities markets for the purpose of
obtaining undue advantages or profits for oneself or others, or to cause damage to third parties.
CVM, by Instruction, specifically prohibits managers and stockholders of public companies,
intermediaries, and other participants in the securities markets, which includes futures and
commodities exchanges, from (1) creating artificial conditions of demand, supply or price, (2)
engaging in price manipulation, (3) engaging in fraudulent trading, and (4) using unfair practices.

BM&F is supervised with respect to financial integrity issues by both BACEN and the
CVM
blic companies,
intermediaries, and other participants in the securities markets, which includes futures and
commodities exchanges, from (1) creating artificial conditions of demand, supply or price, (2)
engaging in price manipulation, (3) engaging in fraudulent trading, and (4) using unfair practices.

BM&F is supervised with respect to financial integrity issues by both BACEN and the
CVM. Brazilian law requires that clearinghouses and clearing and settlement services must have
mechanisms and safeguards to guarantee settlement of obligations, including adequate security
procedures and rules for risk control, contingencies, loss sharing among participants, and the
direct execution of positions held in custody, of contracts and of collateral posted by participants.
Exchanges are required to establish financial safeguards and guarantee funds to guard their
clearing and settlement operations and facilities and to protect member firms and their customers
from defaults, insolvencies or malpractice by market participants. Brazilian law also requires
each exchange to maintain an internal audit system and to monitor its internal controls.

D.
Emergency and Supervisory Enforcement Authority

With respect to emergency authority, BACEN and CVM, pursuant to Brazilian law, have
the power to: (1) suspend the execution of rules adopted by futures exchanges; (2) adopt rules
they deem necessary; (3) void totally or partially the enforcement of decisions taken by futures
exchanges; (4) decree the recess of futures exchanges in order to prevent or correct abnormal
situations; and (5) adopt other measures they deem necessary for the good functioning of the
market. In addition, the BM&F bylaws vest broad authority in the Executive Officers to take
extraordinary actions when warranted to address market disruptions. For instance, the
Clearinghouse Officers are authorized to take all applicable measures in the event of a payment
delay
or correct abnormal
situations; and (5) adopt other measures they deem necessary for the good functioning of the
market. In addition, the BM&F bylaws vest broad authority in the Executive Officers to take
extraordinary actions when warranted to address market disruptions. For instance, the
Clearinghouse Officers are authorized to take all applicable measures in the event of a payment
delay. The CEO and the Clearinghouse Officers and Trading Officer, meeting together, are
authorized to: (1) declare a default; (2) establish operational, credit and risk limits for
participants; and (3) determine for Access Rights Holders and their clients the total or partial
settlement of open interest in one or more Exchange markets.

Paul M. Architzel, Esq.
Page 28

In addition, BACEN may restrict, suspend, or revoke the license of any non-compliant
financial institution.48 For example, Brazilian law empowers BACEN to require institutions with
liquidity problems to: (1) inject additional capital; (2) transfer shareholder control; and/or (3)
undertake company reorganization through incorporation, merger, or dissolution. If necessary,
BACEN may expropriate the shares of the controlling shareholder and sell the shares at public
auction.

E.
Regulation of Access Rights Holders and Intermediaries

Any firm that intends to act as a Commodities Brokerage House must receive an
operating license directly from CVM. Brokerage companies must comply with the accounting
procedures established by the CMN and BACEN, and must submit financial statements every six
months to independent auditors appointed by CVM. Only a natural person resident in Brazil
may serve as the manager of a brokerage company, and each brokerage company is required to
have a technically-qualified manager for each area of operations
CVM. Brokerage compa

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/CFTC_L08_18. Check the current official text before relying on it. Not legal advice.