Circular No. 2.972

CIRCULAR N. 002972 ------------------ Establishes criteria and conditions for the calculation of the portion of Required Shareholders' Equity (PLE) to cover the risk arising from the exposure of operations denominated in Real and remunerated based on prefixed interest rates to the variation of rates practiced in the market, as addressed in Resolution No. 2.692, of 2000. The Collegiate Board of the Central Bank of Brazil, in a session held on 23 March 2000, having regard to the provisions of art. 2, paragraph 3, of the Regulation Annex IV to Resolution No. 2.099, of 17 August 1994, with the wording given by art. 2 of Resolution No. 2.692, of 24 February 2000, D E C I D E D: Art. 1 Establish that the calculation of the daily value of the portion of Required Shareholders' Equity (PLE) to cover the risk arising from the exposure of operations denominated in Real and remunerated based on prefixed interest rates to the variation of interest rates practiced in the market (EC (Juros Pre),t), as addressed in Resolution No. 2.692, of 24 February 2000, shall follow the following formula: Mt 60 Padrão Padrão EC = max ( ( ---- . S VaR ) , VaR ), where: [Juros Pré],t 60 i=1 t-i t-1 Mt = multiplier for day t, disclosed daily by the Central Bank of Brazil, determined as a decreasing function of volatility, comprised between 1 and 3; Padrão VaR = value at risk in reais of the set of operations in question for day t, obtained in accordance with the following formula: ---------------------------------- Padrão \ / n n VaR = \ / S S VaR x VaR x RO , where: t / i=1 j=1 i,t j,t i,j n = number of vertices, understood as the terms Pi; VaR = value at risk in reais associated with vertex Pi on day t, i,t obtained in accordance with the following formula: Pi --- VaR = 2,33 x ----- x SIG x VMTM x / D , where: i,t 252 t i,t Pi = terms of 21, 42, 63, 126, 252, 504 and 756 business days (vertices), considered for the purpose of grouping cash flows, as per the procedure described in art. 3; SIG = standard volatility for day t, disclosed daily by t the Central Bank of Brazil; VMTM = algebraic sum in reais of the portions/values of cash flows i,t marked to market on day t and allocated to vertex Pi, positive or negative, as per the procedure described in art. 3; D = 10 (number of business days considered necessary for the settlement of the position); RO = correlation between vertices i and j, used for the purpose of i,j standard determining VaRt , obtained in accordance with the following formula: k max(Pi,Pj) ( ----------- ) min(Pi,Pj) RO = RO + (1 - RO) , where: i,j RO = base parameter for the calculation of RO i,j, disclosed on the last business day of each month or at any time, at the discretion of the Central Bank of Brazil; k = correlation decay factor, disclosed on the last business day of each month or at any time, at the discretion of the Central Bank of Brazil. Paragraph 1 The risk referred to in the caput is that which affects the financial condition of the
institution due to the existence of operations whose market value depends on movements in interest rates. Paragraph 2 The calculation of the daily value of the portion EC (Juros Pré),t of the PLE must be made by means of an off-balance-sheet report, which, together with the documents that served as the basis for the corresponding calculation, must be kept at the disposal of the Central Bank of Brazil. Art. 2 For the purpose of calculating the daily value of the portion EC (Juros Pré),t of the PLE to cover the risk in question under the terms of art. 1, each cash flow (Fl) is defined as the net result of the value of assets minus the value of liabilities that mature on the same day, referring to the set of operations held open on the immediately preceding business day. Paragraph 1 The cash flows are obtained by decomposing each operation held open into an equivalent time structure of receipts/payments that takes into account the contracted maturity dates. Paragraph 2 The number of cash flows shall correspond to the number of maturities in which the net results calculated under the terms of this article are different from zero. Paragraph 3 The values of assets and liabilities that make up the cash flows must comprise the principal, the interest and the other values related to each operation. Paragraph 4 The values of assets and liabilities that make up the cash flows must be marked to market using the term structure of interest rates representative of the rates in force in the market on the immediately preceding business day. Paragraph 5 Operations without a defined maturity or whose maturity depends on the application of specific contractual clauses must have their corresponding cash flows obtained based on consistent criteria that can be verified by the Central Bank of Brazil. Paragraph 6. For the purpose of obtaining the cash flows from operations with derivative contracts, the following criteria must be observed: I - in the case of swap operations, the treatment of the contract position referenced in Real and in a prefixed interest rate must be identical to that given to a security with remuneration at a prefixed rate, with the same maturity date as the swap, whose redemption value is the final value resulting for the prefixed position in Real; II - in the case of operations with forward and futures contracts referenced in Real and in a prefixed interest rate, the corresponding treatment must be identical to that given to a security with remuneration at a prefixed rate, with the same maturity date as the contracts, whose redemption value is the value of the contracts; III - in the case of future settlement operations involving a prefixed-income security, they must be considered as two opposite positions in prefixed securities, as follows: a) one, represented by a security with a maturity date coinciding with that of the transfer of ownership of the security subject to the operation to the purchaser, whose redemption value is the value of the
operation; and b) the other, represented by a security with the same maturity date as the security subject to the operation, whose redemption value is the redemption value of the latter; IV - in the case of operations with options referenced in Real and in a prefixed interest rate: a) the value representing each position must be obtained by multiplying the number of contracts by their size and by the variation in the option price in relation to the variation in the price of its underlying asset (delta); and b) the cash flows corresponding to each operation must be obtained separately and their result included in the cash flow on the contract maturity date. Paragraph 7. Each cash flow Fl must be associated with a term T1, corresponding to the number of remaining business days until its maturity date. Art. 3. For the purpose of determining VMTM i,t, vertex is defined as the term Pi in which the cash flows must be allocated/grouped. Paragraph 1. Cash flows with a term equal to Pi must be allocated to the corresponding vertices Pi. Paragraph 2. Cash flows with a term of less than 21 business days or more than 756 business days must be allocated to the 21 and 756 business day vertices, respectively, in accordance with the following criteria: I - the fraction Tl/21 of the mark-to-market value of cash flow Fl must be allocated to the 21 business day vertex; II - the fraction Tl/756 of the mark-to-market value of cash flow Fl must be allocated to the 756 business day vertex. Paragraph 3. In the other situations, the cash flow must be allocated to the previous (Pi) and subsequent (Pj) vertices, in accordance with the following criteria: I - the fraction ( Pj - Tl ) / ( Pj - Pi ) of the mark-to-market value of cash flow Fl must be allocated to the vertex with term Pi; II - the fraction ( Tl - Pi ) / ( Pj - Pi ) of the mark-to-market value of cash flow Fl must be allocated to the vertex with term Pj. Art. 4. Operations in which the institution acts exclusively as an intermediary, not assuming any rights or obligations toward the parties, do not form part of the PLE calculation basis. Art. 5. The methodology for determining the rates used for the mark-to-market of the positions subject to the risk in question is the responsibility of the institution leading the conglomerate and must be established based on consistent and verifiable criteria that take into account independence in the collection of data in relation to the rates practiced in its trading desks. Art. 6. The value of the PLE portion determined under the terms of this Circular must be accounted for in accordance with the Chart of Accounts for Institutions of the National Financial System (COSIF). Art. 7. Financial institutions and other institutions authorized to operate by the Central Bank of Brazil, except credit cooperatives and microentrepreneur credit societies, shall have a period of thirty days, counted from the date of entry into force of this Circular, to indicate to the Central Bank of
Brazil/Department of Registration and Information of the Financial System (DECAD) the name of the technically qualified officer responsible for the institution's risk management, as referred to in art. 3 of Resolution No. 2,692, of 2000. Sole paragraph. In the event of replacement of the officer referred to in the caput, the fact must likewise be communicated to the Central Bank of Brazil/DECAD, within a maximum period of thirty days from its occurrence. Art. 8. This Circular enters into force on the date of its publication. Brasília, 23 March 2000 Armínio Fraga Neto Sérgio Darcy da Silva Alves President, acting as Director for economic policy affairs --------------------------------------------------------------------- Notes: 1) S = summation SIG = Sigma RO = Ro; 2) A Technical Note on this Circular is being made available at the Central Bank of Brazil's internet address (www.bcb.gov.br), on the Regulations and Public Hearings page.