Circular No. 3,904 — Establishes procedures for calculating the standardized approach capital requirement (RWAcpad) for counterparty credit risk exposure from derivative financial instrument transactions

CIRCULAR NO. 3,904, OF JUNE 6, 2018

Establishes the procedures for calculating the value of the exposure related to the counterparty credit risk arising from transactions with derivative financial instruments subject to the calculation of the capital requirement through the standardized approach (RWAcpad), as provided for in Resolution No. 4,193, of March 1, 2013.

The Collegiate Board of the Central Bank of Brazil, in a session held on June 6, 2018, based on the provisions of Articles 9, 10, item IX, and 11, item VII, of Law No. 4,595, of December 31, 1964, and Articles 3, § 2, and 15 of Resolution No. 4,193, of March 1, 2013,

RESOLVES:

TITLE I
PRELIMINARY PROVISIONS

SINGLE CHAPTER
OF THE OBJECT AND SCOPE OF APPLICATION

Art. 1 This Circular establishes the procedures for calculating the value of the exposure related to the counterparty credit risk arising from transactions with derivative financial instruments subject to the calculation of the capital requirement through the standardized approach (RWAcpad), as provided for in Resolution No. 4,193, of March 1, 2013.

§ 1 Derivative financial instruments include transactions for the future settlement of foreign currency, gold, or securities.

§ 2 The marking to market of derivative financial instruments must be carried out daily, in a consistent and verifiable manner, even if not adopted for accounting purposes.

§ 3 The value of exposures must be determined considering time periods expressed in years, composed of 252 business days, and truncated to eight decimal places.

Art. 2 The institution classified in Segment 1 (S1), as defined in Resolution No. 4,553, of January 30, 2017, must determine the value of the exposure related to the counterparty credit risk arising from transactions with derivative financial instruments, through the SA-CCR Approach, as established in Articles 6 to 26 of this Circular.

Art. 3 The institution classified in Segment 2 (S2), Segment 3 (S3), or Segment 4 (S4), as defined in Resolution No. 4,553, of 2017, must determine the value of the exposure related to the counterparty credit risk arising from transactions with derivative financial instruments, through the CEM Approach, as established in Articles 27 to 32 of this Circular.

§ 1 The institution referred to in the caput is permitted to use the SA-CCR Approach.

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§ 2 Both the adoption of the SA-CCR Approach and the return to the use of the CEM Approach must be communicated to the Central Bank of Brazil at least three months in advance relative to, respectively, the start and end of their use.

§ 3 The adopted approach must be used in the social year immediately following the formalization of the communication.

§ 4 Once the option referred to in § 1 is exercised, the use of the SA-CCR Approach must be maintained for at least two consecutive social years.

Art. 4 The Central Bank of Brazil may determine that the institution referred to in Art. 3 use the SA-CCR Approach or the CEM Approach.

Sole paragraph. For the purposes of the provision in the caput, the Central Bank of Brazil will consider whether the institution's risk management structure is adequate for transactions with derivative financial instruments considering the relevance of these instruments:
I - in its business model;
II - in its operating revenue; or
III - in the amount of derivatives traded in the over-the-counter market or with a central counterparty.

Art. 5 In the SA-CCR Approach, the use of financial collateral must comply with the provisions contained in Circular No. 3,809, of August 25, 2016.

TITLE II
OF THE SA-CCR APPROACH

CHAPTER I
OF DEFINITIONS AND CLASSIFICATIONS

Section I
Of the Exposure Value

Art. 6 The total value of the exposure related to the credit risk of a given counterparty, arising from transactions with derivative financial instruments, must be equal to the sum of the exposure determined for each netting set, calculated in accordance with the provisions of Art. 7.

Art. 7 The exposure value for each netting set must be calculated as follows:

EXP = 1.4 * (RC + GPF), where:
I - RC = replacement value; and
II - GPF = potential future gain.

§ 1 A netting set is composed of derivative financial instruments traded with the same counterparty, subject to the same bilateral agreement for the netting and settlement of obligations that meets the conditions established in Art. 13 of Circular No. 3,809, of 2016.

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§ 2 The derivative financial instrument not included in a bilateral agreement for the netting and settlement of obligations is treated as a netting set composed of a single instrument.

§ 3 Values, notional amounts, and market values denominated or indexed in foreign currency are converted into national currency based on the exchange rate on the date of determination of the exposure value.

Art. 8 The RC relative to a netting set composed of derivative financial instruments traded without variation margin must be calculated as follows:

RC = Max {V - C; 0}, where:
I - V = sum of the market values of the derivative financial instruments; and II - C = net value of financial collateral calculated in the manner established in Art. 9, §§ 1 and 3.

Sole paragraph. For the purposes of this Circular, variation margin corresponds to the value of financial collateral constituted for the purpose of protecting the institution and the counterparty from the fluctuation of the market value of derivative financial instruments.

Art. 9 The RC relative to a netting set composed of derivative financial instruments traded with variation margin must be calculated as follows:

RC = Max {V - C; THMTA - NICA; 0}, where:
I - V = as defined in Art. 8, item I;
II - C = net value of financial collateral, including those constituted as variation margin; III - THMTA = maximum value of accumulated financial results that does not trigger the constitution of additional variation margin by the counterparty; and IV - NICA = net value of financial collateral constituted, excluding those constituted as variation margin.

§ 1 C is calculated as follows:

C = ∑ Crec (1 - Hc - Hfx) - ∑ Cdep (1 + Hc), where:
I - Crec = market value of the financial collateral constituted by the counterparty in favor of the institution, including when constituted as variation margin; II - Hc = standardized adjustment factor, as provided for in Art. 9, item V and § 2, of Circular No. 3,809, of 2016, associated with the financial collateral constituted as Crec or Cdep; III - Hfx = standardized adjustment factor, as provided for in Art. 9, item VI and § 1, of Circular No. 3,809, of 2016, associated with the currency mismatch in which the exposure and the financial collateral are denominated or indexed; and IV - Cdep = market value of the financial collateral constituted by the institution in favor of the counterparty, including when constituted as variation margin.

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§ 2 NICA is calculated as follows:

NICA = ∑ ICArec (1 - Hc - Hfx) - ∑ ICAdep (1 + Hc), where:
I - ICArec = market value of the financial collateral constituted by the counterparty in favor of the institution; II - ICAdep = market value of the financial collateral constituted by the institution in favor of the counterparty; III - Hc = standardized adjustment factor, as provided for in Art. 9, item V and § 2, of Circular No. 3,809, of 2016, associated with the financial collateral constituted as ICArec or ICAdep; and IV - Hfx = as defined in § 1, item III.

§ 3 In the determination of Cdep and ICAdep, financial collateral that will be promptly returned to the institution in the event of liquidation or bankruptcy of the counterparty is not considered.

§ 4 Transactions occurring in the over-the-counter market, where only the institution constitutes variation margin, are treated as without variation margin.

Art. 10 The institution may limit the exposure value relative to a netting set composed of derivative financial instruments traded with variation margin to the exposure value determined as if the derivative financial instruments had been traded without margin.

Art. 11 The institution may equate to zero the exposure value relative to the issuance of an option traded without variation margin, where the respective premium has been settled and the option forms a netting set composed solely of it.

Art. 12 The exposure value related to the counterparty credit risk of a set composed solely of a credit swap traded without variation margin may be limited, at the institution's discretion, to the value of the premium to be settled, in the case where the institution acts as the risk receiver.

Sole paragraph. For the purposes of the caput, the institution may remove a credit derivative from a netting set and treat it as if traded without variation margin.

Section II
Of Asset Classes

Art. 13. For the calculation of the GPF value, derivative financial instruments must be classified into at least one of the following asset classes:
I - interest rate;
II - exchange rate;
III - credit;
IV - equities; or
V - commodities.

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§ 1 The classification of derivative financial instruments into an asset class is performed based on their primary risk factors.

§ 2 For the purposes of this Circular, primary risk factor corresponds to the variable that determines the market value of the underlying asset of the derivative financial instrument.

§ 3 In determining the primary risk factor of the derivative financial instrument that has more than one risk factor, the one to which the market value of the instrument presents greater sensitivity is considered, according to consistent and verifiable methodology.

§ 4 The Central Bank of Brazil may require that derivative financial instruments be classified simultaneously in more than one asset class.

Section III
Of Nettable Transaction Sets

Art. 14. For the calculation of the GPF, derivative financial instruments must be allocated to nettable transaction sets, classified into the following categories, according to the asset classes to which they belong:
I - base nettable transaction sets;
II - volatility nettable transaction sets; and III - regular nettable transaction sets.

§ 1 A base nettable transaction set is formed by derivative financial instruments that possess:
I - their respective cash flows dependent on two distinct risk factors; and II - their respective long and short positions denominated in the same currency.

§ 2 Each set referred to in § 1 is formed by derivative financial instruments that possess the same pair of risk factors.

§ 3 Volatility nettable transaction sets and regular nettable transaction sets are formed by derivative financial instruments according to the following conditions for each asset class:
I - interest rate: one set for each currency to which the derivative financial instruments refer; II - exchange rate: one set for each currency pair to which the derivative financial instruments refer; III - credit: a single set; IV - equities: a single set; and V - commodities: one set for each of four categories:
a) energy; b) metal; c) agricultural; and

Circular No. 3,904, of June 6, 2018 Page 6 of 22 d) other commodities.

§ 4 Volatility nettable transaction sets are formed by derivative financial instruments that refer to the volatility of at least one risk factor.

§ 5 Regular nettable transaction sets are formed by derivative financial instruments that are not classified in base nettable transaction sets nor in volatility transaction sets.

§ 6 A derivative financial instrument comprises only one nettable transaction set, except in the situation provided for in Art. 13, § 4.

Section IV
Of the GPF Calculation

Art. 15. The GPF must be calculated according to the following formula:

GPF = Multiplier * VAA, where:
I - Multiplier = Min {1; 0.05 + 0.95 * exp (
(V-C)/(20.95VAA))}, where:
a) V = sum of the market values of the derivative financial instruments; and b) C = net value of financial collateral, calculated in the manner established in Art. 9, §§ 1 and 3; and II - VAA = aggregate additional value.

Sole paragraph. VAA is calculated through the following formula:

VAA = ∑VA(asset class), where VA(asset class) corresponds to the additional value relative to the derivative financial instruments of a specific asset class.

CHAPTER II
OF THE CALCULATION OF THE ADDITIONAL VALUE OF ASSET CLASSES

Section I
Of the Additional Value of the Interest Rate Class

Art. 16. The additional value relative to derivative financial instruments of the interest rate class (VAjuros) must be equal to the sum of the relative additional value (VA) determined for each nettable transaction set, according to the following formula:

VAjuros = ∑ VA

§ 1 VA is calculated through the following formula:

VA = FS * VN, where:
I - FS = adjustment factor relative to the nettable transaction set; and II - VN = notional value relative to the nettable transaction set.

§ 2 FS corresponds to:

Circular No. 3,904, of June 6, 2018 Page 7 of 22 I - 0.5% (five tenths of a percent), for regular nettable transaction sets; II - 0.25% (twenty-five hundredths of a percent), for base nettable transaction sets; or III - 2.5% (two and a half percent), for volatility nettable transaction sets.

§ 3 VN is calculated through the following formula:

VN = [(VNE1)^2 + (VNE2)^2 + (VNE3)^2 + 1.4 * VNE1 * VNE2 + 1.4 * VNE2 * VNE3 + 0.6 * VNE1 * VNE3]^(1/2), where VNEk is equal to the effective notional value relative to the nettable transaction set and the maturity category “k”.

§ 4 The maturity category “k” is determined according to the remaining term of the derivative financial instrument, being equal to:
I - 1 (one), if the remaining term is less than one year; II - 2 (two), if the remaining term is equal to or greater than one year, and less than five years; or III - 3 (three), if the remaining term is equal to or greater than five years.

§ 5 VNEk is calculated through the following formula:

VNEk = ∑ δ * VNA * MF, where:
I - δ = standardized delta relative to the derivative financial instrument, defined in Art. 23; II - VNA = adjusted notional value, relative to the derivative financial instrument of maturity “k”; and III - MF = maturity factor relative to the derivative financial instrument, calculated in the manner defined in Art. 24.

§ 6 VNA is calculated through the following formula:

VNA = DS * VN, where:
I - DS = standardized maturity relative to the derivative financial instrument, calculated in the manner defined in Art. 25; and II - VN = notional value of the derivative financial instrument, observed the provisions of Art. 26.

§ 7 The remaining term of the derivative financial instrument referred to in § 4 corresponds to the period comprised between the determination date and:
I - the maturity date of the instrument;
II - the maturity date of the underlying derivative financial instrument, if the traded derivative financial instrument is an option; or

Circular No. 3,904, of June 6, 2018 Page 8 of 22 III - the next payment date of the exposure, if there is provision for settlement on previously established dates, provided that the market value of the traded derivative financial instrument equals zero on this date.

Section II
Of the Additional Value of the Exchange Rate Class

Art. 17. The additional value relative to derivative financial instruments of the exchange rate class (VA câmbio) must be equal to the sum of the relative additional value (VA) determined for each nettable transaction set, according to the following formula:

VA câmbio = ∑ VA

§ 1 VA is calculated through the following formula:

VA = FS * |VNE|, where:
I - |VNE| = absolute value of the effective notional value relative to the nettable transaction set; and II - FS = adjustment factor relative to the nettable transaction set.

§ 2 FS corresponds to:
I - 4% (four percent), for regular nettable transaction sets; or II - 20% (twenty percent), for volatility nettable transaction sets.

§ 3 VNE is equal to the sum of the value determined for each derivative financial instrument, according to the following formula:

VNE = ∑ δ * VNA * MF, where:
I - δ = standardized delta relative to the derivative financial instrument, defined in Art. 23; II - VNA = adjusted notional value, relative to the derivative financial instrument; and III - MF = maturity factor relative to the derivative financial instrument “i”, calculated in the manner defined in Art. 24.

§ 4 VNA corresponds to:
I - the notional value of the position denominated or indexed in foreign currency converted to national currency, as provided in Art. 7, § 3, if the derivative financial instrument presents only one position denominated or indexed in foreign currency; or II - the greater value of the notional values relative to the two positions, converted into national currency, as provided in Art. 7, § 3, if the derivative financial instrument presents both positions denominated or indexed in foreign currencies.

§ 5 In the determination of VNA, the provisions of Art. 26 must be observed.

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Section III
Of the Additional Value of the Credit Class

Art. 18. The additional value for derivative financial instruments of the credit class (VA crédito) must be equal to the sum of the relative additional value (VA) determined for each nettable transaction set, according to the following formula:

VA crédito = ∑ VA

§ 1 VA is calculated through the following formula:

VA = [ (∑t ρt * VAt)^2 + ∑t (1- ρt^2) * (VAt)^2 ]^(1/2), where:
I - VAt = additional value relative to the derivative financial instruments referenced to entity “t” and that compose the nettable transaction set; and II - ρt = correlation factor relative to the credit derivative financial instruments related to entity “t”.

§ 2 The factor ρt corresponds to:
I - 50% (fifty percent), if entity “t” is a legal entity; or II - 80% (eighty percent), if entity “t” is represented by a credit index.

§ 3 VAt is calculated through the following formula:

VAt = VNE * FS, where:
I - VNE = effective notional value relative to the derivative financial instruments referenced to an entity and that compose the nettable transaction set; and II - FS = adjustment factor relative to the entity and the nettable transaction set.

§ 4 FS, for a regular nettable transaction set and for a legal entity, corresponds to:
I - 0.54% (fifty-four hundredths of a percent), if the entity:
a) has issued shares that are included in relevant stock market indices subject to government regulation and supervision; or b) is associated with a Risk Weighting Factor (RWF) less than or equal to 85% (eighty-five percent), according to the provisions of Circular No. 3,644, of March 4, 2013; or II - 6% (six percent), in other cases.

§ 5 FS, for a base nettable transaction set and for a legal entity, corresponds to:
I - 0.27% (twenty-seven hundredths of a percent), if the entity satisfies at least one of the conditions set forth in § 4, item I; or II - 3% (three percent), if the entity does not satisfy any of the conditions set forth in § 4, item I.

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§ 6 FS, for a volatility nettable transaction set and for a legal entity, corresponds to:
I - 2.7% (two and seven tenths percent), if the entity satisfies at least one of the conditions set forth in § 4, item I; or II - 30% (thirty percent), if the entity does not satisfy any of the conditions set forth in § 4, item I.

§ 7 FS, for a nettable transaction set and for an entity represented by a credit index, corresponds to the result of the following formula:

FS = (∑t αt * FS_t) * µ, where:
I - αt = relative participation of entity “t”, a legal entity, in the credit index; II - FS_t = adjustment factor associated with entity “t”, a legal entity, determined according to the provisions of § 4; and III - µ = multiplier associated with the nettable transaction set, corresponding to:
a) 1 (one), for regular nettable transaction sets; b) 0.5 (five tenths), for base nettable transaction sets; or c) 5 (five), for volatility nettable transaction sets.

§ 8 The formula set forth in § 7 for the determination of FS may be replaced by the following formula:

FS = 0.0106 * µ.

§ 9 VNE is equal to the sum of the value determined for each derivative financial instrument, by entity, according to the following formula:

VNE = ∑ δ * VNA * MF, where:
I - δ = standardized delta relative to the derivative financial instrument, defined in Art. 23; II - VNA = adjusted notional value of the derivative financial instrument referenced to the entity; and III - MF = maturity factor relative to the derivative financial instrument, calculated in the manner defined in Art. 24.

§ 10 VNAt is calculated through the following formula:

VNAt = DS * VN_t, where:
I - DS = standardized maturity relative to the derivative financial instrument referenced to entity “t”, calculated in the manner defined in Art. 25; and II - VN_t = notional value of the derivative financial instrument referenced to entity “t”, observing the provisions of Art. 26.

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Section IV
Of the Additional Value of the Equity Class

Art. 19. The additional value related to equity class financial derivative instruments (VA equities) must be equal to the sum of the additional values (VA) calculated for each set of eligible transactions, according to the following formula:

VA equities = ∑ VA

§ 1st The VA is calculated by means of the following formula:

VA = [ (∑t ρt * VAt)
2 + ∑t (1- ρt
2
) * (VAt)
2
] 1/2, where:

I - VAt = additional value related to financial derivative instruments referenced to entity “t” and that make up the set of eligible transactions; and

II - ρt = correlation factor for financial derivative instruments related to entity “t”.

§ 2nd The factor ρt corresponds to:

I - 50% (fifty percent), if entity “t” is a legal entity; or

II - 80% (eighty percent), if entity “t” is represented by an equity index.

§ 3rd The VAt is calculated by means of the following formula:

VAt = VNE * FS, where:

I - VNE = effective notional value related to financial derivative instruments referenced to a given entity and that make up the set of eligible transactions; and

II - FS = adjustment factor related to the entity and the set of eligible transactions.

§ 4th The FS, for a set of regular eligible transactions and for an entity, corresponds to:

I - 32% (thirty-two percent), if the entity is a legal entity; or

II - 20% (twenty percent), if the entity is represented by an equity index.

§ 5th The FS, for a set of base eligible transactions and for the entity, corresponds to:

I - 16% (sixteen percent), if the entity is a legal entity; or

II - 10% (ten percent), if the entity is represented by an equity index.

§ 6th The FS, for the set of volatility eligible transactions and for the entity, corresponds to:

I - 160% (one hundred and sixty percent), if the entity is a legal entity; or

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II - 100% (one hundred percent), if the entity is represented by an equity index.

§ 7th The VNE is equal to the sum of the value calculated for each financial derivative instrument, per entity, according to the following formula:

VNE = ∑ δ * VNA * MF, where:

I - δ = standardized delta related to the financial derivative instrument, defined in art. 23;

II - VNA = adjusted notional value of the financial derivative instrument referenced to the entity; and

III - MF = maturity factor related to the financial derivative instrument, calculated in the manner defined in art. 24.

§ 8th The VNA of the financial derivative instrument is calculated as follows:

I - for an instrument that makes up a regular or base eligible transaction set:

VNA = P * N, where:

a) P = market price of one unit of the share issued by an entity, calculated in accordance with the provisions of Circular No. 3,082, of January 30, 2002, and Resolution No. 4,277, of October 31, 2013; and

b) N = number of units of the share issued by the entity, related to the financial derivative instrument and that make up the clearing set; and

II - for an instrument that makes up a volatility eligible transaction set:

VNA = VR * CN, where:

a) VR = volatility indicator of the share or equity index; and

b) CN = contracted notional value related to the share or equity index.

§ 9th In determining VNA, the provisions of art. 26 must be observed.

Section V
Of the Additional Value of the Commodity Class

Art. 20. The additional value related to commodity class financial derivative instruments (VA comm) must be equal to the sum of the additional values (VA) calculated for each set of eligible transactions, according to the following formula:

VA comm = ∑ VA

§ 1st The VA is calculated by means of the following formula:

VA = [ (0,4 * ∑v VAv)
2 + 0,84 * ∑v VAv
2
] 1/2, where VAv is equal to the additional value related to financial derivative instruments referenced to commodities of type “v” and that make up the set of eligible transactions.

§ 2nd The VAv is calculated by means of the following formula:

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VAv = VNE * FS, where:

I - VNE = effective notional value related to financial derivative instruments referenced to commodities of type “v” and that make up the set of eligible transactions; and

II - FS = adjustment factor related to the type of commodity that make up the set of eligible transactions.

§ 3rd The FS, for regular eligible transaction sets, corresponds to:

I - 40% (forty percent), for the commodity type electricity; or

II - 18% (eighteen percent), for other types of commodities.

§ 4th The FS, for base eligible transaction sets, corresponds to:

I - 20% (twenty percent), for the commodity type electricity; or

II - 9% (nine percent), for other types of commodities.

§ 5th The FS, for volatility eligible transaction sets, corresponds to:

I - 200% (two hundred percent), for the commodity type electricity; or

II - 90% (ninety percent), for other types of commodities.

§ 6th The VNE is equal to the sum of the value calculated for each financial derivative instrument, per type of commodity, according to the following formula:

VNE = ∑ δ * VNA * MF, where:

I - δ = standardized delta related to the financial derivative instrument, defined in art. 23;

II - VNA = adjusted notional value of the financial derivative instrument, of the type of commodity that makes up the eligible transaction set; and

III - MF = maturity factor related to the financial derivative instrument, calculated in the manner defined in art. 24.

§ 7th The VNA of the financial derivative instrument is calculated as follows:

I - for an instrument that makes up a regular or base eligible transaction set:

VNA = P * N, where:

a) P = market price of one unit of the commodity, calculated in accordance with the provisions of Circular No. 3,082, of 2002, and Resolution No. 4,277, of 2013; and

b) N = number of units of the commodity, related to the financial derivative instrument that makes up the clearing set; and

II - for an instrument that makes up a volatility eligible transaction set:

VNA = VR * CN, where:

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a) VR = volatility indicator related to the commodity; and

b) CN = contracted notional value related to the commodity.

§ 8th In determining VNA, the provisions of art. 26 must be observed.

CHAPTER III
OF MULTIPLE MARGIN AGREEMENTS

Section I
Of the Calculation of Exposure Value under Multiple Margin Agreements

Art. 21. The exposure related to the clearing set associated with multiple margin agreements must be calculated according to the following formula:

EXP = ∑ EXPsub, where EXPsub is equal to the exposure associated with a subset formed by financial derivative instruments covered by only one of these agreements.

Sole paragraph. The value of EXPsub is determined in accordance with the provisions of art. 7.

Art. 22. If the institution has entered into a margin agreement that has two or more clearing sets, the exposure associated with these sets must be calculated as follows:

EXP = 1,4 * (RCdcc + GPFdcc), where:

I - RCdcc = replacement value related to the clearing sets covered by the clearing agreement; and

II - GPFdcc = potential future gain related to the clearing sets covered by the clearing agreement.

§ 1st The RCdcc is calculated by means of the following formula:

RCdcc = max {∑cc max {Vcc ; 0} - Cam; 0} + max {∑cc min { Vcc ; 0} - min {Cam ; 0} ; 0},

where:

I - Vcc = market value of the financial derivative instruments that make up one of the clearing sets covered by the agreement; and

II - Cam = net value of the financial collateral related to all clearing sets covered by the agreement, calculated in the manner established in art. 9, §§ 1 and 3.

§ 2nd The GPFdcc is calculated as follows:

GPFdcc = ∑ GPFcc, where GPFcc is equal to the potential future gain related to one of the clearing sets covered by the agreement.

§ 3rd If Cam is equal to or less than GPFdcc, calculated as provided in § 2, the GPFcc is determined as if it were composed of financial derivative instruments traded without margin deposits and the GPFdcc is recalculated.

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CHAPTER IV
OF STANDARDIZED PARAMETERS

Section I
Of Standardized Delta

Art. 23. The standardized delta related to the financial derivative instrument (δ) must correspond:

I - in the case of a call option, to the result of the following formula:

a) 𝛿 = 𝜙 (
𝑙𝑛((𝑃+𝜆𝑗
)/(𝐾+𝜆𝑗
))+0,5∗𝜎
2
∗𝑇
𝜎∗√𝑇
), for a long position, where:

1. Φ = cumulative standard normal distribution function;
2. P = market price of the underlying asset of the option;
3. K = exercise price of the option;
4. λj = smallest value to be added in the context of null or negative interest rates, if the ratio P/K is non-positive, to be applied to all interest rate class options, denominated in currency “j”;
5. T = period until the last date on which the option can be exercised; and
6. σ = standardized volatility associated with the option, defined in the sole paragraph; or

b) 𝛿 = - 𝜙 (
𝑙𝑛((𝑃+𝜆𝑗
)/(𝐾+𝜆𝑗
))+0,5∗𝜎
2
∗𝑇
𝜎∗√𝑇
), for a short position, observing the provisions of art. 11;

II - in the case of a put option, to the result of the following formula:

a) 𝛿 = - 𝜙 (−
𝑙𝑛((𝑃+𝜆𝑗
)/(𝐾+𝜆𝑗
))+0,5∗𝜎
2
∗𝑇
𝜎∗√𝑇
), for a long position; or

b) 𝛿 = 𝜙 (−
𝑙𝑛((𝑃+𝜆𝑗
)/(𝐾+𝜆𝑗
))+0,5∗𝜎
2
∗𝑇
𝜎∗√𝑇
), for a short position, observing the provisions of art. 11;

III - in the case of a financial derivative instrument referenced to a class of payment priority of a securitization operation, to the result of the following formula:

a) 𝛿 =
15
(1+14∗𝐴)∗(1+14∗𝐷)
, for a long position, where:

1. A = percentage of accumulated losses in the value of the underlying assets from which there is a reduction in remuneration of the payment priority class; and

2. D = percentage of accumulated losses in the value of the underlying assets from which there is a total loss of the value of a given payment priority class; or

b) 𝛿 = -
15
(1+14∗𝐴)∗(1+14∗𝐷)
, for a short position; and

IV - in the case of other financial derivative instruments:

a) δ = 1, for a long position; or

b) δ = - 1, for a short position.

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Sole paragraph. The standardized volatility (𝜎) assumes the following values:

I - 50% (fifty percent), for the interest rate class;

II - 15% (fifteen percent), for the exchange rate class;

III - for the credit class:

a) 100% (one hundred percent), for options referenced to legal entities; or

b) 75% (seventy-five percent), for options referenced to an equity index; and

IV - for the equity class:

a) 120% (one hundred and twenty percent), for options referenced to legal entities; or

b) 75% (seventy-five percent), for options referenced to an equity index; and

V - for the commodity class:

a) 150% (one hundred and fifty percent), for options referenced to commodities that belong to the electricity type; or

b) 70% (seventy percent), for options referenced to other commodities.

Section II
Of the Maturity Factor

Art. 24. The maturity factor related to the financial derivative instrument (MF) must be calculated by means of the following formula:

I - MF = √
𝑚𝑖𝑛{𝑀;252}
252
, for a transaction without variation margin; or

II - MF =
3
2
√
𝑀𝑃𝑂𝑅
252
, for a transaction with variation margin.

§ 1st M corresponds to the period, in business days, between the date of exposure calculation and:

I - the maturity date of the instrument;

II - the maturity date of the underlying financial derivative instrument, if the traded financial derivative instrument is an option; or

III - the next payment date of the exposure, if there is provision for settlement on previously established dates, provided that the market value of the traded financial derivative instrument equals zero on that date.

§ 2nd For the purpose of applying the formula defined in item I of the caput, M corresponds to, at minimum, ten business days.

§ 3rd MPOR is equal to:

I - five business days, if the financial derivative instrument is settled through a central counterparty and is subject to an agreement for daily settlement of the exposure;

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II - (5 + RPM - 1), if the financial derivative instrument is settled through a central counterparty;

III - ten business days, if the financial derivative instrument is not settled through a central counterparty and is subject to an agreement for daily settlement of the exposure;

IV - (10 + RPM - 1), if the financial derivative instrument is not settled through a central counterparty and makes up a clearing set with less than five thousand financial derivative instruments; and

V - twenty business days, in the case of clearing sets composed of at least five thousand financial derivative instruments not settled through central counterparties.

§ 4th RPM corresponds to the number of business days provided for the settlement of the exposure related to the derivative instrument.

§ 5th The MPOR established in § 3rd is doubled for the clearing set in which, over a period of two quarters, there have been at least two discrepancies regarding the exposure values between the institution and the counterparty, and at least one of the discrepancies has exceeded the established settlement deadline without being closed.

Section III
Of the Calculation of Maturity

Art. 25. The standardized maturity of the financial derivative instrument (DS), must be calculated as follows:

𝐷𝑆 = exp(−0.05 ∗ 𝑆) − exp(−0.05 ∗ 𝐸)
0.05

§ 1st S is equal:

I - to the period between the date of exposure calculation and the start of the validity:

a) of the underlying financial derivative instrument to the traded instrument;

b) of the traded financial derivative instrument, in other cases; or

II - to zero, for the financial derivative instrument in force.

§ 2nd E is equal to the period between the date of exposure calculation and the maturity date:

I - of the underlying financial derivative instrument to the traded instrument; or

II - of the traded financial derivative instrument, in other cases.

§ 3rd For the purpose of applying the formula defined in the caput, the value of E corresponds to, at minimum, S plus ten business days.

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Section IV
Of the Specifics of Notional Values

Art. 26. The NV, when not clearly identified or when it does not remain constant until the maturity date, must be determined considering the specific conditions determined in the contract.

§ 1st If the determination of the financial result depends on a formula, the NV is calculated by applying it, with the reference time being the moment of calculation, including regarding the market values of the assets and any deadlines.

§ 2nd For a swap that has a trajectory of variation of the contractual notional value over time, the NV is equal to the weighted average of the contractual notional value by time, considering the remaining term.

§ 3rd For a leveraged swap, the NV is equal to the contractual notional value multiplied by the respective leverage factor.

§ 4th For a financial derivative instrument in which there are multiple principal exchanges, the NV is equal to the contractual notional value multiplied by the number of payments to be made.

§ 5th For a financial derivative instrument in which there are periodic settlements of accumulated balances on previously established dates, the NV is equal to zero on the date the settlement is carried out.

§ 6th If an option, to be exercised if the underlying asset reaches or exceeds the predetermined exercise price (digital or binary option), can be reproduced by means of the purchase or sale of two or more options that can only be exercised on the same maturity date, the NV is determined considering the options used in its reproduction, as if traded separately.

§ 7th For an option, to be exercised on predetermined dates, that has a swap as its underlying asset, the NV is calculated considering that S is equal to the period between the date of exposure calculation and the next date on which there is the possibility of exercise.

§ 8th If the exercise price of an option, unknown at the time of payment of its premium, is a multiple of the price of the underlying asset on a future date, the NV is calculated considering:

I - S = period between the date of exposure calculation and the date on which the exercise price is defined; and

II - T = period between the date on which the exercise price is defined and the maturity date of the option.

§ 9th If an option, which establishes limits for fluctuations in asset prices or interest rates for certain payment intervals, can be reproduced by options that can only be exercised on their respective maturity dates, the NV is determined from the sum of the notional values of these options, whereby for the options that limit the fluctuations in the payment interval:

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I - S = T = period between the date of exposure calculation and the start of the payment interval; and

II - E = period between the date of exposure calculation and the end of the payment interval, considering the provisions of art. 25, § 3rd.

TITLE III
OF THE CEM APPROACH

CHAPTER I
OF DERIVATIVES, EXCEPT CREDIT

Art. 27. The value of the exposure related to counterparty credit risk arising from an operation with a financial derivative instrument, except credit derivatives, must correspond to its replacement value, if positive, plus the potential future gain, as provided in art. 28.

Art. 28. The potential future gain arising from a transaction with a financial derivative instrument must be determined by multiplying the notional value of the financial derivative instrument by its respective Potential Future Exposure Factor (PFEF).

§ 1st The notional value denominated in foreign currency is converted into national currency in accordance with the provisions of art. 7, § 3rd.

§ 2nd The PFEF corresponds to the greater of the values related to the long and short positions of the financial derivative instrument, according to the remaining term.

§ 3rd In the case of operations that provide for settlements of values related to periodic adjustments, with respective updating of their terms and conversion of their market value to zero, the remaining term must be considered until the next settlement date, limiting the PFEF to a minimum value of 0.5% (five tenths of a percent) in operations with a remaining term greater than one year.

§ 4th The values related to the references "interest rate" and "price index" are 0% (zero percent), 0.5% (five tenths of a percent) and 1.5% (one and five tenths percent), for the remaining term of the transaction less than one year, from one to five years and greater than five years, respectively.

§ 5th The values related to the references "exchange rate" and "gold" are 1% (one percent), 5% (five percent) and 7.5% (seven and five tenths percent), for the remaining term of the transaction less than one year, from one to five years and greater than five years, respectively.

§ 6th The values related to the reference "equities" are 6% (six percent), 8% (eight percent) and 10% (ten percent), for the remaining term of the transaction less than one year, from one to five years and greater than five years, respectively.

§ 7th The values related to other references not mentioned in §§ 3rd to 6th are 10% (ten percent), 12% (twelve percent) and 15% (fifteen percent), for the remaining term of the transaction less than one year, from one to five years and greater than five years, respectively.

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§ 8th For the purposes of this article, the remaining term must be determined in the manner established in art. 16, § 7th.

CHAPTER II
OF CREDIT DERIVATIVES

Art. 29. The value of the exposure related to counterparty credit risk arising from a transaction with a credit financial derivative instrument must correspond to its replacement value, if positive, plus the potential future gain, as provided in art. 30.

Art. 30. The potential future gain arising from a credit derivative transaction must be determined by multiplying the notional value of the financial derivative instrument by its respective PFEF.

§ 1st The notional value denominated in foreign currency is converted into national currency, in accordance with the provisions of art. 7, § 3rd.

§ 2nd The PFEF corresponds to the following values:

I - 5% (five percent), for underlying assets that represent exposures to financial institutions and other institutions authorized to operate by the Central Bank of Brazil; and

II - 10% (ten percent), for other underlying assets.

§ 3rd For the institution receiving the risk in a transaction with a credit derivative in the credit swap modality, the PFG may be limited to the value of the premium to be settled.

CHAPTER III
OF DERIVATIVES SUBJECT TO AGREEMENTS FOR CLEARING AND SETTLEMENT OF OBLIGATIONS

Art. 31. The value of the exposure related to counterparty credit risk arising from transactions with financial derivative instruments, including credit derivatives, subject to a bilateral agreement for the clearing and settlement of obligations that satisfies the conditions established in art. 13 of Circular No. 3,809, of 2016, must correspond to the result of the sum:

I - of the net replacement value, if positive; and

II - of the net potential future gain (Net PFG), determined according to art. 32.

§ 1st The exposure value mentioned in the caput is determined per counterparty for the set of financial derivative instruments subject to the same agreement for the clearing and settlement of obligations.

§ 2nd The net replacement value mentioned in item I of the caput is defined as the sum of the replacement values of operations with financial derivative instruments, determined per counterparty for the set of operations subject to the same agreement for the clearing and settlement of obligations.

Art. 32. The net potential future gain must be determined according to the following formula:

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GPF_Liq = GPF_Gross * (0.4 + 0.6 * NGR), where:

I - GPF_Gross = sum of potential future gains calculated per transaction with the same counterparty in accordance with Arts. 28 and 30; and

II - NGR = ratio between the net replacement value, if positive, and the sum of positive replacement values of operations subject to an agreement for the settlement and liquidation of obligations, calculated according to the following formula:

NGR = Σ(max(MtMi, 0)) / Σ(max(MtMi, 0)) from i=1 to n, where:

a) n = number of operations with the same counterparty; and b) MtMi = replacement value of derivative financial instrument “i”.

Sole paragraph. The NGR is equal to zero in cases where the net replacement value is not positive.

TITLE IV
FINAL PROVISIONS

Art. 33. Circular No. 3,644, of 2013, shall enter into force with the following alterations:

“Art. 11-A. The value of the exposure related to the credit derivative used as collateral must correspond:

I - to the notional value of the contract, for the institution receiving the risk; II - to zero, for the institution transferring the risk.

Sole paragraph. The Risk Weight Factor (FPR) applicable to the exposure mentioned in item I of the caput refers to the counterparty related to the underlying asset.” (NR)

“Section VIII
Of Derivatives

Art. 12-A. The value of the counterparty credit risk exposure arising from transactions with derivative financial instruments must be determined in the manner defined in Circular No. 3,904, of June 6, 2018.

Sole paragraph. The Risk Weight Factor (FPR) applicable to the exposure mentioned in the caput corresponds to the Risk Weight Factor (FPR) applicable to the counterparty.” (NR)

Art. 34. Circular No. 3,809, of 2016, shall enter into force with the following alteration:

“Art. 3º-A The SA-CCR Approach, as provided for in Circular No. 3,904, of June 6, 2018, may be used concurrently with the approaches mentioned in Art. 3º.

Sole paragraph. In the mitigation of exposures related to counterparty credit risk arising from operations with derivative financial instruments, the institution using the SA-CCR Approach cannot use the approaches mentioned in Art. 3º.” (NR)

“Art. 15. ..........................................................................................................
.........................................................................................................................

§ 4º The result of the netting between derivatives, as provided for in item II of the caput, corresponds:

I - to the value calculated based on Arts. 6º to 26 of Circular No. 3,904, of 2018, for institutions using the SA-CCR Approach; or II - to the value determined according to the provisions of Art. 31 of Circular No. 3,904, of 2018, for institutions using the CEM Approach.” (NR)

Art. 35. Circular No. 3,748, of February 27, 2015, shall enter into force with the following alterations:

“Art. 10. The potential future gain arising from a transaction with a derivative financial instrument must be determined according to the criteria defined in Art. 28 of Circular No. 3,904, of June 6, 2018.” (NR)

“Art. 12. The potential future gain arising from a transaction with a credit derivative must be determined according to the criteria defined in Art. 30 of Circular No. 3,904, of 2018.” (NR)

Art. 36. Arts. 12, 13, 14, 15, 15-A and 15-B of Circular No. 3,644, of 2013, are hereby repealed.

Art. 37. This Circular enters into force on June 1, 2019.

Otávio Ribeiro Damaso
Director of Regulation

This text does not replace the published version in the DOU of 6/8/2018, Section 1, pp. 133-137, and in Sisbacen.