B3 S A Brasil Bolsa Balcão : 001-2020-VOP-BSM-External Communication

October 8, 2020 001/2020-VOP-BSM

E X T E R N A L C O M M U N I C A T I O N

Re: Clarifications about Trading Securities Outside of the Markets Operated by B3

Trading in securities outside of organized markets aims to meet investors' demand for securities that are not listed on an exchange, being known to the market as OTC desk trading.

Included among this demand are securities deriving from other securities which are listed and traded in the markets operated by B3 (for example, structured transactions, deltas and/or strategies), known hereafter as "combinations."

This External Communication consolidates B3 and BSM's understanding of the subject, which has been previously set out in workshops, seminars and decisions by the BSM Supervisory Board, all of which have been published on the BSM website. BSM has also covered the issue in specific meetings with the Participants.

In this regard, the present External Communication will set out: (1) the definition of OTC desk trading; (2) applicable regulations; (3) OTC desk trading conditions (4) examples (non-exhaustive) of OTC desk trading usage compatible with the regulations; (5) execution of transactions at B3 resulting from OTC desk trading of combinations that derive from listed securities; (6) example of an irregular transaction; (7) the difference between OTC desk trading and looking for a counter order and; (8) further information.

1. Definition of OTC desk trading

1.1. The market uses the term OTC desk trading to designate trading outside of the markets operated by B3, of securities1, whereby:

1 Securities are understood as being the assets as foreseen in art. 2 of Law 6.385/76.

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1. intermediaries participate through their proprietary account or on behalf of clients and/or investors and, cumulatively,
2. there is competitive interaction between buy and sell orders to define the quantity and price of a security.

2. Applicable regulations

1. Securities accepted for trading on B3's2 organized markets are those traded through buy and sell orders entered into the trading system operated by B3, hereafter named "listed securities".
2. Combinations that derive from two or more listed securities are also considered to be listed securities, if these combinations are available for trading in the markets operated by B3. In this case, the trading of these securities also occurs through buy and sell orders entered to the trading systems operated by B3.
3. There are securities, derived or not from listed securities, that are not available for trading in the markets operated by B3. In this case the buy and sell orders can be OTC desk traded, performing an important role of granting liquidity for trading in securities that are not listed on B3 and thus being complementary and an accessory to trading in the markets operated by B3.
4. On the other hand, listed securities, that is, those traded via buy and sell orders entered to the systems operated by B3, cannot be OTC desk traded, according to article 59 of CVM instruction 461/07, which establishes that "Trading [is prohibited] outside the organized market of securities admitted therein(…)".
5. Table 1 below outlines the situations in which securities may be traded or not in OTC desk trading:

2 According to article 57, paragraph 1 of CVM Instruction 461/07, securities accepted for trading on the organized exchange markets of B3 are understood as being registered by CVM and accepted for trading in B3's organized markets, as set forth in the Regulamento para Listagem de Emissores e Admissão à Negociação de Valores Mobiliários

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Table 1 - Outline of situations subject, or not, to OTC desk trading

Assets	OTC desk trading possibility
Security listed for trading on B3	Cannot be OTC desk traded
Security not listed for trading on B3	Can be OTC desk traded
Combination of listed securities and this	Cannot be OTC desk traded
combination is listed for trading on B3
Combination of listed securities and this	Can be OTC desk traded
combination is not listed for trading on
B3
Combination comprised of a security	Can be OTC desk traded
listed for trading on B3 and a security
not listed for trading on B3, or
government bonds

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2.6. Please note that art. 20, III3 and art. 32, I4 of CVM Instruction 505/11 assign to the intermediary responsibility for informing its clients about the regular practice of securities trading, as described in Table 1.

3. OTC desk trading conditions

1. OTC desk trading is allowed in unlisted securities, including combinations of listed securities unavailable for trading in the B3 systems, as described in Table 1.
2. The brokers that take part in OTC desk trading must comply with the rules of CVM Instruction 505/11, in particular those regarding recording orders, treatment of conflicts of interests and meeting best execution conditions.

4. Examples (not exhaustive) of OTC desk trading usage compatible with the regulations

4.1. Based on the understandings contained in items 2.1, 2.2 and 2.3, the following combinations exemplify regular OTC desk trading usage:

1. Yield curve: One-Day Interbank Deposit Futures Contract (DI1), Futures Contract Referencing the Average Rate for One-Day Repurchase Agreements (OC1), ID x US Dollar Spread Futures Contract (DDI), U.S. Dollar Spread Futures Contract Referencing One-Day Repurchase Agreements (DCO). Excepting the combinations provided by B3 with FRA on ID x US Dollar Spread (FRC), Forward Rate Agreement on One- Day Repurchase Agreements x US Dollar Spread (FRO), Forward Rate Volatility Structured Transaction (VF1 to VF9) and Interbank Deposit Spot Rate Volatility (VID) Structured Transactions, which cannot be traded off of B3;

1. "Art. 20. The broker must establish rules, procedures and internal controls on the execution of orders in order to: (….) III - ensure that customers are informed about the different markets where the securities specified in the order can be negotiated."
2. "Art. 32. The broker must: I - Ensure the integrity and regulate the operation of the market, including the selection of customers and the requirement of collateral;"

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