Circular No. 3082 — Establishes and Consolidates Criteria for the Accounting Recording and Valuation of Derivative Financial Instruments

CIRCULAR NO. 003082

Establishes and Consolidates Criteria for the Accounting Recording and Valuation of Derivative Financial Instruments.

The Collegiate Board of the Central Bank of Brazil, in a session held on January 30, 2002, based on Article 4, item XII, of Law No. 4,595 of December 31, 1964, by competence delegated by the National Monetary Council, by act of July 19, 1978, and having in view the provisions of Article 22 of Law No. 6,385 of December 7, 1976, with the changes introduced by Article 14 of Law No. 9,447 of March 14, 1997,

DECIDED:

Art. 1. To establish that operations with derivative financial instruments carried out on own account by financial institutions, other institutions authorized to operate by the Central Bank of Brazil, and consortium administrators must be recorded observing the following procedures:

I - in forward operations, the contracted final value minus the difference between this value and the spot price of the asset or right must be recorded, on the date of the operation, in a corrective sub-account for internal use of the appropriate asset or liability account, recognizing revenues and expenses due to the passage of time of the contracts, at least, at the time of monthly trial balances and balance sheets;

II - in options operations, the value of premiums paid or received must be recorded, on the date of the operation, in the appropriate asset or liability account, respectively, remaining therein until the effective exercise of the option, if applicable, when it must then be written off as a reduction or increase in the cost of the asset or right, by the effective exercise, or as revenue or expense, in the case of non-exercise, as applicable;

III - in futures operations, the value of daily adjustments must be recorded in the appropriate asset or liability account, and must be recognized as revenue or expense, at least, at the time of monthly trial balances and balance sheets;

IV - in "swap" operations, the differential to be received or paid must be recorded in the appropriate asset or liability account, and must be recognized as revenue or expense, at least, at the time of monthly trial balances and balance sheets;

V - in operations with other derivative financial instruments, registration must be made in asset or liability accounts according to the characteristics of the contract, including those embedded, which must be recorded separately in relation to the contract to which they are linked.

Paragraph 1. Derivative financial instruments are understood to be those whose value varies as a result of changes in interest rates, price of securities or financial assets, commodity price, exchange rate, stock exchange index, price index, index or credit rating, or any other similar specific variable, whose initial investment is nonexistent or small in relation to the value of the contract, and which are settled on a future date.

Paragraph 2. The reference value of the operations mentioned in the caput must be recorded in clearing accounts.

Paragraph 3. The recording of the result obtained in the operations referred to in this article must be carried out individually, and the offsetting of revenues with expenses in distinct contracts is prohibited.

Paragraph 4. In the calculation of the monthly result, the offsetting of revenues with expenses previously recorded must be carried out, provided that within the same semester and relating to the same contract.

Paragraph 5. In forward operations, the securities and financial assets acquired must be classified in one of the categories provided for in Circular 3,068 of November 8, 2001, on the date of receipt of the asset object of the operation.

Art. 2. The operations with derivative financial instruments referred to in the previous article must be evaluated at market value, at least, at the time of monthly trial balances and balance sheets, computing the appreciation or depreciation in counterpart to the appropriate account of revenue or expense, in the result of the period, observed, when applicable, the provisions of Articles 3 to 5.

Sole Paragraph. For the purposes of the evaluation provided for in the caput, the methodology for calculating market value is the responsibility of the institution and must be established based on consistent and verifiable criteria, which take into account independence in data collection in relation to the rates practiced in its trading desks, and may be used as a parameter:

I - the average representative trading price on the day of the calculation or, when not available, the average representative trading price on the previous business day;

II - the probable net realizable value obtained through the adoption of a pricing technique or model;

III - the price of a similar financial instrument, taking into account, at a minimum, the payment and maturity terms, credit risk, and currency or indexer;

IV - the value of the daily adjustment in the case of operations carried out in the futures market.

Art. 3. Operations with derivative financial instruments intended for "hedge" carried out by the institutions referred to in Art. 1 must be classified in one of the following categories:

I - market risk "hedge";

II - cash flow "hedge".

Paragraph 1. For the purposes of this circular, "hedge" is understood to be the designation of one or more derivative financial instruments with the objective of compensating, in whole or in part, the risks resulting from exposure to variations in the market value or in the cash flow of any asset, liability, commitment or future transaction foreseen, recorded or not, or still groups or parts of these items with similar characteristics and whose response to the risk object of "hedge" occurs in a similar manner.

Paragraph 2. In the "hedge" of market risk category, derivative financial instruments that are intended to compensate risks resulting from exposure to variation in the market value of the item object of "hedge" must be classified.

Paragraph 3. In the "hedge" of cash flow category, derivative financial instruments that are intended to compensate variation in the estimated future cash flow of the institution must be classified.

Paragraph 4. Securities and financial assets classified in the held-to-maturity category, in the manner provided for in Art. 1 of Circular 3,068 of November 8, 2001, cannot be the object of "hedge" for accounting recording and valuation purposes.

Art. 4. Derivative financial instruments intended for "hedge" and the respective items object of "hedge" must be adjusted to market value, at least, at the time of monthly trial balances and balance sheets, observing the following:

I - for those classified in the category referred to in Art. 3, item I, the appreciation or depreciation must be recorded in counterpart to the appropriate account of revenue or expense, in the result of the period;

II - for those classified in the category referred to in Art. 3, item II, the appreciation or depreciation must be recorded:

a) the effective portion, in counterpart to a highlighted account of equity, net of tax effects;

b) any other variation, in counterpart to the appropriate account of revenue or expense, in the result of the period.

Paragraph 1. The effective portion is understood to be that in which the variation in the item object of "hedge", directly related to the corresponding risk, is compensated by the variation in the "hedge" instrument, considering the accumulated effect of the operation.

Paragraph 2. Gains or losses resulting from the appreciation or depreciation mentioned in item II, letter "a", of this article must be recognized in the result simultaneously with the accounting recording of losses and gains in the item object of "hedge".

Art. 5. Operations with derivative financial instruments intended for "hedge" under the terms of Arts. 3 and 4 must cumulatively meet the following conditions:

I - possess documentary identification of the risk object of "hedge", with detailed information about the operation, highlighting the risk management process and the methodology used in the evaluation of the effectiveness of the "hedge" since the conception of the operation;

II - prove the effectiveness of the "hedge" since the conception and during the course of the operation, with indication that the variations in the market value or in the cash flow of the "hedge" instrument compensate the variations in the market value or in the cash flow of the item object of "hedge" in an interval between 80% (eighty percent) and 125% (one hundred and twenty-five percent);

III - provide for the need for renewal or contracting of a new operation in the case of those in which the derivative financial instrument presents maturity earlier than that of the item object of "hedge";

IV - demonstrate, in the case of commitments or future transactions object of "hedge" of cash flow, a high probability of occurrence and prove that such exposure to variations in the cash flow can affect the result of the institution;

V - not have as counterparty a company integrated into the economic-financial consolidated, observed the provisions of Arts. 3 and 18 of Resolution 2,723 of May 31, 2000, altered by Resolution 2,743 of June 28, 2000.

Sole Paragraph. Non-compliance, at any time, with the requirements provided for in this article implies observance of the criteria provided for in Art. 2 and immediate transfer, to the result of the period, in the case of "hedge" of cash flow, of the values relating to the operation recorded in a highlighted account of equity, in the manner of Art. 4, item II.

Art. 6. It is mandatory to disclose, in explanatory notes to the financial statements, qualitative and quantitative information relating to the highlighted derivative financial instruments, highlighting at least the following aspects:

I - utilization policy;

II - objectives and risk management strategies, particularly the "hedge" policy;

III - risks associated with each strategy of acting in the market, internal controls and parameters used for the management of these risks and the results obtained in relation to the proposed objectives;

IV - valuation and measurement criteria, methods and significant premises applied in the calculation of market value;

V - values recorded in asset, liability and segregation accounts, by category, risk and strategy of acting in the market, those with the objective of "hedge" and of trading;

VI - values grouped by asset, reference indexer, counterparty, trading location (exchange or over-the-counter) and maturity ranges, highlighting the reference, cost, market and risk values of the portfolio;

VII - gains and losses in the period, segregated those recorded in the result and in a highlighted account of equity;

VIII - estimated net value of the gains and losses recorded in a highlighted account of equity on the date of the accounting statements that is expected to be recognized in the next twelve months;

IX - values and effect in the result of the period that ceased to be qualified as "hedge" under the terms of Art. 5, as well as those transferred from equity as a result of the accounting recognition of losses and gains in the item object of "hedge";

X - main transactions and future commitments object of "hedge" of cash flow, highlighting the deadlines for the expected financial reflection;

XI - value and type of margins given as guarantee.

Art. 7. Financial instruments that do not possess the characteristics provided for in Art. 1, paragraph 1, of this circular cannot be used as "hedge" instruments for accounting purposes, under the terms of Arts. 3 and 4.

Art. 8. Institutions must keep at the disposal of the Central Bank of Brazil the reports that evidence, in a clear and objective manner, the procedures provided for in this circular.

Sole Paragraph. Upon verification of impropriety or inconsistency in the classification and evaluation processes, the Central Bank of Brazil may determine the reclassification of derivative financial instruments, with the consequent recognition of the effects in the financial statements, in the manner of Art. 2.

Art. 9. The adjustments resulting from the application of the criteria established in this circular compared to those established in the regulation then in force, for the derivative financial instruments existing in the portfolio, must be recorded, due to the change in accounting criterion, in counterpart to the title ACCUMULATED PROFITS OR LOSSES, code 6.1.8.10.00-2, of the Accounting Plan of the Institutions of the National Financial System - Cosif, with the exception of those related to derivative financial instruments classified in the "hedge" of cash flow category, whose adjustments will have as counterpart a highlighted account in equity, provided that the conditions provided for in Arts. 3 to 5 are met.

Sole Paragraph. The adjustments referred to in this article must be disclosed in explanatory notes to the financial statements, evidenced, in a comparative manner, their amount and the effects on the result up to the base date of December 31, 2003.

Art. 10. The value of operations with derivative financial instruments carried out on behalf of third parties must be recorded in the appropriate clearing accounts.

Sole Paragraph. The value of daily adjustments and option premiums must be recorded in the appropriate asset or liability account representing the rights and obligations assumed by the intermediary financial institution with the stock exchange, commodity and futures exchange or registration, settlement and custody system authorized by the Central Bank of Brazil.

Art. 11. The amounts to be received, from clients, in operations with derivative financial instruments, must be computed for the purpose of verifying compliance with the risk diversification limit established by means of Resolution 2,844 of June 29, 2001, and specific regulation.

Art. 12. Article 11 of Circular 3,068 of November 8, 2001 is hereby amended, which shall now read as follows:

"Art. 11. This circular enters into force on the date of its publication, producing effects from June 30, 2002, when Circulars 2,329 of July 7, 1993, and 2,913 of July 21, 1999, will be repealed." (NR)

Art. 13. This circular enters into force on the date of its publication, producing effects from June 30, 2002, when Circular 2,328 of July 7, 1993, Art. 1 of Circular 2,583 of June 21, 1995, and Arts. 1 and 4 of Circular 2,770 of July 30, 1997, are hereby repealed.

Brasília, January 30, 2002

Sérgio Darcy da Silva Alves
Director