MANAGEMENT S DISCUSSION & ANALYSIS 2017

Transcription

1 FINANCIAL STATEMENTS 2017

2 MANAGEMENT S DISCUSSION & ANALYSIS 2017 Dear Shareholders, B3 S.A. Brasil, Bolsa, Balcão ( B3 or Company ) hereby submits for your consideration its Management Report for HIGHLIGHTS OF THE YEAR The main highlight of 2017 was the conclusion of the business combination between BM&FBOVESPA and Cetip and, therefore, the creation of B3. This combination, which had already been approved by shareholders in May 16, received the go-ahead from regulators in March 17 and its conclusion resulted in the strengthening of the Company's business model and strategic positioning, creating a financial market infrastructure company that offers diversified and vertically integrated portfolios of products and services, state-of-the-art technology, as well as excellent operational and risk management standards. Due to the combination, part of management s attention was dedicated towards the integration process of the two Companies. The execution of the integration program, at the end of 2017, was aligned with the plan, with emphasis on deliveries related to the integration of the financial management system, the unification of human resources practices, the physical integration of teams and the launching of the Company's new corporate culture project. With respect to the synergies announced in the premerger period, the R$100 million in recurring bases that were expected to be reached three years after the merger, will already be fully captured in 2018 and could reach R$110 million by The combination is also expected to create value for B3's customers. In this sense, the commercial and product development areas were reorganized, with changes in our customer coverage structure and in the Company's project management office. These enhancements will bring B3 closer to its clients and expand its ability to develop and deliver new products and services. Another relevant delivery for B3 was the completion of the second phase of the Clearings integration, which consolidated technological infrastructure, rules and risk models applicable to derivatives, equities and corporate fixed income markets in a single clearinghouse. The conclusion of this phase enabled the Company to release R$21 billion in deposited guarantees, generating efficiency for clients while maintaining the same level of systemic security for the market. On a macroeconomic backdrop, we highlight the signs indicating that the country s recession period has come to an end, the control of inflation and, above all, the relevant reduction in interest rates, which stood at 13.75% at the beginning of 2017 and ended the year at 7.00%. These improvements positively impacted capital market activities, with the recovery of fund raising operations by companies, either via the stock market or through the issue of debt instruments, and the recovery of credit market for vehicle financings. B3's total revenues in 2017 increased by 10.8% when compared to the previous year, with growth in all of its business segments. We specially highlight the Bovespa segment, which reported a 16.2% increase in revenues reflecting the recovery of the stock market, and the Cetip Financing segment, which increased revenues by 15.5% due to the recovery of vehicle financing activities. Recurring net income, which excludes extraordinary items related to the business combination with Cetip or those not related to the company's recurring operations, decreased by 12.6% compared to 2016, mainly impacted by lower financial income due to the increase in debt and reduction in cash, both impacted by the business combination with Cetip. In 2018, B3 will remain focused on being ever closer to its clients, participants and regulators, connecting them and contributing to the development and growth of the Brazilian financial market. OPERATIONAL PERFORMANCE Financial and Commodities Derivatives ( BM&F Segment ) 1 The average daily volume (ADV) of the BM&F segment reached 3.0 million contracts in 2017, up by 26.4% when compared to 2016, reflecting a volume growth in all contract groups, with highlights to the Interest rate in BRL and Stock indices contracts, which increased 31.6% and 54.2%, respectively. The increase in the contract volume for Interest rate in BRL, the most representative group in the segment, is directly related to the increase in volatility resulting from the cycle of sharp drops in interest rates and uncertainties arising from the political and macroeconomic scenarios in Brazil. As for Stock indices contracts, the increase is due to the 77.8% higher volume of Mini contracts of Stock indices, which was particularly driven by the increase in volume of individual investors. 1 The volume of Mini contracts is weighted in the respective standard contracts, impacting both the volumes and the RPC of these groups of contracts. 2

3 MANAGEMENT S DISCUSSION & ANALYSIS 2017 Average Daily Volume (thousands of contracts) Contracts /2016 (%) Interest rates in BRL 1, , % FX rates % Stock indices % Interest rates in USD % Commodities % TOTAL 2, , % The increase in trading volumes was partially offset by the 22.1% decline in average Revenue per Contract ("RPC") when compared to the previous year. This reduction was observed in all groups of contracts, mainly as a result of: (i) the increase of options contracts in relation to futures contracts, as options have a lower RPC than futures contracts; (ii) the increase of day trade operations (buy and sell on the same day), whose prices are lower than those of other operations; and (iii) a 9.5% appreciation of the Brazilian Real against the US Dollar, negatively impacting the RPC of foreign-currency denominated contracts (FX rates, Interest rates in USD and commodities). Average RPC (R$) Contracts /2016 (%) Interest rates in BRL % FX rates % Stock indices % Interest rates in USD % Commodities % OVERALL AVERAGE % In terms of performance for the different groups of investors in the BM&F segment, foreign investors remained as the most representative group among the four categories, despite their small decline in participation, from 40.0% in 2016 to 38.4% in Individual investors, which have a 16.4% stake, increased their average volume traded by 83.2% from 2016 to 2017 and concentrated their activities mainly in Mini contracts, as previously mentioned. Distribution of ADV by Investor Category (%) Equities and Equity Derivatives ( Bovespa Segment ) The average daily traded value (ADTV) in equities and equity derivatives (options and forward) reached R$8.7 billion in 2017, up by 17.6% over the previous year. This increase is mainly reflected by the 18.4% growth in cash volumes, which represented 96.6% of the entire segment. 3

4 MANAGEMENT S DISCUSSION & ANALYSIS 2017 Average Daily Traded Value (R$ million) Market /2016 (%) Stocks and equity deriv. 7, , % Cash market 7, , % Derivatives % Options market (stocks / indices) % Forward market % Fixed income and other cash-market % TOTAL 7, , % Average market capitalization 2 reached R$2.80 trillion in 2017, up by 25.0% when compared to On the other hand, the average market capitalization increase was partially neutralized by the five-percentage point drop in turnover velocity 3, which went from 79.0% in 2016 to 74.0% in Average Market Capitalization (R$ trillion) and Turnover Velocity (%) Trading and post-trading margins in this segment stood at basis points in 2017, remaining stable when compared to the previous year (-0.9%). Regarding the participation by groups of investors in the Bovespa segment, non-resident investors remained as the most representative among the four categories, with 49.2% of the total traded value. When compared to 2016, the institutional investors group, the second most representative in the segment, increased their ADTV by 29.5%. Distribution of ADTV by Group of Investors (R$ billion) Securities (Cetip UTVM Segment) The financial volume of new registrations totaled R$15.8 trillion in 2017, down by 6.1% versus The segment reported a 7.1% increase in volume of fixed income instruments, mainly explained by the 49.3% growth in registration of bank deposit certificates ("CDBs") and, on the other hand, a 17.7% drop in average volume of OTC derivatives and structured transactions. 2 Market capitalization is the product of multiplying the number of shares issued by listed companies by their respective market prices. 3 Turnover velocity is the result of dividing the volume traded in the cash market during the period by the average market capitalization for the same period. 4

5 MANAGEMENT S DISCUSSION & ANALYSIS 2017 Average Registration Volume by Instruments (R$ trillion) The average price charged for the registration of fixed income instruments declined by 8.6%, impacted by the change in the mix of instruments registered for this group, mainly due to greater participation of one day Interbank Deposits (DI), which have lower prices, and by the migration of customers to lower price ranges due to their increase in volumes. On the other hand, the average price charged for the registration of over-the-counter derivatives and structured transactions increased by 18.2%, explained by lower contract volume and registration of products that reached their price cap. Average Registration Prices (basis points - bps) /2016 (%) Average price fixed income % Average price OTC derivatives/ structured notes (COE) % The average stock of registered assets, in which maintenance (CSD / Repository services) fees are applied, reached R$6.3 trillion, up by 5.0% when compared to the previous year, reflecting the 16.0% growth in average volume of fixed income instruments that was partially offset by a 11.5% drop in volume of over-the-counter derivatives and structured transactions. It should be noted that the growth in fixed income instruments, on which apply the maintenance fees, reflects both the increase in CDBs registrations during the year and the migration of this product to the new pricing model implemented in Mar 15, which reduced the previously charged registration and transaction fees and established a maintenance fee, with gradual shifts of fees that are applicable only to registrations made after the announced change. On the other hand, the higher relative participation of CDBs caused a reducing effect on the average monthly price charged for this service as their prices are lower than the average price of fixed income instruments. Average Maintenance Volume by Instrument (R$ trillion) Average Monthly Maintenance Fee (basis points - bps) /2016 (%) Average price fixed income % Average price OTC derivatives/ structured notes (COE) % The average number of clients that pays utilization fees increased by 1.3% versus 2016 and the price charged for this service increased by 6.2%, reflecting the annual price readjustment by inflation. The number of processed transactions during the year was 4.4% lower than It is worth noting that part of this decline reflects the impacts of Resolution issued by the Central Bank, which restricted, as of 2017, banks' ability to use debentures issued 5

6 MANAGEMENT S DISCUSSION & ANALYSIS 2017 by their leasing companies, causing them to replace this instrument with other bank funding alternatives, such as CDBs, of which only volumes above R$5,000 need to be registered in the Company s systems. Financing (Cetip UFIN Segment) /2016 (%) Monthly Utilization Average number of clients 12,305 12, % Average price (R$) 1,536 1, % Transactions Total number of transactions 372, , % Average price (R$) % Interbank Payment Chamber (CIP) Processed electronic cash transfers (EFT) 411, , % Average price (R$) % The volume of liens registered in the Sistema Nacional de Gravames ("SNG") were positively impacted by the 9.7% increase in the number of vehicles financed. This increase is explained by the combination of a 5.4% increase in the total number of vehicles sold with increased credit penetration, which went from 28.2% of total vehicles sold in 2016 to 29.3% in 2017, reflecting the recovery in the economic activity. As for the Contracts System, there was a 6.4% increase in the number of contracts registered when compared to the previous year, reflecting the combination of growth in number of vehicles financed and decrease in B3 s market share, which went from 73.6% in 2016 to 71.4% in The reduction in market share is explained by the fact that this service was interrupted in the state of Minas Gerais as of Sep /2016 (%) SNG Number of vehicles sold (millions) 16,516 17, % New 3,174 3, % Used 13,342 14, % Number of vehicles financed (millions) 4,654 5, % New 1,740 1, % Used 2,914 3, % % Vehicles financed / vehicles sold 28.2% 29.3% 116 bps Contracts Systems Contracts added (millions) 3,426 3, % % Contracts added / vehicles financed 73.6% 71.4% -224 bps ECONOMIC AND FINANCIAL PERFORMANCE The financial statements for 2017 were impacted by the conclusion of the business combination between BM&FBOVESPA and Cetip on March 29, As a consequence, Cetip's results were consolidated to the Company's financial statements as of March 30, For purposes of comparability of the Company's combined performance, we hereby present the combined managerial results for 2017 and

7 MANAGEMENT S DISCUSSION & ANALYSIS 2017 Revenues 2017/ (In thousand of Brazilian Reals, (%) unless otherwise indicated) IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting Total revenues 4,072,109 4,439,101 1,108,107 2,576,426 4,005, % 10.8% Trading/settlement - BM&F 1,108,107 1,108,107 1,050,397 1,050, % 5.5% Derivatives 1,089,097 1,089,097 1,030,072 1,030, % 5.7% Foreign exchange 19,010 19,010 20,325 20, % -6.5% Trading/settlement - Bovespa 1,136,016 1,136, , , % 16.2% Trading fees 180, , , , % 15.0% Clearing fees 924, , , , % 15.2% Others 31,725 31,725 18,677 18, % 69.9% Cetip Securities segment 834,748 1,101,370-1,061, % Registration fees 89, , , % Maintenance (CSD/TR) 375, , , % Monthly utilization 184, , , % Transaction fees 101, , , % Other revenue from services 82, , , % Cetip Financing segment 323, , , % SNG 122, , , % Contracts Systems (Sircof) 148, , , % Market data and Development of solutions 51,913 68,098-52, % Other Revenues 1,207-1, , % % 0.0% Other revenues 669, , , , % 22.2% Securities lending 100, , , , % -3.4% Listing 57,247 57,247 52,935 52, % 8.1% Depository, custody and back-office 227, , , , % 27.9% Trading access (Brokers) 40,105 40,105 36,186 36, % 10.8% Vendors 108, , , , % 6.6% BM&FBOVESPA bank 37,235 37,256 39,804 39, % -6.5% Others 99,457 99,476 36,012 36, % 174.8% Revenue deductions (398,513) (432,931) (255,645) (398,236) 55.9% 8.7% PIS and Cofins (335,720) (363,438) (220,500) (328,116) 52.3% 10.8% Service tax (62,793) (69,493) (35,145) (70,120) 78.7% -0.9% Net revenues 3,673,596 4,006,170 2,320,781 3,606, % 11.1% Total revenues: B3 ended 2017 with total revenues (before deducting PIS/COFINS and ISS) of R$4,439 million, an increase of 10.8% when compared to 2016, reflecting the revenue growth in all its business segments, as follows. Revenues from trading, clearing and settlement - BM&F segment: reached R$1,108.1 million in 2017 (25.0% of the total), up by 5.5% over the previous year, as a result of the growth in average contract volumes. It is worth noting that in Feb 17, the Company set up a cash flow hedge 3 designating the foreign currency loan taken in Dec 16 as coverage for foreign exchange impacts on the US Dollar denominated revenues of this segment (FX rates and Interest rates contracts in USD), reducing the impact of the exchange rate variation on revenues and, on the other hand, on financial expenses. If we exclude the effect of this cash flow hedge, revenues from this segment would have increased by 3.6% when compared to Revenues from trading, clearing and settlement - Bovespa segment: reached R$1,136.0 million (25.6% of the total), up by 16.2% compared to Revenues from volumes traded (trading and post-trading) amounted to R$1,104.3 million, up by 15.1% over the previous year, reflecting the growth in trading volumes. In addition, other revenues from the Bovespa segment reached R$31.7 million, 69.9% higher than 2016, mainly due to the increase in revenues related to the settlement of public offerings. 3 The average RPC for USD FX rates and interest rates contracts in 2016 considers the average PTAX closing rate at the end of the months from Dec 15 to Nov 16 (R$3.50), while the average RPC for 2017 considers the average PTAX closing rate at the end of the months from Dez 16 to Nov 17 (R$3.19). However, with the adoption of the cash flow hedge from Feb 17 to Dec 17 and the designation of a foreign currency loan to cover the impact of exchange rate variations on revenues generated by such contracts, revenues were recognized based on the Exchange rate of R$3.37 in

8 MANAGEMENT S DISCUSSION & ANALYSIS 2017 Revenues from securities - Cetip UTVM segment: reached R$1,101.4 million in 2017 (24.8% of the total), up by 3.7% versus 2016, mainly explained by the 7.7% growth in monthly utilization revenues, largely due to the annual price readjustment by inflation ("IGP-M"), and the 14.8% increase in other revenues, reflecting the higher number of processed electronic cash transfers (TEDs). Revenues from financings - Cetip UFIN segment: reached R$423.6 million in 2017 (9.5% of the total), up by 15.5% versus 2016, mainly due to: (i) growth in SNG revenues by 12.5%, explained by the 9.7% increase in the number of vehicles financed and the annual price readjustment by inflation, which were partially offset by revenue deferral from previous years 4 ; and (ii) growth in Contract System revenues by 14.3%, resulting from the increase in the number of contracts registered and the annual price readjustment by inflation. Other revenues: revenues not tied to volume traded reached R$670.0 million (15.1% of the total) in 2017, up by 22.2% when compared to the same period of the previous year. Key highlights were: Depositary, custody and back-office: reached R$227.2 million (5.1% of the total), up by 27.9% versus 2016, as a result of: (i) a 51.3% increase in revenues from Tesouro Direto, which totaled R$99.3 million in 2017; (ii) the price readjustment by inflation, as of Jan 17, for certain depositary services; and (iii) the 6% increase in the average number of accounts at the central depositary. Market data: revenues from market data reached R$108.3 million (2.4% of the total), up by 6.6% versus 2016, mainly explained by the annual price readjustment by inflation. Securities lending: reached R$100.4 million (2.3% of the total), down by 3.4% when compared to the same period of the last year, resulting from lower volumes of outstanding contracts in the quarter and reflecting reduced investor willingness to implement strategies that bet on the decrease of stock prices in the Bovespa segment. Others: reached R$99.5 million (2.2% of the total), up by 174.8% versus the previous year, composed by provision reversals of: (i) R$57.8 million related to a legal proceeding in which the payment of additional social security contribution was being discussed and there was a favorable outcome, in the sense that the Company does not apply to the list of companies of which the additional contributions were being discussed; and (ii) R$22.6 million related to liabilities associated with the maintenance of the Company s healthcare plan 5. Net revenues: net revenues increased by 11.1% when compared to 2016, reaching R$4,006.2 million in Expenses Expenses reached R$2,609.1 million in 2017, up by 51.7% when compared to the previous year. Excluding amortization expense of intangible assets of R$570.3 million from the business combination with Cetip, total expenses would have been R$2,038.8 million, an 18.5% increase when compared to 2016, mainly explained by non-recurring items related to the combination with Cetip. 2017/ (In thousand of Brazilian Reals, (%) unless otherwise indicated) IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting Expenses (2,125,051) (2,609,112) (1,226,195) (1,720,032) 73.3% 51.7% Personnel (628,339) (692,507) (505,105) (730,604) 24.4% -5.2% Data processing (182,512) (188,988) (144,648) (183,628) 26.2% 2.9% Deprec. and amortization (715,560) (742,137) (98,320) (204,048) 627.8% 263.7% Third-party services (111,545) (130,232) (45,530) (101,105) 145.0% 28.8% Maintenance (20,890) (22,085) (16,102) (20,977) 29.7% 5.3% Communication (6,353) (7,629) (5,292) (10,176) 20.0% -25.0% Marketing (25,937) (27,990) (11,396) (22,984) 127.6% 21.8% Taxes (9,072) (10,113) (7,869) (8,588) 15.3% 17.8% Board/comittees compensation (13,973) (15,511) (9,798) (15,895) 42.6% -2.4% Related to the combination with Cetip (269,047) (491,832) (65,629) (78,783) 310.0% 524.3% Others (141,823) (280,087) (316,506) (343,244) -55.2% -18.4% 4 The Company recognizes a part of SNG revenues at the time of the registration of a financial restriction and the remaining revenues during the period in which the financial restriction remains registered until it is removed. 5 According to Law nº 9.656/98, it is provided to the employee which contributes with any amount of money to the health plan of the Company, the right to maintain their status as beneficiary in the event of being fired or retired, as long as the employee assumes the entire cost of his plan. The provision set up in Dec 16 is related to the difference, over time, of the average cost between the health plan negotiated by the Company and the estimated average cost that inactive beneficiaries would bear if they did not maintain the condition of beneficiaries. As of 2017, the Company began to adopt the contribution tables by age group model for its healthcare plans so that the amounts paid by former employees are now calculated according to the respective age group, thus eliminating the potential shortfall. 8

9 MANAGEMENT S DISCUSSION & ANALYSIS 2017 Personnel and payroll-related charges: totaled R$692.5 million, down by 5.2% versus This expense line was impacted by the 3.0% adjustment under the annual collective bargaining agreements to Company's salary base as of Aug 17 and the reduction of expenses resulting from the synergy gains generated by the Cetip transaction. Depreciation and amortization: totaled R$742.1 million in 2017, impacted by the amortization of intangible assets in the amount of R$570.3 million resulting from the business combination Cetip. Third party services: reached R$130.2 million, up by 28.8% versus the previous year. This growth reflects the increase in billing expenses, which totaled R$68.8 million in 2017 (versus R$47.2 million in 2016), and higher expenses with legal fees and consultants related to the development of the Company s projects and products. Related to the Cetip transaction: totaled R$491.8 million in 2017, comprised of: (i) R$333.2 million in extraordinary expenses with personnel (dismissals, withholding and charges on the payment of options granted to Cetip employees 6 ); (ii) R$124.7 million in expenses related to advisors and consultants; and (iii) R$33.9 million in asset write-offs of investments that will be discontinued due to the conclusion of the Cetip transaction and other provisions. Others: totaled R$280.1 million, down by 18.4% when compared to the previous year, impacted mainly by non-recurring expenses of R$231.3 million recognized in 2016 and referring to: (i) provision related to a legal dispute that had its chance of loss changed from possible to probable; and (ii) provision for success fees that, as of 3Q16, was made for legal proceedings classified as possible or remote loss chances. Financial Result 2017/ (In thousand of Brazilian Reals, (%) unless otherwise indicated) IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting Financial result 93, , , , % -44.8% Financial income 887, ,705 1,167,300 1,472, % -37.6% Financial expenses (793,621) (784,502) (442,516) (656,663) 79.3% 19.5% Divestment from CME Group shares - - (572,800) (572,800) - - Financial result reached R$134.2 million in 2017, down by 44.8% over the same period of the last year. Financial income: totaled R$918.7million, a 37,6% drop when compared to 2016, mainly explained by a decrease in average cash for the period due to the payment, in Apr 17, of R$8.4 billion to the former shareholders of Cetip. Financial expenses: totaled R$784,5million, up by 19.5% versus 2016, mainly explained by the interest payment on the debentures issued at the end of Dec 16, in the amount of R$331.8 million. Income tax and social contribution 2017/ (In thousand of Brazilian Reals, (%) unless otherwise indicated) IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting Income tax and social contribution (281,064) (241,964) 199,494 (112,367) % 115.3% Current (93,494) (137,049) (144,391) (309,129) -35.2% -55.7% Deferred (187,570) (104,915) 343, , % % Income tax and social contribution totaled R$242.0 million in Current tax totaled R$137.0 million and included R$46.4 million in taxes with cash impact paid by Banco BM&FBOVESPA, Cetip Info, Cetip Lux and also for the adhesion of B3 to the Special Tax Regularization Program (PERT) in Aug 17. Deferred income tax and social contribution totaled R$104.9 million, with no cash impact. 6 Within the context of the business combination between BM&FBOVESPA and Cetip, the stock option plans granted to Cetip employees were prepaid in cash and subsequently canceled. 9

10 MANAGEMENT S DISCUSSION & ANALYSIS 2017 Net income 2017/ (In thousand of Brazilian Reals, (%) unless otherwise indicated) IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting IFRS Accounting Managerial Accounting Net income 1,296,645 1,225,119 1,446,064 2,018, % -39.3% Net margin 35.3% 30.6% 62.3% 56.0% -2,701 bps -2,539 bps Attributable to: BM&FBOVESPA s shareholders 1,296,240 1,224,751 1,446,263 2,018, % -39.3% Net margin 35.3% 30.6% 62.3% 56.0% -2,703 bps -2,540 bps Minority interest (199) (199) % % Net income attributable to B3 s shareholders reached R$1,224.8 million, down by 39.3% versus 2016, impacted mainly by the reduction in the financial result due to the lower cash position and to the increase in the Company s indebtedness. Reconciliation of net income (In thousand of Brazilian Reals, unless otherwise indicated) /2016 (%) Net income (attributable to shareholders) 1,224,714 2,018, % Expenses related to the combination with Cetip 325,383 51, % Non-recurring provisions 17, , % Impairment 43, Impact related to CME Group - 116,784 - Changes on long term stock based compensation program/methodology - 17,490 - Taxes Refinancing (REFIS/PERT) 87, Intangible amortization (combination with Cetip) 376, Intangible amortization (combination with GRV) 8,567 34, % Recurring net income 2,083,986 2,383, % Deferred Tax (goodwill from Bovespa combination) 532, , % Deferred Tax (goodwill from Cetip combination) 239, Recurring net income adjusted by goodwill tax benefit 2,855,458 2,924, % Note: net of taxes, calculated based on a 34% rate, applied to the deductible portion. Excluding the non-recurring items mentioned above, the recurring net income would have reached R$2,084.0 million in 2017, a 12.6% decrease, which was also impacted by the reduction of the Company's financial result. In addition, if adjusted for tax benefits resulting from the amortization of goodwill created with the mergers of Bovespa Holding and Cetip S.A., net income would have totaled R$2,855.5 million. MAIN ITEMS OF THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2017 Assets, Liabilities and Shareholders Equity Accounts B3's balance sheet remained solid at the end of 2017, with R$37,579.9 million in total assets and shareholders' equity of R$24,310.0 million, an increase of 20.6% and 27.4%, respectively, versus The main changes in assets, in comparison with 2016, involved cash and cash equivalents (current and non-current), which totaled R$7,835.3 million, down by 47.2% versus Intangible asset increased 82.3%, ending 2017 at R$27,891.7 million, compared to R$15,302.2 million in Both variations are explained by the business combination with Cetip, by both the cash disbursement for the transaction and the recognition of goodwill and intangible assets. Current liabilities totaled R$5,494.5 million, a 50.2% increase over Dec 16 and representing 14.6% of total liabilities and shareholders' equity. In current liabilities, the most important line was debentures, which ended 2017 at R$1,513.2 million corresponding to the first amortization of debentures issued in 2016 payable at the end of In addition, the collateral for transactions line increased by 31.3% year-over-year, from R$1,653.8 million in 2016 to R$2,171.5 million in 2017, being that this line is offset by similar impacts on the lines cash and cash equivalents and short-term financial investments under the assets side. Non-current liabilities totaled R$7,775.4 million, down by 7.7% over 2016, representing 20.7% of total liabilities and shareholders' equity. The most significant changes were: (i) a 49.9% drop in debentures from R$2,991.8 million in 2016 to R$1,497.5 million in 10

11 MANAGEMENT S DISCUSSION & ANALYSIS , explained by the R$1.5 billion to be amortized in Dec 18 which is accounted for as current liabilities; (ii) increase in loans, also due to the business combination with Cetip, reaching R$509.1 million in 2017 versus R$33.9 million in 2016; and (iii) an increase in provisions for risks due to a change in classification of legal contingencies to probable and provisions for success fee related to legal disputes classified as possible or remote loss chances. Shareholders' equity at the end of Dec 17 totaled R$24,310.1 million, of which 64.7% of total liabilities and shareholders' equity consisted mainly of R$18,399.4 million in capital reserves and R$3,198.7 million in share capital. OTHER FINANCIAL INFORMATION Investments In 2017, investments amounted to R$247.8 million, of which R$203.4 million were invested in the Bovespa and BM&F segments, particularly for technological upgrades of PUMA and the equity phase of the new Clearinghouse, and R$37.0 million were invested in infrastructure and technological architecture in the Cetip UTVM and Cetip UFIN segments. Budget for adjusted expenses 7, depreciation and amortization and investments 8 for 2018: In Dec 17, the Company announced its budgets for adjusted operating expenses, depreciation and amortization and expected investments for 2018, as follows: (i) Adjusted operating expenses budget of R$1,050 million to R$1,100 million, (ii) Depreciation and amortization budget from R$910 million to R$980 million (including amortization of intangible assets); and (iii) Investment budget of R$220 million to R$250 million. Distribution of earnings The Board of Directors declared a payment of R$923.0million in interest on capital in OTHER HIGHLIGHTS Evolution of the business combination: throughout 2017, B3 maintained its focus on conducting the process of integrating the activities of BM&FBOVESPA and Cetip. Some highlights for the year were the integration of the financial management system, advances in the physical integration of teams that shifted over 1,000 employees to different work spaces within its facilities and the standardization of positions, salaries and benefit packages. Additionally, the client relationship, product development and project management areas were reorganized, aiming to bring clients closer to the Company and accelerate the developing processes of projects and products. The program of the new desired corporate culture was also launched. The integration will be fully completed as early as 2018, making B3 even more efficient and closer to its customers. Integration of Clearings (post-trading): in Aug 17, the implementation of the second phase of the post-trading integration project was completed, which consisted on the migration of equity and corporate fixed-income markets to a newly-integrated infrastructure with the financial derivatives and commodities markets. With the migration, these markets began to benefit from the efficiency generated by the Company's risk model, the Close Out Risk Evaluation ("CORE"), resulting in the release, to the market, of approximately R$21 billion in required guarantees (which jointly with the first phase totaled R$41 billion in reduction in required guarantees), without changing the systemic clearing security. It should also be noted that, since the completion of the clearing integration project, the Central Bank began to accept overseas deposits of guarantees for financial derivatives (previously, this authorization was only granted for the equities and commodity derivatives markets). International Qualification of BM&FBOVESPA s Clearinghouses: in Mar 17, the European Securities Market Authority (ESMA) recognized the clearing and settlement of the Company as third-country CCPs, which implies in its classification as qualified central counterparties ("Qualified CCP "). Within the context of Basel III rules, the Qualified CCP status is relevant for determining the allocation of capital by foreign financial institutions with exposure to CCP credit risk. Improvements to the special listing segments and State-Owned Enterprises Governance Program: in Jun 17, the improvement process for the Novo Mercado segment was concluded, which was aimed at adapting the requirements of this segment with best market practices. The changes involved rules related to outstanding shares, shareholding dispersion, board of directors, exit from the listing segment, corporate reorganization, supervision and control, among others. In 2017, large companies listed in the 7 Expenses adjusted for: (i) depreciation and amortization; (ii) stock grant plan - principal and charges - and stock options plans; (iii) integration expenses; and (iv) provisions. 8 Does not include investments related to the business combination with Cetip. 11

12 MANAGEMENT S DISCUSSION & ANALYSIS 2017 traditional market segments migrated to the Novo Mercado, recognizing the value of this segment, given its differential in governance requirements. In addition, in Aug 17, Petrobras and Banco do Brasil joined the State-Owned Enterprises Governance Program, which aims to increase transparency and strengthen investor confidence in listed state-owned companies. Advances in UFIN Projects: the implementation of the electronic appraisal platform was completed, which contributed to the strengthening of an electronic solution, guaranteeing consumers, resellers and banks even more security on the conditions of the vehicle being financed. By Mar 17, customers using the platform represented more than 30% of the used-vehicle financing market. UP2DATA: aligned with the strategy of improving the way B3 explores the data generated and stored on its platforms, the Company has improved in better segmenting and adding value to the data offered to its customers. Examples of this effort were the launching of the end-of-day data delivery services ("EOD") and reference data ( UP2DATA ), which contains data on closing prices, adjustment prices, reference prices, instrument registration, curves, volatility, indices, among others. CORPORATE GOVERNANCE AND RISK MANAGEMENT B3 aims to maintain the excellence of its corporate governance practices, ensuring alignment of interests between the Company and its management, shareholders, market participants and other stakeholders. The importance of good governance practices for the long-term success of B3 is underlined by its widespread capital structure, with no controlling shareholder or controlling shareholder group, as well as its institutional responsibility to develop the markets it manages. Among the key highlights of the Company s governance structure are its listing on Novo Mercado, having a Board of Directors consisting mostly of independent members, according with CVM Instruction 461/07 and the existence of an Audit Committee composed, exclusively, by independent members. In 2017, B3 was awarded, for the eighth time, the Transparency Award by Anefac (the National Association of Finance, Management and Accounting Executives). Internal Audit The mission of B3 s Internal Audit is to give the Board of Directors, the Audit Committee and the Executive Board an independent, impartial and timely assessments of the efficacy of risk management and governance processes, as well as of the adequacy of internal controls and compliance with rules and regulations relating to the operations of the Company and its subsidiaries. Aligned with the best international practices and B3 s strong risk management culture, in 2015 the Company was granted the Internal Audit Quality certification, which recognizes corporations that adopt the best practices and international standards for internal audit advocated by the Institute of Internal Auditors (IIA). Internal Controls, Compliance and Corporate Risk To manage its risks and controls, B3 uses the four lines of defense model. Under this model, the first line, which is primarily responsible for risk mitigation and internal controls procedures, is the business area itself. The second line of defense includes risk management, internal controls and compliance functions and is operated by the department of Internal Controls, Compliance and Corporate Risk, which provide support for business units and assist Management s decision making. The third line refers to the internal audit, and acts independently of the internal controls environment. Finally, the fourth line of defense comprises revision of the financial statements by an independent external audit and the regulatory oversight of the Central Bank of Brazil (BACEN) and the Brazilian Securities Commission (CVM). The department of Internal Controls, Compliance and Corporate Risk reports directly to the CEO and provides information to assist the work of the Board of Directors Audit Committee and Risk and Finance Committee. Its key responsibilities are: Corporate Processes and Risks: to set up a comprehensive structure to implement and support the continuous development of the organization s processes on a standardized basis, to provide mechanisms to manage the portfolio of processes, to carry out constant maintenance and enhancement, as well as identify, assess, address, monitor and report the evolution of corporate risks and assure that such risks are aligned with B3 s risk appetite; Internal controls: to assess and monitor the Company s control environment on a regular basis; Compliance: to assist in fulfilling, complying with and applying internal and external regulations governing the Company s activities; Business Continuity: to identify and assess the legal and regulatory requirements for business continuity, and the internal and external threats that may jeopardize the Company s operations. To set up a crisis management and response structure, with training programs, testing and analyses to ensure that continuity plans are in place and operating properly; 12

13 MANAGEMENT S DISCUSSION & ANALYSIS 2017 Financial risk and modeling: to validate the parameters and methods designed by the operating areas for handling central counterparty and financial risks, as well as assessing the impact of possible political, social and economic scenarios on the Company s operating income; Information security: to plan and structure strategies and actions to be taken in order to prevent the loss of and protect the Company s assets (people, processes and technology). Central Counterparty Risk - Risk Management The operations carried out in the markets managed by B3 are guaranteed by margin deposits. Collaterals consists of deposits in cash, government bonds, corporate debt securities, bank letters of guarantee, stocks and international securities, among others. As of Dec 17, the volume of collateral deposited by participants totaled R$244.5 billion, 8.29% lower than the total deposited at the end of On August 28, 2017, the second phase of the BM&FBOVESPA Clearinghouse (integration of the equities and derivatives markets) was completed, providing participants with great advancements in terms of technology and efficiency in capital allocation. As a result, margin calls were reduced and the volume of deposited guarantees decreased by R$22.1 billion, directly benefiting customers and participants. In addition to greater efficiency in participants' capital allocation, we implemented a common risk management to all markets, with a unified view on portfolio risks, definition of a single model for margin calculation and improvement of safeguards structures. HUMAN RESOURCES After the completion of the business combination with Cetip, the focus on human resources was towards various integration initiatives related to people and management. These include the unification of organizational structures, redesigning of benefits and remuneration strategy and performance evaluation. With the view of building a solid company in mind, we invested in mapping the organizational cultures of BM&FBOVESPA and Cetip to carry out the co-creation of a new B3 corporate culture. The Company s management spent over 7,500 hours analyzing, discussing and affirming the Company s values and causes. This evolution in corporate culture has already reflected in the openness, collaboration and pride of our employees, who recognize B3 as one of the best companies to work for, according to Love Mondays, a career community that ranks companies based on employee evaluations. B3 had 2,136 employees and interns at the end of SUSTAINABILITY AND SOCIAL INVESTMENT B3 was the first stock Exchange in the Americas to join the Women's Empowerment Principles (WEPs) initiative of the UN Women and the Global Compact, which helps the private sector to promote gender equality in the workplace. The Company s adhesion took place in a bell ringing ceremony in support of the promotion of gender equality, called "Ring the Bell for Gender Equality", a global initiative of the Sustainable Stock Exchanges ("SSE"). Aiming to stimulate reflection and to induce the use of good sustainability practices by its main stakeholders, B3 launched the guide "Sustainability: Business Opportunity in the Intermediation Sector". The launch was in partnership with IFC, BID and ABDE, within the context of the CVM's Laboratory of Financial Innovation. The initiative "Report or Explain SDG - Sustainable Development Goals" was also launched in partnership with the Global Reporting Initiative ("GRI"). The purpose is to encourage listed companies to consider SDG in their disclosure materials, promoting the understanding of the issue and its progressive incorporation into their business strategy. During this first year, 25% of listed companies adhered to the practice. SELF-REGULATION B3 operates in the self-regulation of issuers listed in its markets and, as part of a cooperation agreement signed with the CVM to monitor information disclosed by publicly-traded companies, more than 27,000 documents were examined and over one thousand requests were made for clarification on non-compliance issues of current legislations. Under the agreement for monitoring of listed funds, more than 2,000 documents were examined and 100 requests were made. 13

14 MANAGEMENT S DISCUSSION & ANALYSIS 2017 In Jul 17, the process of reviewing the Novo Mercado and Level 2, which began in 2015, was completed. The process involved market entities, companies listed in these two segments and relevant stakeholders. At the end of the process, through a Restricted Public Hearing, listed companies approved the Novo Mercado Regulation proposed by B3, and rejected the suggested changes to rules of the Level 2 segment. The new Novo Mercado Regulation came into effect on January 02, In May 17, the new version of the State-Owned Enterprises Governance Program was published. Also in 2017, Banco do Brasil and Petrobras were certified in the Program. In addition, the supervision and inspection of Participants in markets managed by B3 is performed by BM&FBOVESPA Supervisão de Mercados (BSM). EXTERNAL AUDIT The Company engaged Ernst & Young Auditores Independentes to provide external auditing services for its 2017 financial statements. Specifically, in the case of Cetip SA, which was merged into the Company on July 3, 2017, PricewaterhouseCoopers Auditores Independentes was engaged to provide auditing services for its financial statements for the first quarter of 2017 (1Q17). The Company s policy for engaging external audit services is based on internationally accepted principles, which preserve the independence of work of this nature and include the following practices: (i) the auditor may not perform executive or management functions in the Company or its subsidiaries; (ii) the auditor may not perform operational activities in the Company or its subsidiaries that might compromise the efficacy of the audit work; and (iii) the auditor must remain impartial, avoiding any conflicts of interest or loss of independence, and must be objective in his opinions and pronouncements on the financial statements. During the fiscal year ended December 31, 2017, Ernst & Young Auditores Independentes was engaged to provide other services not related to external auditing, whose sum of the contract values represented 9% of the total fees related to the external audit services planned for the period. The other services contracted were: (i) reasonable assurance and issuance of a pro forma financial report on BM&FBOVESPA for the fiscal year ended December 31, 2016 (CVM Instruction 565) (R$84 thousand engaged on March 20, 2017); (ii) the auditing of the financial statements of December 31, 2016 of Companhia São José Holding (R$5 thousand engaged on March 15, 2017); and (iii) Due Diligence of R3, a foreign company that received investments from B3 Inova USA LLC (R$127 thousand engaged on April 25, 2017). As for PricewaterhouseCoopers Auditores Independentes, related parties were engaged to provide other services not related to external audit, whose sum of contract values represented 416% of total fees related to the external audit services of Cetip SA's 1Q17 financial statements. The other contracted services refer to: (i) advice on compliance with regulatory obligations in Luxembourg (R$52 thousand, engaged on January 01, 2017); (ii) mapping, diagnosis and recommendations on IT architecture (R$437 thousand engaged on March 10, 2017); and (iii) limited assurance to measure the fair value of Cetip s stock option plans (R$180 thousand, engaged on March 20, 2017), the latter being hired by BM&FBOVESPA. Independent Auditors Justification - Ernst&Young Auditores Independentes The services provided that are not related to external audit does not affect the independence or objectivity in the conduction of the examinations and revisions made by the external audit. The policy for acting with the Company on providing professional services not related to external audit is based on principles that preserve the independence of Independent Auditors, which were observed in the provision of services mentioned above. Independent Auditors Justification - PricewaterhouseCoopers Auditores Independentes The services provided that are not related to external audit does not affect the independence or objectivity in the conduction of the examinations and revisions made by the external audit. The policy for acting with the Company on providing professional services not related to external audit is based on principles that preserve the independence of Independent Auditors, which were observed in the provision of services mentioned above. MANAGEMENT S REPRESENTATION In compliance with CVM Instruction 480, the Management declares that they have discussed, reviewed and agreed to the financial statements for the fiscal year ended December 31, 2017 and the opinions expressed in the independent auditors report 14

15 MANAGEMENT S DISCUSSION & ANALYSIS 2017 ADDITIONAL INFORMATION The focus of this Management Report has been B3 s performance and key developments in the year For further details about the Company and its market, please see the Reference Form available on B3 s Investor Relations website ( or the CVM s website ( ACKNOWLEDGMENTS Finally, we would like to thank our employees for their efforts during the year, as well as our suppliers, shareholders, financial institutions, customers and other stakeholders for their support in

16 Financial Statements 2017 B3 S.A. - Brasil, Bolsa, Balcão (Formerly BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros) December 31, 2017 with Independent Auditor s Report

17 São Paulo Corporate Towers Av. Presidente Juscelino Kubitschek, Vila Nova Conceição São Paulo SP - Brasil Phone: ey.com.br A free translation from Portuguese into English of Independent Auditor s Report on individual and consolidated financial statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standard Board (IASB). Independent Auditor s Report on Individual and Consolidated Financial Statements To the Board of Directors and Shareholders B3 S.A. - Brasil, Bolsa, Balcão São Paulo, Brazil We have audited the individual and consolidated financial statements of B3 S.A. Brasil, Bolsa, Balcão ( Company ), formely BM&FBOVESPA S.A. - Bolsa de Valores, Marcadorias e Futuros, identified as B3 and Consolidated, respectively, which comprise the balance sheet as at December 31, 2017, and the related statements of income, of comprehensive income, of changes in equity and of cash flows for the year then ended, and a summary of significant accounting practices and other explanatory information. In our opinion, the financial statements referred to above present fairly, in all material respects, the individual and consolidated financial position of B3 S.A. Brasil, Bolsa, Balcão at December 31, 2017, its individual and consolidated financial performance and its cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Basis for Opinion We conducted our audit in accordance with Brazilian and international standards on auditing. Our responsibilities, in accordance with such standards, are described in section Auditor s responsibilities for the audit of the individual and consolidated financial statements. We are independent of the Company and its subsidiaries, in accordance with the relevant ethical principles set forth in the Code of Ethics for Professional Accountants and in the professional standards issued by Brazil s Association of State Boards of Accountancy (CFC), and we comply with the other ethical responsibilities in accordance with these standards. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of the audit of the financial statements taken as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

18 Key audit matters (Continued) 1. Technology environment The Company operates in a complex technology environment, with several systems in operation and a high volume of transactions. In addition, in 2017, new systems were added in the business combination with Cetip S.A. - Mercados Organizados, and Equity and Corporate Debt Clearinghouse migrated to Câmara BM&F Bovespa Clearinghouse as a result of the second phase of the post-trade integration project of the derivatives, shares, assets and exchange houses - IPN V2, which led to significant changes in the Company's technology environment, processes and controls. Given that B3's operations are highly dependent on the proper operation of the technology structure and its systems, coupled with the complexity of the platforms inherent in the nature of its business, we considered the technology environment a key audit matter. How our audit addressed the matter: Among other procedures, our audit included an evaluation of the migration process of Equity and Corporate Debt Clearinghouse to BM&FBovespa Clearinghouse and of the design and operational effectiveness of the IT general controls ("ITGC") implemented by the Company for the systems considered significant for the audit, including those arising from the business combination with Cetip S.A - Mercados Organizados. The ITGC evaluation included audit procedures to assess controls over logical access, change management and other aspects of technology. With regard to the audit of logical access, we analyzed, on a sample basis, the process of new user access authorization and granting, timely revocation of access to transferred or terminated employees, and periodic review of users. We also analyzed the password, security setting and technology resource access policies. In connection with the change management process, we evaluated whether changes to the systems were duly authorized and approved by B3 management. We also analyzed the operations management process, focusing on the policies to safeguard information and timely handling of incidents. For processes considered significant for the financial statements, we identified the key automated or ITdependent controls in order to perform a sample testing of the design and operational effectiveness of such controls. We also evaluated whether the business continuity plan guidelines follow market standards, and if the incidents reported throughout the year were submitted to the Business Continuity Committee. Our technology experts were involved in these procedures. The audit procedures carried out in the process of migration of Equity and Corporate Debt Clearinghouse to BM&FBovespa Clearinghouse, in the ITGC, as well as in the automated and ITdependent controls considered significant in the audit process, provided us with an appropriate basis to plan the nature, timing and extent of our substantive audit procedures.

19 Key audit matters (Continued) 2. Role of central market guarantor counterparty B3 is a multi-asset exchange vertically integrated, a model in which a single agent is responsible for all phases of the trading and post-trading process of the market. As such, the Company acts as the central depository of assets, clearing and settlement house and central counterparty. As a central guarantor counterparty, B3 is the buyer of all sellers and seller for all buyers, for settlement purposes. Accordingly, B3 is required to establish mechanisms to estimate and cover possible losses arising from nonsettlement of one or more participants, and to hold financial investments in highly liquid assets with low exposure to market risk. At December 31, 2017, B3 has R$245 billion in guarantees deposited by the participants, as described in Note 17. This is considered a key audit matter given the amounts involved and the Company s role as Financial Market Infrastructure (FMI). How our audit addressed the matter: Our audit procedures included, among others, understanding, before and after the implementation of IPN V2, of the activities of the clearinghouses, focusing on Risk Modeling, Central Counterparty Risk, Collateral Management and Pricing processes. In these processes, we analyzed organizational structure and governance aspects, definition of strategy and limits, policies, and measurement methodologies. We also identified and evaluated the design and operational effectiveness of key controls related to pricing, calculation and margin call. Considering the methodology used by B3, we performed an independent recalculation of the margin required in certain scenarios and periods, and also recalculated the allocation of collaterals. We analyzed the reconciliation of the information disclosed in the notes with the operating system reports as of December 31, 2017, in addition to checking the custody statements of a sample of assets. Our risk and control experts were involved in these procedures. The results of our audit procedures on the testing of guarantees deposited by market participants were consistent with those assessed and disclosed by management, as described in Note 17, and were considered appropriate in forming an opinion on the financial statements taken as a whole.

20 Key audit matters (Continued) 3. Bovespa Holding S.A. and CETIP S.A. - Mercados Organizados Goodwill Impairment Assessment The Company records goodwill of R$22 billion in the statement of financial position, arising from the acquisitions of Bovespa Holding S.A. and CETIP S.A. - Mercados Organizados. Analysis of the recoverable amount of goodwill involves significant judgments in determining the assumptions used in cash flow projections, including growth and discount rates. Given the materiality of the amounts involved, misstatements in the determination of the recoverable amounts of goodwill recorded may result in a material impact on the financial statements. Accordingly, this issue was considered a key audit matter. How our audit addressed the matter: Our audit procedures included, among others, the evaluation of the methodology and models used by management in assessing goodwill, including definition of the assumptions that support the cash flows projections considered in the asset impairment tests. We evaluated the consistency of the data used in comparison to the market outlook. We performed an independent calculation of the discount rate using our market premium assumptions, beta of comparable companies and country risk, among others. We involved our valuation professionals in this evaluation. We compared the assertiveness of projections made by management in previous periods in relation to the performance achieved by B3. We analyzed the behavior of the key assumptions adopted under stress scenarios, in order to anticipate the sensitivities of the methodology. We also compared the recoverable amount calculated based on the discounted cash flows by cash generating unit with the corresponding book value of the goodwill, and evaluated the adequacy of the disclosures included in Note 9 to the financial statements. Based on the audit procedures performed in connection with the goodwill impairment tests prepared by the Company management and the audit evidence obtained that supports our tests, including our sensitivity analyses, the evaluations of the recoverable amounts of goodwill, prepared by the Company, as well as the respective disclosures, are appropriate in the context of the Financial Statements taken as a whole.

21 Key audit matters (Continued) 4. Disclosure and provisions for tax, civil and labor contingencies As mentioned in Note 14, B3 and its subsidiaries are parties to various administrative and legal proceedings involving labor, tax and civil issues, arising from the ordinary course of business. The assessment of the likelihood of loss in the proceedings involves a high degree of subjectivity by the legal advisors in charge of the case, as well as by B3 management, and takes into account aspects related to the existence of case law, recurrence of the claims, and measurement of any future disbursements. In view of the significance, complexity and judgment involved in the assessment, definition of the timing for recognition, measurement and disclosures of tax, civil and labor contingencies, this issue was considered a key audit matter. How our audit addressed the matter: Our audit procedures included obtaining confirmation letters regarding the ongoing proceedings directly from the Company's legal advisors as of December 31, 2017, and comparing the likelihood of loss and amounts assigned with the operating controls and accounting records. For the most significant cases, we tested the calculation of the amounts recorded and disclosed, and evaluated the likelihood of loss in relation to case laws and existing legal theses. Our tax professionals were involved in these procedures. We also analyzed communications received from supervisory agencies related to lawsuits, notices served and discussions of which the Company is a party, and the adequacy of contingency-related disclosures and provisions recorded. We also assessed the adequacy of the disclosures made by the Company regarding tax, civil and labor contingencies in Note 14 to the financial statements. Based on the audit procedures performed on the tax, civil and labor contingencies and on the results obtained, the likelihood of loss, estimated amounts, provisions and disclosures prepared by management were considered appropriate in the context of the financial statements taken as a whole.

22 Key audit matters (Continued) 5. Business combination with Cetip S.A. - Mercados Organizados As described in Note 2d, B3 concluded the business combination with CETIP S.A.- Mercados Organizados on March 29, 2017, after approval by the competent agencies. Accounting for the transaction requires the use of judgment in measuring the fair value attributed to assets acquired and liabilities assumed, and consequently, in determining goodwill based on expectation of future profitability. This issue was considered a key audit matter in view of the high level of subjectivity for projection of future cash flows, determination of discount rates and useful life of assets. How our audit addressed the matter: Our audit procedures included, among others, the analysis of the financial settlement, accounting record of the transaction and its disclosure in explanatory notes. With the assistance of our corporate finance specialists, we evaluated the methodology and models used by management in evaluating the fair value of the assets acquired and liabilities assumed, intangible assets identified and useful lives considered. We evaluated the consistency of the data used in comparison to the market outlook, and performed an independent calculation of the discount rate using our market premium assumptions, beta of comparable companies and country risk, among others. Based on the result of the procedures performed on the business combination and evidence obtained, the evaluation and disclosures made by management were considered appropriate, in the context of the financial statements taken as a whole. Other matters Statements of value added The individual and consolidated Statements of Value Added (SVA) for the year ended December 31, 2017, prepared under the responsibility of Company management and presented as supplementary information for IFRS purpose, were submitted to the same audit procedures performed in accordance with the audit of the Company s financial statements. For the purposes of forming our opinion, we evaluated whether these statements are reconciled with the financial statements and accounting records, as applicable, and whether their layout and content are in accordance with the criteria set forth in Accounting Pronouncement CPC 09 - Statement of Value Added. In our opinion, these statements of value added were prepared fairly, in all material respects, in accordance with the criteria set forth in Accounting Pronouncement CPC 09 and are consistent with the individual and consolidated financial statements taken as a whole.

23 Other information accompanying the individual and consolidated financial statements and the auditor s report Company s management is responsible for such other information, which includes the Management Report. Our opinion on the individual and consolidated financial statements does not cover the Management Report and we do not express any form of audit conclusion thereon. In connection with the audit of the individual and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, to consider whether this report is materially inconsistent with the financial statements or with our knowledge obtained in the audit, or otherwise whether this report appears to be materially misstated. If based on our work we conclude that there is material misstatement in the Management Report, we are required to report this fact. We have nothing to report on this matter. Responsibilities of the management and those charged with governance for the individual and consolidated financial statements Management is responsible for the preparation and fair presentation of the individual financial statements in accordance with accounting practices adopted in Brazil and of the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of these financial statements that are free from material misstatement, whether due to fraud or error. In preparing the individual and consolidated financial statements, Management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s financial reporting process and include Management, the Audit Committee and the Board of Directors of the Company and its subsidiaries.

24 Auditor s responsibilities for the audit of the individual and consolidated financial statements Our objectives are to obtain reasonable assurance about whether the individual and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Brazilian and international standards on auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they can be reasonably expected to influence the economic decisions of users taken on the basis of these financial statements. As part of the audit conducted in accordance with the Brazilian and international standards on auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement in the individual and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Obtain an understanding of the internal controls relevant to the audit in order to design audit procedures appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s and its subsidiaries internal controls. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. Conclude on the appropriateness of Management s use of the going concern basis of and, based on the audit evidence obtained, whether material uncertainty exists related to events or conditions that may cast significant doubt on the Company s and its subsidiaries ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the individual and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company and its subsidiaries to cease to continue as a going concern. Evaluate the overall presentation, structure and content of financial statements, including disclosures and whether the individual and consolidated financial statements represent the corresponding transactions and events consistently with the appropriate disclosure objective. Obtain sufficient appropriate audit evidence regarding the financial information of entities or business activities of the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group s audit and, consequently, for the audit opinion.

25 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings. When, eventualy identified during our audit, any significant deficiencies in internal controls were also be communicated. We also provide those in charge of governance with a statement that we have complied with the relevant ethical requirements, including the applicable independence requirements, and communicate any relationships or matters that could significantly affect our independence, including, when applicable, respective safeguards. Based on the matters that were communicated to those in charge of governance, we determine those that were considered most significant in the audit of the financial statements for the current year and, therefore, that represent the significant audit issues. We describe these matters in our audit report, unless the law or regulation has forbidden public disclosure of the matter or when in extremely rare circumstances we determine that the matter should not be reported in our report because the adverse consequences from such disclosure may, within a reasonable perspective, overcome the benefits from communication to the public interest. São Paulo, March 1 st, ERNST & YOUNG Auditores Independentes S.S. CRC-2SP034519/O-6 Eduardo Wellichen Accountant CRC-1SP184050/O-6