Circular No. 3635 — Procedures for Calculating Risk-Weighted Assets for Foreign Currency Coupon Rate Variability Exposures under the Standardized Approach

CIRCULAR NO. 3,635, OF MARCH 4, 2013

Establishes the procedures for calculating the portion of risk-weighted assets (RWA) related to exposures subject to foreign currency coupon rate variability, whose capital requirement is calculated using the standardized approach (RWAJUR2), 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 foreign currency coupon rate variability, whose capital requirement is calculated using the standardized approach (RWAJUR2), as provided for in Resolution No. 4,193, of March 1, 2013, must be carried out based on the following formula:

RWA = F * M * (Sum_{k=1 to m} [ Sum_{j=1 to 11} (EL_{i,j,k} + DV_{i,j,k}) + Sum_{j=1 to 11} DHZ_{j,k} + DHE_k ])

where:
I - F = factor established in Art. 4 of Resolution No. 4,193, of 2013; II - M = multiplier factor for exposure subject to foreign currency coupon rate variability, to be disclosed by the Central Bank of Brazil; III - m = number of foreign currencies in which there is exposure subject to foreign currency coupon rate variability; IV - EL = net exposure at vertex "i" and in foreign currency "k"; V - DV = vertical mismatch at vertex "i" and in foreign currency "k"; VI - DHZ = horizontal mismatch in foreign currency "k" within maturity zone "j"; and VII - DHE = horizontal mismatch in foreign currency "k" between maturity zones.

Sole Paragraph. The calculation referred to in the caput applies to operations classified in the trading book, in the form of Resolution No. 3,464, of June 26, 2007, including financial derivative instruments, and subject to variation in foreign currency coupon rates, defined as the fixed interest rates of instruments referenced in the said foreign currency "k" or denominated in foreign currency "k".

Art. 2 For the determination of the daily value of the RWAJUR2 portion, it is defined that each position is the cash flow corresponding to the net result of the value of active positions minus the value of passive positions that mature on the same day, referring to the set of operations held open on the previous business day.

§ 1 Cash flows must be obtained by decomposing each operation held 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 where the net results determined 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 previous 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 cash flows, operations with financial derivative instruments must be considered, observing the following criteria in the case of operations with options referenced on foreign currency coupons:
I - the value 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 II - the cash flows corresponding to each operation must be obtained separately and their result must be included in the cash flow of the contract's maturity date.

§ 7 Cash flows resulting from credit derivatives used as a hedge for the adjustment to the market value of operations with financial derivative 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 in a foreign currency coupon, allocated at vertex P defined in Art. 3 of this Article.

Art. 3 Cash flows must be grouped into the following vertices (P_i), according to the number of remaining business days until their maturity date (T):
I - P_1, corresponding to one business day;
II - P_2, corresponding to 21 business days;
III - P_3, corresponding to 42 business days;
IV - P_4, corresponding to 63 business days;
V - P_5, corresponding to 126 business days;
VI - P_6, corresponding to 252 business days;
VII - P_7, corresponding to 504 business days; VIII - P_8, corresponding to 756 business days; IX - P_9, corresponding to 1,008 business days; X - P_10, corresponding to 1,260 business days; and XI - P_11, corresponding to 2,520 business days.

§ 1 Cash flows with a term equal to P_1 must be allocated to the corresponding vertex P_1.

§ 2 Cash flows with a term greater than 2,520 business days must be allocated to vertex P_11, in the proportion corresponding to T/2,520 of their marked-to-market value.

§ 3 Cash flows with terms between one business day and 2,520 business days must be allocated to the preceding (P_i) and succeeding (P_{i+1}) vertices, according to the following criteria:
I - the fraction (P_{i+1} – T) / (P_{i+1} – P_i) of the marked-to-market value of the cash flow must be allocated to the vertex with term P_i; and II - the fraction (T – P_i) / (P_{i+1} – P_i) of the marked-to-market value of the cash flow must be allocated to the vertex with term P_{i+1}.

Art. 4 The exposure in foreign currency "k", at vertex P_i, is defined by the allocation of each position in the said currency, whether bought or sold, at the said vertex, as established in Art. 3 of this Circular, and must be weighted by the following factors Y_i:
I - for positions at vertex P_1, Y_i is 0% (zero percent); II - for positions at vertex P_2, Y_i is 0.50% (fifty hundredths percent); III - for positions at vertex P_3, Y_i is 0.70% (seventy hundredths percent); IV - for positions at vertex P_4, Y_i is 0.80% (eighty hundredths percent); V - for positions at vertex P_5, Y_i is 1.20% (one whole and twenty hundredths percent); VI - for positions at vertex P_6, Y_i is 2% (two percent); VII - for positions at vertex P_7, Y_i is 4% (four percent); VIII - for positions at vertex P_8, Y_i is 6% (six percent); IX - for positions at vertex P_9, Y_i is 8% (eight percent); X - for positions at vertex P_10, Y_i is 10% (ten percent); and XI - for positions at vertex P_11, Y_i is 18% (eighteen percent).

Art. 5 The vertices mentioned in Art. 3 of this Circular are grouped into three maturity zones, each associated with a factor W_j:
I - Zone 1 comprises vertices P_1 to P_4, for which W_j is 40% (forty percent); II - Zone 2 comprises vertices P_5 to P_8, for which W_j is 30% (thirty percent); and III - Zone 3 comprises vertices P_9 to P_11, for which W_j is 30% (thirty percent).

Art. 6 Each exposure bought or sold in foreign currency "k", at each vertex P_i, must be weighted by the respective factor Y_i, resulting in the weighted exposure.

Sole Paragraph. The value of the net exposure EL is determined considering the net value of the sum of weighted exposures at each vertex P_i, for foreign currency "k".

Art. 7 The value of the vertical mismatch DV corresponds to 10% (ten percent) of the smaller value between the absolute value of the sum of weighted bought exposures and the absolute value of the sum of weighted sold exposures at each vertex P_i, for foreign currency "k".

Art. 8 The value of the horizontal mismatch within maturity zones DHZ corresponds to the smaller value between the sum of positive ELs and the sum of the absolute values of negative ELs of each vertex P_i belonging to zone "j", multiplied by the factor W_j, for foreign currency "k".

Art. 9 The value of the horizontal mismatch between maturity zones DHE corresponds to the sum of the following values:
I - 40% (forty percent) of the smaller absolute value between the total exposures of Zone 1 and Zone 2, if they have contrary total exposures; II - 40% (forty percent) of the smaller absolute value between the total exposures of Zone 2 and Zone 3, if they have contrary total exposures; and III - 100% (one hundred percent) of the smaller absolute value between the total exposures of Zone 1 and Zone 3, if they have contrary total exposures.

Art. 10. The value of the total exposures of zone "j" mentioned in Art. 9 corresponds to the sum of the net exposures EL of each vertex P_i belonging to zone "j", for foreign currency "k".

Art. 11. In the determination of the RWAJUR2 portion, exposures subject to the variation of coupon rates for the United States dollar, euro, Swiss franc, yen, and British pound sterling must be calculated separately.

§ 1 Exposures subject to the variation of coupon rates for foreign currencies not mentioned in the caput may be calculated jointly – as subject to the variation of the coupon rate of a single currency – in the determination of the RWAJUR2 portion.

§ 2 Exposures subject to the variation of coupon rates for the foreign currencies referred to in the caput whose value is less than 5% (five percent) of the total exposures subject to the variation of foreign currency coupon rates may receive the treatment mentioned in § 1.

Art. 12. The methodology for determining the rates used for marking to market exposures subject to the variation of foreign currency coupon rates must be established based on consistent and verifiable criteria, in accordance with current regulations.

§ 1 Exposures resulting from operations with securities denominated in foreign currencies must be determined in reais, by converting their respective values, based on the sell quotes available in transaction PTAX800, option 5, of the Central Bank Information System (Sisbacen), of the day prior to that to which the determination refers.

§ 2 Operations in which the institution acts exclusively as an intermediary, assuming no rights or obligations with the parties, do not form part of the calculation base for the RWAJUR2 portion.

§ 3 It is the responsibility of the conglomerate institution responsible for sending accounting information to the Central Bank of Brazil to determine the consolidated RWAJUR2 portion.

Art. 13. A report detailing the determination of the RWAJUR2 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 determination of the RWAJUR2 portion, as well as the methodology used for determining the market value of the respective operations.

Art. 14. This Circular enters into force on October 1, 2013.

Art. 15. Circular No. 3,362, of September 12, 2007, is revoked, effective October 1, 2013.

Sole Paragraph. Citations to Circular No. 3,362, 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. 14/15, and in Sisbacen.