This article is of particular importance to foreign institutions that intend to obtain a broker’s license in the Brazilian market.
The Brazilian OTC derivatives market is a complex and regulated environment. In order to operate in this market, both domestic and foreign institutions must comply with a strict set of rules and regulations. One of the key players in this market is the registration entity, which plays a vital role in ensuring the transparency, efficiency, and integrity of OTC derivatives transactions.
Derivative contracts are securities (Art. 2, VII and VIII, Brazilian Law No. 6,385/76). As securities, they are subject to the provisions of Law No. 6,385/76 and the regulation of the CVM (Comissão de Valores Mobiliários).
Brazilian Law No. 6,385/76 provides that in order for derivative contracts admitted for trading in Brazil to be legally valid, they must be registered with registration entities authorized by the Brazilian Central Bank or the CVM (art. 2, §4º). Registration, therefore, is a condition for the validity of the derivative contract.
This rule applies not only to stock exchange operations but also to OTC operations in Brazil. In Brazil, this role is commonly played by a organized market administrative entity (Art. 143 of Resolution CVM No. 135).
The Importance of the Relationship between Brokers and OTC Market Administrative Entities
As discussed earlier, the relationship between a broker and a OTC market administrative entity is crucial for ensuring that the derivative contracts offered by the broker to Brazilian investors are validly traded. The OTC market administrative entity must also approve the contracts that will be registered (Normative Annex II, Resolution CMN No. 135, Art. 9).
This issue is particularly important for foreign entities seeking to obtain an intermediary license in Brazil for at least two reasons: (i) this validity condition is not commonly found in other countries, so foreign institutions may not be accustomed to it, and (ii) not all derivative contracts will be approved by the market administrator or accepted for registration purposes.
Foreign institutions that wish to obtain a broker license in Brazil must necessarily offer local products to investors residing in Brazil. This means bringing innovations to the investors based on the negotiation of financial products accepted for registration in Brazil. This makes prior alignment between the foreign institution and the OTC market administrators a basic requirement for the success of the foreign institution’s operations in Brazil, including in the licensing process before the Brazilian Central Bank.
In practice, the Brazilian regulator itself, during the licensing process, may request evidence that the products to be offered in the Brazilian market are accepted by both the OTC market administrator and the CVM (Art. 6, Resolution CMN No. 4970/21).
