C I R C U L A R L E T T E R. B3 s Trading Environments New Connectivity Models and Authorizations for Trading via Colocation.

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1 October 9, /2017-DP C I R C U L A R L E T T E R To: Re: B3 s Market Participants BM&FBOVESPA Segment B3 s Trading Environments New Connectivity Models and Authorizations for Trading via Colocation. Owing to technological advances, new models for connectivity to B3 s trading systems will be implemented and new services via colocation authorized from November 13, 2017 (inclusive), as detailed in this Circular Letter. With these new connectivity models full trading participants (FTPs) and trading participants (TPs) (referred to jointly as Participants for the purposes of this Circular Letter), independent providers of technological solutions (Providers) and investors hosted in B3 s colocation area will be authorized to conduct the following activities, provided they comply with the technological specifications established by the BM&FBOVESPA Technology Infrastructure Access Manual: (i) sending, receiving and routing orders; (ii) receiving and distributing market data; and (iii) receiving and distributing drop copy messages. 1. Connectivity models To optimize control of trade flows and trade segregation, and to align connections with the new models, B3 will replace the current PUMALink categories with the following two categories: Full trading participant (FTP) connection: used by FTPs to register orders in their own names or on behalf of TPs or investors. This connection is linked to the trading desk connection and order connection. Sponsored direct connection: used solely by investors to enter orders in their own name, under the responsibility of FTPs or TPs. 1

2 All types of access to the electronic trading platform will be classified in accordance with three characteristics: The administrator of the execution solution; The agent with access to the execution solution; and The hosting location for the execution solution Administrator of execution solution The administrator of the execution solution will be identified according to the administrator of the Order Management System (OMS), Execution Management System (EMS) and any other order management systems that are connected directly to PUMALink. Thus the administrator of the execution solution may be: an FTP or TP; a Provider; or an authorized investor Agent with access to execution solution Connections will be divided into the following three categories, according to the agent with access to the execution solution used to send orders to B3 s trading system: Trading desk used by FTPs and TPs to enter, amend or cancel orders and register trades in their own names or on behalf of investors. Order entry may be performed solely by traders; Order used by FTPs and TPs to enter, amend or cancel orders and register trades in their own names or on behalf of investors. Order entry may be performed solely by order s, responsible bank order s or bank order s; 2

3 DMA (Direct Market Access) used by investors, always under the responsibility of FTPs or TPs, solely for entering orders in their own name, or via a master account in the case of funds and investment clubs, managed subaccounts and non-resident investors whose accounts are linked to an omnibus account. According to the parameters of the FTP or TP responsible, such orders may be entered (i) directly into B3 s trading system or (ii) into a system provided by the FTP, TP or Provider that routes these orders to B3 s trading system. In the latter case, orders must be routed electronically, automatically, without intervention by a trading professional, and with no alterations in the specifications contained in the orders issued by the investor, such as price, quantity, type, or qualifiers Hosting location for execution solution The hosting location for the execution solution is where the FTP s, TP s, Provider s or investor s technology infrastructure connected to PUMALink is physically located, and may be in B3 s colocation area or another data center B3 s colocation area If the FTP, TP, Provider or investor has technology infrastructure hosted in B3 s colocation area, they will be allowed to: receive, send and route orders; receive and distribute market data; receive and distribute drop copy messages; monitor the hosted equipment and the transactions performed via such equipment; and host applications for processing or distribution of data relating only to trading. 3

4 Both physical and remote access to equipment installed in B3 s colocation area must comply with the terms of the BM&FBOVESPA Technology Infrastructure Access Manual, which is available at Services / Connectivity / BM&FBOVESPA Technology Infrastructure Access Manual Leasing space in B3 s colocation area FTPs, TPs, Providers and investors accredited and certified by B3 will be authorized to lease space in B3 s colocation area for the hosting of their equipment and systems, in compliance with the legal and regulatory restrictions applicable to their respective activities and jurisdictions. When acquiring the service for the first time, the FTP, TP, Provider or investor must sign the new Colocation Adhesion Term by November 10, The term is available at Colocation on SPA. Current lessees must sign the new Adhesion Term by March 30, Contracting for cross-connections between different Participants As of November 13, 2017 (inclusive), cross-connections involving racks hosted in B3 s colocation area will be allowed between: Providers and investors; Providers and FTPs; Providers and TPs; Providers; FTPs and TPs. It should be noted that the use of cross-connections is restricted to (i) order reception and routing; (ii) reception and distribution of market data; (iii) reception 4

5 and distribution of drop copy messages; and (iv) monitoring of hosted equipment and the transactions performed via such equipment. Contracting parties may also ask B3 for permission to use cross-connections between: FTPs; TPs; investors belonging to the same business group; FTPs and investors; TPs and investors. A prior assessment by B3 will be required in this case, taking into consideration the following aspects, among others, at its discretion: (i) protection of investors; (ii) operational needs; and (ii) mitigation of order execution risk, including the risk associated with the use of an additional pre-trade tool. 2. Procedures for identifying trades performed by FTP s, TP s, Provider s or investor s systems For the purposes of identifying the new connectivity models described in this Circular Letter, B3 will make changes to the information sent as part of order and trade registration messages. This will be done in two stages. In the first stage, effective as of publication of this Circular Letter, orders will be identified by the Sender Location Tags listed in Annex I of this Circular Letter, and the EntryPoint order entry protocol. In the second stage, orders will be identified by the Sender Location Tags listed in Annex II to this Circular Letter. B3 will announce the start date for this stage in due course. 5

6 3. Plan for migration to new models B3 will automatically migrate the existing connection models. New requests for the connections mentioned in this Circular Letter must be made via Sistema de Controle de Serviços CSNet, at Nova Solicitação / Solicitar Ativação. 4. Order flow segregation The same order entry and management connection may not be shared by FTPs or TPs. In other words, each connection with B3 s trading system must be exclusive to each Participant. 5. Control of pre-trade risk As detailed in Annex III of this Circular Letter, use of the LiNe pre-trade risk control tool is mandatory to mitigate trade execution and counterparty risk for all orders and trades: performed by all investors classified as high-frequency traders (HFTs), whatever the connection used; originating from B3 s colocation area; and where the investor is the administrator of the execution solution connected to B3 s trading environment, as defined in item 1.1 of this Circular Letter. FTPs and TPs responsible for investors whose orders and trades match these three criteria must implement all measures and controls necessary to ensure that the LiNe pre-trade risk tool is used in such cases. B3 uses the following parameters and information to classify investors as HFTs: (i) the number of messages transmitted to the trading environment and the time between messages; (ii) the number of trades and the time between trades; and (iii) other parameters at B3 s discretion. The accounts of investors classified as 6

7 HFTs must be identified as such in the respective orders even if they have been entered via a trading desk connection. B3 will inform Participants if their investors are classified as HFTs. Orders sent by these investors may be transmitted only via gateways running the LiNe pretrade risk control tool, which must have risk limits previously configured by the FTP or TP responsible. Regardless of the adequate functioning of the LiNe pre-trade risk tool or implementation of other pre-trade risk tools by the FTP or TP responsible, all Participants must permanently monitor their investors activities and exposure, taking any measures necessary. For orders and trades that do not comply with the provisions of this item, FTPs and TPs may use a different pre-trade risk control tool to that offered by B3 (LiNe), but if so it must first be assessed by B3 and BM&FBOVESPA Market Supervision (BSM) before the start of trading. In addition, it must have at least the same functionalities as LiNe and allow the Participant to set the following parameters: (i) maximum risk for buy and sell orders per instrument; (ii) maximum risk for long and short positions per instrument; and (iii) maximum risk for long and short positions per instrument group. In operational terms, the tool must also enable real-time monitoring and management of the use of the parameters and limits set. 6. Certification of trading software Only software previously certified by B3 may be used in trading. All such software will be subject to supervision by BSM and may be monitored by verification of versions, which must contain the following information: M.m.R.B. where: M = major release with material changes to software (new certification required) 7

8 m = new version with non-material changes to software such as additional functionality (new certification not required) R = minor release with improvements and bug fixes (new certification not required) B = new generation of the software, not necessarily with changes (new certification not required). In the event of material changes to software, or at B3 s discretion, new certification may be required. It is important to bear in mind that software certification is a process that assesses integration of the participant s system with B3 s systems in the functionalities declared by the participant, and should not be confused with the requirements of the Operational Qualification Program (PQO). 7. Contingency measures Whatever the connectivity model chosen, FTPs and TPs must have a contingency structure to assure the delivery of services to the investors for which they are responsible, in accordance with business continuity criteria, the requirements of the PQO, and the applicable rules and regulations, especially in the event of internet service interruption, high market volatility or demand peaks. 8

9 8. Participation in morning connectivity tests of B3 s trading systems The trading platform will be made available for morning connectivity tests in order to enable Participants and investors in the BM&F and BOVESPA segments to validate trading systems, connectivity channels and integration, and to identify possible future problems before the start of the trading session. Participation in morning connectivity tests is mandatory for all Participants and investors in all interfaces with B3, such as order entry connections, market data distribution channels, drop copy sessions, and trading screens. FTPs must perform morning connectivity tests of the execution solutions administered by them or by Providers for use by investors or trading professionals under their responsibility. TPs must perform morning connectivity tests of the execution solutions administered by them or by Providers for use by investors or trading professionals under their responsibility. Investors must perform morning connectivity tests of the execution solutions administered by them, as defined in item 1.1 of this Circular Letter. The timetable, script and scope for morning connectivity tests are available at Regulation / Regulations and manuals / Operational / Parameters / Instruments for connectivity tests. 9. Responsibilities of FTPs and TPs Regardless of the changes described in this Circular Letter, when there is no involvement of a TP, the FTP is responsible for: (i) supervising order entries through its connections and having the capacity to cancel them; 9

10 (ii) requesting from B3 the cancellation of orders executed through its connections, whenever necessary; (iii) authorizing, monitoring and suspending the flow of orders from its connections with B3 s trading system; (iv) complying and assuring compliance with mandatory use of the pre-trade risk tool for all orders executed under its responsibility; (v) obtaining a statement of awareness and authorization from all nonresident investors, particularly in the case of investors domiciled in the United States of America (U.S. Persons) and products subject to supervision by the Commodity Futures Trading Commission (CFTC), whereby: a) the signatory consents to and undertakes to abide by the jurisdiction of the Securities and Exchange Commission of Brazil (CVM), the Central Bank of Brazil and the respective foreign regulators, as applicable; and b) the signatory gives express consent, in compliance with Supplementary Law 105/2001, for B3 to submit information (full name or corporate name, full address in the country of origin, CVM code and NFA ID or other investor identification codes, as applicable, as well as other information relating to transactions performed) to local and foreign regulators for the purpose of meeting regulatory requirements, as applicable; (vi) ensuring that non-resident investors trade products via agents with access to the execution solutions authorized in accordance with the applicable local and foreign legislation and regulations, implementing mechanisms to monitor such investors and preventing registration of orders relating to unauthorized products, for example by failing to specify a trading limit; 10

11 (vii) taking necessary measures to ensure that non-resident investors registration details are presented to B3 in a timely manner whenever requested, even when such details are maintained and updated by a foreign intermediary institution; (viii) ensuring that foreign intermediary institutions use appropriate practices for identification and registration of non-resident investors, in compliance with local regulations and with those applicable in their country of origin; (ix) setting trading limits for all investors; (x) publishing on its website, in a section that is easy to see, the criteria for selecting the investors permitted to use B3 s colocation area. Moreover, when a TP is involved it becomes responsible for the obligations described in items (v), (vi), (vii), (viii) and (x), as well as being jointly responsible with the FTP for the obligations mentioned in items (i), (iii), (iv) and (ix). Item (ii) above is the exclusive sole responsibility of the FTP, even if a TP is involved in the trade concerned. 10. Implementation of prudential measures by B3 In the event of non-compliance with the rules or incorrect use of the connections described in this Circular Letter, B3 may at its sole discretion: suspend access to the connections of the Participant or investor responsible; order the FTP or TP to review and immediately adjust investors risk; rescind the PQO Execution Broker seal held by the FTP responsible; limit the FTP s and TP s order flows by throttling; 11

12 take other prudential measures to mitigate operational and counterparty risks, including additional collateral requirements for the FTP and TP. 11. Commercial policy The commercial policy in force for B3 s colocation area will remain unchanged until November 10, Requests made after that date must comply with the new commercial policy, available at Access to BM&FBOVESPA Market Data via all new connectivity models described in this Circular Letter must be contracted for separately in accordance with the Market Data Commercial Policy, which is available at Services / Market Data / Distributors / Contracts and commercial policy. The PUMALink Commercial Policy is available at Services / Trading / BM&FBOVESPA PUMA Trading System / How to connect / PUMALink. The specifications for the EntryPoint order entry protocol are available at Services / Trading / BM&FBOVESPA PUMA Trading System / Developers and vendors / EntryPoint order entry. Connectivity information is available at Services / Connectivity. 12. General provisions On entering into force, this Circular Letter revokes the following Circular Letters: 021/2008-DP, dated July 8, 2008; 033/2008-DP, dated August 20, 2008; 042/2008-DP, dated August 28, 2008; 12

13 044/2008-DP, dated September 4, 2008; 045/2008-DP, dated September 4, 2008; 028/2009-DP, dated May 18, 2009; 030/2010-DP, dated August 9, 2010; 001/2011-DP, dated January 3, 2011; 023/2011-DP, dated May 9, 2011; 014/2012-DP, dated March 8, 2012; 067/2012-DP, dated December 4, 2012; 003/2013-DP, dated January 11, 2013; 014/2013-DP, dated February 18, 2013; 032/2013-DP, dated April 24, 2013; 083/2013-DP, dated December 6, 2013; 002/2014-DP, dated January 31, 2014; 042/2014-DP, dated July 28, 2014; 037/2016-DP, dated April 20, 2016; 015/2017-DP, dated February 22, This Circular Letter should be observed together with the provisions of Circular Letter 030/2016-DP, dated April 11, 2016, particularly with regard to categories of trading area professionals; and Circular Letter 033/2017-DP, dated April 27, The terms and procedures defined in B3 s applicable normative documents should also be taken into consideration. 13

14 BSM is empowered to oversee compliance with the rules contained in this present Circular Letter, in accordance with the regulations in force. Further information on technical issues can be obtained from Trading Support by at or by telephone on , option 2. Further information on commercial policy can be obtained from Market Data & Colocation by at or by telephone on Further information on the commercial policy for PUMALink can be obtained from Service Development by at or by telephone on Gilson Finkelsztain Chief Executive Officer Cícero Augusto Vieira Neto Chief Operating Officer 14

15 Annex I to Circular Letter 063/2017-DP Stage 1 Use of Sender Location Tags Pursuant to the provisions of item 2 of this Circular Letter, the reference table for use of TAG Sender Location Tags is as follows: # Connection Category Agent with Access Administrator of Solution Hosting Location Sender Location 1 Trader BVMF 2 Order Another data center REPS 3 order and bank order REPB FTP/TP 4 Trader BVMF 5 Order REPS 6 order and bank order REPB 7 FTP connection Trader BVMF 8 Order Another data center REPS 9 order and bank order REPB Provider 10 Trader BVMF 11 Order REPS 12 order and bank order REPB 13 Another data center FTP/TP DMA1 14 COLO0/COLO1 Another data 15 Sponsored XXXX* center direct Investor (DMA) Provider 16 connection COLO0/COLO1 17 Another data center Investor DMA3 18 COLO0/COLO1 * Four alphanumeric characters defined by B3 must be used for exclusive identification of each Provider. 1/1

16 Annex II to Circular Letter 063/2017-DP Stage 2 Use of Sender Location Tags Pursuant to the provisions of item 2 of this Circular Letter, the reference table for use of TAG Sender Location Tags is as follows: # Connection Category Agent with Access Administrator of Solution Hosting Location Sender Location 1 Trader MESPF/MESNF 2 Order ASRPF/ASRNF Another data center order 3 ASBPF/ASBNF and bank order FTP/TP 4 Trader MESPC/MESNC 5 Order ASRPC/ASRNC 6 order and bank order ASBPC/ASBNC 7 FTP connection Trader MESXXXXF* 8 Order ASRXXXXF* Another data center order 9 ASBXXXXF* and bank order Provider 10 Trader MESXXXXC* 11 Order ASRXXXXC* 12 order and bank order ASBXXXXC* 13 Another data center DMAPF FTP/TP 14 DMAPC 15 Sponsored Another data center DMAXXXXF* direct Investor (DMA) Provider 16 connection DMAXXXXC* 17 Another data center DMACF Investor 18 DMACC * Four alphanumeric characters defined by B3 must be used for exclusive identification of each Provider. 1/1

17 Annex III to Circular Letter 063/2017-DP Mandatory Use of LiNe Pre-Trade Risk Tool Pursuant to the provisions of item 5 of this Circular Letter, the reference table for use of the LiNe pre-trade risk tool is as follows: Connection Category Agent with Access Trader Administrat or of Solution Hosting Location LiNe Order order and bank order Trader FTP/TP Another data center Mandatory use for investors classified as HFTs FTP connection Order order and bank order Trader Mandatory use for all investors Order order and bank order Trader Provider Another data center Mandatory use for investors classified as HFTs Sponsored direct connection Order order and bank order Investor (DMA) Investor (DMA) Investor (DMA) Investor (DMA) Investor (DMA) Investor (DMA) FTP/TP Provider Investor Another data center Another data center Another data center Mandatory use for all investors Mandatory use for investors classified as HFTs Mandatory use for all investors Mandatory use for investors classified as HFTs Mandatory use for all investors Mandatory use for all investors Mandatory use for all investors 1/1