CIRCULAR No. 3,581, OF MARCH 8, 2012

Establishes the minimum requirements for the use of internal credit risk classification systems in the calculation of the PEPR portion, referred to in Resolution No. 3,490, of August 29, 2007.

The Board of Directors of the Central Bank of Brazil, in a session held on March 8, 2012, based on the provisions of arts. 10, item IX, and 11, item VII, of Law No. 4,595, of December 31, 1964, and in view of the provisions of art. 6 of Resolution No. 3,490, of August 29, 2007,

R E S O L V E :

TITLE I

PRELIMINARY PROVISIONS

SOLE CHAPTER

SCOPE OF APPLICATION

Art. 1 The use of internal credit risk classification systems (IRB approaches) for calculating the monthly value of the PEPR portion of the Required Reference Equity (PRE), referred to in Resolution No. 3,490, of August 29, 2007, is permitted for the following institutions:

I - multiple banks, savings banks, commercial banks, except cooperative banks not part of a financial conglomerate, and the National Bank for Economic and Social Development (BNDES); and

II - financial conglomerates, in accordance with the Chart of Accounts for Institutions of the National Financial System (Cosif), composed of at least a multiple bank, savings bank or commercial bank, except cooperative banks.

Art. 2 The use of IRB approaches depends on prior authorization from the Department of Supervision of Banks and Banking Conglomerates (Desup) of the Central Bank of Brazil.

§ 1 The authorization referred to in the caput may be canceled, at the discretion of Desup, if the minimum requirements established in this Circular cease to be met or the calculated values do not adequately reflect the credit risk of the exposures.

§ 2 Once the authorization referred to in the caput is granted:

I - the respective IRB approach must be mandatorily used for calculating the monthly value of the PEPR portion; and

II - the return to calculating the PEPR portion in the manner established in Circular No.

3,360, of September 12, 2007, will depend on prior authorization from Desup.

Art. 3 The institution that adopts an IRB approach must prove:

I - that the internal system used meets the minimum requirements established in this Circular, and Desup must be timely informed if any of these cease to be met; and

II - that models and information technology systems acquired from third parties and used in internal classification systems are adequate to its risk profile and meet the minimum requirements established in this Circular.

Art. 4 The IRB approaches are applicable to the exposures defined in Circular No. 3,360, of 2007, not classified in the trading portfolio, according to the criteria established in Circular No. 3,354, of June 27, 2007, and to exposures classified in the trading portfolio subject to counterparty credit risk.

§ 1 The use of an IRB approach does not apply to exposures:

I - weighted by the Risk Weighting Factor (FPR) of 0% (zero percent), under the terms of arts. 10 and 21, item I, of Circular No. 3,360, of 2007;

II - mentioned in art. 16 of Circular No. 3,360, of 2007;

III - arising from interdependent operations and other operations carried out with related institutions with which financial statements are prepared on a consolidated basis;

IV - related to assets deducted from the Reference Equity (PR), under the terms of the regulations in force;

V - related to the risk of the underlying asset arising from investments in shares and tradable goods (commodities) covered, respectively, by the PACS and PCOM portions of the PRE, referred to in Resolution No. 3,490, of 2007;

VI - related to operations with derivative financial instruments in which the institution acts exclusively as an intermediary, not assuming any rights or obligations with the parties;

VII - related to equity interests consolidated in an economic-financial conglomerate, as provided in Resolutions nos. 2,723, of May 31, 2000, and 2,743, of June 28, 2000;

VIII - not characterized as credit operations, equity interests or investments, derivative contracts or as operations subject to counterparty credit risk;

IX - related to shares of subordinated or senior class of Credit Rights Investment Funds (FIDC) and other modalities of substantial retention of risks and benefits, arising from operations of sale or transfer of financial assets that

remain, in their entirety, recorded in the institution's assets, under the terms of the regulations in force;

X - related to historical residual balances, upon request of the institution and authorization by Desup; and

XI - related to fund shares that receive the treatment provided in the caput of art. 15 of Circular No. 3,360, of 2007.

§ 2 Exposures not subject to IRB approaches must receive the treatment established in Circular No. 3,360, of 2007, for the purposes of calculating the PEPR portion.

TITLE II

IRB APPROACHES

CHAPTER I

RISK PARAMETERS AND TYPES OF APPROACHES

Section I

Risk Parameters

Art. 5 The IRB approaches use the following risk parameters:

I - Probability of Default (PD), percentage corresponding to the long-term expectation of default rates, as defined in art. 15, for the 1 (one) year time horizon of borrowers of a certain level of credit risk or homogeneous risk group, as defined in § 1 of art. 44;

II - Exposure at Default (EAD), which corresponds to the value of the institution's exposure, whether effective or contingent, to the borrower or counterparty at the time of the occurrence of the default event, gross of provisions and any partial write-offs to loss;

III - Loss Given Default (LGD), which corresponds to the percentage, in relation to the observed EAD parameter, of the economic loss resulting from default, considering all relevant factors, including discounts granted for credit recovery and all direct and indirect costs associated with the collection of the obligation; and

IV - Effective Maturity (M), which corresponds to the remaining term of the operation weighted by the cash flows related to each future period as presented in art. 86.

Section II

On the Types of Approaches

Art. 6º The IRB approaches comprise:

I - advanced IRB approach;
II - basic IRB approach;
III - simplified approach;
IV - VaR approach;
V - PD/LGD approach;
VI - internal ratings-based approach (RBA); and VII - supervisory formula approach (SF).

§ 1º The use of the advanced IRB approach implies the own estimation of the values of the PD, LGD and EAD parameters, and the internal calculation of the value of the M parameter, when applicable.

§ 2º The use of the basic IRB approach implies the internal estimation of the value of the PD parameter, the internal calculation of the value of the M parameter and the use of the values disclosed by the Central Bank of Brazil for the other risk parameters, except when alternatively provided.

§ 3º The IRB approach referred to in item I of the caput applies to exposures classified in the categories "sovereign entities", "financial institutions", "retail" and "wholesale", defined in art. 7º.

§ 4º The IRB approach referred to in item II of the caput applies to exposures classified in the categories "sovereign entities", "financial institutions" and "wholesale", defined in art. 7º.

§ 5º The IRB approaches referred to in items III, IV and V of the caput apply to exposures classified in the category "equity interests", defined in art. 7º, and consist, respectively, of:

I - application of standardized risk weighting factors to certain types of exposure, for the simplified approach;

II - application of the Value at Risk (VaR) methodology to the quarterly returns of the value of the shares or risk factors representative of the exposures, for the VaR approach; and

III - use of standardized values for the LGD parameter and of values for the PD parameter obtained through exposures to the same counterparty belonging to other exposure categories, or through the external mapping technique, for the PD/LGD approach.

§ 6º The IRB approaches referred to in items VI and VII of the caput apply to securitization exposures.

Circular nº 3.581, of 8 March 2012
5

CHAPTER II

ON THE EXPOSURE CATEGORIES

Section I

On the specification of the categories

Art. 7º The exposures subject to the use of the IRB approaches must be segmented into the following categories:

I - "sovereign entities", covering exposures to central governments of foreign countries and their respective central banks;

II - "financial institutions", covering exposures to financial institutions and other institutions authorized to operate by the Central Bank of Brazil with which financial statements are not prepared on a consolidated basis, exposures to financial institutions headquartered abroad with which financial statements are not prepared on a consolidated basis and exposures to multilateral organizations and Multilateral Development Entities (MDE) not listed in art. 10 of Circular nº 3.360, of 2007;

III - "retail", covering:

a) exposures to natural persons and to legal entities with annual gross revenue less than R$3,600,000.00 (three million six hundred thousand reais), managed in a non-individualized manner through homogeneous risk groups, which take the form of financial instruments typically aimed at retail; and

b) exposures related to loans and financings to natural persons with residential real estate collateral;

IV - "equity interests", covering the acquisition of shares or quotas of companies, with the exception of capital instruments issued by financial institutions and other institutions authorized to operate by the Central Bank of Brazil; and

V - "wholesale", covering exposures to natural persons and legal entities that do not fall within the categories described in items I to IV.

Art. 8º The "retail" category is divided into the following subcategories:

I - "residential", comprising loans and financings to natural persons with residential real estate collateral, regardless of the exposure value, limited to one residential unit per counterparty, and the first unit acquired must always be considered;

II - "qualified retail revolving credit", comprising unsecured and revolving exposures whose counterparties are natural persons, whose aggregate value per counterparty is less than R$40,000.00 (forty thousand reais) and which present low volatilities in loss rates compared to the historical average volatility of losses of the subcategory "other retail exposures" identified in item III,

especially in the low value ranges for the PD parameter; and

III - "other retail exposures", comprising exposures not falling within the subcategories described in items I and II.

Sole paragraph. Exposures classified in the "retail" category, except the "residential" subcategory, must observe the limit for the value of operations with the same counterparty established in art. 14, § 1º, item IV, of Circular nº 3.360, of 2007, amended by Circular nº 3.471, of 16 October 2009.

Art. 9º The "wholesale" category is divided into the following subcategories:

I - "exposures to natural persons not falling within the 'retail' category and to small and medium-sized enterprises (SME)", comprising exposures to legal entities under private law with annual gross revenue less than R$48,600,000.00 (forty-eight million six hundred thousand reais);

II - "specialized financing", comprising "project financing", "object financing", "commodities financing", "income-producing real estate" and the special subcategory "high-volatility commercial real estate" (HVCRE); and

III - other wholesale exposures not classified in the subcategories described in items I and II.

§ 1º The subcategory "specialized financing" of the type "project financing" includes financing transactions with the following characteristics:

I - the main source of payment for the transaction consists of the revenues earned by the financed project itself and not by the entity sponsoring it; and

II - in the case of non-financial collateral being pledged, as mentioned in art. 87, the main collateral of the transaction consists of the physical facilities of the financed project itself.

§ 2º The subcategory "specialized financing" of the type "object financing" includes credit transactions for the acquisition of an asset with the following characteristics:

I - the main source of funds for payment of the financing consists of the revenues earned by the acquired asset itself and not by the entity sponsoring it;

II - the main collateral of the transaction consists of the acquired asset itself; and

III - the borrower does not have funds to pay off the financing without the revenues earned by the financed asset.

§ 3º The subcategory "specialized financing" of the type "commodities financing" includes short-term credit transactions for the acquisition of commodities or receivables linked to commodities, with the following characteristics:

I - the main source of funds for payment of the financing consists of the revenue from the sale of the financed commodities or the receivables associated with them, as well as the financial results of the receivables themselves, and not the revenues earned by the entity acquiring the commodities; and

II - the borrower does not have funds to pay off the financing without the revenue from the sale of the commodities or without the financial results of the receivables associated with them.

§ 4º The subcategory "specialized financing" of the type "income-producing real estate" includes financing transactions for the acquisition and construction of real estate with the following characteristics:

I - the revenues earned by the real estate itself constitute the main source of payment for the financing;

II - the main collateral of the transaction consists of the financed real estate development itself; and

III - there is a strong positive correlation between the possibility of payment of the financing and the expected degree of recovery in case of default, in which both depend primarily on the revenues generated by the financed units.

§ 5º The subcategory "specialized financing" of the type "HVCRE" includes financing transactions for the acquisition or construction of commercial real estate with the following characteristics:

I - the historical loss rates of transactions in the subcategory show higher volatilities than those observed in the subcategory "specialized financing" of the type "income-producing real estate", identified in § 4º;

II - the main source of funds for payment at the time the financing is granted consists of the revenues, with a high degree of uncertainty, earned by the acquired real estate itself and not by the entity sponsoring it;

III - the main collateral of the transaction consists of the financed real estate development itself; and

IV - the borrower does not have funds to pay off the financing without the revenues earned by the real estate development.

§ 6º The classification of transactions in the subcategory "specialized financing" of the type "HVCRE" may be determined by Desup.

§ 7º For the purposes of the verification provided for in § 5º, item I, the use of expected loss rates is permitted, in the case of absence or insufficiency of a database.

§ 8º The individualized risk classification of a retail exposure during part of the risk management process does not exclude its classification as "retail", nor the treatment applicable to this type of exposure.

Art. 10. Exposures related to the acquisition of receivables originating from exposures classifiable in the "retail" and "wholesale" categories must be highlighted for treatment distinct from the other exposures of these categories, according to the provisions of arts. 58 and 59.

Section II

On the Use of the IRB Approach for Exposure Categories

Art. 11. The use of the IRB approach for a given exposure category in a business unit implies the use of the same approach for all relevant exposures of that category and respective subcategories in that unit.

§ 1º A business unit is defined as the structure used for managing portfolios with similar characteristics.

§ 2º The business unit defined in § 1º is not necessarily linked to the legal structure of the financial conglomerate or to registration in the National Register of Legal Entities (CNPJ).

§ 3º For exposures in business units that are not relevant in relation to the size of the institution and for exposure categories whose value is considered irrelevant in relation to the risk incurred, there may occur, exceptionally, at the discretion of Desup:

I - the use of an approach different from the previously authorized one; and

II - the calculation of the value of the PEPR Portion in the manner established in Circular No. 3.360, of 2007.

§ 4º The use of the IRB approach for any of the exposure categories implies its adoption, in part or in whole, also for the "equity interests" category, observing the materiality criterion.

§ 5º The use of the IRB approach for the "wholesale" category implies its use for the subcategory "specialized financing".

Section III

On Qualitative Requirements

Art. 12. The IRB approach adopted for a given category must meet the following requirements:

I - measure credit risk consistently, taking into account the characteristics of the borrower and the transaction;

II - classify credit risk according to a consistent methodology;

III - be integrated, together with the risk parameter estimates, into the credit risk management framework addressed by Resolution No. 3,721, of 30 April

2009, and be used together with the limits defined by the institution to measure, monitor and control credit risk exposure;

IV - support the decisions and procedures arising from the adopted management policies and strategies;

V - employ technological infrastructure and controls compatible with the nature of the transactions, the complexity of the products and the magnitude of the institution's credit risk exposure;

VI - subject the internal estimates of risk parameters to a validation process; and

VII - assess new products and businesses being discontinued in a conservative manner.

Art. 13. The institution adopting the IRB approach shall maintain a sufficient number of technically qualified professionals in its business, operational, credit granting, assessment and risk management, internal audit and information technology areas, as well as in those involved in the development, validation, assessment and use of internal credit risk classification systems.

Art. 14. The use of the IRB approach implies the maintenance of adequate and updated descriptive documentation on all relevant aspects of the systems used, covering, at a minimum:

I - adopted policies and strategies;

II - theoretical basis;

III - assessment, measurement and monitoring methodologies, including those used in statistical models, comprising theoretical basis, assumptions, data sources, statistical tests for system validation and the circumstances in which the methodologies do not work satisfactorily;

IV - treatment given to new products, including characteristics, assessment, measurement and monitoring methodologies and performance reports;

V - segmentation of the credit portfolio, classification criteria, responsibility of the professionals involved, frequency of classification review and monitoring of the classification process;

VI - internal definitions of delinquency, default, loss, breach, situations of exception to the classifications used internally, as well as all other definitions used to qualify clients and transactions, demonstrating their consistency with the regulatory definitions, where applicable;

VII - structure of the internal risk classification system;

VIII - internal controls;

IX - operational routines;
X - assessment reports, including those of internal audit and of the validation processes; XI - risk reports, including stress test reports; XII - management reports that provide input for the decision-making process of the institution's executive board and board of directors; and XIII - history of changes made to internal systems, including in the validation process.

CHAPTER III

ON DEFAULT

Section I

On the Definition

Art. 15. Default is defined as the occurrence of at least one of the following events:

I - for exposure classified in the "retail" category:

a) the institution considers that the borrower or counterparty will not fully honor the respective obligation without the institution resorting to actions such as the enforcement of guarantees provided or pledged collateral; or

b) the respective obligation has been in arrears for more than 180 (one hundred and eighty) days, in the case of exposure classified in the "residential" subcategory, or for more than 90 (ninety) days, in the case of exposure classified in the other subcategories;

II - for exposure related to loans and financings to individuals secured by residential real estate classified in the "wholesale" subcategory:

a) the institution considers that the borrower or counterparty will not fully honor at least one obligation vis-à-vis the institution itself without the latter resorting to actions such as the enforcement of guarantees provided or pledged collateral; or

b) at least one obligation of the borrower or counterparty vis-à-vis the institution related to loans and financings secured by residential real estate has been in arrears for more than 180 (one hundred and eighty) days;

III - for exposure classified in the other categories:

a) the institution considers that the borrower or counterparty will not fully honor at least one obligation vis-à-vis the institution itself without the latter resorting to actions such as the enforcement of guarantees provided or pledged collateral; or

b) at least one obligation of the borrower or counterparty vis-à-vis the institution has been in arrears for more than 90 (ninety) days.

§ 1º Indications that a specific borrower or counterparty will not fully honor an obligation include:

I - the institution, on its own initiative and independently of any regulatory requirement, ceases to accrue income relating to the exposure;

II - the institution, on its own initiative and independently of any regulatory requirement, recognizes in its accounts a significant deterioration in the credit quality of the borrower or counterparty;

III - the institution sells, transfers or renegotiates with a relevant economic loss the credit rights relating to the obligation, due to a significant deterioration in the credit quality of the borrower or counterparty;

IV - the institution petitions for the bankruptcy of, or takes similar action in respect of, the borrower or counterparty, based on the non-fulfillment of credit obligations under the agreed terms; and

V - the borrower or counterparty requests any type of judicial measure that limits, delays or prevents the fulfillment of its obligations under the agreed terms; and

VI - the borrower or counterparty has been subject to any type of judicial measure that limits, delays or prevents the fulfillment of its obligations under the agreed terms.

§ 2º Obligations relating to guaranteed accounts and similar exposures are considered past due from the day on which the debit balance exceeds the agreed limit.

§ 3º The methodology for counting the days during which an operation is past due must be consistent over time and clearly documented.

§ 4º The criteria defined by the institution, both for marking and for unmarking exposures in default, must be consistent with the requirements of this Circular and aligned with its credit risk management.

Section II

On the Renegotiation Policy

Art. 16. An institution using the IRB approach must have a policy that is consistent over time and clearly documented for the renegotiation of operations and similar measures, in accordance with Resolution No. 2,682, of December 21, 1999, identifying, at a minimum:

I - those responsible for the policy and for the monitoring reports and the bodies responsible for approving the renegotiation;

II - the original operation and its monitoring, including in the event of

BANCO CENTRAL DO BRASIL

renegotiation;

III - the means of disseminating the respective information within the institution;

IV - the effective minimum maturity required of an operation for it to be renegotiated;

V - the limit on the level of delinquency for a renegotiation;

VI - the maximum number of renegotiations per operation;

VII - the analysis of the debtor's payment capacity in a renegotiation; and

VIII - the analysis of the occurrence of losses in the present value of the operation, as well as changes in the values of the risk parameters.

Sole paragraph. Credit granting processes must be consistent with the policy mentioned in the main clause.

TITLE III

ON CREDIT RISK

CHAPTER I

ON CREDIT RISK CLASSIFICATION SYSTEMS

Art. 17. The use of more than one credit risk classification system for different exposures belonging to the same category is permitted.

§ 1º Credit risk classification systems comprise methods, processes, controls, data storage and information technology systems, intended to:

I - measure credit risk, including the assignment of values to risk parameters;

II - clearly define the various risk levels into which financial operations are segmented; and

III - allow financial operations to be classified into risk levels.

§ 2º The definition mentioned in item II of § 1º for the categories "wholesale", "sovereign entities" and "financial institutions" must include the qualitative description of the risk levels and the typical profile of the borrowers classified therein.

§ 3º The choice of the classification system must be documented and based on the best capacity to discriminate the risk level based on the characteristics of the borrowers or counterparties and of the operations.

Art. 18. The criteria for defining risk levels must:

I - be plausible and justifiable;
II - result in significant differentiation between the various levels of credit risk in the categories and subcategories to which such classification applies; and III - be consistent with the credit granting policies and with the policies for treating problem credits.

§ 1. The classification of transactions must use timely and relevant information according to verifiable criteria.

§ 2. The criteria and procedures for classification according to credit risk must be periodically reviewed to ensure that they remain applicable to the current composition of the portfolio, to market conditions and to the economic scenario.

§ 3. Clear and sufficiently detailed documentation on the definition of credit risk levels must be maintained, so as to allow the verification and replication of the classifications.

§ 4. Exposures must be classified conservatively if adequate and sufficient information is not made available.

§ 5. Counterparties must be classified individually, except in the cases of entities that belong to the same economic group and receive a uniform risk classification, at the institution's discretion and subject to the assessment of Desup.

Art. 19. The classification of borrowers or counterparties must reflect not only the 1 (one) year period used to estimate the value of the PD parameter, but also the possibility of deterioration of credit quality over horizons exceeding 1 (one) year.

Sole paragraph. The classification addressed in the caput must consider the effect of the deterioration of economic conditions in relation to the current situation and the occurrence of unexpected events, mainly on the sectors most sensitive to fluctuations in those conditions.

Art. 20. Risk quantification systems of a parameterized nature must:

I - be subject to continuous monitoring and periodic critical assessments of the results and of their processes, so as to ensure the use of all relevant information; and

II - be complemented, when necessary, with adjustments of a qualitative nature intended to mitigate their limitations, following previously documented procedures.

§ 1. The models used, in particular the variables employed, must demonstrably have high predictive capacity in relation to the performance of the borrowers or counterparties and the transactions to which the institution is exposed.

§ 2. The estimates produced by the models addressed in § 1 must not present significant bias.

§ 3. The institution must establish a process for verifying the accuracy, completeness and adequacy of the data used for classifying exposures to the current risk profile.

§ 4. The performance and stability of the models must be monitored, so as to enable comparison between the values estimated for the risk parameters and their respective realized values.

§ 5. The risk classification process, when composed of several assessment instances, must keep records and justifications of the entire history of classifications of the same exposure.

Art. 21. Idiosyncratic adjustments that override the risk quantification process established by the institution (overrides) must be individually tracked for performance analysis purposes.

Art. 22. The data used to build the model must be demonstrably representative of the universe of borrowers or counterparties and of current products.

Sole paragraph. If it is not possible to demonstrate the representativeness of the data, conservative adjustments must be made.

Art. 23. Changes in criteria, parameters or procedures used for risk classification must be documented and made available for review by Desup.

Art. 24. A history of the risk classification of borrowers or counterparties and of guarantors must be maintained, covering the initial risk classification, the classification date, the methodology, the main data used and the person responsible for the classification, with sufficient detail and data to allow retrospective classification in the event of a model change.

Art. 25. The process of classifying borrowers and transactions must be supported by an appropriate incentive structure, so as to isolate it from pressures from persons who may benefit from it and, in particular, to prevent persons involved in that process from obtaining gains arising from the granting of credit.

CHAPTER II

ON STRESS TESTS

Art. 26. The use of IRB approaches must include the performance of stress tests designed to verify the adequacy of the PEPR portion to the current risk profile, which consider, at a minimum:

I - the occurrence of isolated events or changes in economic or market conditions that affect the institution's ability to bear the risks of the exposures mentioned in the caput of art. 4; and

II - simulations of specific scenarios, representative of situations of low or

medium stress, that affect specific aspects of the IRB approach adopted.

Sole paragraph. To perform the stress tests mentioned in the caput, the respective data must allow:

I - estimation of the migration of exposures between risk levels; and

II - quantification of the impact of relatively mild deterioration in the credit market on the risk classifications of exposures.

Art. 27. Sufficient PR must be maintained and compatible with the results of the stress tests established in art. 26.

CHAPTER III ON GOVERNANCE

Section I

On the Duties of the Board of Directors and the Board of Officers

Art. 28. The duties of the board of officers and the board of directors of the institution that uses an IRB approach are:

I - to define the guidelines for the performance of internal control activities, the levels of authorization required to assume different levels of risk, as well as the information and periodic reports to be submitted for their consideration; and

II - to verify the adequacy of the results produced within the scope of the IRB approach to the institution's risk profile.

Art. 29. The duties of the board of directors of the institution that uses an IRB approach or of a specific committee designated by it are:

I - to approve all essential and determining aspects of the credit risk classification and estimation processes; and

II - to know the general aspects of the IRB approach adopted and understand the management reports associated with the systems used.

Art. 30. The duties of the board of officers of the institution that uses an IRB approach are:

I - to have adequate knowledge about the structure and operational process of the internal classification system, the IRB approach adopted and the management reports associated with the systems used;

II - to monitor the process of using the IRB approach;

III - to verify the adequacy of the results of using the IRB approach to the current risk profile;

IV - to approve the adoption of practices related to internal credit risk classification systems that present significant differences from the procedures originally established;

V - to define the structure of risk limits assumed by the institution; and

VI - to verify the adequacy of the results of the internal credit risk classification systems to the institution's risk profile.

Sole paragraph. The board of officers of the institution must inform the board of directors or the designated committee of any exception or modification in the established credit granting policies that may significantly affect the use or the results of the IRB approach adopted.

Art. 31. The reports sent to the institution's board of officers and board of directors must include information regarding:

I - risk profile of each classification level;

II - migration matrix between classification levels;

III - estimates of the risk parameters relevant to each classification level; and

IV - comparison between the estimated values for each risk parameter and the values actually realized.

Sole paragraph. The frequency of the reports must enable the timely adoption of corrective measures.

Section II

On the Credit Risk Control Units

Art. 32. The structuring, implementation and management of the IRB approach adopted are responsibilities of one or more credit risk control units.

§ 1 The credit risk control units must have administrative independence and functional segregation in relation to the area responsible for granting credit.

§ 2 The activities referred to in the caput may be performed by the credit risk management unit referred to in art. 8 of Resolution No. 3,721, of 2009.

§ 3 The regular assessments by the credit risk control unit regarding the performance of the credit risk classification process must be sufficiently documented, specifying the areas that require improvement.

Art. 33. The functions of the credit risk control unit are:

I - to monitor the classification assigned to exposures over time;

II - to produce and analyze reports on the risk classification system, with highlight the following information:
a) historical default rates, ordered according to the classification of risk at the time of default; b) historical default rates, ordered according to the classification of risk in the period of, at least, 12 (twelve) months prior to the default event; c) analysis of migration rates between risk levels; and d) analysis of the behavior of key criteria for risk classification; III - implement procedures to verify the consistency of risk classifications across different business units and geographic areas; IV - review and document any change in the risk classification process, including the respective grounds; V - review the classification criteria based on their predictive capacity with respect to risk; VI - monitor actions taken to improve identified deficiencies; and VII - monitor overrides.

CHAPTER IV

ON THE MONTHLY VALUE OF THE PEPR INSTALMENT

Art. 34. The total monthly value of the PEPR instalment must correspond to the result of the following formula:

PEPR = PEPR(IRB) + PEPR(3360), where:

I - PEPR (IRB) = monthly value of the PEPR instalment calculated by means of the IRB approach; and

II - PEPR (3360) = monthly value of the PEPR instalment relating to exposures subject to the treatment defined by Circular No. 3,360 of 2007.

Sole paragraph. The monthly value of the PEPR(IRB) instalment must correspond to the result of the following formula:

PEPR (IRB) = ΣKi × EADi, where:

I - Ki = credit risk weighting factor associated with obligor or risk pool "i"; and

II - EADi = value of the Exposure at Default parameter

associated with exposure "i" relating to obligor or risk pool "i".

CHAPTER V ON THE "WHOLESALE", "SOVEREIGN ENTITIES" AND "FINANCIAL INSTITUTIONS" CATEGORIES

Section I

On the Distribution of Exposures by Risk Levels

Art. 35. For the "wholesale", "sovereign entities" and "financial institutions" categories, the IRB approach employed must provide for the balanced distribution of exposures across risk levels, without excessive concentration in any given level, considering two dimensions:

I - the risk of default of the obligor or counterparty, which determines the value of the PD parameter; and

II - the specific factors of the transaction, which determine the value of the LGD parameter.

§ 1º A significant concentration of exposures at a risk level must be justified by empirical evidence demonstrating the reasonable homogeneity of the obligors or counterparties classified there.

§ 2º Institutions that use the mapping of exposures classified in the "specialized financing" subcategory, as per Art. 40, need not consider the dimensions mentioned in items I and II of the main body of this Article.

§ 3º Obligors and transactions must have their classification reviewed at least annually.

§ 4º The classification of higher-risk obligors and transactions must be reviewed more frequently.

§ 5º Procedures must be established to ensure the continuous obtaining of new relevant information about their obligors and the timely updating of classifications.

Section II

On the Dimension Relating to the Obligor or Counterparty

Art. 36. The dimension relating to the risk of default of the obligor or counterparty, as per Art. 35, item I, must provide for the distribution of exposures across at least eight risk levels, of which seven levels must correspond to exposures for which no default is observed and one level must correspond to exposures for which default is observed.

§ 1º Each level must be associated with a specific estimate of the PD parameter.

§ 2º Different exposures relating to the same obligor or counterparty must be classified at the same risk level, regardless of differences in the characteristics of the respective transactions, except in the following cases:

I - treatment of country risk, depending on whether their exposures are denominated in local currency or foreign currency; and

II - treatment of exposures with surety collateral that result in a change in the risk classification.

§ 3º Desup may, at its discretion, determine a change in the number of risk levels considered in the IRB approach used.

Section III

On the Dimension Relating to Specific Factors of the Transaction

Art. 37. The dimension relating to specific factors of the transaction, mentioned in Art. 35, item II, must consider exclusively the factors relating to the transaction that may influence the magnitude of potential losses.

Sole paragraph. In the case of the use of the Foundation IRB approach, the use of factors that jointly reflect characteristics of the transaction and of the obligor or counterparty is permitted.

Art. 38. The number of risk levels relating to the dimension of specific factors of the transaction must be sufficient to prevent exposures with large differences in the values of the LGD parameter from being grouped at the same level.

Sole paragraph. The criteria used for the segregation of levels must be supported by empirical evidence.

Section IV

On the Calculation of the Value of Factor K

Art. 39. For exposures classified in the "wholesale", "sovereign entities" and "financial institutions" categories, factor K as per the sole paragraph, item I, of Art. 34, must correspond to the result of the following formula:

, where:

I - N = cumulative normal distribution function;

II - N -1 = inverse of the cumulative normal distribution function;

III - PD = Probability of Default parameter;

IV - LGD = parameter Loss Given Default;

V - M = parameter Effective Maturity;

VI - b = adjustment coefficient of parameter M, calculated according to the following formula: b = (0,11852 - 0,05478 x ln(PD))2; and

VII - R = correlation factor.

§ 1º For the exposures mentioned in the caput, the correlation factor R must correspond to the result of the following formula: , where:

I - i=1 in cases of exposures to:

a) financial institutions subject to the Internal Process for Assessing Capital Adequacy (Icaap), under the terms of Resolution No. 3.988, of 30 June 2011; and

b) institutions not authorized by the Central Bank of Brazil that carry out activities conducted by a financial institution, such as the management of consortiums and credit cards, acquisition of credit operations, management of third-party resources, commercial invoice discounting (factoring) operations, financial leasing, securitization, provision of credit enhancement in securitization operations, custody of securities and financial assets, and treasury; and

II - i=0, in other cases.

§ 2º For exposures classified in the subcategory "SME", the correlation factor R must correspond to the result of the following formula: , where:

I - S = annual gross revenue of the legal entity, in millions of reais, limited to a minimum value of 3,6 (three and six tenths) and a maximum value of 48,6 (forty-eight and six tenths), with the value of S being equal to 3,6 (three and six tenths) for natural persons; and

II - e = Napierian constant.

§ 3º For exposures classified in the subcategory "HVCRE", the correlation factor R must correspond to the result of the following formula:

, where: I - PD = parameter Probability of Default; and II - e = Napierian constant.

§ 4º The adoption of the advanced IRB approach for the subcategory "HVCRE" implies the adoption of the same approach for the subcategory of "income-generating real estate ventures".

§ 5º The value of factor K for exposures in default subject to the advanced IRB approach and classified in the categories "wholesale", "sovereign entities", and "financial institutions" must correspond to the result of the following formula: K = max (0, LGD - EL), where: I - LGD = parameter Loss Given Default; and II - EL = expected loss percentage, as established in art. 110.

§ 6º The value of factor K must be equal to 0 (zero) for exposures in default subject to the basic IRB approach classified in the categories "wholesale", "sovereign entities", and "financial institutions".

Art. 40. The classification of exposures in the subcategory "specialized financings" based on an internal assessment of the degree of compliance with certain criteria associated with the types "project financing", "specific asset financing", "commodity financing", "income-generating real estate venture", and "HVCRE" is permitted.

§ 1º The criteria for the classification referred to in the caput are described in Annexes I to IV of this Circular.

§ 2º The classification methodology for exposures of the "HVCRE" type, in the subcategory "specialized financings", must provide for their allocation into five risk levels, four of which must correspond to exposures where no default is verified and one level must correspond to exposures where default is verified, according to the following weighting (Pi):

I - Strong level, 95% (ninety-five percent);

II - Good level, 120% (one hundred and twenty percent);

III - Satisfactory level, 140% (one hundred and forty percent);

IV - Weak level, 250% (two hundred and fifty percent); and

V - Default level, 0% (zero percent).

§ 3º The methodology for classifying exposures of the other types of the "specialized financing" subcategory must provide for the allocation of exposures into five risk levels, of which four levels must correspond to exposures in which default is not verified and one level must correspond to exposures in which default is verified, according to the following weightings (Pi):

I - Strong level, 70% (seventy percent);

II - Good level, 90% (ninety percent);

III - Satisfactory level, 115% (one hundred and fifteen percent);

IV - Weak level, 250% (two hundred and fifty percent); and

V - Default level, 0% (zero percent).

§ 4º The factor K for exposures of the "HVCRE" type that receive the treatment provided for in the caput must be calculated as follows:

Ki = F x Pi , in which:

I - F = factor applied to the EPR, pursuant to art. 1º of Circular No. 3,360, of 2007;

and

II - Pi = the value of P associated with the exposure, among those mentioned in § 2º.

§ 5º The factor K for other types of the "specialized financing" subcategory that receive the treatment provided for in the caput must be calculated as follows:

Ki = F x Pi , in which:

I - F = factor applied to the EPR, pursuant to art. 1º of Circular No. 3,360, of 2007;

and

II - Pi = the value of P associated with the exposure, among those mentioned in § 3º.

Section V

On Exposures Classified in the SME Subcategory and Exposures to Natural Persons

Art. 41. Desup may, exceptionally, waive the individualized treatment required for exposures classified in the "SME" subcategory and exposures to natural persons not classified in the "retail" category, allowing their inclusion in a homogeneous risk group as defined in § 1º of art. 44, provided that the management of these exposures is carried out in a non-individualized manner.

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Section VI

On Data Storage

Art. 42. The complete history of estimates of the PD parameter and of the observed default frequency for each risk level must be stored, as well as the history of migration of exposures between risk levels.

Art. 43. For the "wholesale", "sovereign entities" and "financial institutions" categories, the use of the advanced IRB approach implies the storage of the following information:

I - complete history of the estimates of the LGD and EAD parameters associated with each operation;

II - main data used for the estimation of the risk parameters;

III - identification of the person responsible or model used in the estimation process;

IV - realized values of the LGD and EAD parameters associated with each operation; and

V - loss and recovery values for each exposure in default.

CHAPTER VI

OF THE "RETAIL" CATEGORY

Section I

Of the Homogeneous Risk Group

Art. 44. For exposures classified in the "retail" category, the systems for classifying exposures according to credit risk must allow the association of each exposure to a homogeneous risk group, identified based on the following criteria:

I - risk characteristics of the borrower or counterparty;

II - risk characteristics of the exposure, including the type of product and the existence of guarantees, among others; and

III - delay in the operations associated with the exposures.

§ 1º "Homogeneous risk group" is defined as the set of retail exposures with common characteristics for the purposes of assessment and quantification of credit risk, identified based on the criteria established in the caput.

§ 2º The distribution of exposures classified in the "retail" category must provide significant differentiation of risks and avoid concentrations in certain homogeneous risk groups.

§ 3º Significant concentrations in a homogeneous risk group must be justified by empirical evidence that proves the reasonable homogeneity of the borrowers or counterparties and of the operations classified therein.

§ 4º It must be ensured that the number of exposures classified in a given homogeneous risk group is sufficient to allow the adequate measurement and validation of its risk parameters.

Art. 45. For each homogeneous risk group, the values of the PD and LGD parameters must be estimated, and the circumstantial occurrence of identical estimates for different homogeneous risk groups is permitted.

Sole paragraph. External data and statistical models may be used as a complementary source of information, provided that a strong correlation with the risk profile and segmentation of the institution's exposures is demonstrated.

Art. 46. The values and characteristics of losses and the frequency of defaults associated with homogeneous risk groups must be reviewed, at least, annually.

§ 1º Exposures must remain allocated to correct homogeneous risk groups, and, for this purpose, their classifications must be reviewed, at least, annually.

§ 2º The review process referred to in the caput may be carried out through the use of statistically representative sampling.

Section II

Of the Calculation of the Value of Factor K

Art. 47. For exposures classified in the "retail" category, the value of factor K must correspond to the result of the following formula:

, where:

I - N = cumulative normal distribution function;

II - N -1 = inverse of the cumulative normal distribution function;

III - PD = Probability of Default parameter;

IV - LGD = Loss Given Default parameter; and

V - R = correlation factor.

§ 1º For exposures classified in the "residential" subcategory, the value of the correlation factor R is 0.15 (fifteen hundredths).

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§ 2º For exposures classified in the "qualified retail revolving credit" subcategory, the value of the correlation factor R is 0.04 (four hundredths).

§ 3º For the other retail exposures, the value of the correlation factor R must correspond to the result of the following formula: R = 0.03 x (1 – e -35 x PD) / (1 – e -35) + 0.16 x [1 – (1 – e -35 x PD) / (1 – e -35)], where e = Napier's constant.

§ 4º The value of factor K for exposures in default subject to the advanced IRB approach and classified in the "retail" category must correspond to the result of the following formula: K = max (0, LGD - EL), where: I - LGD = Loss Given Default parameter; and II - EL = percentage of expected loss, as established in art. 110.

Section III

Of Data Storage

Art. 48. The use of the IRB approach for exposures classified in the "retail" category implies the storage of the following information:

I - data used in the process of allocation to homogeneous risk groups, including data on the risk characteristics of the borrower and the operation, as well as data on the delay;

II - estimates of the values of the PD and LGD parameters associated with the homogeneous risk groups;

III - realized values for the LGD and EAD parameters and observed frequency of default; and

IV - identification of the homogeneous risk groups in which the exposures in default were allocated in the year prior to the default.

CHAPTER VII OF THE "EQUITY HOLDINGS" CATEGORY

Section I

Of the General Provisions

Art. 49. For exposures classified in the "equity holdings" category, the option to use the simplified approach, the VaR approach or the PD/LGD approach must be consistent with the amount and complexity of these exposures and with the size and complexity of the institution.

BANCO CENTRAL DO BRASIL

§ 1º The use of different approaches for different portfolios is permitted, provided that they are consistent with their internal use, subject to evaluation by Desup.

§ 2º Desup may, at its discretion, determine the use of an approach different from that used by the institution among those established in the caput.

§ 3º The value of the EAD parameter must correspond to the book value of the long positions in shares not classified in the trading portfolio.

Section II

Of the Simplified Approach

Art. 50. The monthly value of the PEPR(IRB) portion calculated through the simplified approach must correspond to the result of the formula established in art. 34, sole paragraph, where the factor Ki corresponds to the result of the following formula:

Ki = K* x F, where:

I - K* = 300% (three hundred percent), for shares traded on a stock exchange, or 400% (four hundred percent), for other shares; and

II - F = factor applied to the EPR, pursuant to art. 1 of Circular No. 3.360, of 2007.

Art. 51. Long positions in shares may be offset by short positions in the same shares and by financial derivative instruments not classified in the trading portfolio, intended to hedge those shares, provided that these have an effective maturity term of at least 1 (one) year.

Section III

On the VaR Approach

Art. 52. The use of the VaR approach is conditioned upon compliance with the following minimum requirements:

I - robustness of loss estimates in the face of adverse and relevant market movements in relation to the long-term risk profile of the institution's portfolio;

II - adequacy of the VaR model used to the risk profile and complexity of the portfolio, and it must explain historical price variations, measure non-linearity risk, consider adverse market conditions and potential concentration risks;

III - theoretical and empirical proof of the techniques and processes for mapping exposures into risk factors, or into approximations (proxies);

IV - use of all relevant data, information and methodologies available to estimate the volatilities of the returns of exposures;

V - implementation of a comprehensive stress testing program that submits

its estimations to historical and prospective scenarios; and

VI - establishment of policies, procedures and controls that meet, at a minimum, the following requirements:

a) integration of the approach into the risk and portfolio management of exposures included in the "equity holdings" category;

b) independent and periodic review of the VaR model used;

c) monitoring of limits and credit risk of transactions classified in the "equity holdings" category;

d) independence of the unit that develops and uses the VaR model from the units that manage the investments; and

e) allocation of qualified personnel in the modeling processes.

Sole paragraph. If the minimum requirements established in the caput cease to be met, the simplified approach must be used to calculate the monthly value of the PEPR(IRB) portion, an adequacy plan must be prepared and its approval must be obtained from Desup.

Art. 53. In the VaR approach, the monthly value of the PEPR(IRB) portion must correspond to the potential loss obtained through a VaR model based on the 99th percentile and one-tailed confidence interval of the difference between quarterly returns and the risk-free rate calculated over the long-term sample period.

§ 1 Data relating to time horizons shorter than one quarter may be used, provided that conservative, consistent, empirically proven and duly documented adjustment techniques are used.

§ 2 In the event of data limitations or technical limitations that produce results of dubious quality, procedures that generate conservative values for the respective PEPR(IRB) portion must be adopted.

§ 3 The use of models with historical scenario analysis implies the ability to demonstrate that the methodology and the quantification of results are in accordance with the parameters established in the caput.

§ 4 The use of factor models implies empirical proof that the factors are sufficient to measure general and specific risks.

§ 5 In the case of using multivariate VaR models, recognition of correlations among the various risk factors will be permitted, at the discretion of Desup, provided they are documented and empirically proven.

Art. 54. The individual monthly value of the PEPR(IRB) portion calculated according to the VaR approach must be higher than that calculated using the following values for the K* factor:

I - 200% (two hundred percent), for shares traded on a stock exchange; and

II - 300% (three hundred percent), for other shares.

Sole paragraph. The value of the K factor defined in art. 34, sole paragraph, item I, is equal to the K* factor multiplied by the F factor applicable to the EPR, pursuant to art. 1 of Circular No. 3.360, of 2007.

Art. 55. The validation of the VaR approach must ensure the accuracy and consistency of the VaR models, the modeling processes and the database used by performing, at a minimum:

I - periodic comparison of observed returns with the estimates produced by the VaR models and demonstration that these returns are within the expected ranges, both for the portfolio and for individual positions;

II - use of quantitative validation tools;

III - demonstration of the consistency of the quantitative validation criteria over time;

IV - maintenance of documentation of all relevant aspects of the validation process, including changes in the database and in the estimation methods; and

V - performance of backtesting on a continuous basis, in relation to the following elements:

a) quarterly results forecast internally and the results effectively observed; and

b) estimates of return volatilities, supported by an appropriate database.

Sole paragraph. Desup may request that the backtesting defined in item V use a time horizon different from the quarterly one, as well as the conversion of the quarterly result forecasts to the new defined time horizon.

Art. 56. The use of the VaR approach implies the maintenance of descriptive and updated documentation, covering:

I - characteristics of the VaR model used, including methodology, theoretical basis, parameters, variables, data sources and the statistical process for validating the selected explanatory variables;

II - determinants of the choice of the VaR model used;

III - history of changes in the methodology of the VaR model used; and

IV - circumstances in which the VaR model used does not work effectively.

§ 1 The documentation must demonstrate the adequacy of the approach employed to the minimum qualitative and quantitative standards required.

§ 2 The documentation must demonstrate that the approximations referred to in art. 52, item III, do not lead to an underestimation of the risk of the exposures.

Section IV

Of the PD/LGD Approach

Art. 57. The use of the PD/LGD approach is conditioned upon meeting the minimum requirements defined for estimating the PD parameter for exposures in the "wholesale" category, as set forth in arts. 63, 64 and 66 to 72.

§ 1 The calculation of the value of the PEPR(IRB) portion, mentioned in art. 34, sole paragraph, through the PD/LGD approach must use:

I - the formula for calculating the K factor defined in the caput of art. 39;

II - the value of the LGD parameter equal to 90% (ninety percent); and

III - the risk weight adjusted for the value of the M parameter equal to 5 (five) years.

§ 2 The value of the PD parameter must be inferred as follows:

I - use of the PD parameter values of exposures to the same counterparty belonging to other categories; or

II - use of the PD parameter value obtained through the "external mapping" technique, defined in art. 72, in the absence of exposures to the same counterparty belonging to other categories subject to the IRB approach.

§ 3 If the value of the K factor is obtained according to the provisions of § 2, item II, of this article, its value must be multiplied by 1.5 (one point five).

§ 4 In the case of operations intended to provide hedge for exposure belonging to the "equity" category, the value of the LGD parameter is equal to 90% (ninety percent) for the exposure to the hedge provider and the value of the M parameter is equal to 5 (five) years.

§ 5 The risk weight factors (Ki) must not have a value greater than 1.

§ 6 The value of the K* factor must correspond to the result of the following formula:

K* = Ki / F, where F = factor applicable to the EPR amount, under Circular No. 3,360, of 2007.

§ 7 The value of the EL* factor must correspond to the result of the following formula:

EL* = PD x LGD / F, where:

I - PD = value of the Probability of Default parameter; II - LGD = value of the Loss Given Default parameter; III - F = factor applicable to the EPR amount, under Circular No. 3,360, of 2007.

§ 8 The sum of the K* and EL* factors must be compared to the following minimum values:

I - 100% (one hundred percent), for publicly traded equity holdings, to be held for a minimum term of 5 (five) years and not intended to realize capital gains in the short term nor to anticipate extraordinary long-term gains;

II - 100% (one hundred percent), for non-publicly traded equity holdings, for which the return is obtained through regular cash flows not derived from capital gains and there is no expectation of future or immediate extraordinary gains;

III - 200% (two hundred percent), for other publicly traded equity holdings, including short sales; and

IV - 300% (three hundred percent), for other exposures.

§ 9 If the sum mentioned in § 8 is less than the minimum values established in its items, the value of K* must be set equal to the respective minimum values.

TITLE IV

OF ACQUIRED FINANCIAL RECEIVABLES

CHAPTER I

OF SEGREGATION

Art. 58. Acquired financial receivables must be segregated into retail financial receivables and wholesale financial receivables.

§ 1 The criteria for segregation of retail financial receivables are the same as those for classification of exposures in the "retail" category.

§ 2 The criteria for segregation of wholesale financial receivables are the same as those for classification of exposures in the "wholesale" category, including individualized treatment and analysis of the debtors of the receivables.

Art. 59. The treatment given to portfolios of acquired financial receivables must be the same as that provided for the respective subcategory of the "retail" and "wholesale" categories in which these portfolios would be classified, if originated by the acquiring institution itself.

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§ 1 If the minimum requirements for classification of the underlying assets in a specific subcategory of the "retail" and "wholesale" categories are not met, the treatment given to the acquired financial receivables must be the same as that given to the following subcategories:

I - "other retail exposures", as defined in art. 8, item III, for retail receivables; and

II - "other wholesale exposures", as defined in art. 9, item III, for wholesale receivables.

§ 2 If the set of receivables includes receivables associated with more than one exposure subcategory, each exposure must receive the treatment of the subcategory in which it must be classified.

§ 3 If the set of financial receivables includes receivables associated with more than one exposure subcategory and it is not possible for the institution to associate each exposure with its category, the treatment given must be that which results in the highest value of the PEPR portion.

§ 4 For retail financial receivables, the use of external data sources is permitted, provided they are complementary to internal analyses.

§ 5 For retail financial receivables, the database used to estimate the values of the PD and LGD parameters must disregard the effects of credit risk mitigation techniques used together with the receivables.

Art. 60. The use of the advanced IRB approach for wholesale financial receivables is conditioned upon authorization of the same approach for the "wholesale" category.

CHAPTER II OF DILUTION RISK

Art. 61. In calculating the PEPR portion, in addition to credit risk, the dilution risk associated with a set of financial receivables or individual financial receivables must be considered, according to the following criteria:

I - the estimated value for the EL associated with the risk of reduction of the set of receivables must be estimated for the horizon of 1 (one) year and expressed as a percentage of the total receivables, disregarding the effects of credit risk mitigation techniques used together with the receivables;

II - the value of the PD parameter associated with the risk of reduction must be equal to the value for the EL associated with the risk of reduction, considering the value of the LGD parameter associated with the risk of reduction equal to 100% (one hundred percent); and

III - the receivables must meet the same quantitative requirements of the category or subcategory in which the underlying exposures are classified.

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§ 1 The risk of reduction is defined as the possibility of the occurrence of events that can reduce the value of the receivables, including the return or discount for defective or out-of-specification goods.

§ 2 For estimating the value of the EL associated with the risk of reduction, the priority use of external data sources is permitted.

§ 3 The values of the risk parameters established in item II of the caput and the formulas used to calculate the K factor applicable to the respective exposure subcategory must be used to obtain the K factor associated with the risk of reduction.

§ 4 The criteria established in the caput must be adopted for both retail and wholesale financial receivables.

§ 5 The value of the M parameter must be determined in accordance with the provisions of Art. 86.

§ 6 In the event of proof that the risk of reduction is effectively monitored and controlled, the value of the M parameter must be equal to 1 (one) year.

§ 7 At the discretion of Desup and upon proof of irrelevance of the risk of reduction to which the institution is exposed, the calculation of this risk may be waived.

§ 8 The calculation of the risk of reduction in accordance with the caput does not imply the waiver of the calculation of the K factor associated with credit risk and the value of the PEPR portion associated with a set of financial receivables or individual financial receivables.

Art. 62. The fidejussory guarantees and credit derivatives associated with the receivables must receive the treatment established in Arts. 87 to 108.

Sole paragraph. The fidejussory guarantees referred to in the caput must observe the following additional procedures:

I - in the case of the guarantee fully covering both the credit risk and the risk of reduction, the original risk weight used must be replaced by the risk weight of the guarantor in the calculation of both risks;

II - in the case of the guarantee fully covering only the credit risk or the risk of reduction, the risk weight of the guarantor must only be used to calculate the value of the portion of the PEPR(IRB) associated with the exposures whose risks were mitigated, which will be added to the portion of the PEPR(IRB) associated with the exposures whose risk was not mitigated; and

III - in the case of the guarantee partially covering the credit risk or the risk of reduction, the uncovered portion must be submitted to the treatment provided for in Arts. 62 and 86 to 105.

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TITLE V

ON THE RISK PARAMETERS

CHAPTER I

ON THE ESTIMATES OF THE RISK PARAMETERS PD, LGD and EAD

Art. 63. The estimates of the values of the PD, LGD and EAD parameters must meet the following requirements:

I - be based on historical data, empirical evidence and complementary subjective aspects, if the latter are relevant;

II - consider all available quantitative and qualitative information, observing the relevance criterion;

III - incorporate relevant changes in the criteria and processes for granting credit or in the recovery processes;

IV - reflect technical advances, changes in databases and other relevant information;

V - use a database representative of the universe of its current borrowers and products, as well as its credit granting standards;

VI - contemplate economic, legal and market conditions underlying the model, compatible with both the current scenario and forecast scenarios;

VII - use a number of exposures in the sample and a sample period sufficient to ensure adequate precision and robustness to the estimates; and

VIII - adopt models that produce satisfactory results in "out-of-sample" tests.

§ 1 In case of data restriction, the estimates must be made conservatively.

§ 2 The estimates of the values of the PD, LGD and EAD parameters must be reviewed, at least annually.

Art. 64. Financial institutions must use internal data as the main source of information for estimating risk parameters.

Sole paragraph. The use of external data and third-party statistical models as a complementary source of information is permitted, provided that good adherence to the risk profile and segmentation of the institution's exposures is demonstrated.

Art. 65. In the process of estimating risk parameters for the "retail" category, based on long-term observed losses, the following may alternatively be used:

I - the PD parameter to infer the value of the LGD parameter; and II - the long-term observed loss given default rates to infer the value of the PD parameter.

Art. 66. The risk parameters associated with the risk levels must remain, over time, within expected ranges, without presenting significant bias.

§ 1 For the purposes of verifying the provisions of the caput, the following comparisons (backtesting) must be performed, at least annually:

I - default rates realized with values of the PD parameter associated with each risk level; and

II - values of the LGD and EAD parameters observed with their estimates for each risk level, in the event of using the advanced IRB approach.

§ 2 In the event of using the basic IRB approach, the comparison of the risk parameters disclosed by the Central Bank of Brazil with the respective realized values for the exposures must be considered.

§ 3 The comparisons provided for in § 1 must be adjusted to the characteristics of the models and the stage of the economic cycle and be adequately documented, including the methods and values of the risk parameters used.

§ 4 If the limits mentioned in the caput are not respected, an action plan must be established to correct the respective estimates.

§ 5 Throughout the execution of the action plan mentioned, the estimates of the risk parameters must be adjusted to the respective realized values.

CHAPTER II

ON THE ESTIMATION OF THE PD RISK PARAMETER

Section I

On the Values for the PD Parameter

Art. 67. For exposures classified in the categories "wholesale", "financial institutions" and "retail", the minimum value for the PD parameter is 0.03% (three hundredths of one percent).

Art. 68. For exposures in default, the value for the PD parameter of the borrower or counterparty is 100% (one hundred percent).

Art. 69. The PD parameter may be adjusted based on the existence of fiduciary guarantees, in accordance with the criteria set forth in arts. 87 to 108.

Section II

On the Estimation Techniques

Art. 70. For the categories "wholesale", "sovereign entities" and "financial institutions", the estimation of the value of the PD parameter must adopt a primary technique among the following:

I - internal estimation;

II - external mapping; or

III - statistical method.

§ 1 The techniques mentioned in items II and III of the caput must be used as the primary estimation technique only when adequate data for internal estimation is absent.

§ 2 The institution that adopts the IRB approach must be able to combine the results of the aforementioned techniques, with a view to performing comparisons, adjustments and critical analyses, as well as making adjustments to the models due to limitations of these techniques or of the information and data available.

§ 3 Techniques and information that reflect long-term conditions must be used during the process of estimating the value of the PD parameter.

§ 4 It is incumbent upon the institution that adopts the IRB approach to prove that the technique used is consistent and adequate to the characteristics of the borrower or counterparty, the risk associated with it and the database.

Subsection I

On Internal Estimation

Art. 71. The internal estimation technique must rely on the use of estimates based on the internal history of default for estimating the value of the PD parameter.

§ 1 The use of the internal estimation technique is conditioned upon the demonstration that:

I - the databases are consistent with the definition of default adopted and with the profile of the clients classified in the current portfolio; and

II - the estimates adequately reflect the policies for granting financing and any differences between the classification system that generated the data and the current system used by the institution.

§ 2 In the case of limitation of available data and changes in the policies for granting financing or in the internal risk classification models, the estimation must be adjusted conservatively.

Subsection II

On External Mapping

Art. 72. In the external mapping technique, the analysis of information from a credit rating agency must consider the information typically related to the borrower or counterparty and disregard the information typically related to the nature of the transaction carried out.

§ 1 The external mapping technique consists of associating internal credit risk classifications to the classification structure adopted by a credit rating agency, comparing the internal classifications to the external classifications of that agency for the borrower or counterparty.

§ 2 Potential differences between the internal definitions and methodologies and those adopted by the external credit rating agency used for the purposes of the provisions of the caput must be analyzed and considered.

§ 3 The direct use of:

I - ordering of the risk levels used by an external credit rating agency; and

II - probabilities of default or similar measures produced by an external credit rating agency as internal PD estimates is prohibited.

§ 4 The mapping process must be duly documented, including the internal credit risk classifications and their associations with the external classifications.

Subsection III

On the Statistical Method

Art. 73. The use of the statistical method technique is conditioned upon compliance with the requirements established in art. 20.

Sole paragraph. The statistical method technique consists of using the average of the individual estimates of default rates, obtained through statistical models, for counterparties belonging to each risk level.

CHAPTER III

ON THE ESTIMATION OF THE LGD RISK PARAMETER

Section I

On the Basic IRB Approach

Art. 74. For exposures not associated with collateral and classified in the categories "wholesale", "sovereign entities" and "financial institutions", the LGD parameter used in the basic approach must assume the following values:

I - 85% (eighty-five percent), for exposures to natural persons and companies with revenue less than or equal to R$3,600,000.00 (three million six hundred thousand reais) not classified in the "retail" category;

II - 70% (seventy percent), for exposures to companies with revenue greater than or equal to R$48,600,000.00 (forty-eight million six hundred thousand reais);

III - the result of the following formula, for exposures to companies with revenue greater than R$3,600,000.00 (three million six hundred thousand reais) and less than R$48,600,000.00 (forty-eight million six hundred thousand reais): LGD = 0.70 + 0.15 x [1 - (S - 3.6) / 45], where S = value of the annual gross revenue of the legal entity in millions of reais, limited to a minimum of 3.6 (three point six) and a maximum of 48.6 (forty-eight point six); and

IV - 45% (forty-five percent), for exposures classified in the category "sovereign entities".

Section II

Advanced IRB Approach

Art. 75. The estimation of the value of the LGD parameter used in the advanced approach must meet the following requirements:

I - be individualized for each type of exposure;

II - take into account the particular characteristics of the exposures;

III - contemplate a complete economic cycle, including periods characterized by losses higher than the long-term average in credit operations;

IV - be equal to or greater than the long-term weighted average of the loss rates given default;

V - adopt conservative estimates, if a relevant positive correlation is observed between the frequency of default and the value of the LGD parameter or when it is not possible to demonstrate the inexistence of said correlation;

VI - adequately reflect the collection procedures; and

VII - consider eventual differences between the collection procedures that generated the data and the current procedures used by the institution.

§ 1º The value of the LGD parameter of an exposure may be estimated jointly with that of other exposures.

§ 2º The weighting provided for in item IV of the caput must be carried out by means of the annual default rate or the number of defaults, in a manner consistent and adequate to the characteristics of the periods considered.

§ 3º For exposures classified in the "retail" category, the value of the LGD parameter must be estimated for each homogeneous risk group, and may be obtained from the long-term observed loss rates and the PD parameter.

§ 4º The definition of the economic cycle must consider indicators of performance of the credit portfolio, among them:

I - growth of the portfolio; and

II - severity and frequency of default events.

Art. 76. Potential dependencies between the credit risk of the borrower or counterparty and of the provider of the collateral or of the collateral itself, whether financial or non-financial, as per art. 87, as well as mismatches of terms and currencies, must be considered conservatively.

Art. 77. The estimates of the value of the LGD parameter must be based on historical recovery rates and consider:

I - potential mismatches between the market value of the pledged collateral and its value at the time of settlement;

II - potential restrictions on the timely settlement of the collateral; and

III - potential impediments or difficulties in the transfer of the collateral.

Art. 78. In the treatment of pledged collateral, internal requirements additional to those established in art. 20, §§ 1º and 2º, of Circular nº 3.360, of 2007, must be established for the management of these collaterals and the risks associated with them, including the verification of the legal certainty of the instruments.

Art. 79. The estimation of the value of the LGD parameter related to an exposure in default must consider the occurrence of unexpected additional losses during the recovery period.

Subsection I

Of Surety Guarantees and Credit Derivatives

Art. 80. The use of the advanced IRB approach implies the estimation of the value of the LGD parameter, considering the existence of surety guarantees or credit derivatives.

§ 1º For the purposes of the provisions of the caput, the treatment provided for in arts. 101 to 106 is permitted.

§ 2º In the case of adoption of credit risk mitigation instruments in the form of surety guarantees or credit derivatives, compliance with the following requirements must be proven for the adjustment of the value of the LGD parameter defined in the caput:

I - the criteria for eligibility of guarantors must be clearly defined and documented; and

II - the guarantee contract must be:

a) non-resilable on the part of the guarantee provider;

b) valid until the total settlement of the underlying obligation, as well as of the accessory obligations originating from it; and

c) enforceable in a jurisdiction in which the guarantor has liquidatable assets.

§ 3º In the case of adoption of credit risk mitigation instruments in the form of credit derivatives, compliance with the following requirements additional to those established in § 2º must be proven:

I - the reference exposure used to determine the settlement value of the credit derivative, in the event of default, must be the same exposure subject to the credit risk mitigation instrument, except in the cases provided for in art. 104, § 1º;

II - the exposure used to determine the default of the credit derivative must be identical to the exposure subject to the credit risk mitigation instrument, except in the case provided for in art. 104, § 2º;

III - the performance of a robust analysis of the payment structure of the credit derivative, considering its influence on the recovery process; and

IV - the satisfactory treatment of residual risks.

§ 4º The consideration of conditional surety guarantees for exposures submitted to the advanced IRB approach is permitted, provided that adequate treatment of the potential reduction of the credit risk mitigation effect related to the respective conditions is proven.

§ 5º Repurchase agreements, securities financing or other similar transactions in which the institution, acting as an intermediary, provides a surety guarantee, must be considered as its own.

CHAPTER IV

OF THE ESTIMATION OF THE EAD PARAMETER

Section I

Of the General Provisions

Art. 81. The estimates of the value of the EAD parameter must be greater than or equal to the current exposure gross of provisions and of eventual partial write-offs to loss.

§ 1º For the purposes of the provisions of the caput, it is defined:

I - current exposure is the sum of the value of the effective exposure and of the portion of the EAD parameter associated with the contingent exposure;

II - effective exposure is the exposure not arising from a credit commitment or corresponding to a portion of a credit commitment already converted into a credit operation; and

III - contingent exposure is the portion of a credit commitment not converted into a credit operation.

§ 2 The value of the EAD parameter portion associated with contingent exposures is obtained by multiplying the contracted and unused amount by the corresponding Credit Conversion Factor (CCF).

§ 3 The value of the EAD parameter related to derivative exposures, transactions to be settled for the purchase and sale of foreign currency, gold, securities and other exposures subject to counterparty credit risk must be determined in accordance with the provisions of Circular No. 3,360 of 2007, for determining the value of the respective exposure.

§ 4 The credit commitments mentioned in § 1, items II and III, are classified as follows:

I - credits to be released: portions of credit effectively contracted and whose release is conditioned upon compliance with some requirement or condition; and

II - credit limits: contracted and unused limit in some credit modality, or set of credit modalities.

Art. 82. For actual exposures, the estimate of the value of the EAD parameter cannot be less than the respective accounting balance at the time of determination, gross of provisions and any partial write-offs to loss.

Section II

On Credit Conversion Factors in the Basic IRB Approach

Art. 83. The use of the basic IRB approach implies the use of the following values for the CCF:

I - 0% (zero percent), for credit commitments unconditionally and unilaterally cancellable and credits to be released whose requirements or conditions have not yet been met;

II - those provided for in art. 6 of Circular No. 3,360 of 2007, for other credit commitments; and

III - 100% (one hundred percent) for guarantees, sureties, co-obligations and other personal guarantees of the fulfillment of financial obligations of third parties, as well as for credits to be released whose requirements or conditions have already been met.

Circular No. 3,581 of 8 March 2012
41

Sole paragraph. To use the 0% (zero percent) CCF, the institution must demonstrate the ability to:

I - actively monitor the financial condition of the borrower and the possibility of immediate cancellation of the credit commitment offered, in the face of evident deterioration of these conditions, for unconditionally and unilaterally cancellable commitments; and

II - verify non-compliance with the agreed requirements or conditions, in the case of credits to be released.

Section III

Estimation of the EAD Parameter in the Advanced IRB Approach

Art. 84. For contingent exposures, the probability of drawdowns occurring before the verification of default must be reflected in the estimates of the value of the EAD parameter.

Sole paragraph. For contingent exposures, methodologies, processes and procedures must be defined to estimate the possibility of additional disbursements after the occurrence of default.

Art. 85. The use of the advanced IRB approach implies compliance with the following minimum requirements for internal estimation of the value of the EAD parameter:

I - individualized estimation, by means of the long-term weighted average of the exposure values at the time default is verified, determined for sets of exposures and similar borrowers or counterparties, considering a sufficiently long period of time;

II - consideration of a complete economic cycle, including periods characterized by high losses in credit operations relative to the long-term average;

III - adoption of conservative estimates, if a significant positive correlation is observed between the frequency of default and the value of the EAD parameter or when it is not possible to demonstrate the absence of such correlation; and

IV - use of intuitive and plausible criteria, based on reliable internal analyses.

§ 1 The weighting provided for in item I of the caput must be made by means of the default rate or the number of defaults, in a manner consistent and appropriate to the characteristics of the respective periods.

§ 2 The use of an internally calculated CCF is conditioned upon compliance with the minimum requirements mentioned in the caput.

§ 3 The use of an internally calculated CCF is not permitted for exposures related to the provision of guarantees, sureties, co-obligations and other personal guarantees of the fulfillment of financial obligations of third parties.

§ 4 The institution that uses the advanced IRB approach must be able to describe in a substantiated manner the calculation model for the value of the EAD parameter and its determining factors.

§ 5 The estimates of the value of the EAD parameter must be reviewed for each portfolio, at least annually, upon the occurrence of a relevant fact or at the discretion of Desup.

§ 6 The estimates of the value of the EAD parameter must be adjusted in a conservative manner in the case of identification of the existence of a positive correlation between the probability of default of a counterparty and the value of the exposure to that same counterparty, due to the specific characteristics of the transaction.

CHAPTER V

ON THE CALCULATION OF THE RISK PARAMETER M

Art. 86. The value of the parameter M must be limited to a minimum of 1 (one) year and a maximum of 5 (five) years and must correspond to the remaining term of the transaction or, at the discretion of the institution, to the result of the following formula:

M = (∑t t x FCt)/∑t FCt , where

I - t = period of time, in years; and

II - FCt = Cash Flow (principal, interest and fees provided for in contracts) with payment scheduled for period "t".

§ 1 For repurchase agreements, securities financing, credit derivatives with daily margin adjustment, foreign exchange transactions with spot settlement and transactions linked to foreign trade settleable with an irrevocable letter of credit, after shipment of the goods, issued by a large international bank, the minimum value for the parameter M must be equal to the greater of one day and the effective maturity term, in years.

§ 2 The exposures eligible for determination of the value of the parameter M as provided for in § 1 must be linked to an instrument of immediate settlement in case of default.

§ 3 For the purposes of the provisions of § 1, a letter of credit is considered irrevocable when there is no conditionality that could create an obstacle to payment.

§ 4 For contingent exposures, the value of parameter M must correspond to the final agreed maturity, subject to the limits mentioned in the caput.

§ 5 If there is no contractually foreseen maturity, the value of parameter M must be equal to 5 (five) years.

TITLE VI
ON CREDIT RISK MITIGATION IN THE BASIC IRB APPROACH
CHAPTER I
ON RISK MITIGATORS

Art. 87. Differentiated treatment is permitted for the exposure covered by the following credit risk mitigation instruments, within the scope of the basic IRB approach:

I - eligible financial guarantee (financial collateral);

II - eligible real guarantee (non-financial collateral);

III - agreement for the netting and settlement of obligations;

IV - suretyship guarantee; and

V - credit derivative.

§ 1 The differentiated treatment referred to in the caput consists of the internal calculation of the values for the LGD or EAD parameters and applies to the portion of the exposure covered by the credit risk mitigation instrument, and the treatment provided for in the basic IRB approach must be applied to the remaining portion of the exposure.

§ 2 The use of the option provided for in the caput is conditioned upon compliance with the following requirements:

I - the contract that supports the coverage of the exposure by the credit risk mitigation instrument must have legal enforceability in all relevant jurisdictions;

II - the timely exercise of the rights provided for in the contract referred to in item I must be ensured through the adoption of formalized procedures;

III - the risks of deterioration of the credit risk mitigation instrument must be monitored and controlled;

IV - the segregation between the assets of the custodian entity and the instruments held in custody by it must be proven, in the case of the use of collateral;

V - the capacity for adequate control of legal, operational, liquidity, market and other residual risks resulting from the use of credit risk mitigation instruments must be demonstrated;

VI - the credit risk mitigation instrument must not be provided by a related institution, with which financial statements are prepared on a consolidated basis;

VII - all rights and obligations arising from the credit risk mitigation instrument must be formalized in a specific contract;

BANCO CENTRAL DO BRASIL

VIII - the terms of the specific contract must enable the adoption of all measures and procedures necessary for the timely execution of the credit risk mitigation instrument, including the settlement or transfer of ownership of the collateral pledged in the event of default by the counterparty; and

IX - the credit risk associated with the credit risk mitigation instrument or the value of the collateral must not present a relevant positive correlation with the credit risk of the exposure.

§ 3 The credit risk mitigation instrument must be associated with a specific transaction, except in the following cases:

I - use of bilateral agreements for the netting and settlement of obligations; and

II - exclusive association of the instrument with a set of exposures in which the default of one exposure belonging to the set directly implies the default of the other exposures.

§ 4 The mitigating effect of the instrument mentioned in item II of the caput must be disregarded when it is simultaneously associated with exposures of another institution.

§ 5 The collateral may be pledged by the counterparty or by a third party on behalf of that counterparty.

CHAPTER II

ON FINANCIAL COLLATERAL

Art. 88. The following financial instruments are considered financial collateral:

I - securities issued by the National Treasury;

II - securities issued by central governments of foreign countries and their respective central banks that meet the requirements established in art. 13, item II, of Circular No. 3.360, of 2007;

III - private securities;

IV - shares included or not in relevant stock exchange indices;

V - shares of investment funds with a low risk profile managed by the institution itself;

VI - demand deposits, time deposits, savings deposits, in gold or in securities issued by the National Treasury that cumulatively meet the requirements established in art. 20, § 3, item V, of Circular No. 3.360, of 2007; and

VII - senior class securitization securities without substantial retention of risks, as provided in art. 115, items IV and XVI, associated with securitization processes.

Art. 89. In the case of using financial collateral as a credit risk mitigation instrument, the exposure value, considering the credit risk mitigation, must correspond to the result of the following formula:

E* = max{0, [E x (1 + He) - C x (1 - Hc - Hfx)]}, where:

I - E* = exposure value, considering the credit risk mitigation;

II - E = current value of the exposure, not considering the credit risk mitigation;

III - C = current value of the financial collateral;

IV - He = standardized adjustment factor associated with the exposure;

V - Hc = standardized adjustment factor associated with the nature of the financial collateral used; and

VI - Hfx = standardized adjustment factor associated with the currency mismatch in which the exposure and the financial collateral used are referenced.

§ 1 The value of the standardized adjustment factor Hfx is 10% (ten percent), in the case of a currency mismatch in which the exposure and the financial collateral used are referenced, and 0% (zero percent), in the case of no such mismatch.

§ 2 The values of the standardized adjustment factors Hc and He must correspond to:

I - 3% (three percent), for sovereign securities whose effective maturity is less than 1 (one) year and whose market absorption index is less than 20% (twenty percent);

II - 4% (four percent), for sovereign securities whose effective maturity is less than 1 (one) year and whose market absorption index is between 20% (twenty percent) and 40% (forty percent);

III - 5% (five percent), for sovereign securities whose effective maturity is less than 1 (one) year and whose market absorption index is between 40% (forty percent) and 50% (fifty percent);

IV - 10% (ten percent), for the standardized adjustment factor He relative to sovereign securities whose effective maturity is less than 1 (one) year and whose market absorption index is greater than 50% (fifty percent);

V - 5% (five percent), for sovereign securities whose effective maturity is between 1 (one) and 5 (five) years and whose market absorption index is less than 20% (twenty percent);

VI - 7% (seven percent), for sovereign securities whose effective maturity is between 1 (one) and 5 (five) years and whose market absorption index is between 20% (twenty percent) and 40% (forty percent);

VII - 8% (eight percent), for sovereign securities whose effective maturity is between 1 (one) and 5 (five) years and whose market absorption index is between 40% (forty percent) and 50% (fifty percent);

VIII - 16% (sixteen percent) for the standardized adjustment factor He relative to sovereign securities whose effective maturity is between 1 (one) and 5 (five) years and whose market absorption index is greater than 50% (fifty percent);

IX - 7% (seven percent), for sovereign securities whose effective maturity is equal to or greater than 5 (five) years and whose market absorption index is less than 20% (twenty percent);

X - 10% (ten percent), for sovereign securities whose effective maturity is equal to or greater than 5 (five) years and whose market absorption index is between 20% (twenty percent) and 40% (forty percent);

XI - 12% (twelve percent), for sovereign securities whose effective maturity is equal to or greater than 5 (five) years and whose market absorption index is between 40% (forty percent) and 50% (fifty percent);

XII - 24% (twenty-four percent) for the standardized adjustment factor He relative to sovereign securities whose effective maturity is equal to or greater than 5 (five) years and whose market absorption index is greater than 50% (fifty percent);

XIII - 6% (six percent), for private securities and senior class securitization securities without substantial risk retention whose effective maturity is less than 1 (one) year and whose market absorption index is less than 20% (twenty percent);

XIV - 8% (eight percent), for private securities and senior class securitization securities without substantial risk retention whose effective maturity is less than 1 (one) year and whose market absorption index is between 20% (twenty percent) and 40% (forty percent);

XV - 10% (ten percent), for private securities and senior class securitization securities without substantial risk retention whose effective maturity is less than 1 (one) year and whose market absorption index is between 40% (forty percent) and 50% (fifty percent);

XVI - 20% (twenty percent), for the standardized adjustment factor He relative to private securities and senior class securitization securities without substantial risk retention whose effective maturity is less than 1 (one) year and whose market absorption index is greater than 50% (fifty percent);

XVII - 10% (ten percent), for private securities whose effective maturity is between 1 (one) and 5 (five) years and whose market absorption index is less than 20% (twenty percent);

XVIII - 14% (fourteen percent), for private securities whose effective maturity is between 1 (one) and 5 (five) years and whose market absorption index is between 20% (twenty percent) and 40% (forty percent);

XIX - 16% (sixteen percent), for private securities whose effective maturity is between 1 (one) and 5 (five) years and whose market absorption index is between 40% (forty percent) and 50% (fifty percent);

XX - 32% (thirty-two percent), for the standardized adjustment factor He relative to private securities whose effective maturity is between 1 (one) and 5 (five) years and whose market absorption index is greater than 50% (fifty percent);

XXI - 14% (fourteen percent), for private securities whose effective maturity is equal to or greater than 5 (five) years and whose market absorption index is less than 20% (twenty percent);

XXII - 20% (twenty percent), for private securities whose effective maturity is equal to or greater than 5 (five) years and whose market absorption index is between 20% (twenty percent) and 40% (forty percent);

XXIII - 24% (twenty-four percent), for private securities whose effective maturity is equal to or greater than 5 (five) years and whose market absorption index is between 40% (forty percent) and 50% (fifty percent);

XXIV - 40% (forty percent), for the standardized adjustment factor He relative to private securities whose effective maturity is equal to or greater than 5 (five) years and whose market absorption index is greater than 50% (fifty percent);

XXV - 15% (fifteen percent), for shares included in the Ibovespa index or main stock exchange indices abroad and gold, whose market absorption index is less than 20% (twenty percent);

XXVI - 22% (twenty-two percent), for shares included in the Ibovespa index or main stock exchange indices abroad and gold, whose market absorption index is between 20% (twenty percent) and 40% (forty percent);

XXVII - 26% (twenty-six percent), for shares included in the Ibovespa index or main foreign stock exchange indices and gold, whose market absorption index is between 40% (forty percent) and 50% (fifty percent);

XXVIII - 45% (forty-five percent), for the standardized adjustment factor He relative to shares included in the Ibovespa index or main foreign stock exchange indices and gold, whose market absorption index is greater than 50% (fifty percent);

XXIX - 25% (twenty-five percent), for shares not included in the Ibovespa index or main foreign stock exchange indices, whose market absorption index is less than 20% (twenty percent);

XXX - 36% (thirty-six percent), for shares not included in the Ibovespa index or main foreign stock exchange indices, whose market absorption index is between 20% (twenty percent) and 40% (forty percent);

XXXI - 44% (forty-four percent), for shares not included in the Ibovespa index or main foreign stock exchange indices, whose market absorption index is

between 40% (forty percent) and 50% (fifty percent);

XXXII - 50% (fifty percent) for the standardized adjustment factor He relative to shares not included in the Ibovespa index or main foreign stock exchange indices, whose market absorption index is greater than 50% (fifty percent);

XXXIII - (100% - Hfx) for the standardized adjustment factor Hc, whose market absorption index is greater than 50% (fifty percent), regardless of the type of financial collateral used; and

XXXIV - 0% (zero percent), for demand deposits, time deposits and savings deposits.

§ 3 The market absorption index (I(ABS)), calculated on a daily basis, corresponds to the result of the following formula:

, where

I - QiT = quantity of securities or marketable securities "i" pledged as collateral or associated with the exposure on the calculation date "T";

II - TVMiT = unit market value of the security or marketable security "i" on the calculation date "T";

III - Nit = quantity of securities or marketable securities "i" traded in the market on date "t"; and

IV - TVMit = unit market value of the security or marketable security "i" on date "t".

§ 4 For exposures in fund quotas, mentioned in art. 88, item V, the standardized adjustment factor He must correspond to the highest standardized adjustment factor applicable to the assets eligible for acquisition according to the fund's regulation.

§ 5 For collateral in the form of fund quotas mentioned in art. 88, item V, the standardized adjustment factor Hc to be used must correspond to the standardized adjustment factor Hc that results in the highest value for the sum of the standardized adjustment factors Hc and Hfx, when applicable, associated with the assets eligible for acquisition according to the fund's regulation.

§ 6 When the credit risk mitigation instrument consists of a set of financial collaterals, the following rule must be applied:

I - the standardized adjustment factor Hc to be applied to the set of collaterals must correspond to the sum of the respective standardized adjustment factors Hc weighted by the relative share of each type of financial collateral in the set; and

II - the standardized adjustment factor Hfx to be applied to the set of collaterals must

correspond to the sum of the respective standardized adjustment factors Hfx weighted by the relative share of each type of financial collateral in the set.

§ 7 For the purposes of the provisions of item II of the caput, the securities or marketable securities must be aggregated by counterparty.

§ 8 In the case of pledged collaterals being securities or marketable securities issued by an institution belonging to the financial conglomerate, the institution is allowed to consider a market absorption index lower than 20% (twenty percent) for these operations.

§ 9 For the purposes of calculating the market absorption index, the methodology for calculating the market value and the quantity of securities traded is the responsibility of the institution and must be established based on consistent and verifiable criteria, which take into account the independence in data collection in relation to its commercial areas.

§ 10 Senior class securitization securities associated with resecuritization, as per art. 115, item XXV, are not considered financial collaterals.

Art. 90. For exposures classified in the "wholesale", "sovereign entities" and "financial institutions" categories covered by financial collaterals, the calculation of factor K must use the value of the Effective Loss Given Default (LGD*) parameter whose value corresponds to the result of the following formula:

LGD* = LGD x (E* / E), where:

I - LGD = standardized value of the Loss Given Default parameter, according to art. 74;

II - E = current value of the exposure, not considering credit risk mitigation; and

III - E* = value of the exposure after credit risk mitigation, calculated according to art. 89.

Art. 91. For exposures related to repurchase agreements, the standardized adjustment factors provided for in art. 89, items IV, V and VI, may assume a value equal to 0% (zero percent), provided that the following requirements are met:

I - the counterparty must be a relevant market participant;

II - the exposure and the respective collateral must be in currencies or government securities that receive FPR equal to 0% (zero percent), according to the provisions of Circular No. 3.360, of 2007;

III - the exposure and the collateral must be indexed to the same currency;

IV - the term of the operation must be 1 (one) day or the exposure and the collateral must be marked to market daily;

V - if carried out in Brazil, the operation must be registered in the Special System for Settlement and Custody (Selic); and

VI - if carried out abroad, the operation must meet the following requirements:

a) in the event of failure to replenish the counterparty's margin, the time between the failure and the liquidation of the collateral must be less than 4 (four) business days;

b) the settlement of the transaction must be carried out in a settlement system suitable for the nature of the transaction;

c) the transaction must be governed by rules that establish its immediate termination in the event of the counterparty's failure to fulfill the agreed obligations;

d) the institution must have the faculty and the legal right to appropriate the collateral and to liquidate it for its benefit upon the occurrence of any event of default;

e) the transaction must follow market standards and the rules in force for repurchase agreements; and

f) the exposure must be subject to daily margin adjustment.

Sole paragraph. For the purposes of the provisions of the caput, the following are considered relevant market participants:

I - central governments and their respective central banks;

II - banks, securities distribution companies (SDTVM) and securities brokerage companies (SCTVM);

III - financial investment funds domiciled in Brazil;

IV - financial investment funds domiciled abroad subject to government regulation and supervision, as well as to capital requirements or leverage limits;

V - pension funds subject to government regulation and supervision; and

VI - recognized clearing and settlement chambers, subject to government regulation.

CHAPTER III

ON NON-FINANCIAL COLLATERAL

Section I

On the Types of Collateral

Art. 92. For exposures classified in the categories "wholesale", "sovereign entities" and "financial institutions", non-financial collateral includes the following types:

I - "fiduciary assignment of commercial and residential real estate (CRE/RRE)";

II - "financial receivables";

III - "fiduciary assignment of vehicles"; and

IV - "other non-financial collateral", specified in art. 99.

Art. 93. For the purpose of obtaining the value of the LGD* parameter related to exposures covered by non-financial collateral, the collateralization ratio of the exposure (C/E) must be calculated.

§ 1º If the C/E ratio is less than the minimum collateralization index (C*), the mitigating effect must be disregarded.

§ 2º If the C/E ratio is greater than the C* index, but less than the minimum overcollateralization index (C**), the mitigating effect must be considered partially, as follows:

I - the fraction of the exposure covered by collateral, with a value equivalent to the ratio (C/E) / C**, must be associated with the minimum LGD parameter, referring to the type of collateral used; and

II - the fraction of the exposure not covered by collateral must be associated with the value of the LGD parameter for exposures without collateral, as defined by the Central Bank of Brazil.

§ 3º If the C/E ratio is greater than the C** index, the mitigating effect must be considered in its entirety and the value of the exposure must be associated with the minimum LGD parameter referring to the type of collateral used.

§ 4º The C* index for non-financial collateral corresponds to the following values:

I - 0% (zero percent), for the type "financial receivables";

II - 30% (thirty percent), for the CRE/RRE type;

III - 30% (thirty percent), for the type "fiduciary assignment of vehicles"; and

IV - 30% (thirty percent), for the type "other non-financial collateral".

§ 5º The C** index for non-financial collateral corresponds to the following values:

I - 125% (one hundred and twenty-five percent), for the type "financial receivables";

II - 140% (one hundred and forty percent), for the CRE/RRE type; and

III - 140% (one hundred and forty percent), for the types "fiduciary assignment of vehicles" and "other non-financial collateral".

§ 6º The value of the minimum LGD parameter for non-financial collateral must correspond to:

I - 45% (forty-five percent), for the CRE/RRE type;

II - 50% (fifty percent), for the type "fiduciary assignment of vehicles";

III - 60% (sixty percent), for the type "financial receivables"; and

IV - 70% (seventy percent), for the type "other non-financial collateral".

Art. 94. If a transaction is simultaneously associated with financial collateral and non-financial collateral of various types, including the type "financial receivables", the value of the exposure after credit risk mitigation (E*) must be segregated as follows:

I - portion covered by collateral belonging to the type "financial receivables";

II - portion covered by collateral belonging to the types CRE/RRE, "fiduciary assignment of vehicles" and "other non-financial collateral"; and

III - portion covered by financial collateral.

§ 1º The credit risk mitigation effect of non-financial collateral of the types CRE/RRE, "fiduciary assignment of vehicles" and "other non-financial collateral" must be disregarded if the following condition is verified:

(C+ / E**) ≤ Cm*, in which:

I - C+ = sum of the values of non-financial collateral of the types CRE/RRE, "fiduciary assignment of vehicles" and "other non-financial collateral";

II - E** = portion of the value of E* covered by non-financial collateral of the types CRE/RRE, "fiduciary assignment of vehicles" and "other non-financial collateral"; and

III - Cm* = 30% (thirty percent).

§ 2º The credit risk mitigation effect of non-financial collateral of the types CRE/RRE, "fiduciary assignment of vehicles" and "other non-financial collateral" must be considered partially if the following condition is verified:

Cm* < (C+ / E**) < Cm**, in which Cm** = 140% (one hundred and forty percent).

§ 3º For the purposes of the provisions of § 2º, the following rules must be observed:

I - the value of the LGD parameter related to the part of the exposure covered by the set of collateral, with a value equivalent to (C+ / E**) / Cm**, must be equal to the value of the minimum LGD parameter associated with each type of collateral, in its respective proportion; and

II - the value of the LGD parameter related to the part not covered by the set of collateral must be equal to the value of the LGD parameter of the respective category, as defined by the Central Bank of Brazil.

§ 4. The credit risk mitigation effect of non-financial collateral of the CRE/RRE types, "fiduciary assignment of vehicles" and "other non-financial collateral" must use the minimum LGD parameter, defined in art. 93, § 6, associated with each type of collateral, in its respective proportion, if the following condition is met:

Cm** ≤ (C+ / E**).

§ 5. The portion of the exposure covered by financial receivables is subject to the provisions of art. 93.

Section II

On Operations Guaranteed by Real Estate under a Fiduciary Assignment Regime

Art. 95. The association of non-financial collateral of the CRE/RRE type with exposures classified in the "wholesale", "sovereign entities" and "financial institutions" categories is conditioned upon meeting the following requirements:

I - the risk of the operation must be linked to the borrower's ability to honor its commitments through other sources, not depending significantly on the performance of the collateral;

II - the collateral must be enforceable in all relevant jurisdictions;

III - any right or encumbrance over the collateral must be legally enforceable, as well as timely registered;

IV - all legal requirements for the establishment of rights or encumbrances over the collateral must be fully met;

V - the contract that binds the collateral to the legal enforcement process must allow its liquidation within an adequate time frame;

VI - the value of the collateral must not exceed the fair value negotiated between private parties under regular market conditions; and

VII - the collateral must be subject to periodic revaluations, as follows:

a) the value of the collateral and any factors that may influence it, including elements of a tax and environmental nature, must be monitored at a minimum annual frequency;

b) in the case of volatile markets or markets subject to significant changes, the frequency of valuations must be adjusted to reflect such characteristics; and

c) in the case of evidence of a substantial reduction in the value of the collateral in relation to general market variations or the occurrence of credit events, including default, the asset must be appraised by an expert.

§ 1. In the case of using non-financial collateral of the CRE/RRE type, credit granting policies, including the accepted modalities of CRE/RRE type collateral, must be clearly documented.

§ 2. The necessary measures must be adopted to ensure that non-financial collateral of the CRE/RRE type is adequately insured against damage and deterioration.

Section III

On Operations Guaranteed by Financial Receivables

Art. 96. Eligible as non-financial collateral of the "financial receivables" type are financial receivables with an original effective term of less than or equal to one year, whose payment consists of financial flows originating from commercial transactions in which the credit borrower is the creditor.

§ 1. The pledging of financial receivables as collateral, referred to in the caput, must occur through fiduciary assignment or assignment of credit rights.

§ 2. The financial receivables mentioned in the caput encompass checks, duplicate invoices, credit card invoices and invoices from public service concessionaires.

§ 3. Not eligible as non-financial collateral of the "financial receivables" type are financial receivables:

I - linked to securitization or credit derivatives; and

II - drawn against affiliates of the borrower, including subsidiaries and employees.

§ 4. The legal instruments by which the collateral is constituted must unequivocally assure the institution the rights over the revenues arising from the collateral.

§ 5. Procedures must be adopted that guarantee the enforcement and liquidation of rights over the collateral in all relevant jurisdictions.

§ 6. The legal framework in which the collateral is formalized must guarantee the institution's priority right over it.

§ 7. All documentation referring to the operations covered by the collateral must bind the parties involved in the operation and be enforceable in any relevant jurisdiction.

§ 8. Periodic reviews must be carried out to verify and ensure the continuous legal support of the collateral.

§ 9. All aspects relevant to collateralization through financial receivables must be duly documented.

§ 10. There must be robust control of the periodic receipts of revenues arising from the collateral.

§ 11. The institution must have mechanisms that ensure compliance with the legal conditions necessary for the timely enforcement of the collateral.

§ 12. Adequate procedures must be adopted to determine the credit risk of the receivables used as collateral, including the analysis of the business, the sector of operation of the borrower and the types and profiles of clients with which the borrower does business.

§ 13. The adequacy and credibility of the credit granting policy must be reviewed by the assignee of the receivables accepted as collateral, in cases where the institution depends on this policy to assess the credit risk of its clients.

§ 14.
For risk management purposes, the degree of overcollateralization between the exposure amount and the value of the receivables must be defined considering all appropriate factors, including the performance of the receivables, the concentration within the group of receivables pledged by the individual borrower, the potential concentration risk in relation to the total of its exposures and the degree of correlation of the borrower with the drawees.

Art. 97. Each exposure, both effective and contingent, related to the collateral must be continuously monitored, including, when appropriate:

I - verification of the margins or levels of collateralization required in relation to the total amount of receivables and their characteristics, including their quality;

II - monitoring of payments and replacements of receivables, as well as their respective terms;

III - procedures for verifying the payment of receivables and confirming the existence of available credit lines;

IV - monitoring and evidentiary analysis of collateral;

V - monitoring of the concentration of a borrower's receivables in relation to its debtors;

VI - regular financial analysis of borrowers;

VII - regular financial analysis of the debtors of the receivables, especially when a small number of high-value receivables is used; and

VIII - periodic review of compliance with the agreed contractual clauses, legal and other restrictions.

Sole paragraph. Compliance with the adopted exposure concentration limits must be periodically monitored.

Art. 98. In the event of non-compliance, the enforcement of receivables used as non-financial collateral must occur according to a formalized and adequately documented process, applicable to situations of regularity and deterioration of the quality of the receivables.

Section IV

On Other Non-Financial Collateral

Art. 99. At the discretion of Desup, other instruments may be considered non-financial collateral of the type "other non-financial collateral", and must meet the following requirements in addition to those provided for in arts. 92 and 93:

I - existence of a sufficiently liquid market for the sale of the collateral, in a timely and economically efficient manner, in the relevant jurisdiction;

II - existence of verifiable market prices, which allow comparison between these and the amount received at the time of enforcement of the collateral, in its relevant jurisdiction;

III - priority over any other creditors in relation to the revenues derived from the enforcement of the collateral;

IV - detailed contractual description of the collateral, in addition to specifications of the forms and frequency of its revaluations;

V - adequate documentation of internal policies and procedures in relation to the types of collateral accepted, including those referring to the amounts of each collateral and the respective mitigated exposure; and

VI - adequacy of the credit granting policy to the characteristics of the operations carried out, addressing:

a) the appropriate values of each collateral in relation to the amount of the covered exposures;

b) the capacity for timely liquidation of the collateral;

c) the capacity to objectively determine the market price of the collateral;

d) the capacity to determine the frequency with which the value of the collateral can be readily obtained, including valuations and appraisals performed by qualified professionals;

e) the capacity to determine the volatility of the collateral's value; and

f) the assessment of the impact of factors such as obsolescence, deterioration and loss of value of the collateral as a result of behavioral changes.

§ 1º Collateral constituted in the form of inventories or equipment must be insured or periodically revalued based on physical inspection.

§ 2º The collateral must not present significant discrepancies between the valuation value and its market price and its liquidation value.

CHAPTER IV

ON BILATERAL NETTING AGREEMENTS

Art. 100. Bilateral agreements for the netting and settlement of obligations are eligible for use as credit risk mitigation instruments, provided they meet the following requirements in addition to those provided for in Resolution No. 3.263, of February 24, 2005:

I - the performing party must have the right to immediately terminate the operations covered by the agreement, in the event of non-compliance;

II - the netting of exposures, including the amounts of collateral, must result in a single net amount between the counterparties involved;

III - the agreement must create legal enforceability in each relevant jurisdiction in which the events of non-compliance may occur;

IV - in the case of netting between exposures classified in the trading book and exposures not classified in the trading book, the following conditions must be met:

a) daily mark-to-market of all exposures subject to netting; and

b) use of financial collateral; and

V - the collateral can be liquidated in a timely manner, in the event of non-compliance.

§ 1º For the calculation of the K factor, the value of the EAD parameter must be used, considering the credit risk mitigation resulting from the netting agreements (EAD*), whose value must correspond to the result of the following formula:

EAD* = EAD x (E* / E), where:

I - E* = value of the effective exposure, considering the credit risk mitigation associated with bilateral netting agreements, whose value must correspond to the result of the following formula: E* = max{0, [∑E - ∑C + ∑(ES x HS) + ∑(Efx x Hfx)]};

II - E = current value of the exposure, not considering the credit risk mitigation;

III - C = current value of the financial collateral;

IV - ES = absolute value of the net position in a given operation;

V - HS = standardized adjustment factor for the operation related to ES, according to the criteria defined in art. 89, § 2º, items I to XXXIV;

VI - Efx = absolute value of the net exposure in a currency other than the settlement currency of the netting agreement;

VII - Hfx = standardized adjustment factor defined in art. 89, item VI; and

VIII - EAD = value of the EAD parameter, disregarding the credit risk mitigation resulting from the netting agreements.

§ 2º The effect of credit risk mitigation produced by a netting agreement must not be reflected in an adjustment of the LGD parameter.

CHAPTER V

ON SURETYSHIPS AND CREDIT DERIVATIVES

Art. 101. Suretyships and credit derivatives are eligible as credit risk mitigation instruments, provided they meet the following requirements:

I - they represent personal and non-transferable obligations of the protection provider;

II - they do not allow the unilateral release of the protection provider in relation to the obligation assumed; and

III - prohibit the increase in protection costs due to deterioration in the credit quality of the exposure subject to the credit risk mitigation instrument.

Art. 102. The contracts that support the credit risk mitigation instruments mentioned in Art. 101 must meet the following conditions:

I - they cannot be terminated;

II - they do not allow the unilateral release of the protection provider from the assumed obligation; and

III - they prohibit the increase in protection costs due to deterioration in the credit quality of the subject of the credit risk mitigation instrument.

Art. 103. Fidejussory guarantees must meet the following additional requirements:

I - the right to timely receipt of payments from the guarantor does not depend on the adoption of additional legal measures; and

II - the guarantee coverage reaches all types of payments for which the debtor is responsible in the operation, including margin adjustments.

Art. 104. Credit derivatives must meet the following additional requirements:

BANCO CENTRAL DO BRASIL

I - the list of credit events that trigger the activation of the protection must include, at a minimum:

a) non-payment of the amount due, under the agreed contractual terms, except for any periods of payment delay that do not characterize non-compliance;

b) bankruptcy, insolvency or inability of the debtor to pay its debt; and

c) renegotiation of the debt resulting from forgiveness or postponement of principal, interest and fees, which result in losses;

II - the contract cannot expire before the deadlines required for the occurrence of non-compliance of the exposure subject to the credit risk mitigation instrument;

III - expected losses must be estimated through a robust assessment process, in the case of no delivery of the asset associated with the credit risk or the exposure for which the protection was acquired;

IV - if the payment is conditioned on the delivery of the asset associated with the credit risk or the exposure for which the protection was acquired, the transfer must be carried out regardless of the consent of the debtor associated with the exposure for which the protection was acquired;

V - the parties responsible for determining the occurrence of the credit event must be clearly identified; and

VI - the protection buyer must have the right to determine the occurrence of a credit event to the seller.

§ 1º The exposure used as reference for calculating the settlement value of the credit derivative upon the occurrence of non-compliance must be the same exposure subject to the credit risk mitigation instrument, except when the following requirements are met:

I - the reference exposure has a credit rating pari passu to the exposure subject to the credit risk mitigation instrument or a lower degree of subordination;

II - both exposures are associated with the same counterparty; and

III - there are legal provisions that allow:

a) the declaration of non-compliance of the exposure subject to the credit risk mitigation instrument upon the non-compliance of the reference exposure of the credit derivative and vice versa; or

b) the acceleration of the maturity of the exposure subject to the credit risk mitigation instrument upon the occurrence of non-compliance of the reference exposure of the credit derivative.

§ 2º The requirements mentioned in § 1º also apply to the exposure used to determine the non-compliance of the credit derivative.

§ 3º Only credit swaps and total return swaps that meet the requirements established in Art. 3, § 1, of Circular No. 3.106, of 10 April 2002, are eligible as credit risk mitigation instruments.

Art. 105. For the portion of the exposure covered by fidejussory guarantees or credit derivatives, the institution must:

I - apply the treatment for the category or subcategory to which the guarantee provider belongs; and

II - consider the value of the PD parameter relative to the guarantor as the value of the PD parameter of the exposure.

§ 1º If there is no assurance of the unrestricted and total substitution of the borrower by the guarantor, an intermediate value between the value relative to the underlying debtor and the value relative to the guarantor must be used as the value for the PD parameter.

§ 2º The value of the LGD parameter relative to the underlying debt may be replaced by the value of the LGD parameter relative to the guarantee, considering the degree of subordination of the guarantee.

Art. 106. For the credit risk mitigation instruments dealt with in Art. 101, in the case of the underlying obligation being referenced in a currency different from the reference currency of the instrument used, the value of the instrument (GA) must correspond to the result of the following formula:

GA = G x (1 - Hfx), where:

I - G = nominal value of the credit risk mitigation instrument; and

II - Hfx = standardized adjustment factor, as defined in Art. 89, § 1º, associated with the currency mismatch in which the exposure and the credit risk mitigation instrument used are referenced.

Sole paragraph. After the adjustment defined in the caput is made, the treatment provided for in Art. 100 must be applied to the portions of the exposure covered and not covered, respectively, by the credit risk mitigation instrument.

CHAPTER VI

ON MATURITY MISMATCH

Art. 107. The effective maturity terms of the credit risk mitigation instrument and the exposure subject to mitigation must be calculated conservatively.

§ 1º For the exposure covered by a credit risk mitigation instrument, the effective term must be the longest possible period for complete settlement of the obligation by the counterparty, including any grace period.

§ 2º The effective maturity term of the credit risk mitigation instrument must be the shortest among all those provided for contractually, including considering the existence of optionalities.

§ 3º The effective residual maturity of the credit risk mitigation instrument must be equal to or greater than the effective residual maturity of the exposure subject to mitigation in the following cases:

I - the credit risk mitigation instrument has an original effective maturity of less than 1 (one) year; and

II - the credit risk mitigation instrument has an effective residual maturity of less than 3 (three) months.

Art. 108. In the event of a mismatch between the effective maturity of the exposure and the effective maturity of the credit risk mitigation instrument associated with it, the value of the credit risk mitigation instrument (Pa) must correspond to the result of the following formula:

Pa = P x (t - 0.25) / (T - 0.25), where:

I - P = value of the credit risk mitigation instrument adjusted by the standardized adjustment factors referred to in art. 89, items IV, V and VI;

II - t = min (T, effective residual maturity of the credit risk mitigation instrument in years); and

III - T = min (5, effective residual maturity of the exposure in years).

Sole paragraph. The provisions of the caput do not apply when the credit risk mitigation instrument consists of financial receivables with an effective maturity of less than 1 (one) year, as defined in art. 96, whose financial resources remain in the custody of the institution until there is replacement with new receivables or settlement of the credit.

TITLE VII

ON LOSSES AND PROVISIONS

CHAPTER I

ON EXPECTED LOSS

Section I

On the Definition

Art. 109. For exposures subject to the IRB approach, the amount of expected loss is defined as the result of multiplying the expected loss percentage (EL) by the value of the EAD parameter.

Section II

On Expected Loss in the "Wholesale", "Sovereign Entities", "Financial Institutions" and "Retail" Categories

Art. 110. For exposures classified in the "wholesale", "sovereign entities", "financial institutions" and "retail" categories, the estimated value for EL must be obtained by multiplying the value of the PD parameter by the value of the LGD parameter.

§ 1º For exposures in default, the value of the PD parameter is equal to 100% (one hundred percent).

§ 2º For exposures in default subject to the advanced IRB approach, the estimated value for EL is equal to the estimate of expected loss, determined in accordance with art. 112.

§ 3º For the exposures referred to in art. 40, § 3º, the estimated value for EL is obtained by multiplying the following values by the factor F mentioned in art. 40, § 5º, item I:

I - Strong level, 5% (five percent);

II - Good level, 10% (ten percent);

III - Satisfactory level, 35% (thirty-five percent);

IV - Weak level, 100% (one hundred percent); and

V - Default level, 625% (six hundred and twenty-five percent).

§ 4º For the exposures referred to in art. 40, § 2º, the estimated value for EL is obtained by multiplying the following values by the factor F mentioned in art. 40, § 4º, item I:

I - Strong level, 5% (five percent);

II - Good level, 5% (five percent);

III - Satisfactory level, 35% (thirty-five percent);

IV - Weak level, 100% (one hundred percent); and

V - Default level, 625% (six hundred and twenty-five percent).

Section III

On Expected Loss in the "Equity Interests" Category

Art. 111. For exposures classified in the "equity interests" category whose sum of the K* and EL* factors is greater than the values defined in art. 57, § 8º, the estimated value for EL must be obtained by multiplying the value of the PD parameter by the value of the LGD parameter.

Sole paragraph. For the other exposures, the estimated value for EL is equal to 0 (zero).

Section IV

On Loss Estimation

Art. 112. The estimated value for EL for exposures in default must be calculated based on current economic circumstances and the status of the exposure.

§ 1º Cases in which the estimated value for EL is less than the sum of the provisions related to the transaction must be justified.

§ 2º The justification mentioned in § 1º may be made on an aggregate basis, provided it is duly substantiated.

§ 3º The status of the exposure mentioned in the caput consists of its characterization, considering the following aspects:

I - time elapsed after the occurrence of default;

II - percentage already recovered; and

III - prospects for recovery of the remaining balance.

Art. 113. The total expected loss corresponds to the sum of the expected loss amounts obtained for each exposure.

Sole paragraph. The following do not form part of the total expected loss:

I - exposures classified in the "equity interests" category subject to the PD/LGD approach; and

II - securitization exposures.

CHAPTER II

ON PROVISIONS

Art. 114. The total provisions related to exposures subject to IRB approaches must be segregated from the total provisions related to exposures that receive the treatment established in Circular No. 3.360, of 2007.

§ 1º Discrepancies between the segregated amount of eligible provisions related to exposures subject to IRB approaches and the respective amount of expected loss, determined in accordance with art. 109, must be justified.

§ 2º The following do not form part of the total provisions related to exposures subject to IRB approaches:

I - provisions related to exposures classified in the category "equity

BANCO CENTRAL DO BRASIL

corporate"; and
II - the provisions relating to securitization exposures.

TITLE VIII THE SECURITIZATION PROCESS

CHAPTER I DEFINITIONS

Art. 115. For the purposes of the treatment of traditional or synthetic securitization exposures through the use of IRB approaches, the following definitions apply:

I - traditional securitization is the process in which the flow of receipts associated with a set of underlying assets is used to remunerate securitization securities structured in at least two classes of payment priority, in which there is transfer of the underlying assets to the issuing counterparty;

II - synthetic securitization is the process in which the flow of receipts associated with a set of underlying assets is used to remunerate securitization securities structured in at least two classes of payment priority, in which the credit risk relating to the underlying assets is transferred by means of a credit derivative or any other instrument that allows such transfer;

III - underlying assets are the credit rights, securities or negotiable instruments and credit derivatives that serve as collateral for securitization securities;

IV - securitization security is the security or negotiable instrument whose remuneration is associated with the flow of receipts from the underlying assets;

V - originating counterparty is the natural person or legal entity that performs at least one of the following activities:

a) origination, directly or indirectly, of the underlying asset;

b) administration or advisory to the issuing counterparty in the issuance of securitization securities;

c) participation in the public placement of securitization securities; and

d) provision of credit or liquidity enhancement to the securitization securities issued by the issuing counterparty or retention of credit risk in any other form;

VI - issuing counterparty is the financial or non-financial institution, company or entity not part of the National Financial System (SFN) that issues securitization securities;

VII - administrator of the underlying assets is the institution responsible for processing the payments and receipts of the securitization operation, and may also, among other activities, act in support of the formalization of the contracts and guarantees of the securitization process, as well as in the evaluation of such guarantees;

VIII - credit enhancement is the instrument that guarantees, totally or partially, the flow of receipts from the underlying assets that serve as collateral for a securitization security;

IX - liquidity enhancement is the instrument that guarantees, totally or partially, the timeliness of the payment flows of securitization securities;

X - securitization exposure is the exposure to credit risk in a securitization process, including:

a) holding securitization securities in portfolio;

b) provision of credit or liquidity enhancement to securitization securities;

c) assumption of the condition of risk-receiving counterparty in a credit derivatives operation; and

d) execution of swap contracts directly or indirectly linked to securitization securities;

XI - early repurchase option is the contractual right of repurchase of the securitization securities by the issuing counterparty, before their maturity;

XII - securitization spread (SS) is the difference, measured as a percentage, between the amounts received from the underlying assets, including the income arising from their reinvestment, and the amounts paid to the securitization securities, including the expenses inherent to the securitization process;

XIII - implicit support is the assumption, by the originating counterparty, of any non-contractual obligation, with a view to covering losses of investors in securitization securities;

XIV - controlled early amortization is the contractual faculty of early redemption at the request of the holder of securitization securities, in the event of the occurrence of predetermined events, in which the following conditions are met:

a) in the event of early amortization, the availability of sufficient resources for payment of the securitization securities must be ensured;

b) throughout the early amortization period, the charges, principal, expenses, losses and recoveries must be previously and proportionally divided, based on the relative participations of each party in the remaining flows of the underlying assets;

c) the term in which the amortization occurs must be sufficient to amortize at least 90% (ninety percent) of the outstanding balance of the securitization securities or to recognize them as in default; and

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d) throughout the early amortization period, the value of each installment of reimbursement to investors must not be greater than what would occur in the case of linear amortization;

XV - uncontrolled early amortization is the contractual faculty of early redemption at the request of the holder of securitization securities, in the event of the occurrence of predetermined events, in which any of the conditions established in item XIV is not met;

XVI - junior class is the class of securitization securities that presents the lowest payment priority in the same issuance, compared to the other classes;

XVII - senior class is the class of securitization securities that presents the highest payment priority in the same issuance, compared to the other classes;

XVIII - mezzanine class is any class of securitization securities that presents a payment priority higher than that of the junior class and lower than that of the senior class, in the same issuance;

XIX - accumulation point (PA) is the predetermined level of the securitization spread, above which the amount corresponding to the excess spread is accumulated in a reserve fund destined for the absorption of losses;

XX - reserve fund is the set of financial resources destined for the absorption of losses;

XXI - substantial transfer of risks is the transfer of risks resulting from the sale or assignment of assets carried out in accordance with Resolution No. 3,533, of 31 January 2008;

XXII - substantial retention of risks is the retention of risks arising from the sale or assignment of assets carried out in accordance with Resolution No. 3,533, of 2008;

XXIII - investor portion is the value of revolving assets assigned to the issuing counterparty that effectively constitute underlying assets in the securitization process;

XXIV - originator portion is the value of revolving assets assigned to the issuing counterparty that do not constitute underlying assets in the securitization process;

XXV - resecuritization is the securitization process whose underlying assets consist of securitization securities; and

Sole paragraph. The risk-weighting factor (Ki) for securitization exposures is equal to the factor Ki* multiplied by the factor F applicable to the EPR, pursuant to art. 1 of Circular No. 3,360, of 2007.

CHAPTER II

ON TRADITIONAL SECURITIZATION

Art. 116. In a traditional securitization process with substantial transfer of risks, the originating counterparty is permitted to exclude the respective underlying assets from the calculation of the PEPR portion, subject to compliance with the following requirements:

I - absence of effective control, direct or indirect, by the originating counterparty over the assigned underlying assets;

II - absence of any joint liability of the originating counterparty in relation to the underlying assets;

III - unrestricted right of the assignee to trade or offer the underlying assets as collateral;

IV - absence of obligations for the originating counterparty in relation to the securitization securities, except when the obligations relate exclusively to the processing of receipts from the underlying assets;

V - compliance with the conditions set forth in §§ 2 and 3 of art. 119, in the event of an early repurchase option;

VI - absence of the obligation of the originating counterparty to replace all or part of the transferred underlying assets, in order to reduce the credit risk of the respective set of transferred assets;

VII - prohibition on the provision of credit enhancement by the originating counterparty after the issuance of the securitization notes; and

VIII - prohibition on increasing the return rate of the securitization notes in order to compensate for a deterioration in the credit quality of the underlying assets that causes loss to the originating counterparty or a reduction in the return rate of the notes held by it.

Sole paragraph. For the purposes of the provisions of item I of the caput, the originating counterparty shall be deemed to hold effective control over the transferred underlying assets when the obligation to repurchase them and retain the risks associated with them is contractually provided for.

Art. 117. In a traditional securitization process with early amortization, whose underlying assets include revolving exposures, the originating counterparty must include the investing tranche in the calculation of the PEPR tranche, subject to the provisions of art. 140, if the exercise of early amortization implies:

I - a downgrade of the payment priority of the securitization notes held by the originating counterparty, compared to the priority of other note holders; or

II - an increase in the originating counterparty's exposure to losses associated with the underlying assets.

Sole paragraph. The provisions of the caput do not apply to a traditional securitization process with early amortization whose underlying assets include revolving exposures, which meets the requirements established in art. 116 and falls into one of the following hypotheses:

I - the investors in the respective securitization notes fully assume the risk inherent in future drawdowns of the investing tranche, even in the event of early amortization;

II - the exercise of early amortization results exclusively from an event unrelated to the performance of the underlying assets or the credit quality of the issuing counterparty; and

III - the replication of a payment structure of securitization notes backed by non-revolving underlying assets, associated with the exercise of early amortization, does not imply a reduction in the originating tranche.

CHAPTER III

ON SYNTHETIC SECURITIZATION

Art. 118. In a synthetic securitization process, the recognition of credit risk mitigation instruments as provided for in arts. 87 to 108 for the respective underlying assets is permitted, provided that the following requirements are met:

I - the originating counterparty must transfer substantially the credit risk associated with the underlying assets;

II - the transfer of the credit risk of the underlying assets may not be subject to restrictions or conditions that modify the share of risk transferred, such as:

a) the establishment of limits beyond which mitigation is not applicable, even in the occurrence of a credit event;

b) the option to cancel the credit risk mitigation instrument as a result of a deterioration in the credit quality of the underlying assets;

c) the obligation to replace the assets whose credit risk has been transferred;

d) a provision for an increase in the cost of the credit risk mitigation instrument as a result of a deterioration in the credit quality of the underlying assets;

e) a provision for an increase in the return rate of investors in the respective securitization notes, except for the originating counterparty, as a result of a deterioration in the credit quality of the underlying assets; and

f) the possibility of providing credit enhancement by the originating counterparty after the issuance of the securitization notes;

III - the contracts relating to the securitization process must be subject to a qualified legal opinion supporting their enforceability in any relevant jurisdiction; and IV - compliance with the provisions of art. 119, in the hypothesis of the existence of an early repurchase option.

Sole paragraph. In the hypothesis of a maturity mismatch in a synthetic securitization process, the originating counterparty must observe the provisions of arts. 107 and 108.

CHAPTER IV

ON THE EARLY REPURCHASE OPTION

Art. 119. In the calculation of the PEPR tranche, the originating counterparty must consider the existence of the early repurchase option, in the contractually established hypothesis of:

I - the obligation to repurchase the underlying assets transferred to the issuing counterparty, if the option is exercised, in a traditional securitization process; and

II - the cancellation of the credit derivative, if the option is exercised, in a synthetic securitization process.

§ 1º For the purposes of the provisions of the caput:

I - the underlying assets transferred to the issuing counterparty must be treated as transferred with substantial retention of risks; and

II - in synthetic securitization processes, the originating counterparty shall consider the entire amount of the underlying assets in the calculation of the PEPR tranche, disregarding the benefits arising from the credit derivative associated with the transaction.

§ 2º The originating counterparty is permitted to disregard the early repurchase option in the calculation of the PEPR tranche, provided that the following requirements are met:

I - the exercise of the option is conditional on the outstanding balance of the underlying assets or the securitization notes not exceeding 10% (ten percent) of the original amount;

II - the exercise of the repurchase option is conditional on the consent of the originating counterparty; and

III - the structure of the repurchase option does not evidence the objective of avoiding losses for the holders of the securitization notes or for the issuing counterparty in providing credit enhancement.

§ 3º For the purposes of the provisions of item I of § 2º, the value of the securitization notes must consider the current value of the reference exposures of the credit derivatives, in the case of synthetic securitization processes.

CHAPTER V

ON EXPECTED LOSS IN SECURITIZATION EXPOSURES

Art. 120. The provision of implicit support in a securitization process implies treating all securitization exposures associated with it as exposures with substantial risk retention.

§ 1º The originating counterparty must give publicity to any implicit support provided, as well as to the effects of this measure on the calculation of the PEPR portion.

§ 2º The documentation relating to a securitization process must evidence the voluntary nature and compliance with market prices in any purchase of underlying assets or securitization notes by the originating counterparty.

§ 3º For the purpose of proving the voluntary nature, the provision of implicit support must obtain approval from the institution's board of directors.

CHAPTER VI

ON CREDIT AND LIQUIDITY BACKSTOPS

Section I

On the Requirements for Eligibility of Liquidity Backstops

Art. 121. The provision of credit risk mitigation for securitization exposures implies treating the exposure subject to the mitigation as an own exposure, for the purposes of calculating the value of the PEPR portion.

Sole paragraph. The provisions of the caput do not apply to the originating counterparty.

Section II

On the Treatment of Credit and Liquidity Backstops

Art. 122. The exposure value relating to credit, liquidity or funding backstops must be determined by multiplying the value of the commitment assumed, net of any drawdown of funds already made, by the respective CCF, which must correspond to:

I - 0% (zero percent), in the case of funding provided by the administrator of the underlying assets, provided that the commitment is unconditionally cancellable without the need for prior notice from the administrator;

II - 100% (one hundred percent), in the case of a credit backstop; and

III - 100% (one hundred percent), in the case of a liquidity backstop that meets the following requirements:

a) the circumstances for drawing down the funds available for the liquidity backstop are clearly identified and limited;

b) drawdowns of the funds available for the liquidity backstop are conditional on a high probability of repayment of such funds upon settlement of the underlying assets or the provision of the credit backstop;

c) the funds available for the liquidity backstop are not used to cover exposures in default or losses associated with the underlying assets;

d) the securitization process is not structured in a way that ensures the use of the funds available for the liquidity backstop;

e) the securitization notes covered by the liquidity backstop, when externally rated, have a rating, at a minimum, equivalent to investment grade at the time of a drawdown of the available funds;

f) no drawdown of funds available for the liquidity backstop occurs after the credit backstop associated with the securitization process has been exhausted; and

g) the reimbursement of the funds drawn for liquidity enhancement has priority over all other obligations relating to the securitization process and is not subject to postponement, forgiveness, or extinguishment of the debt.

§ 1 The requirements specified in items "a", "b", "c", "e", "f", and "g" of item III of the caput must be contractually provided for.

§ 2 In the event of the existence of multiple liquidity or credit enhancements provided by the same institution in a securitization process, the calculation of the PEPR portion relating to the overlap of enhancements must consider only the enhancement to which the highest CCF is attributed.

§ 3 If the liquidity enhancement does not meet the provisions of item III of the caput, its notional value must be multiplied by the risk weighting factor (Ki) with a value equal to 1 (one).

CHAPTER VII

ON THE APPROACHES FOR SECURITIZATION EXPOSURES

Section I

On General Provisions

Art. 123. The determination of the value of the PEPR portion related to underlying assets through the IRB approach implies the use of the IRB approach also for calculating the value of the PEPR portion related to securitization exposures.

§ 1º In the event that the portfolios to which the set of underlying assets of a securitization exposure belong are treated, for the purpose of determining the PEPR portion, according to different IRB approaches, the approach used in the predominant portion of the set of assets must be applied to the securitization exposure.

§ 2º An updated historical record of the composition of the set of underlying assets of each securitization exposure must be maintained, in order to substantiate the choice of the approach used.

Art. 124. In the absence of specific treatment in the IRB approach for a type of underlying asset, the originating counterparty authorized to use that approach must determine the value of the PEPR portion related to securitization exposures, as set forth in Circular No. 3.360, of 2007.

Art. 125. In the event of using the IRB approach for a securitization exposure by the originating counterparty, the maximum value of the PEPR portion related to that exposure must correspond to the value determined for the respective underlying assets in the absence of securitization, according to the approach used for each portfolio.

Art. 126. In the case of partial risk retention, the maximum between the K factors associated with the share of the exposure retained by the institution and with the underlying assets must be used, in proportion to the retained risk.

Art. 127. In the case of the institution acting as an investor in a securitization process whose underlying assets are classified in the "retail" category, the use of the treatment described in Circular No. 3.360, of 2007, is permitted, given the proven impossibility of obtaining information for adequate measurement of the credit risk of said assets.

Sole paragraph. The use of the option provided for in the caput is subject to prior authorization from Desup.

Section II

On the RBA Approach

Art. 128. The RBA approach applies to securitization exposures in which it is possible to determine internally:

I - the credit risk of the underlying assets; and

II - the impacts of the subordination structure and other characteristics on the credit risk of the securitization exposures.

§ 1º The internal classification process of the RBA approach must allow the segregation of exposures into at least eleven Long-Term Credit Quality Levels (NQL) and three Short-Term Credit Quality Levels (NQC).

§ 2º The internal classification within the scope of the RBA approach must be compared with external classifications, where these exist, in order to identify any discrepancies.

Art. 129. Within the scope of the RBA approach, factor Ki must be applied to each securitization exposure, considering the following aspects:

I - internal classification of the risk of the securitization exposure, assigned in accordance with art. 128, § 1º;

II - term of the exposure;

III - relative degree of seniority among exposures classified in the same NQC or NQL; and

IV - level of granularity of the set of underlying assets.

§ 1º For the purposes of determining the factor Ki to be applied to securitization exposures, the value established for factor Ki* must be used:

I - in annex V, for exposures classified as long-term; and

II - in annex VI, for exposures classified as short-term.

§ 2º The degree of seniority of the exposure, mentioned in item III of the caput, must be used to obtain the values of factor Ki* applicable to different subordination classes that present identical values for NQL or NQC.

§ 3º The level of granularity mentioned in item IV of the caput is determined based on the effective number of underlying assets (N), as defined in art. 134, as follows:

I - if N is greater than or equal to 6 (six), the exposure is considered granular;

II - if N is less than 6 (six), the exposure is considered non-granular.

§ 4º In cases of long-term internal classification of the RBA approach lower than level NQL11 and short-term internal classification of the RBA approach lower than level NQC3, the risk weighting factor Ki with a value equal to 1 (one) must be applied to the securitization exposure, regardless of the seniority of the class and the granularity of the set of underlying assets.

Section III

On the Supervisor Formula Approach (SF)

Art. 130. The SF approach applies to securitization exposures in which the institution is not able to consider the impacts of the subordination structure and other characteristics of the securitization process for the purposes of credit risk classification.

Art. 131. The value of the PEPR portion calculated for a securitization security class through the use of the SF approach is given by multiplying the total value of the securitized underlying assets by the greater of the following values:

I - F x 0.07 x T; or

II - F/0.08 x {S[L + T] - S[L]}, in which:

a) T = exposure range; and

b) L = credit enhancement level.

§ 1º The function S[.] mentioned in item II of the caput is defined by:

, in which:

I - KIRB = risk weighting factor for securitization exposure, determined through the SF approach;

II- ω = 20;

III - d = 1 - (1 - h) x (1 - Beta[KIRB; a,b]); where Beta [KIRB; a,b] is the cumulative Beta probability distribution with parameters "a" and "b", defined in subparagraphs "d" and "e" of item IV, evaluated at variable KIRB; and

IV - K[L] = (1 - h) x ((1 - Beta[L; a,b]) x L + Beta[L; a + 1,b] x c), in which:

a) h=((1-KIRB)/LGD(SEC)) N

b) N = effective number of underlying assets of the securitization exposure;

c) Beta [L; a, b] = cumulative Beta probability distribution with parameters "a" and "b" evaluated at variable L;

d) a = g x c;

e) b = g x (1 - c);

f) c = KIRB/(1-h);

g) -1;

h) ;

i) ;

j) τ = 1.000; and

k) LGD(SEC) = LGD parameter applicable to securitization exposures.

K K L K K d K e se K L L se L K S L IRB K L K IRB IRB IRB IRB IRB IRB ( )/[ ] [ ] /1 [ ]

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§ 2 The amplitude of the securitization exposure (T) corresponds to the ratio between the nominal value of the class of securitization securities held and the notional value of the underlying assets.

§ 3 For securitization exposures whose underlying assets are retail exposures, the assignment of the value 0 (zero) to the parameters "h" and "v", mentioned in subitems "a" and "i" of item IV of § 1 of this article, is permitted.

§ 4 The use of the option referred to in § 3 is conditioned on authorization from Desup.

Art. 132. The value of the KIRB factor mentioned in art. 131 must correspond to the result of the following formula:

KIRB = (PEPR(SEC) + EL(SEC)) / V(SEC) , where:

I - PEPR(SEC) = value of the PEPR portion related to the securitization exposure;

II - EL(SEC) = percentage of expected loss related to the securitization exposure; and

III - V(SEC) = total value of the underlying assets.

§ 1 The calculation of the value of V(SEC) must include the value of the EAD parameter associated with undrawn credit commitments.

§ 2 The values of PEPR(SEC) and EL(SEC) must correspond to the respective values for PEPR(IRB) and EL related to the underlying assets, obtained through the same IRB approach used and considering the effects of any credit risk mitigation instrument employed.

§ 3 For securitization structured through the use of a special purpose entity (SPE), the underlying assets must include the resources eventually segregated by the SPE in a reserve fund.

§ 4 In cases where the institution establishes a provision related to the securitization exposure or there is a non-refundable discount on the purchase price of an underlying asset, the value of the V(SEC) factor must be equal to the gross amount of the asset, disregarding the provision or the discount.

Art. 133. The level of credit enhancement (L) mentioned in art. 131 corresponds to the ratio between the amount of all classes subordinated to the class of the exposure held and the total value of the assets underlying the securitization exposure.

§ 1 In calculating the value of L, the effects of any credit enhancements and reserve funds capitalized through future receivables from the underlying assets that do not present a balance must be disregarded.

§ 2 In calculating the value of L, the inclusion of the balance of a reserve fund composed of accumulated cash flows from the underlying assets, associated with an exposure class whose degree of subordination is higher than that of the class of the exposure held, is permitted.

Art. 134. The effective number of underlying assets (N) of the securitization exposure mentioned in art. 131, § 1, item IV, subitem "b", must correspond to the result of the following formula:

; where: EADi = value of the EAD parameter relative to each underlying asset associated with the borrower or homogeneous risk group "i".

§ 1 In the case of resecuritization, the calculation of N must consider the securitization securities used in the process.

§ 2 In the event that the weight of the underlying asset with the largest participation in the asset pool (C1) is known, it is permitted to consider the value of N equal to the ratio 1/C1.

Art. 135. The value of the LGD(SEC) parameter mentioned in art. 131, § 1, item IV, subitem "k", is calculated by means of the following formula:

, where: LGDi = average value of the LGD parameter relative to all underlying assets associated with the borrower or homogeneous risk group i.

Sole paragraph. The value of the LGD(SEC) parameter must be equal to 100% (one hundred percent) for securitization exposures related to resecuritization.

Art. 136. In the event that the weight C1 mentioned in art. 134, § 2, is less than or equal to 0.03 (three hundredths), the use of the following values for the LGD(SEC) and N parameters is permitted:

I - LGD(SEC) = 50% (fifty percent); and

II - N = (C1 x Cm + [(Cm – C1)/(m-1)] x max {1-m x C1,0})-1 , where:

a) m = number of assets with the largest participation in the pool of underlying assets, set by the institution; and

b) Cm = weight of the "m" largest assets in the pool of underlying assets.

Sole paragraph. In the event that only C1 is calculated and its value is less than or equal to 0.03 (three hundredths), the use of the following values for LGD(SEC) and N is permitted:

I - LGD(SEC) = 50% (fifty percent); and

II - N = 1 / C1.

Art. 137. For the SF approach, in the case of underlying assets consisting of purchased receivables, the values of KIRB associated with credit and dilution risks must be calculated separately by using the respective risk parameters, estimated according to the provisions of arts. 58 to 62.

§ 1 In the event that the credit and dilution risks associated with purchased receivables are covered by aggregate guarantee in a securitization process, including credit or liquidity enhancements common to both risks, the value of the LGD(SEC) parameter must be calculated by means of the following formula: , where:

I - LGDi = average value of the LGD parameter relative to all underlying assets associated with the borrower or homogeneous risk group i;

II - Ki= credit risk weighting factor associated with the borrower or homogeneous risk group "i"; and

III - Kdi= dilution risk weighting factor associated with the borrower or homogeneous risk group "i".

§ 2 For the purposes of the provisions of the caput and § 1, the provision of the sole paragraph of art. 115 does not apply.

Art. 138. A risk weighting factor Ki with a value equal to 1 (one) must be applied to securitization exposures whose underlying assets are predominantly subject to IRB approaches mentioned in art. 6, for which the RBA or SF approaches cannot be used.

CHAPTER VIII

ON CREDIT RISK MITIGATION FOR SECURITIZATION EXPOSURES

Art. 139. The use of the SF or RBA approaches implies the treatment of credit risk mitigation instruments according to the provisions of arts. 87 to 108.

Sole paragraph. The effects of credit risk mitigation instruments must be associated with the senior class of securitization securities, and their association with more subordinated classes is permitted when they are intended for protection relating to:

I - first losses; or

II - losses of each class of securitization securities proportionally.

CHAPTER IX

OF THE PEPR PORTION RELATING TO EARLY AMORTIZATION

Art. 140. If early amortization is provided for, as set forth in art. 115, item XIV, the respective value of the PEPR portion must correspond to the product of the following factors:

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I - value of the investor portion;

II - applicable FCC, in accordance with §§ 2 and 3; and

III - KIRB factor, mentioned in art. 131, § 1, item I.

§ 1 For the calculation of the value of the EAD parameter relating to securitization exposures, the values of current, effective and contingent exposures must be calculated in relation to the investor portion.

§ 2 For the purposes of the provisions of the caput, the following FCCs must be applied to revolving underlying assets in securitization processes with controlled early amortization:

I - 90% (ninety percent), when the underlying assets consist of commitments not associated with retail credits;

II - 90% (ninety percent), when the underlying assets consist of commitments not unconditionally cancellable without prior notice associated with retail credits; and

III - the value corresponding to the ratio between the 3 (three) month average of the securitization spread and the accumulation point (SS90/PA), when the underlying assets consist of commitments unconditionally cancellable without prior notice associated with retail credits, in accordance with the following values:

a) 0% (zero percent), if the SS90/PA ratio is greater than 133.33% (one hundred and thirty-three point thirty-three percent);

b) 1% (one percent), if the SS90/PA ratio is less than or equal to 133.33% (one hundred and thirty-three point thirty-three percent) and greater than 100% (one hundred percent);

c) 2% (two percent), if the SS90/PA ratio is less than or equal to 100% (one hundred percent) and greater than 75% (seventy-five percent);

d) 10% (ten percent), if the SS90/PA ratio is less than or equal to 75% (seventy-five percent) and greater than 50% (fifty percent);

e) 20% (twenty percent), if the SS90/PA ratio is less than or equal to 50% (fifty percent) and greater than 25% (twenty-five percent); and

f) 40% (forty percent), if the SS90/PA ratio is less than or equal to 25% (twenty-five percent).

§ 3 For the purposes of the provisions of the caput, the following FCCs must be applied to revolving underlying assets in a securitization process with uncontrolled early amortization:

I - 100% (one hundred percent), when the underlying assets consist of

commitments not associated with retail credits;

II - 100% (one hundred percent), when the underlying assets consist of commitments not unconditionally cancellable without prior notice associated with retail credits; and

III - the value corresponding to the SS90/PA ratio, when the underlying assets consist of commitments unconditionally cancellable without prior notice associated with retail credits, in accordance with the following values:

a) 0% (zero percent), if the SS90/PA ratio is greater than 133.33% (one hundred and thirty-three point thirty-three percent);

b) 5% (five percent), if the SS90/PA ratio is less than or equal to 133.33% (one hundred and thirty-three point thirty-three percent) and greater than 100% (one hundred percent);

c) 15% (fifteen percent), if the SS90/PA ratio is less than or equal to 100% (one hundred percent) and greater than 75% (seventy-five percent);

d) 50% (fifty percent), if the SS90/PA ratio is less than or equal to 75% (seventy-five percent) and greater than 50% (fifty percent); and

e) 100% (one hundred percent), if the SS90/PA ratio is less than or equal to 50% (fifty percent).

§ 4 In the absence of an accumulation point set contractually, its value is set at 4.5 (four point five) percentage points higher than the value of the securitization spread that allows investors in the securitization securities to exercise early amortization.

§ 5 For the purposes of the provisions of § 4, if the exercise of early amortization is not directly linked to the value of the securitization spread, the value of the accumulation point is set at 4.5% (four point five percent).

TITLE IX

OF THE USE OF IRB APPROACHES

CHAPTER I

OF THE DATABASES

Art. 141. The use of an IRB approach implies the storage of data for the following periods:

I - for exposures classified in the "retail" category, the calculation of the estimates of the values of the PD, LGD and EAD parameters must consider, at a minimum, data relating to the previous 5 (five) years;

II - for exposures classified in the "equity interests" category, the calculation of the estimates of the values of the PD parameter used in the PD/LGD approach must consider, at a minimum, data relating to the previous 5 (five) years; and

III - for the other exposures:

a) the calculation of the estimates of the values of the PD parameter must consider, at a minimum, data relating to the previous 5 (five) years; and

b) the calculation of the estimates of the values of the LGD and EAD parameters must consider data relating, at a minimum, to the previous 7 (seven) years, preferably comprising a complete economic cycle.

Art. 142. The use of external databases and external classifications of exposures according to credit risk is permitted as complementary sources of information for calculating the estimates of the risk parameters, provided that the compatibility of the external data and classifications with the risk factors to which the own exposures are subject is demonstrated.

Art. 143. The use of models developed by third parties as part of the internal process of classifying exposures according to credit risk is permitted.

§ 1º The use of models developed by third parties must meet the same requirements for validating the use of internally developed systems, observing the following additional requirements:

I - the documentation of the level of integration of the models into the internal process of classifying exposures must be satisfactory; and

II - the degree of understanding of the models, their results and implications must be adequate for their use in the classification and risk measurement system.

§ 2º The validation process referred to in arts. 147 to 155 must prove the adequacy of the models developed by third parties to the nature of the institution's own exposures and to the methodology adopted in the internal process of classifying exposures.

§ 3º The performance of models developed by third parties and the integrity of the data used in the internal process of classifying exposures must be periodically reviewed.

Art. 144. The use of data shared between financial institutions is permitted.

Sole paragraph. For the use of the option provided for in the caput, the adequacy between the shared data and the internal classification system used must be demonstrated.

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CHAPTER II

ON THE EVIDENCE OF USE

Art. 145. The institution that uses the IRB approach must demonstrate the use of this approach in a continuous, integrated and comprehensive manner, at least in the following processes:

I - definition of tolerated risk levels;

II - establishment and alteration of limits;

III - decision-making regarding the assumption of risks;

IV - changes to the strategy and policies for credit risk management, referred to in Resolution No. 3,721, of 2009;

V - preparation of management reports;

VI - performance of the Internal Capital Adequacy Assessment Process (Icaap), under the terms of Resolution No. 3,988, of 2011;

VII - programming and performance of simulations of extreme conditions (stress tests);

VIII - pricing and measurement of the profitability of operations; and

IX - granting and monitoring of credit.

§ 1º The evidence referred to in the caput comprises the identification, description and documentation of the continuous, integrated and comprehensive use of the risk parameters associated with the IRB approach used.

§ 2º The documentation mentioned in § 1º must be kept up to date.

Art. 146. The practices and criteria associated with the classification system must be aligned with the various areas of the institution involved in the credit process, including the risk management and commercial areas, considering:

I - the criteria used for segmentation of exposure categories, as well as those used for defining risk levels and homogeneous risk groups;

II - the values and procedures related to the recovery and collection processes; and

III - the measurement techniques and parameters used for calculating expected losses.

Sole paragraph. The final risk classification must consider the analyses performed in the assessment instances to which the exposure was submitted.

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CHAPTER III

ON THE VALIDATION PROCESS

Art. 147. The use of the IRB approach is conditioned upon the performance of a validation process of the internal models and systems for credit risk classification, in order to prove their adequacy to the current risk profile, comprehensiveness and consistency.

§ 1º The evidence referred to in the caput comprises the critical analysis of the following aspects, at a minimum:

I - methodologies, assumptions and theoretical foundations used in the models;

II - adequacy of the development process of the internal credit risk classification systems, including the models adopted, their logical foundation and the variables used;

III - main definitions adopted internally, including the criteria for default and portfolio segmentation and the risk parameters;

IV - accuracy and adequacy of the values estimated for the risk parameters and for losses;

V - segmentation of portfolios into risk levels sufficient for significant differentiation of risk;

VI - use of all relevant information for the adequate measurement of credit risk;

VII - identification of the historical intervals that support the estimates of the risk parameters;

VIII - comprehensiveness, consistency, integrity and reliability of the input data of the models and information technology systems and of the processes for building the database;

IX - existence of processes that assess the potential impact on credit risk arising from new products;

X - adequacy of backtesting and stress tests;

XI - assessment of the evidence defined in art. 145 and of compliance with the provisions of art. 141 and its respective documentation;

XII - adequacy of the internal controls of the systems to their complexity;

XIII - compatibility of the calculations performed by the information technology systems and the operational logic with the assumptions and methodologies adopted;

XIV - adequacy of the technological infrastructure and of the functioning of the systems

BANCO CENTRAL DO BRASIL

of information technology used in the models, including tests, homologations and certifications;

XV - integrity, comprehensiveness and consistency of the documentation of the models used;

XVI - content and comprehensiveness of the periodic risk measurement reports, backtesting and stress tests;

XVII - adequacy of the critical analysis and approval process referred to in art. 157;

XVIII - adequacy of the calculation of capital relative to exposures submitted to the IRB approaches; and

XIX - compliance with the requirements mentioned in arts. 141 to 144.

§ 2º The validation process is the exclusive responsibility of the institution, which must demonstrate to Desup the adequacy and adherence of the models used to its risk profile.

§ 3 The validation process must analyze the maximum tolerated deviations between the estimates of the risk parameters mentioned in Art. 66 and their realized values, considering the current economic cycle moment and systematic variations in default rates.

Art. 148. The validation process must be carried out at least every 3 (three) years and, in particular, whenever any relevant change occurs in the systems, models, the institution's risk profile, or the monthly value of the institution's PEPR installment.

Sole paragraph. The relevance of the changes mentioned in the caput must be defined according to consistent and verifiable criteria, adequately documented and subject to evaluation by Desup.

Art. 149. The validation process must be independent of the development processes of the systems and models and of the use of their results.

Art. 150. The validation process must be conducted by technically qualified personnel and subject to an appropriate incentive structure, in order to ensure:

I - critical and effective analysis; and

II - absence of pressures from agents external and internal to the institution that could benefit from specific results arising from the validation process.

Art. 151. The validation process must include information technology systems acquired from third parties.

Art. 152. It is permitted to restrict the validation process to the aspects affected by relevant changes in the systems, models, or the institution's risk profile, provided that a prior critical analysis of these changes and an adequate diagnosis of their consequences on the IRB approach used are prepared.

§ 1 The exercise of the option referred to in the caput is subject to approval by Desup.

§ 2 Non-approval by Desup of the restricted validation process under the caput implies the performance of a validation process that includes the critical analysis of the aspects mentioned in Art. 147, § 1.

Art. 153. The validation process must consider the use of alternative quantitative validation methodologies and resort to comparisons with appropriate and updated external data sources, covering an adequate observation period.

Art. 154. The validation process must be adequately documented and its results submitted to the institution's board of directors and the board of directors.

Sole paragraph. Changes in the validation methods and information used, with respect to both databases and collection intervals used, must be clearly documented and justified.

Art. 155. The institution that uses the IRB approach must implement a structure responsible for the validation process.

Sole paragraph. The institution must designate a person responsible for the validation process.

Art. 156. Relevant changes in the risk profile of the institution that uses the IRB approach must be communicated to Desup, as well as the relevant changes described in Art. 148, including in the validation process, and those that cause a significant impact on the calculation of the monthly value of the institution's PEPR installment.

Sole paragraph. The provisions of the caput also apply to changes that individually are not relevant but are relevant together.

CHAPTER IV

ON THE CRITICAL EVALUATION PROCESS

Art. 157. Changes that do not give rise to the performance of the validation process described in Arts. 147 to 155 must be submitted to a critical evaluation and approval process previously defined and documented.

CHAPTER V

ON AUDIT

Art. 158. The internal risk classification system must be submitted to internal audit evaluation at least annually, covering at least:

I - effectiveness of the validation process referred to in Arts. 147 to 155; II - performance of validation processes in cases of relevant changes in the model or the institution's risk profile, as per Art. 148; III - organization of the credit risk management structure; IV - use of systems and models in a continuous, integrated, and comprehensive manner in the granting and monitoring of credit; V - inclusion of stress tests in daily risk management practices; VI - integrity of adherence tests and their effective use in verifying performance and in improving systems and models; VII - observance of risk management policies and strategies, including compliance with related limits and procedures; VIII - sufficiency and technical qualification of professionals in business areas, operational, risk management, information technology, as well as any others involved in the development, validation, and use of systems and models; IX - integrity and adequacy of management information systems; X - involvement of the institution's board of directors in the credit risk management process; XI - timeliness and quality of information provided to the board of directors; XII - processes for obtaining estimates of the values of the PD, LGD, and EAD parameters and their adequacy to the institution's risk profile; XIII - degree of adherence to the requirements established in this Circular; and XIV - adequacy of the critical evaluation and approval process mentioned in Art. 157.

§ 1 The evaluation process by internal audit must be conducted by technically qualified personnel, independently.

§ 2 The provisions of items I, II, and VIII of the caput must be carried out independently of the validation process referred to in Arts. 147 to 155.

§ 3 The internal audit evaluation activity must be documented.

TITLE X
ON REGISTRATION
CHAPTER I
ON THE REQUIREMENTS

Art. 159. At the time of requesting the authorization referred to in art. 2, the institution must have been using, for a minimum period of 1 (one) year, internal credit risk classification and parameter estimation systems aligned with the minimum requirements for using IRB approaches, observing the provisions of art. 12, item III, covering at least 60% (sixty percent) of the exposures in the application scope weighted by their respective FPRs established in Circular No. 3.360, of 2007.

§ 1 The prior use period referred to in the caput is subject to the provisions of art. 145.

§ 2 The IRB approaches must be adopted for at least 90% (ninety percent) of the exposures in the application scope weighted by their respective FPRs established in Circular No. 3.360, of 2007, within a maximum period of 5 (five) years from the request referred to in the caput, through a progressive implementation plan.

§ 3 For exposures classified in the categories "wholesale", "sovereign entities" and "financial institutions", the use of the advanced IRB approach is not conditioned on the prior use of the basic IRB approach.

§ 4 Authorization to use the advanced IRB approach is conditioned on proof of coverage of at least 50% (fifty percent) of the total exposures classified in the categories "wholesale", "sovereign entities" and "financial institutions", weighted by their respective FPRs established in Circular No. 3.360, of 2007.

§ 5 Throughout the progressive implementation conducted according to the plan mentioned in § 2, exposures classified in a category for which the use of the basic IRB approach is initially authorized may migrate to the advanced IRB approach, upon prior authorization from Desup, observing the provisions of § 4.

Art. 160. The inclusion of financial products in the use of IRB approaches must be communicated to Desup, observing relevance criteria.

Art. 161. Exceptionally, for requests for authorization to use IRB approaches submitted until 31 December 2013, the minimum data coverage periods shall be as follows:

I - for exposures classified in the "retail" category, the estimates of the PD, LGD and EAD parameters must consider data relating to the previous 3 (three) years;

II - for exposures classified in the categories "wholesale", "financial institutions", "sovereign entities" and "equity holdings", the estimates of the PD parameter must consider data relating to the previous 3 (three) years; and

III - for exposures classified in the categories "wholesale", "financial institutions" and "sovereign entities", the estimates of the LGD and EAD parameters must consider data relating to the previous 5 (five) years.

Sole paragraph. The minimum periods established in items I, II and III shall be increased by 1 (one) year for requests for authorization to use IRB approaches submitted between 1 January 2014 and 31 December 2014.

CHAPTER II

ON THE AUTHORIZATION REQUEST

Art. 162. Institutions applying to use IRB approaches must request the respective authorization, from 28 December 2012, by means of an application signed by the institution's chief executive officer and by the director designated in the form of art. 12 of Resolution No. 3.721, of 2009.

§ 1 The request referred to in the caput must explicitly specify:

I - the categories, subcategories, business units and the respective IRB approaches for which authorizations are requested; and

II - the portfolios and their respective classification systems for which authorizations are requested.

§ 2 Throughout the progressive implementation plan provided for in art. 159, § 2, the extension of the IRB approach used for new systems or the migration from the basic IRB approach to the advanced one, whether or not provided for in said plan, are subject to proof of use in a continuous, integrated and comprehensive manner established in art. 145 and to authorization by Desup.

§ 3 The request referred to in the caput must be accompanied by the following documentation:

I - declarations attesting:

a) awareness that, once the use of IRB approaches is authorized for certain exposures, the methodology established in Circular No. 3.360, of 2007, may no longer be used to calculate the value of the PEPR portion relating to those exposures, except upon prior authorization from Desup;

b) compliance with the minimum requirements established in this Circular and awareness that eventual non-full compliance with specific aspects does not compromise the consistency in the use of IRB approaches and in credit risk management;

c) prior use, for a minimum period of 1 (one) year, of the IRB approach specified for risk classification and estimation of risk parameters, according to the provisions of art. 159 for at least 60% (sixty percent) of the exposures in the application scope weighted by their respective FPRs; and

d) truthfulness and completeness of the information sent;

II - progressive implementation plan, for the subsequent 5 (five) years, of the IRB approaches for 90% (ninety percent) of the exposures belonging to the application scope weighted by their respective FPRs, containing a schedule, measures and responsibilities for its implementation;

III - report prepared based on the document "Information on Internal Credit Risk Classification Systems", to be disclosed by Desup;

IV - adequacy plan, containing a schedule, measures and responsibilities for full compliance with the specific aspects mentioned in item I, subitem "b"; and

V - internal audit opinion, containing the conclusions on the assessment established in art. 158.

Art. 163. Requests for authorization to use the IRB approach shall be subject to a selection and prioritization process by Desup.

Sole paragraph. In the selection and prioritization process referred to in the caput, the following criteria shall be taken into consideration:

I - completeness and adequacy of the documents mentioned in art. 162, § 3º, to the requirements established in this Circular;

II - history of the institution regarding risk and control assessments, economic and financial soundness, transparency in relationships, compliance with regulations and timely compliance with determinations;

III - degree of development of the credit risk management structure, the estimation of risk parameters and the internal credit risk classification systems;

IV - relative share of the value of the institution's PEPR portion in relation to the aggregated PRE of the SFN;

V - amount of the institution's assets; and

VI - date of the authorization request.

Art. 164. During the process of analysis by Desup of the request for use of the IRB approach, the institution must:

I - provide any additional information in a timely manner;

II - inform, in the manner to be established by Desup, the monthly value of the PEPR portion calculated using the requested IRB approach; and

III - enable access to people, documents and systems involved in the development and use of the requested IRB approach.

Art. 165.
The use of the IRB approach and the estimation of the values of the risk parameters for the calculation of the PEPR(IRB) portion shall occur only for the portfolios expressly authorized by Desup and after the date stipulated in the respective authorization.

Art. 166. The relevant changes mentioned in art. 148, as well as the change of approach whose use was previously authorized, are subject to prior authorization from Desup.

CHAPTER III

ON THE PROGRESSION PERIOD

Art. 167. During the progression period, the monthly value of the PEPR(IRB) portion must correspond to the result of the following formula:

PEPR(IRB) = Max [PEPR(PRO); S x PEPR(PAD)], where:

I - PEPR(PRO) = monthly value of the PEPR portion calculated using the IRB approach;

II - PEPR(PAD) = monthly value of the PEPR portion calculated according to the provisions of Circular No. 3.360, of 2007, related to the same exposures for which the PEPR(PRO) portion was calculated; and

III - S = progression factor.

§ 1º The progression period begins on the date stipulated according to the provisions of art. 165 and ends on the date when the progression factor S assumes the value zero.

§ 2º The value of the progression factor S is equal to:

I - 0.90 (ninety hundredths), throughout the first year after the authorization date;

II - 0.80 (eighty hundredths), throughout the second year after the authorization date;

III - 0.70 (seventy hundredths), throughout the third year after the authorization date; and

IV - 0 (zero), from the fourth year of the authorization date.

§ 3º Desup may extend the periods in which the progression factor S assumes the values listed in § 1º, items I to III, considering at least the following criteria:

I - consistency and evolution of the database used;

II - compliance with the progressive implementation plan;

III - alignment of management practices with the IRB approach used;

IV - adequacy and results of backtesting;
V - consistency of stress tests; and
VI - adequacy of the internal controls structure related to the credit processes.

TITLE XI

ON THE DISCLOSURE OF INFORMATION

CHAPTER I

ON GENERAL INFORMATION

Art. 168. The following information must be disclosed in a publicly accessible report:

I - categories, subcategories, portfolios and business units subject to the IRB approaches used;

II - risk levels related to the main portfolios subject to the IRB approaches;

III - description of internal estimates for other purposes not related to the calculation of PRE;

IV - description of the process of management and recognition of credit risk mitigators; and

V - control mechanisms of the IRB approaches used, including aspects related to independence, assignment of responsibilities and procedures for reviewing systems and models.

Art. 169. The report referred to in art. 168 must contain a brief description of the main methodologies used to classify the credit risk of exposures classified in the categories "sovereign entities", "banking institutions", "wholesale", "equity interests" and "retail".

§ 1º The description referred to in the caput must cover the subcategories "SME", "specialized financing", of the "wholesale" category, wholesale financial receivables and the subcategories "residential", "qualifying revolving retail credit" and "other retail exposures", of the "retail" category.

§ 2º For each of the categories and subcategories mentioned in § 1º, the description referred to in the caput must include, at a minimum:

I - nature of the operations included therein;

II - definitions, methods and other relevant information used in the estimation of values and validation of the PD, LGD and EAD parameters, according to the IRB approach used;

BANCO CENTRAL DO BRASIL

III - maximum tolerated deviations, mentioned in art. 147, § 3º;

IV - values of contingent exposures and estimates of the value of the EAD parameter, in the case of using the advanced IRB approach;

V - values related to losses incurred in the period prior to disclosure, including comparison with past loss experience and analysis of factors that affected losses; and

VI - comparative analysis between the estimates of the values of the PD, LGD, EAD parameters and the expected loss amount EL and the respective values actually realized, considering a sufficiently long historical period.

Art. 170. An adequate number of PD parameter bands must be defined in each category and subcategory mentioned in art. 169, and informed, at a minimum, for each defined PD parameter band:

I - the total value of exposures, considering for this purpose:

a) the amount of the accounting balances of exposures classified in the category "equity interests"; and

b) the sum of the drawn balance with the total of contingent exposures;

II - the average value of the K factor weighted by the value of each exposure belonging to the range; and

III - the average percentage value of the LGD parameter weighted by the value of each exposure belonging to the range, in the case of using the advanced IRB approach.

Sole paragraph. The information referred to in art. 169 concerning the "retail" category and its subcategories must be disclosed with the following segregation:

I - by homogeneous risk groups; or

II - by ranges of expected losses defined in each subcategory.

Art. 171. The institution that also uses the treatment established in Circular No. 3.360, of 2007, must additionally disclose a description of the portfolios in each exposure category or subcategory that are subject to the following approaches:

I - treatment established in Circular No. 3.360, of 2007;

II - basic IRB approach; and

III - advanced IRB approach.

Art. 172. The segmentation referred to in arts. 5, item I, and 6, sole paragraph, item I, of Circular No. 3.477, of 24 December 2009, must be replaced by the exposure categories and subcategories established in this Circular.

Art. 173. For the calculation of the Basel Index referred to in art. 5, item V, of Circular No. 3.477, of 2009, the value of the EPR amount is defined as follows:

EPR = EPR(3360) + EPR(IRB), where:

I - EPR(3360) = monthly value of the EPR amount referring to exposures subject to the treatment defined by Circular No. 3.360, of 2007; and

II - EPR(IRB) = PEPR(IRB) / F, where F is the factor applicable to the EPR amount, in accordance with Circular No. 3.360, of 2007.

Art. 174. For exposures classified in the "specialized financing" subcategory subject to the weighting criteria disclosed by the Central Bank of Brazil or those belonging to the "equity interests" category subject to the simplified approach, the total value relative to:

I - exposures that receive a 300% (three hundred percent) weighting, defined in art. 50;

II - exposures that receive a 400% (four hundred percent) weighting defined in art. 50; and

III - each weighting associated with the categories defined in art. 40, §§ 2 and 3.

CHAPTER II

ON INFORMATION ABOUT CREDIT RISK MITIGATORS

Art. 175. The report referred to in art. 168 must contain the following qualitative information on credit risk mitigation instruments associated with exposures subject to IRB approaches:

I - description of the policies and the degree of use, both for contingent exposures and for effective exposures, in the event of employing netting and settlement agreements for obligations; and

II - description of the main types of collateral used.

Art. 176. For each of the categories and subcategories subject to the IRB approach, the following quantitative information must be made available:

I - total net value of the effects of netting agreements after applying the standardized adjustment factors of exposures associated with financial collateral and other collateral; and

II - total net value of the effects of netting agreements of exposures covered by personal guarantees or credit derivatives.

Sole paragraph. Exposures subject to the IRB approach are not subject to the provisions of art. 7, item II, of Circular No. 3.477, of 2009.

CHAPTER III

ON INFORMATION ABOUT COUNTERPARTY CREDIT RISK

Art. 177. The report referred to in art. 168 must describe the policies for identification, treatment and capital management, as provided in Resolution No. 3.988, of 2011, for transactions subject to counterparty credit risk, in the case of a positive correlation between:

I - the probability of counterparty default and market variations; and

II - the probability of default of a counterparty and the value of the exposure to that same counterparty, due to the specific characteristics of the transaction.

CHAPTER IV

ON ADDITIONAL INFORMATION

Art. 178. The institution must disclose additional information it deems relevant, in order to ensure:

I - appropriate transparency of credit risk management and measurement;

II - adequacy of the PR to the risks incurred; and

III - adequacy of the IRB approach used to the current credit risk profile.

§ 1 The information relating to the IRB approach used must include any relevant change involving quantitative aspects since the last disclosure.

§ 2 Desup may determine the disclosure of additional information to that provided for in this Circular in relation to the IRB approach used.

CHAPTER V

ON THE PERIODICITY OF INFORMATION

Art. 179. The qualitative information referred to in arts. 168 to 178 must be updated at least annually.

Sole paragraph. The qualitative information relating to a relevant change in the IRB approach used must be disclosed within 90 (ninety) days after authorization for its use.

Art. 180. The quantitative information referred to in arts. 168 to 178 must be updated quarterly, in relation to the base dates of 31 March, 30 June, 30 September and 31 December.

Sole paragraph. The information must be updated within a maximum of 60 (sixty) days from the base dates of 31 March, 30 June and 30 September, and 90 (ninety) days from the base date of 31 December.

Art. 181. The information referred to in arts. 168 to 174 must be available in a single location, publicly accessible and easy to find, preferably on the institution's website on the internet.

§ 1 The availability referred to in the caput applies to information relating to the current year and, at a minimum, to the last 5 (five) years.

§ 2 The information relating to the last 5 (five) years must be accompanied by a comparative assessment and an explanation for the relevant variations that occurred.

§ 3. The information must be available together with that relating to the risk management structure, in accordance with the provisions of Resolutions nos. 3.380, of 29 June 2006, 3.464, of 26 June 2007, and 3.721, of 2009.

§ 4. The information on the place where the information referred to in the caput is available must be published together with the financial statements.

Art. 182. After the authorization referred to in art. 2, the information referred to in arts. 168 to 178 must be available together with that provided for in Circular No. 3.477, of 2009.

CHAPTER VI

FINAL PROVISIONS

Art. 183. The director designated under the terms of art. 12 of Resolution No. 3.721, of 2009, is responsible for the information referred to in art. 168.

Art. 184. This Circular enters into force on the date of its publication.

Luiz Awazu Pereira da Silva
Anthero de Moraes Meirelles
Director of Regulation of the Financial System Director of Supervision

Annex I to Circular No. 3.581, of 8 March 2012

Risk classification criteria for specialized financings of the "project finance" type

Aspect I - Financial soundness of the project

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Market conditions.	Demand is strong and growing. The project has few competitors or presents a substantial and durable comparative advantage in relation to items such as location, cost or technology.	Demand is strong and stable. The project has few competitors or presents an occasional comparative advantage in relation to items such as location, cost or technology.	Demand is adequate and stable. The project presents no comparative advantage in relation to items such as location, cost or technology.	Demand is weak and declining. The project presents a comparative disadvantage in relation to items such as location, cost or technology.
Financial indicators (debt service coverage, loan life coverage, project life coverage, ratio between debt and project value).	The financial indicators are solid, considering the project's risk level. The economic assumptions are very robust.	The financial indicators range between solid and good, considering the project's risk level. The economic assumptions are robust.	The financial indicators are average, considering the project's risk level.	The financial indicators are fragile, considering the project's risk level.
Stress analysis.	The project is able to honor its financial obligations, even in the face of a persistent and severe scenario of economic or sectoral stress.	The project is able to honor its financial obligations in the face of a normal scenario of economic or sectoral stress. The possibility of its non-compliance is associated with the occurrence of severely adverse economic conditions.	The project is vulnerable to a scenario of stress usual throughout an economic cycle. The possibility of its non-compliance is associated with usual adverse conditions.	The project has a high probability of entering into non-compliance if economic or sectoral conditions do not improve rapidly.

BANCO CENTRAL DO BRASIL

Aspect II - Financial structure of the project

Criteria Requirements to be met for the rating grade Strong Good Satisfactory Weak Duration (dura- tion) of the credit compared to the duration of the pro- ject.
The useful life of the project greatly exceeds the dura- tion of its finan- cing.
The useful life of the project exceeds the duration of its financing.
The useful life of the project exceeds the duration of its financing.
The useful life of the project may not exceed the duration of its financing.
Form of amor- tizations.
The debt is conti- nuously amorti- zed.
The debt is conti- nuously amorti- zed.
A large part of the debt is amorti- zed continua- lly and a small
part is amorti-
zed only at maturity.
A small part of the debt is amortized continuously and a large part is amortized only at maturity.

Aspect III - Political and legal environment

Criteria	Requirements to be met for the assessment grade
	Strong	Good	Satisfactory	Weak
Political risk, including transfer risk, considering the business plan and mitigators.	The risk exposure is very low. There are very effective mitigating instruments, if necessary.	The risk exposure is low. There are satisfactory mitigating instruments, if necessary.	The risk exposure is moderate. There are some mitigating instruments of moderate effectiveness.	The risk exposure is high. The mitigation instruments are weak or nonexistent.
Force majeure risk (war, social unrest, etc.).	The risk exposure is very low.	The risk exposure is low.	The protection is considered standard.	The risks are significant and not fully mitigated.
Government support and importance of the project to the country in the long term.	The project has strategic importance for the country (preferably export-oriented). There is strong government support.	The project is important for the country. There is good government support.	The project is not strategic, but brings unquestionable benefits to the country. Government support may not be explicit.	The project is not essential for the country. There is little or no government support.
Legal and regulatory stability (risk of changes in the law).	The regulatory environment is favorable and stable in the long term.	The regulatory environment is favorable and stable in the medium term.	Regulatory changes can be foreseen with a reasonable degree of certainty.	Current or future regulatory issues may affect the project.

CENTRAL BANK OF BRAZIL

Obtaining the necessary support and approval of local laws of interest to the project.	There is full certainty regarding obtaining support and approval of local laws.	There is limited certainty regarding obtaining support and approval of local laws.	There is limited certainty regarding obtaining support and approval of local laws.	There are broad doubts regarding obtaining support and approval of local laws.
Degree of legal protection of contracts, guarantees and securities.	Contracts, guarantees and securities have broad legal protection.	Contracts, guarantees and securities have broad legal support.	Contracts, guarantees and securities have legal support, even if certain non-essential elements exist.	There are essential elements that create uncertainty regarding the legal support of contracts, guarantees and securities.

Aspect IV - Characteristics of the transactions

Criteria	Requirements to be met for the assessment grade
	Strong	Good	Satisfactory	Weak
Design and technology risk.	The design and technology of the project have broad approval.	The design and technology of the project have broad approval.	The design and technology of the project are approved. The initial problems are mitigated by robust technical support.	The design and technology have not been tested. There are problems relating to the technology or the design is complex.
Authorizations and permits.	All authorizations or permits have been obtained.	Some authorizations or permits are pending, but obtaining them is probable.	Some authorizations or permits are pending, but the obtaining process is well established and routine.	Some authorizations or permits essential for the operation of the project are missing and obtaining them is not routine. Additional conditions may be imposed.

Type of cons- truction con- tract.
The contract is a single turnkey contract, with fixed prices and a fixed delivery date. All purchases of materials are the res- ponsibility of the contractor.
The contract is a single turnkey contract, with fixed prices and a fixed delivery date. All purchases of materials are the res- ponsibility of the contractor.
The contract is for one or more turnkey contracts, with fixed prices and a fixed delivery date. Purchases of materials may not be the res- ponsibility of the contractor.
The prices are free or parti- ally fixed dos. There is inter- relation between the the various service providers.
Completion guarantees of the work.
The financial soli- dity of the pro- ject bears high settlement costs for non-comple- tion of the work.
The completion guarantee of the work is so- lid and provided by a sponsor with an excellent credit history.
The financial soli- dity of the pro- ject bears signi- ficant settlement costs for non- completion of the work.
The completion gua- rantee of the work is provided by spon- sors with a good credit history.
The finan- cial solidity of the project adequately bears the costs of settlement for non-comple- tion of the work.
The completion guarantee of the work is provided by sponsors with a good credit history.
The finan- cial solidity of the project does not bear ade- quately the costs of settlement by non- comple- tion of the work.
The guarantee of completion of the work is provi- ded by spon- sors with a history of deficient cre- dit.
Previous experience and ca- pacity fi- nancial of the contractor in the execution of similar pro- jects.
The contractor has previous experi- ence and financial capacity proven .
The contractor has previous experi- ence and financial capacity proven .
There is a limitation in the previous expe- rience or capa- city of the contractor.
There is no evi- dence of the ex- perience or of the financial capa- city of the contractor.
Scope and na- ture of the con- tracts of Ope- ration and Maintenance (O&M).
There is a contract of long term well structured for O&M, preferenti- ally contem- plating performance incentives.
There are re- serve accounts for O&M.
There is a contract of long term for
O&M.
There are re- serve accounts for O&M.
There is a contract with term limited for O&M.
There is a re- serve account for
O&M.
There is no con- tract for
O&M.
There is a risk that the high operating costs exceed the coverage of the mitigators.

BANCO CENTRAL DO BRASIL

Technical capacity, track record and financial capacity of the project operator	Very strong. There is full commitment of technical assistance from the sponsors.	Strong. There is limited commitment of technical assistance from the operators	Reasonable. There is no record of the operators' capacity for technical assistance.	Limited or weak. The operator depends on local authorities.
Guaranteed purchase contract with fixed price or "take or pay" clause.	The contractual buyer has an excellent credit history. The contractual termination clauses are very well defined and the contract term comfortably exceeds the debt maturity.	The contractual buyer has a good credit history. The contractual termination clauses are very well defined and the contract term exceeds the debt maturity.	The contractual buyer has a reasonable credit history. The contractual termination clauses are usual and the contract term equals the debt maturity.	The contractual buyer has a poor credit history. The contractual termination clauses are weak and the contract term is shorter than the debt maturity.
Guaranteed purchase contract without a fixed price or without a "take or pay" clause.	The project produces essential services or a commodity widely sold on a global scale. The production is readily absorbable at the projected prices, even with market growth rates below historical ones.	The project produces essential services or a commodity widely sold on a regional scale. The production is regionally absorbable at the projected prices, given the historical market growth rates.	The commodity is sold in a limited market, which can absorb the production only at prices below the projected ones.	The estimated production is demanded by only one buyer or few buyers, or is not customarily sold in organized markets.
Price, volume and transport risk of basic inputs. Track record and financial capacity of the supplier.	The supply contract is long term and the supplier has excellent financial capacity.	The supply contract is long term and the supplier has good financial capacity.	The supply contract is long term and the supplier has good financial capacity, although with some risk of price variation.	The supply contract is short term or the supply contract is long term, but with a supplier of low financial capacity. There is high risk of price variation.

BANCO CENTRAL DO BRASIL

Input risk.	There are independently audited, confirmed and operated input reserves, widely exceeding the project's maturity term.	There are independently audited, confirmed and operated input reserves, exceeding the project's life span.	The proven input reserves are sufficient until the debt matures.	The project depends, to some degree, on unproven or unexploited input reserves.

Aspect V - Strength of the project's lead company

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Track record and financial capacity or reputation of the project sponsor.	The project sponsor has an excellent track record and high financial strength.	The project sponsor has a good track record and good financial strength.	The project sponsor has an adequate track record and good financial strength.	The project sponsor is deficient in terms of track record and financial strength.
Sponsor's capacity to support the project, evidenced by equity, degree of shareholder control and incentive to inject additional resources when necessary.	The project is highly strategic for the sponsor, considering its main area of operation and its long-term strategy.	The project is strategic for the sponsor, considering its main area of operation and its long-term strategy.	The project is important for the sponsor, considering its main area of operation.	The project is not essential to the sponsor's long-term strategy or to its main area of operation.

Aspect VI - Structure of guarantees

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Comprehensiveness of contracts and accounting records.	The contracts and accounting records are fully comprehensive.	The contracts and accounting records are fully comprehensive.	There are gaps in the comprehensiveness of the contracts, which do not compromise the execution of the project. The accounting records are comprehensive.	There are serious gaps in the comprehensiveness of the contracts and deficiencies in the accounting records.

Pledge of as- sets, consider- ing their qual- ity, value and li- quidity.
There is total certainty as to the capac- ity to appropri- ate the assets giv- en as collateral, including preva- lence over any third party rela- ting to contracts, assets and accounts ne- cessary for the oper- ation of the pro- ject. There is robust certainty as to the capac- ity to appro- priate the assets given as collateral, including preva- lence over the majority of third parties, relating to contracts, assets and accounts necessary to the operation of the project. There is acceptable cer- tainty regarding the capa- city to appro- priate the assets given as collateral, including the preva- lence over a relevant portion of third par- ties, regarding contracts, assets or accounts necessa- ry for the opera- tion of the project. There are few real or fide- uciary guarantees. The con- tractual clauses are not capable of unequivocally preventing the borrower from incurring new debt that may put at risk the pay- ment of the obligations related to the pro- ject. Lender's control over the project's cash flows (withdrawals of resources, inde- pendent linked ac- tas vinculadas in- dependentes, etc.). O emprestador tem total controle sobre os fluxos de caixa do projeto. O emprestador tem controle limi- tado sobre os flu- xos de caixa do projeto. O emprestador tem controle li- mitado sobre os fluxos de caixa do projeto. O emprestador não tem controle sobre os fluxos de caixa do pro- jeto. Poder vinculante das cláusulas con- tratuais (pré-paga- mentos obrigató- rios, postergação de pagamentos, restrição de divi- dendos etc.). A vinculação é ro- busta para o tipo de projeto. O projeto está im- pedido de contrair nova dívida. A vinculação é sa- tisfatória para o ti- po de projeto. O projeto somente pode contrair nova dívida sob condi- ções muito restri- tas. A vinculação é razoável para o tipo de projeto. O projeto somen- te pode contrair nova dívida em condições restri- tas. A vinculação é insuficiente para o tipo de proje- to. Não há restrição a que o projeto contraia nova dívida. Fundos de reser- va (destined for debt service, operation & main- tenance, reinforce- ment, change, fortuitous events, etc.). The coverage period of the reserve funds is greater than the average. The funds are consti- tuted in currency or a letter of credit provided by a bank with an excellent credit rating. The coverage period of the reserve funds corresponds to the average. The resources of the reserve funds are fully paid in. The coverage period of the reserve funds corresponds to the average. The resources of the reserve funds are fully paid in. dos. The coverage period of the reserve funds is below the average. The resources of the reserve funds depend on operating revenues. Presence of SPE. Presence of SPE from the pre- operational phase of the project. Presence of SPE from the operational phase of the project. Absence of SPE, but inclusion of other clauses that ensure the separation of the project's assets and those of the spon- sor (ring-fenced assets,
for example). example). Absence of SPE, as well as other clauses that ensure the sepa- ration of the pro- ject's assets and the sponsor's assets (ring-fenced assets, for example).

Circular No. 3,581, of March 8, 2012
102

Annex II to Circular No. 3,581, of March 8, 2012

Risk classification criteria for specialized financings of the types "revenue-generating real estate venture" and "high volatility commercial real estate financings (HVCRE)"

Aspect I - Financial soundness of the venture

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Market conditions.	There is a good balance between supply and demand for the type and location of the venture. The number of competing ventures is equal to or less than the projected demand.	There is a good balance between supply and demand for the type and location of the venture. The number of competing ventures is close to the projected demand.	There is a precarious balance between supply and demand for the type and location of the venture. There is a supply of competing ventures and others are in the planning stage. The configuration and functionality of the venture may be inferior to those of new competitors.	Market conditions are weak and there is uncertainty regarding their improvement and a return to equilibrium. The venture loses tenants upon the expiration of contracts. The terms of new leases are less favorable compared to those of the expired ones.
Financial indicators (debt service coverage, loan-to-value coverage, project-to-value coverage, debt-to-project value ratio).	The debt service coverage indicator is strong and the debt-to-project value ratio is low, given the type of property. If a secondary market exists, the transaction is standardized.	The debt service coverage indicator and the debt-to-project value ratio are satisfactory. If a secondary market exists, the transaction is standardized.	The debt service coverage indicator is declining and the debt-to-project value ratio is increasing.	There is a significant decline in the debt service coverage indicator and the debt-to-project value ratio is well below the standard for new financings.

CENTRAL BANK OF BRAZIL

Stress analysis.	The venture's resources, including contingent resources, and its liability structure allow it to honor its financial obligations, even in the face of a severe economic stress scenario (such as high interest rates and low growth).	The venture is able to honor its financial obligations in the face of a normal economic stress scenario. Non-compliance is likely only in the face of severely adverse economic conditions.	In the face of adverse economic conditions, a decline in the venture's revenues would compromise its ability to cover expenses, significantly increasing the risk of default.	The venture's financial situation is strained. There is a high risk of default if economic or sectoral conditions do not improve quickly.
Cash flow predictability for completed and stabilized properties.	Contracts are long-term, with solvent tenants and a dispersion of expiration dates. There is a history of tenants remaining at the end of the contract and the vacancy rate is low. Maintenance, security, insurance and tax expenses are predictable.	Most contracts are long-term, with tenants of varying degrees of solvency. Tenant turnover at the end of the contract is normal and the vacancy rate is low. Expenses are predictable.	Most contracts are medium-term, with tenants of varying degrees of solvency. Tenant turnover at the end of the contract and the vacancy rate are moderate. Expenses are relatively predictable, but vary in relation to revenues.	Contracts have variable terms and tenants have varying degrees of solvency. Tenant turnover at the end of the contract is high and the vacancy rate is high. There are significant expenses to prepare the space for new tenants.
Cash flow predictability for completed but not yet stabilized properties.	Leases and their values meet or exceed projections. The venture should achieve stabilization in the near future.	Leases and their values meet or exceed projections. The venture should achieve stabilization in the near future.	Leases and their values meet projections. The venture should not achieve stabilization in the near future.	Leases and their values are below projections. Even if the projected occupancy rate is achieved, cash flow is restricted due to reduced revenue.

CENTRAL BANK OF BRAZIL

Cash flow predictability for the construction phase.	The property was previously and fully leased until the maturity of the financing or previously sold to a buyer rated as investment grade, or the institution has a firm commitment from an institution rated as investment grade to finance the marketing phase of the venture.	The property was previously and fully leased or sold to a tenant or buyer with a good credit history, or the institution has a firm commitment for financing from a lender with a good credit history.	Leases and their values meet projections, but the property may not be previously leased and there may be no financing for marketing. The institution itself is the sole financier of all phases of the venture.	The property suffers deterioration due to excessive costs, worsening market conditions, cancellation of leases or other factors. There may be litigation with the institution responsible for financing the marketing phase of the venture.

Aspect II - Asset characteristics

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Location.	The property is located in a highly desirable and convenient location for the services demanded by the tenants.	The property is located in a desirable and convenient location for the services demanded by the tenants.	The location of the property does not constitute a comparative advantage.	The location, configuration or maintenance of the property causes difficulties for the venture.
Configuration and condition.	The property is favored due to its design, configuration and maintenance. The property is highly competitive in relation to new ventures.	The design, configuration and maintenance of the property are adequate. The property is competitive in relation to new ventures.	The design, configuration and maintenance of the property are adequate.	There are deficiencies in the design, configuration or maintenance of the property.
Property under construction.	The construction budget is conservative and the technical risks are limited. The contractors are highly qualified.	The construction budget is conservative and the technical risks are limited. The contractors are highly qualified.	The construction budget is adequate and the contractors have average qualifications.	The project exceeds the budget or is unrealistic due to its technical risks. The executors have insufficient qualifications.

BANCO CENTRAL DO BRASIL

Aspect III - Solvency of the lead company of the venture

Criteria	Requirements to be met for the assessment grade
	Strong	Good	Satisfactory	Weak
Financial capacity and willingness to support the venture.	The sponsor/developer has employed substantial financial resources in the construction or acquisition of the venture. The sponsor/developer possesses substantial resources, and its direct and contingent liabilities are limited. The sponsor/developer's properties have geographic and nature diversification.	The sponsor/developer has employed financial resources in the construction or acquisition of the venture. The developer/entrepreneur possesses sufficient resources to sustain the venture in the event of a cash flow deficit. The developer/entrepreneur's ventures are diversified only in geographic terms.	The sponsor/developer's contribution may be irrelevant or non-financial. The sponsor/developer's resources are modest.	The sponsor/developer does not have the capacity or interest in sustaining the venture.
Reputation and track record with similar ventures.	Management is experienced and the sponsors are highly qualified. Their reputation is high, with a long track record of success in similar ventures.	The qualification of management and the sponsors is appropriate, with a track record of success in similar ventures.	The qualification of management and the sponsors is average. Their track record is not a cause for major concern.	Management is inefficient and the sponsors' qualification is deficient. There is a track record of difficulties for management and sponsors in conducting similar ventures.

BANCO CENTRAL DO BRASIL

Relationship with the main market partici- pants of the real estate market.
The relationship is robust with the main agents of the rental market.
The relationship is good with the main agents of the rental market.
Adequate relations with the main brokers of the rental market and other providers of real estate ser- vices.
The relationship is precarious with the main agents of the rental market or other pro- viders of real estate services.

Aspect IV - Structure of the guarantees

Criteria	Requirements to be met for the assessment grade
	Strong	Good	Satisfactory	Weak
Feasibility of the guarantees.	The guarantees have the highest possible degree of subordination and priority in relation to other creditors.	The guarantees have the highest possible degree of subordination and priority in relation to other creditors.	The guarantees have the highest possible degree of subordination and priority in relation to other creditors.	There are restrictions on the enforceability of the collateral.
Appropriation of rents.	The rents are pledged to the institution. Tenant information is updated to allow for direct and uninterrupted payment.	The rents are pledged to the institution. Tenant information is updated to allow for direct and uninterrupted payment.	The rents are pledged to the institution. Tenant information is updated to allow for direct and uninterrupted payment.	The rents are not pledged to the institution. Tenant information is not updated, which may compromise direct and uninterrupted payment.
Quality of insurance coverage.	The insurance amount is greater than or equal to the exposure amount and the insurance maturity date is equal to or later than the exposure maturity date.	The insurance amount is greater than or equal to the exposure amount and the insurance maturity date is equal to or later than the exposure maturity date.	The insurance amount is greater than or equal to the exposure amount and the insurance maturity date is equal to or later than the exposure maturity date.	The insurance amount is less than the exposure amount or the insurance maturity date is earlier than the exposure maturity date.

Annex III to Circular No. 3,581 of March 8, 2012

Classification criteria for specialized financing of the "specific object financing" type

Aspect I - Financial soundness of the object

Criteria	Requirements to be met for the assessment grade
	Strong	Good	Satisfactory	Weak
Market conditions.	Demand is strong and growing, with high barriers to entry and low sensitivity to technological changes and changes in the economic scenario.	Demand is strong and stable, with moderate barriers to entry and moderate sensitivity to technological changes and changes in the economic scenario.	Demand is adequate and stable, with limited barriers to entry and significant sensitivity to technological changes and changes in the economic scenario.	Demand is weak and declining, with vulnerability to technological changes and changes in the economic scenario. There is a high degree of uncertainty.
Financial indicators.	Financial indicators are robust, considering the risk level of the object, and the economic assumptions are very robust.	Financial indicators range between robust and good, considering the risk level of the object, and the economic assumptions are robust.	Financial indicators are in line with the standard, considering the risk level of the object.	Financial indicators are deficient, considering the risk level of the object.
Stress analysis.	Revenues are stable in the long term and sufficient to honor financial obligations, even under a severe stress scenario throughout an economic cycle.	Revenues are satisfactory in the short term and sufficient to honor financial obligations under a common economic stress scenario. Default is likely only under severely adverse economic conditions.	Revenues are uncertain in the short term and vulnerable to a usual stress scenario throughout an economic cycle. Default is highly likely under usual adverse conditions.	Revenues are highly uncertain. The probability of default is high if economic conditions do not improve rapidly.
Market liquidity.	The market is global and the assets are highly liquid.	The market is global or regional and the assets are relatively liquid.	The market is regional and limited short-term prospects restrict liquidity.	The market is local or of little relevance, and the assets are illiquid or have low liquidity, especially in sectorized markets.

CENTRAL BANK OF BRAZIL

Aspect II - Political and legal environment

Criteria	Requirements to be met for the assessment grade
	Strong	Good	Satisfactory	Weak
Political risk, including transfer risk.	Exposure to risk is very low and there are very efficient mitigating instruments available, if necessary.	Risk exposure is low and satisfactory mitigating instruments are available, if necessary.	Risk exposure is moderate and mitigating instruments of moderate effectiveness are available.	Risk exposure is high and the risk mitigating instruments are weak or absent.
Legal and regulatory risks.	The jurisdiction favors asset repossession and contract enforcement.	The jurisdiction favors asset repossession and contract enforcement.	The jurisdiction generally favors asset repossession and contract enforcement, although the process may be lengthy or difficult.	The jurisdiction may hinder, delay or make asset repossession or contract enforcement impossible. The legal and regulatory environment is weak or unstable.

Aspect III - Characteristics of transactions

Criteria	Requirements to be met for the rating
	Strong	Good	Satisfactory	Weak
Financing term compared to the economic life of the asset.	The payment flow is stable. Amortization only at maturity is low. There is no grace period.	Amortization only at maturity remains at a satisfactory level.	Amortization only at maturity is significant, with potential grace periods.	Amortization only at maturity is high or total.

BANCO CENTRAL DO BRASIL

Aspect IV - Operational risk

Criteria	Requirements to be met for the rating
	Strong	Good	Satisfactory	Weak
Permits and licenses.	All licenses have been obtained. The assets comply with current and foreseeable safety standards.	All licenses have been obtained or are in the process of being obtained. The assets comply with current and foreseeable safety standards.	Most licenses have been obtained or are in the process of being obtained. Obtaining the remaining licenses is considered routine. The assets comply with current safety standards.	There are problems in obtaining some licenses. Part of the planned configuration or operations may require revision.
Nature and scope of the operation and maintenance (O&M) contracts.	The long-term O&M contract is well established, preferably including performance incentives and the use of reserve accounts (if necessary).	The O&M contract is long-term and includes the use of reserve accounts (if needed).	The O&M contract has a limited term or provides for the limited use of reserve accounts (if needed).	There is no O&M contract, resulting in risk of high operating cost and of the occurrence of costs not covered by mitigants.
Financial capacity, prior experience in managing the type of asset and ability to redeploy the asset in the market at the end of the contract.	The track record is excellent and the ability to redeploy the asset in the market is strong.	The track record is satisfactory and the ability to redeploy the asset in the market is certain.	The track record is weak or short and there is uncertainty regarding the ability to redeploy the asset in the market.	There is no track record or ability to redeploy the asset in the market.

Aspect V - Characteristics of the assets

Criteria	Requirements to be met for the assessment grade
	Strong	Good	Satisfactory	Weak
Configuration, size, design and maintenance compared to other assets in the same market.	There is a great advantage in design and maintenance. The standardized configuration results in market liquidity for the object.	The design and maintenance are above average. The standardized configuration (with possible limited exceptions) results in market liquidity for the object.	The design and maintenance are average. The configuration has specificities that may result in a more restricted market for the object.	The design and maintenance are below average. The asset is close to the end of its economic life. The configuration is very specific and the market for the object is very restricted.

BANCO CENTRAL DO BRASIL

Resale value.	The current resale value is considerably higher than the debt value.	The current resale value is moderately higher than the debt value.	The current resale value is slightly higher than the debt value.	The current resale value is lower than the debt value.
Sensitivity of the asset's value and liquidity to economic cycles.	The asset's value and liquidity are relatively insensitive to economic cycles.	The asset's value and liquidity are sensitive to economic cycles.	The asset's value and liquidity are very sensitive to economic cycles.	The asset's value and liquidity are extremely sensitive to economic cycles.

Aspect VI - Soundness of the financed company

Criteria	Requirements to be met for the assessment grade
	Strong	Good	Satisfactory	Weak
Financial capacity, previous experience in managing the type of asset and capacity to market the asset at the end of the contract.	The track record is excellent and the marketing capacity is great.	The track record and marketing capacity are satisfactory.	The track record is weak or short and the marketing capacity is uncertain.	There is no track record or capacity to market the asset.
Track record or reputation of the incorporating company and financial capacity.	The track record and reputation are excellent and the financial soundness is high.	The track record and reputation are good and financial soundness is good.	The track record and reputation are reasonable and the financial soundness is good.	There is no track record or the reputation is questionable. There is no financial soundness.

Aspect VII - Structure of guarantees

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Control of the asset.	The legal documentation gives the lender effective control of the asset or of the company that owns it (example: priority of appropriation of the asset in case of default).	The legal documentation gives the lender effective control of the asset or of the company that owns it (example: priority of appropriation of the asset in case of default).	The legal documentation gives the lender effective control of the asset or of the company that owns it (example: priority of appropriation of the asset in case of default).	The contract provides little security to the lender, resulting in risk of loss of control over the asset.

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111

Rights and means available to the lender to monitor the location and condition of the asset.	The lender has unrestricted capacity to monitor the location and condition of the asset (regular reports, possibility of carrying out inspections).	The lender has unrestricted capacity to monitor the location and condition of the asset.	The lender has unrestricted capacity to monitor the location and condition of the asset.	There are limitations on the lender's capacity to monitor the location and condition of the asset.
Insurance against damage.	The insurance coverage is broad, including third-party damage, and provided by companies of the highest quality.	The insurance coverage is satisfactory (does not include third-party damage) and provided by good quality insurance companies.	The insurance coverage is average (does not include third-party damage) and provided by insurance companies of acceptable quality.	The insurance coverage is inadequate (does not include third-party damage) or provided by low quality insurance companies.

Annex IV to Circular No. 3.581, of 8 March 2012

Classification criteria for specialized lending of the type "financing of tradable goods (commodities)"

Aspect I - Financial soundness of the project

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Degree of over-collateralization of the transaction.	The value of the pledged collateral greatly exceeds the value of the exposure.	The value of the pledged collateral exceeds the value of the exposure.	The value of the pledged collateral is sufficient to cover the exposure.	The value of the pledged collateral is insufficient to cover the exposure.

Aspect II - Political and legal environment

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Country risk.	There is no country risk.	Country risk exposure is limited (in particular, external reserves located in emerging countries).	Country risk exposure is moderate (in particular, external reserves located in emerging countries).	Country risk exposure is high (in particular, domestic reserves in emerging countries).
Country risk mitigation.	Mitigation is very high, through robust mechanisms for obtaining funds abroad. The goods have strategic value and the buyer is of excellent quality.	Mitigation is strong, through mechanisms for obtaining funds abroad. The goods have strategic value and the buyer is of high quality.	Mitigation is acceptable, through mechanisms for obtaining funds abroad. The goods have moderately strategic value and the buyer is of acceptable quality.	Mitigation is partial and there are no mechanisms for obtaining funds abroad. The goods have no strategic value and the buyer is of low quality.

Aspect III - Characteristics of the assets

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Liquidity and susceptibility to damage.	The goods are quoted on an organized market. Hedging is possible on futures markets or through over-the-counter instruments. The goods are not susceptible to damage.	The goods are quoted on an organized market. Hedging is possible through over-the-counter instruments. The goods are not susceptible to damage.	The goods are not quoted on an organized market, but are liquid. The possibility of hedging is uncertain. The goods are not susceptible to damage.	The goods are not quoted on an organized market and their liquidity is limited, given the size of the market. Hedging is not possible. The goods are susceptible to damage.

BANCO CENTRAL DO BRASIL

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113

Aspect IV - Soundness of the trading company

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Financial capacity of the intermediary.	Very robust, considering the risks and the business philosophy.	The intermediary has sustainable financial capacity in the long term.	The intermediary has sustainable financial capacity in the short term.	There is no evidence of the intermediary's financial capacity.
Previous experience, including the ability to manage the logistics process.	There is extensive experience with the type of transaction. The track record of success in operations and cost efficiency are robust.	There is sufficient experience with the type of transaction. The track record of success in operations and cost efficiency are above average.	There is limited experience with the type of transaction. The track record of success in operations and cost efficiency are moderate.	Experience with the type of transaction is limited or uncertain. Costs and profits are volatile.
Intermediation controls and hedging policies.	The standards for counterparty selection, hedging and monitoring are strict.	The standards for counterparty selection, hedging and monitoring are adequate.	Agreements entered into in the past have not presented problems or the problems that occurred were not significant.	Agreements entered into in the past presented problems that resulted in considerable losses.
Quality of the financial information disclosed.	The financial information is comprehensive and clear.	The financial information is clear, but not comprehensive.	The financial information is insufficient or unclear.	The financial information is insufficient or unclear.

Aspect V - Structure of the guarantees

Criteria	Requirements to be met for the rating grade
	Strong	Good	Satisfactory	Weak
Control over the asset.	There is total certainty as to the ability to take possession, at any time, of the assets given as collateral, including priority over any third party.	There is total certainty as to the ability to take possession at any time of the assets given as collateral, including priority over any third party.	At some point in the process, the lender loses legal control of the asset. The loss of control is mitigated by knowledge of the intermediation process or by the assumption of the operation by third parties.	Contractual gaps create a risk of loss of effective control over the asset. Recovery of control may not occur.

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Insurance against damage.	The insurance coverage is broad, including damage to third parties, and is provided by companies of the highest quality.	The insurance coverage is satisfactory (does not include damage to third parties) and is provided by good quality insurance companies.	The insurance coverage is average (does not include damage to third parties) and is provided by insurance companies of acceptable quality.	The insurance coverage is inadequate (does not include damage to third parties) or is provided by low quality insurance companies.

Annex V to Circular No. 3.581, of 8 March 2012

Table 1 - K* Factor RBA internal long-term classification in the RBA approach

Internal Classification	K* Factor for exposure to the class with the highest degree of seniority and whose pool of underlying assets is granular	K* Factor for exposure to the class with the lowest degree of seniority and whose pool of underlying assets is granular	K* Factor for exposure whose pool of underlying assets is non-granular
NQL1	7%	12%	20%
NQL2	8%	15%	25%
NQL3	10%	18%	35%
NQL4	12%	20%
NQL5	20%	35%
NQL6	35%	50%
NQL7	60%	75%
NQL8	100%
NQL9	250%
NQL10	425%
NQL11	650%

Annex VI to Circular No. 3.581, of 8 March 2012

Table 1 - K* Factor RBA for internal short-term classification

Internal Classification (illustrative)	K* Factor for exposure to the class with the highest degree of seniority and whose pool of underlying assets is granular	K* Factor for exposure to the class with the lowest degree of seniority and whose pool of underlying assets is granular	K* Factor for exposure whose pool of underlying assets is non-granular
NQC1	7%	12%	20%
NQC2	12%	20%	35%
NQC3	60%	75%	75%