Circular No. 3354 — Establishes Minimum Criteria for Classifying Operations in the Trading Portfolio, Pursuant to Resolution No. 3,464 of June 26, 2007

CIRCULAR NO. 003354

Establishes minimum criteria for classifying operations in the trading portfolio, pursuant to Resolution No. 3,464 of June 26, 2007.

The Collective Board of Directors of the Central Bank of Brazil, based on the provisions of Article 10, item IX, with the renumbering given by Law No. 7,730 of January 31, 1989, and Article 11, item VII, of Law No. 4,595 of December 31, 1964, and considering the provisions of Article 5, paragraph 2, of Resolution No. 3,464 of June 26, 2007,

DECIDED:

Article 1. Financial institutions and other institutions authorized to operate by the Central Bank of Brazil must observe minimum criteria in determining the operations to be included in the trading portfolio, as provided for in Resolution No. 3,464 of June 26, 2007.

Article 2. To classify operations in the trading portfolio, the intention to trade must be proven based on:

I - clearly documented trading and hedging strategies;

II - clearly defined active management policies and procedures, including monitoring of operations without movement in the trading portfolio, and which guarantee, at a minimum, that:

a) operations are subject to limits and the compliance with these limits is subject to daily monitoring by a risk control unit independent of the trading unit;

b) the limits established for operations are reviewed by the institution's board of directors;

c) operations are valued at market value at least once a day; and

d) the list of operations is reported to the director responsible for market risk management as an integral part of the risk management process.

Article 3. The policy for determining operations to be included in the trading portfolio, as provided for in Article 5 of Resolution No. 3,464 of 2007, must provide for:

I - definition of the trading portfolio to be adopted by the institution and its dependencies abroad, including a clear description of operations that may be classified as trading activities, as well as the criteria used to identify hedges;

II - market valuation methodology to be adopted for financial instruments classified in the trading portfolio, including the origin of prices and rates, which must be obtained from independent external sources, as well as the treatment of instruments with low liquidity;

III - hypotheses for reclassifying operations in the trading portfolio, as well as the controls created to ensure that inappropriate reclassifications do not occur;

IV - procedures to be adopted in the event of low liquidity of an operation or its hedge.

Article 4. Procedures to ensure that the criteria for classification in the trading portfolio are observed consistently must include:

I - identification of the person responsible for monitoring compliance with the policy for classifying operations in the trading portfolio;

II - frequency and methodology for verifying compliance with the policy for determining operations included in the trading portfolio;

III - controls that ensure that the classification remains adequate over time;

IV - controls that monitor the turnover of operations in the trading portfolio.

Article 5. The institutions mentioned in Article 1 must maintain documentation that proves the consistency of the criteria for classifying operations in the trading portfolio.

Sole Paragraph. In the event of the absence of operations classified in the trading portfolio, the documentation mentioned in the main text must include proof of the consistency of the adopted criteria.

Article 6. The classification policy for the trading portfolio must be reviewed periodically.

Article 7. The institutions mentioned in Article 1 must keep available to the Central Bank of Brazil reports that clearly and objectively demonstrate the procedures provided for in this circular.

Sole Paragraph. If impropriety or inconsistency is found in the classification processes, the Central Bank of Brazil may determine, at any time, the reclassification of operations, as well as adjustments to the policy referred to in Article 3.

Article 8. This circular enters into force on the date of its publication, and its provisions must be observed by the institutions mentioned in Article 1 as soon as the market risk management structure referred to in Resolution No. 3,464 of June 26, 2007 is implemented.

Brasília, June 27, 2007.

Alexandre Antonio Tombini
Director