Circular No. 3365 — Provisions on the Measurement of Interest Rate Risk for Operations Not Classified in the Trading Book

CIRCULAR NO. 003365

Dispenses on the measurement of interest rate risk for operations not classified in the trading book.

The Collegiate Board of the Central Bank of Brazil, in a session held on September 12, 2007, based on the provisions of Arts. 10, item IX, with the renumbering given by Law No. 7,730, of January 31, 1989, and 11, item VII, of Law No. 4,595, of December 31, 1964, and having in view the provisions of Art. 6 of Resolution No. 3,490, of August 29, 2007,

D E C I D E D:

Art. 1 The measurement and evaluation of interest rate risk for operations not classified in the trading book, in the form of Resolution No. 3,464, of June 26, 2007, must be carried out by means of a system that meets the following minimum criteria, according to the nature of the operations, the complexity of the products, and the dimension of the exposure to interest rate risk of the institution:

I - include all operations sensitive to changes in interest rates;

II - use widely accepted risk measurement techniques and financial concepts;

III - consider data related to rates, terms, prices, options, and other adequately specified information;

IV - define appropriate assumptions to transform positions into cash flows;

V - measure sensitivity to changes in the term structure of interest rates, among different rate structures, and in the assumptions;

VI - be integrated into daily risk management practices;

VII - allow for the simulation of extreme market conditions (stress tests); and

VIII - enable the estimation of Reference Equity (PR) compatible with risks as determined in Art. 3 of Resolution No. 3,490, of August 29, 2007.

Sole Paragraph. The criteria, assumptions, and procedures used in the system for measuring and evaluating interest rate risk for operations not classified in the trading book must be consistent, verifiable, documented, and stable over time.

Art. 2 The stress tests mentioned in Art. 1, item VII, must:

I - be carried out at least quarterly;

II - estimate the percentage variation in the market value of operations not classified in the trading book relative to PR, using a shock compatible with the 1st and 99th percentiles of a historical distribution of variations in interest rates, considering a holding period of one year and an observation period of five years;

III - estimate the number of basis points of parallel interest rate shocks necessary to cause reductions in the market value of operations not classified in the trading book corresponding to 5% (five percent), 10% (ten percent), and 20% (twenty percent) of PR;

IV - be carried out individually for each risk factor that contributes to at least 5% (five percent) of the total exposures related to operations not classified in the trading book, and in an aggregated manner for the remaining operations.

Art. 3 A report detailing the results of the measurement of interest rate risk for operations not classified in the trading book must be sent to the Department of Monitoring of the Financial System and Information Management (Desig) of the Central Bank of Brazil, in the format and periodicity to be established by it.

Sole Paragraph. Institutions must keep available to the Central Bank of Brazil, for a period of five years, the information used to calculate the results mentioned in the main text.

Art. 4 Financial institutions and other institutions authorized to operate by the Central Bank of Brazil must be able to prove that their measurement system adequately captures and evaluates the interest rate risks of operations not included in the trading book.

Sole Paragraph. The inadequacy of the system subjects the institutions mentioned in the main text to the provisions of Art. 5 of Resolution No. 3,490, of 2007.

Art. 5 This Circular enters into force on the date of its publication, producing effects from July 1, 2008.

Brasília, September 12, 2007.

Alexandre Antonio Tombini
Director