Circular No. 3477 of December 24, 2009: Disclosure of Risk Management, Required Reference Equity (PRE), and Reference Equity (PR) Adequacy

Circular No. 3,477, of December 24, 2009 1

CIRCULAR NO. 3,477

Provides for the disclosure of information regarding risk management, the Required Reference Equity (PRE), as governed by Resolution No. 3,490 of August 29, 2007, and the adequacy of Reference Equity (PR), as governed by Resolution No. 3,444 of February 28, 2007.

The Collegiate Board of the Central Bank of Brazil, in a session held on December 23, 2009, based on the provisions of Articles 10, item IX, and 11, item VII, of Law No. 4,595 of December 31, 1964, and considering the provisions of the sole paragraph of Article 8 of Resolution No. 3,490 of August 29, 2007,

D E C I D E D:

Article 1. Information regarding risk management, the Required Reference Equity (PRE), as governed by Resolution No. 3,490 of August 29, 2007, and the adequacy of Reference Equity (PR), defined in accordance with Resolution No. 3,444 of February 28, 2007, must be disclosed by the following institutions:

I - multiple banks, commercial banks, investment banks, exchange banks, and savings banks;

II - institutions that are part of a financial conglomerate, in accordance with the Accounting Plan of Institutions of the National Financial System (Cosif), or of economic-financial consolidation, composed of at least one of the institutions mentioned in item I; and

III - institutions required to establish an audit committee, as provided in Article 10 of the Regulation annexed to Resolution No. 3,198 of May 27, 2004.

§ 1st. The disclosure must be carried out with detail appropriate to the scope and complexity of operations and the sophistication of risk management systems and processes, observing that relevant differences between the information provided in this circular and other information disclosed by the institution must be clarified.

§ 2nd. Institutions must have a formal information disclosure policy approved by the board of directors or, in its absence, by the executive board, which includes:

I - the specification of the information to be disclosed;

II - the system of internal controls applied to the information disclosure process;

III - the establishment of a continuous process to confirm the reliability of disclosed information and the adequacy of its content; and

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IV - the relevance criteria used for the disclosure of information, based on the needs of external users for purposes of economic decisions.

Article 2. The disclosure of information governed by this circular must be made on a consolidated basis for institutions that are part of a financial conglomerate and of economic-financial consolidation.

Article 3. Qualitative aspects must be disclosed for each of the risk management structures, including:

I - description of risk management objectives and policies, with strategies and processes used;

II - description of the structured risk communication and information process and of the measurement systems used by the institution; and

III - hedge and risk mitigation policies, and strategies and processes used for the continuous monitoring of the effectiveness of hedges and mitigation instruments.

Sole paragraph. At a minimum, credit, operational, liquidity, and market risks must be considered, highlighting interest rate risk on operations not classified in the trading book.

Article 4. The following information regarding PR must be disclosed:

I - simplified information on the maturity dates and conditions of the instruments comprising Level I and Level II of PR;

II - value of Level I of PR, detailed according to its components, as per Article 1, § 1, of Resolution No. 3,444 of 2007;

III - value of Level II of PR, detailed according to its components, as per Article 1, § 2, of Resolution No. 3,444 of 2007;

IV - value of PR deductions, as per Articles 3, 4, and 5 of Resolution No. 3,444 of 2007;

V - total value of PR; and

VI - relevant restrictions or impediments, existing or possible, to the transfer of resources between consolidated institutions.

Article 5. The following information regarding PRE and the adequacy of PR must be disclosed:

I - value of the PEPR portion of PRE, segmented by risk weighting factors (RWF), in accordance with Articles 11 to 16 of Circular No. 3,360 of September 12, 2007;

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$$ EPR = \frac{\left[ \left( PCAM + PJUR + PCOM + PACS + POPR \right) \cdot F \right] + IB}{100} $$

II - values of the PJUR[1], PJUR[2], PJUR[3], PJUR[4], PACS, PCOM, and PCAM portions of PRE, calculated in accordance with Circulars Nos. 3,361, 3,362, 3,363, 3,364, 3,366, and 3,368, all of September 12, 2007, and 3,389 of June 25, 2008;

III - value of the POPR portion of PRE, calculated in accordance with Circular No. 3,383 of April 30, 2008;

IV - total value of PRE;

V - Basel Index (IB), determined according to the following formula:

$$ IB = \frac{EPR}{PR} $$

in which:

EPR = sum of the products of exposures by their respective RWF, determined in accordance with Circular No. 3,360 of 2007;

F = factor applicable to EPR, in accordance with Circular No. 3,360 of 2007;

PJUR = PJUR[1] + PJUR[2] + PJUR[3] + PJUR[4];

VI - amount of PR calculated to cover interest rate risk on operations not classified in the trading book; and

VII - description of the methodology adopted to assess the adequacy of PR, including risks not covered by the PRE portions.

Article 6. The following information regarding exposures to credit risk, as governed by Circular No. 3,360 of 2007, must be disclosed:

I - total value of exposures and average exposure value in the quarter;

II - percentage of exposures of the ten largest clients relative to the total of operations with credit granting characteristics;

III - amount of overdue operations, gross of provisions and excluding operations already written off as losses, segregated into the following ranges:

a) overdue up to 60 days;

b) overdue between 61 and 90 days;

c) overdue between 91 and 180 days; and

d) overdue above 180 days;

IV - flow of operations written off as losses in the quarter; and

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V - amount of provisions for losses related to the exposures governed by the caput.

Sole paragraph. The information governed by item I must be segmented by:

I - RWF in accordance with Articles 10 to 16 of Circular No. 3,360 of 2007;

II - countries and geographic regions with significant exposures; and

III - economic sector.

Article 7. The following information regarding credit risk mitigation instruments must be disclosed:

I - description of the policies and methodologies for evaluating and measuring mitigation instruments, including the assessment of their concentration risk; and

II - total value mitigated by the instruments defined in Articles 20 to 22 of Circular No. 3,360 of 2007, segmented by type of mitigator and by RWF, as per Article 6, sole paragraph, item I.

Article 8. The following information regarding counterparty credit risk must be disclosed:

I - description of the methodology to establish limits on exposures subject to counterparty risk;

II - description of the methods and policies to ensure the effectiveness of guarantees and to define provisions related to credit operations, in case they are distinct from the minimum regulatory provisions;

III - notional value of contracts subject to counterparty credit risk, including derivatives, delivery transactions, asset lending, and repurchase agreements, segmented as follows:

a) values related to contracts to be settled in clearing and settlement systems, in which the clearinghouse acts as central counterparty; and

b) values related to contracts in which there is no acting of clearinghouses as central counterparty, segmented between contracts without guarantees and contracts with guarantees;

IV - gross positive value of contracts subject to counterparty credit risk, including derivatives, delivery transactions, asset lending, and repurchase agreements, disregarding positive values related to netting agreements, as defined in Resolution No. 3,263 of February 24, 2005;

V - positive values related to agreements for the netting and settlement of obligations, as defined in Resolution No. 3,263 of 2005;

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VI - value of guarantees that cumulatively meet the following requirements:

a) are held or custodied by the institution itself;

b) have the exclusive purpose of constituting a guarantee for the operations to which they are linked;

c) are subject to movement, exclusively, by order of the depositary institution; and

d) are immediately available to the depositary institution in the event of debtor default or the need to realize them;

VII - global net exposure to counterparty credit risk, defined as the exposure to counterparty credit risk net of the effects of netting agreements and the value of guarantees defined in items V and VI;

VIII - percentage of exposures to credit risk covered by the notional value of hedges effected through credit derivatives; and

IX - notional value of credit derivatives segmented by type of operation, as per Circular No. 3,106 of April 10, 2002, detailed as follows:

a) credit derivatives held in the institution's portfolio, separated by "risk received" or "risk transferred"; and

b) credit derivatives used for intermediation purposes, separated by "risk received" or "risk transferred".

Article 9. The following information regarding the sale or transfer of financial assets and operations with securities or marketable securities originating from securitization processes, including those structured through credit derivatives, must be disclosed:

I - brief description of policies and objectives related to credit assignment and operations with securities or marketable securities originating from securitization processes;

II - flow of exposures assigned in the quarter with substantial transfer of risks and benefits;

III - balance of exposures assigned without substantial transfer or retention of risks and benefits;

IV - balance of exposures assigned with substantial retention of risks and benefits;

V - flow of exposures assigned in the quarter with substantial retention of risks and benefits, which were written off as losses; and

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VI - total value of exposures resulting from the acquisition of securities or marketable securities originating from securitization processes, highlighting those potentially structured through credit derivatives, segmented as follows:

a) type of security or marketable security originating from securitization process;

b) type of credit, security, or marketable security backing the issuance; and

c) class of the security or marketable security, regarding the subordination of this to others, for redemption purposes.

§ 1st. For the purposes of this article, securitization process is considered an operation comprising the following stages:

I - origination of credits or securities and marketable securities;

II - assignment of credits or securities and marketable securities to institutions, companies, or entities not part of the National Financial System; and

III - issuance, by institutions, companies, or entities not part of the National Financial System, of securities and marketable securities, which may take the form of quotas, certificates, or titles, with express linkage to the acquired credits or securities and marketable securities.

§ 2nd. For the purposes of items II to V of the caput of this article, the definitions of Resolution No. 3,533 of January 31, 2008, must be used.

Article 10. The total value of the trading book must be disclosed by relevant market risk factor, segmented between long and short positions.

Article 11. The following information regarding operations not classified in the trading book must be disclosed:

I - brief description of policies and methodologies for measuring interest rate and equity risk; and

II - assumptions used for the treatment of early settlement of loans and deposits that do not have a defined maturity.

Article 12. At a minimum, the total exposure to financial derivative instruments by category of market risk factor must be disclosed, segmented between long and short positions, segregated as follows:

I - operations with financial derivative instruments carried out on own account with central counterparty, subdivided into those carried out in Brazil and abroad;

II - operations with financial derivative instruments carried out on own account without central counterparty, subdivided into those carried out in Brazil and abroad;

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§ 1st. For the purpose of calculating the value of exposures in derivatives with non-linear characteristics, the variation of the derivative's price relative to the variation of the underlying asset's price (delta) multiplied by the quantity of contracts and their size must be considered.

§ 2nd. The segmentation by market risk factor governed by the caput corresponds, at a minimum, to classification in the following categories:

I - interest rates;

II - exchange rates;

III - equity prices; and

IV - commodity prices (commodities).

Article 13. Additional information that the institution deems relevant must be disclosed, in order to ensure appropriate transparency of its risk management and measurement, as well as the adequacy of its PR.

Sole paragraph. The Department of Supervision of Banks and Banking Conglomerates (Desup) or the Department of Supervision of Cooperatives and Non-Banking Institutions (Desuc) may determine the disclosure of information additional to that provided in this circular.

Article 14. The information governed by this circular must be updated with the following minimum frequency:

I - annually, for qualitative information, or when there is a relevant change; and

II - quarterly, relative to the base dates of March 31, June 30, September 30, and December 31, for quantitative information.

Sole paragraph. The update of information must be carried out within a maximum period of sixty days for the base dates of March 31, June 30, and September 30, and of ninety days for the base date of December 31.

Article 15. The information governed by this circular must be available in a single location, publicly accessible and easily located, on the institution's website.

§ 1st. The information must be available together with that regarding the risk management structure, as provided in Article 4 of Resolution No. 3,380 of June 29, 2006, Article 6 of Resolution No. 3,464 of June 26, 2007, and Article 7 of Resolution No. 3,721 of April 30, 2009.

§ 2nd. The institution must publish, together with the financial statements, the location of the information on the institution's website.

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§ 3rd. The institution must make available information regarding, at a minimum, the five most recent years, accompanied by a comparative assessment and explanation for relevant variations, observing that:

I - disclosure of information for base dates prior to December 31, 2009, is exempted;

II - disclosure of information for base dates prior to December 31, 2010, must be made by April 1, 2011; and

III - the information governed by item VI of Article 5 must be disclosed starting from the base date of December 31, 2011.

Article 16. The director indicated in accordance with Article 4 of Resolution No. 3,490 of 2007 is responsible for the information governed by this circular.

Article 17. This circular enters into force on the date of its publication.

Brasília, December 24, 2009.

Alexandre Antonio Tombini Alvir Alberto Hoffmann Director Director

This text does not replace that published in the DOU and Sisbacen.