Circular No. 3637 — Procedures for Calculating Risk-Weighted Assets for Interest Rate Coupon Exposures Under the Standardized Approach

CIRCULAR NO. 3,637, OF MARCH 4, 2013

Establishes the procedures for calculating the portion of risk-weighted assets (RWA) related to exposures subject to the variation of interest rate coupon rates whose capital requirement is calculated using the standardized approach (RWAJUR4), 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 Articles 9, 10, item IX, and 11, item VII, of Law No. 4,595, of December 31, 1964, and Articles 3, paragraph 2, and 15 of Resolution No. 4,193, of March 1, 2013,

RESOLVES:

Article 1. The calculation of the daily value of the portion of risk-weighted assets (RWA), related to exposures subject to the variation of interest rate coupon rates whose capital requirement is calculated using the standardized approach (RWAJUR4), as provided for in Resolution No. 4,193, of March 1, 2013, must be carried out based on the following formula:

RWAJUR4 = F * Σ(i=1 to 11) [ Σ(j=1 to M) (ELi + DV + DHZj + DHE) ]

where:
I - F = factor established in Article 4 of Resolution No. 4,193, of 2013; II - M = multiplier factor for exposure to interest rate coupon, to be published by the Central Bank of Brazil; III - t = number of interest rates in which there is exposure to interest rate coupon; IV - ELi = net exposure at vertex "i" for interest rate coupon "t"; V - DV = vertical mismatch at vertex "i" for interest rate coupon "t"; VI - DHZ = horizontal mismatch in interest rate coupon "t" within maturity zone "j"; and VII - DHE = horizontal mismatch in interest rate coupon "t" 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 the variation of interest rate coupon rates, defined as the fixed interest rates of the instruments referenced in the mentioned coupon.

Article 2. For the determination of the daily value of the RWAJUR4 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, referring to the set of operations kept open on the business day immediately preceding.

§ 1. Cash flows must be obtained through the decomposition of each operation kept 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 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 through the use of the temporal structure of interest rates that represents the rates in force in the market on the business day immediately preceding.

§ 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 an interest rate coupon:
I - the representative value of each position must be obtained by multiplying the quantity of contracts by its 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 the 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 an interest rate coupon, allocated at vertex P defined in Article 3.

Article 3. Cash flows must be grouped into the following vertices (Pi), according to the number of business days remaining until the maturity date (T):
I - P1, corresponding to one business day;
II - P2, corresponding to 21 business days;
III - P3, corresponding to 42 business days;
IV - P4, corresponding to 63 business days;
V - P5, corresponding to 126 business days;
VI - P6, corresponding to 252 business days;
VII - P7, corresponding to 504 business days;
VIII - P8, corresponding to 756 business days; IX - P9, corresponding to 1,008 business days; X - P10, corresponding to 1,260 business days; and XI - P11, corresponding to 2,520 business days.

§ 1. Cash flows with a term equal to Pi must be allocated to the corresponding vertices Pi.

§ 2. Cash flows with a term greater than 2,520 business days must be allocated to vertex P11, in the proportion corresponding to T/2,520 of its marked-to-market value.

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

Article 4. The exposure at interest rate coupon "t", at vertex Pi, is defined by the allocation of each position in said rate, whether bought or sold, at said vertex, and must be weighted by the following factors Yi:
I - for positions at vertex P1, Yi is 0% (zero percent); II - for positions at vertex P2, Yi is 0.50% (fifty hundredths percent); III - for positions at vertex P3, Yi is 0.70% (seventy hundredths percent); IV - for positions at vertex P4, Yi is 0.80% (eighty hundredths percent); V - for positions at vertex P5, Yi is 1.20% (one whole and twenty hundredths percent); VI - for positions at vertex P6, Yi is 2% (two percent); VII - for positions at vertex P7, Yi is 4% (four percent); VIII - for positions at vertex P8, Yi is 6% (six percent); IX - for positions at vertex P9, Yi is 8% (eight percent); X - for positions at vertex P10, Yi is 10% (ten percent); and XI - for positions at vertex P11, Yi is 18% (eighteen percent).

Article 5. The vertices mentioned in Article 3 of this Circular are grouped into three maturity zones, each associated with a factor Wj:
I - Zone 1 comprises vertices P1 to P3, whose Wj is 40% (forty percent); II - Zone 2 comprises vertices P4 to P7, whose Wj is 30% (thirty percent); and III - Zone 3 comprises vertices P8 to P11, whose Wj is 30% (thirty percent).

Article 6. Each exposure bought or sold at interest rate coupon "t", in each vertex Pi, must be weighted by the respective factor Yi, resulting in the weighted exposure.

Sole Paragraph. The value of the net exposure ELi is determined considering the net value of the sum of the weighted exposures at each vertex Pi, for interest rate coupon "t".

Article 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 the weighted bought exposures and the absolute value of the sum of the weighted sold exposures at each vertex Pi, for interest rate coupon "t".

Article 8. The value of the horizontal mismatch within maturity zones DHZj corresponds to the smaller value between the sum of positive ELi and the sum of the absolute values of negative ELi of each vertex Pi belonging to zone "j", multiplied by the factor Wj, for interest rate coupon "t".

Article 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.

Article 10. The value of the total exposures of zone "j" mentioned in Article 9 corresponds to the sum of the net exposures ELi of each vertex Pi belonging to zone "j", for interest rate coupon "t".

Article 11. In the determination of the RWAJUR4 portion, exposures subject to the variations of the Reference Rate (TR), Long-Term Interest Rate (TJLP), and Basic Financial Rate (TBF) coupons must be calculated separately.

§ 1. Exposures subject to the variation of interest rate coupon rates not mentioned in the caput may be calculated jointly – as subject to the variation of the rate of a single interest rate coupon – in the determination of the RWAJUR4 portion.

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

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

§ 1. Operations in which the institution acts exclusively as an intermediary, assuming no rights or obligations towards the parties, do not integrate the calculation base of the RWAJUR4 portion.

§ 2. It is the responsibility of the institution of the conglomerate responsible for sending accounting information to the Central Bank of Brazil to determine the consolidated RWAJUR4 portion.

Article 13. A report detailing the determination of the RWAJUR4 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 RWAJUR4 portion, as well as the methodology used for determining the market value of the respective operations.

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

Article 15. Circular No. 3,364, of September 12, 2007, is hereby repealed, effective October 1, 2013.

Sole Paragraph. Citations to Circular No. 3,364, 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. 16/17, and in Sisbacen.