Circular No. 3634: Procedures for Calculating Risk-Weighted Assets for Fixed-Rate Real-Denominated Exposures Under the Standardized Approach

CIRCULAR NO. 3,634, OF MARCH 4, 2013

Establishes the procedures for calculating the portion of risk-weighted assets (RWA) related to exposures subject to variation in fixed interest rates denominated in real whose capital requirement is calculated using the standardized approach (RWAJUR1), as provided for in Resolution No. 4,193, of March 1, 2013.

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

RESOLVES:

Art. 1 The calculation of the daily value of the portion of risk-weighted assets (RWA), related to exposures subject to variation in fixed interest rates denominated in real whose capital requirement is calculated using the standardized approach (RWAJUR1), as provided for in Resolution No. 4,193, of March 1, 2013, must be carried out based on the following formula:

RWA_{t, JUR1} = F * max(1/60 * sum_{i=1}^{60} VaR_{t-i, Standard}, max_{i=1}^{60} sVaR_{t-i, Standard})

where:
I - F = factor established in Art. 4 of Resolution No. 4,193, of 2013; II - M_{pre, t} = multiplier for day "t", published daily by the Central Bank of Brazil, determined as a decreasing function of volatility, whose value is between 1 and 3; III - VaR_{t, Standard} = value at risk, expressed in reals, of the set of exposures referred to in the caput for day "t", obtained according to the following formula:

VaR_{t, Standard} = sum_{i=1}^{n} sum_{j=1}^{n} VaR_{i,t} * VaR_{j,t} * ρ_{i,j}

where:
a) n = 10 (number of vertices Pi); b) VaR_{i,t} = value at risk, expressed in reals, associated with vertex Pi on day "t", obtained according to the following formula:

VaR_{i,t} = VMTM_{i,t} * D * σ_{i,t} * 2.33 / sqrt(252)

where:

1. Pi = vertex considered for the purpose of grouping cash flows, according to the procedure described in Art. 3 of this Circular;
2. σ_{i,t} = standard volatility for term "i" and day "t", published daily by the Central Bank of Brazil;
3. VMTM_{i,t} = algebraic sum, positive or negative, expressed in reals, of the values of cash flows marked to market on day "t" and allocated to vertex Pi, according to the procedure described in Art. 3 of this Circular; and
4. D = 10 (number of business days considered necessary for the settlement of the position);
   c) ρ_{i,j} = correlation between vertices "i" and "j", used for the purpose of determining VaR_{t, Standard}, obtained according to the following formula:

ρ_{i,j} = ρ * (1 - ρ) / (max(Pi, Pj) / min(Pi, Pj))^k + ρ

where:

1. ρ = base parameter for the calculation of ρ_{i,j}, published on the last business day of each month or at any time, at the discretion of the Central Bank of Brazil; and
2. k = correlation decay factor, published on the last business day of each month or at any time, at the discretion of the Central Bank of Brazil;
   IV - sVaR_{t, Standard} = stressed value at risk, expressed in reals, of the exposures mentioned in the caput for day "t", obtained according to the following formula:

sVaR_{t, Standard} = sum_{i=1}^{n} sum_{j=1}^{n} sVaR_{i,t} * sVaR_{j,t} * ρ^S_{i,j}

where:
a) n = 10 (number of vertices Pi); b) sVaR_{i,t} = stressed value at risk, expressed in reals, associated with vertex Pi on day "t", obtained according to the following formula:

sVaR_{i,t} = VMTM_{i,t} * D * σ^S_{i} * 2.33 / sqrt(252)

where:

1. Pi = vertex considered for the purpose of grouping cash flows, according to the procedure described in Art. 3 of this Circular;
2. σ^S_{i} = standard volatility attributed to vertex "i", used for the calculation of sVaR_{i,t};
3. VMTM_{i,t} = algebraic sum, positive or negative, expressed in reals, of the values of cash flows marked to market on day "t" and allocated to vertex Pi, according to the procedure described in Art. 3 of this Circular;
4. D = 10 (number of business days considered necessary for the settlement of the position);
   c) ρ^S_{i,j} = correlation between vertices "i" and "j", used for the purpose of determining sVaR_{t, Standard}, obtained according to the following formula:

ρ^S_{i,j} = ρ^S * (1 - ρ^S) / (max(Pi, Pj) / min(Pi, Pj))^k^S + ρ^S

where:

1. ρ^S = base parameter for the calculation of the correlations used in sVaR_{t, Standard}; and
2. k^S = decay factor for the calculation of the correlations used in sVaR_{t, Standard}.

§ 1 The calculation referred to in the caput applies to operations subject to variation in fixed interest rates related to financial instruments denominated in real and classified in the trading book, in the form of Resolution No. 3,464, of June 26, 2007, including derivative financial instruments.

§ 2 The values of σ^S_{i}, ρ^S and k^S will be published by the Central Bank of Brazil.

§ 3 For the purpose of determining VMTM_{i,t}, a vertex is defined as the term Pi to which cash flows must be allocated or grouped.

Art. 2 For the determination of the daily value of the RWAJUR1 portion, each cash flow is defined as the net result of the value of active positions minus the value of passive positions that mature on the same day, related to the set of operations maintained open on the immediately preceding business day.

§ 1 Cash flows must be obtained through the decomposition of each operation maintained open into an equivalent temporal structure of receipts and payments, considering the contracted maturity dates.

§ 2 The number of cash flows will correspond to the number of maturities in which the net results determined in accordance with this article are different from zero.

§ 3 The values of assets and liabilities that make up the cash flows must include the principal, interest, and other values related to each operation.

§ 4 The values of assets and liabilities that make up the cash flows must be marked to market using the temporal structure of interest rates that represents the rates in force in the market on the immediately preceding business day.

§ 5 Operations without defined maturity or whose maturity depends on the application of specific contractual clauses must have their corresponding cash flows obtained based on consistent criteria and verifiable by the Central Bank of Brazil.

§ 6 For the purpose of obtaining the cash flows of operations with derivative financial instruments, the following criteria must be observed:
I - in the case of swap operations, the treatment of the position of the contract referenced in real and in fixed interest rate must be identical to that granted to a bond with remuneration in fixed rate, with the same maturity date as the swap, whose redemption value is the final resulting value for the real fixed position; II - in the case of operations with forward and futures contracts referenced in real and in fixed interest rate, the corresponding treatment must be identical to that granted to a bond with remuneration in fixed rate, with the same maturity date as the aforementioned contracts, whose redemption value is the value of these contracts; III - in the case of future settlement operations involving fixed-income bonds, the treatment must be identical to that granted to two opposite positions in fixed bonds, being:
a) one, represented by a bond with a maturity date coincident with that of the transfer, to the acquirer, of the ownership of the bond object of the operation, whose redemption value must be the value of the operation; and b) the other, represented by a bond with the same maturity date as the bond object of the operation, whose redemption value must be the redemption value of the latter; and IV - in the case of operations with options referenced in real and in fixed interest rate:
a) the value representative of each position must be obtained by multiplying the quantity of contracts by their size and by the variation of the option price relative to the variation of the price of its underlying asset (delta); and b) the cash flows corresponding to each operation must be obtained separately, and their result must be included in the cash flow of the date of the contract's maturity.

§ 7 Cash flows resulting from credit derivatives used as a hedge for the adjustment to the market value of operations with derivative financial instruments due to variation in the credit quality of the counterparty (CVA) must be excluded.

§ 8 The values of positions held as a result of investments in investment fund shares must be treated consistently based on the proportional composition of their portfolios or, if impossible, as a position subject to variation in fixed interest rates, allocated to vertex P10 defined in Art. 3 of this Circular.

Art. 3 Cash flows must be grouped into the following vertices Pi, according to the number of business days remaining until the date of their maturity (Ti):
I - P1, corresponding to 21 business days;
II - P2, corresponding to 42 business days;
III - P3, corresponding to 63 business days;
IV - P4, corresponding to 126 business days;
V - P5, corresponding to 252 business days;
VI - P6, corresponding to 504 business days;
VII - P7, corresponding to 756 business days;
VIII - P8, corresponding to 1,008 business days; IX - P9, corresponding to 1,260 business days; and X - P10, corresponding to 2,520 business days.

§ 1 Cash flows with a term less than 21 business days must be allocated to vertex P1 in the proportion corresponding to Ti/21 of their marked-to-market value.

§ 2 Cash flows with a term greater than 2,520 business days must be allocated to vertex P10, in the proportion corresponding to the fraction Ti/2,520 of their marked-to-market value.

§ 3 Cash flows between the terms of 21 business days and 2,520 business days must be allocated to the preceding (Pi) and subsequent (Pj) vertices, according to the following criteria:
I - the fraction (Pj – Ti) / (Pj – Pi) of the marked-to-market value of the cash flow must be allocated to the vertex of term Pi; and II - the fraction (Ti – Pi) / (Pj – Pi) of the marked-to-market value of the cash flow must be allocated to the vertex of term Pj.

Art. 4 The methodology for calculating the rates used for marking to market of exposures subject to variation in fixed interest rates denominated in real must be established based on consistent and verifiable criteria, in compliance with current regulations.

§ 1 Operations in which the institution acts exclusively as an intermediary, assuming no rights or obligations with the parties, do not integrate the calculation base of the RWAJUR1 portion.

§ 2 It is the responsibility of the institution of the conglomerate responsible for sending accounting information to the Central Bank of Brazil to calculate the consolidated portion of RWAJUR1.

Art. 5 A report detailing the calculation of the RWAJUR1 portion must be sent to the Central Bank of Brazil, in the manner to be established.

Sole Paragraph. Institutions must keep available to the Central Bank of Brazil, for a period of five years, the information used for the daily calculation of the RWAJUR1 portion, as well as the methodology used for calculating the market value of the respective operations.

Art. 6 This Circular enters into force on October 1, 2013.

Art. 7 The following are repealed, as of October 1, 2013:
I - Circular No. 3,361, of September 12, 2007; II - Circular No. 3,498, of June 28, 2010; and III - Circular No. 3,568, of December 21, 2011.

Sole Paragraph. Citations to Circular No. 3,361, of 2007, shall henceforth refer to this Circular.

Luiz Awazu Pereira da Silva
Director of Regulation of the Financial System

This text does not replace the published in the DOU of 3/6/2013, Section 1, p. 13/14, and in Sisbacen.