Circular No. 3648 — Establishes Minimum Requirements for Calculating the Credit Risk Exposure Component Subject to Capital Requirement Calculation via Internal Risk Rating Systems (IRB Approaches) (RWACIRB)

CIRCULAR NO. 3,648, OF MARCH 4, 2013
Establishes the minimum requirements for calculating the portion related to credit risk exposures subject to the calculation of the capital requirement through internal risk classification systems (IRB approaches) (RWACIRB), 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,

R E S O L V E S:

TITLE I
PRELIMINARY PROVISIONS

SINGLE CHAPTER
SCOPE OF APPLICATION

Article 1. The use of internal credit risk classification systems (IRB approaches) for calculating the monthly value of the portion related to credit risk exposures subject to the calculation of the capital requirement (RWACIRB), as provided for in Resolution No. 4,193, of March 1, 2013, is permitted for the following institutions:

I - multiple banks, savings banks, commercial banks, except for cooperative banks that are not part of a financial conglomerate, and the National Bank for Economic and Social Development (BNDES); and

II - entities that are part of a prudential conglomerate, in accordance with the Accounting Plan of the Institutions of the National Financial System (Cosif), composed of at least one of the institutions mentioned in item I.

Article 2. The use of IRB approaches depends on prior authorization from the Department of Supervision of Banks and Banking Conglomerates (Desup) of the Central Bank of Brazil.

§ 1. The authorization referred to in the caput may be canceled, at the discretion of Desup, if the minimum requirements established in this Circular are no longer met or if the calculated values do not adequately reflect the credit risk of the exposures.

§ 2. Once the authorization referred to in the caput is granted:

I - the respective IRB approach must be used for calculating the monthly value of the RWACIRB portion; and

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II - the withdrawal of the use of the IRB approach requires prior authorization from Desup.

Article 3. The institution that adopts an IRB approach must prove:

I - that the internal system used meets the minimum requirements established in this Circular, and that Desup must be informed in a timely manner if any of these are no longer met; and

II - that models and information technology systems acquired from third parties and used in the internal risk classification systems are adequate to its risk profile and meet the minimum requirements established in this Circular.

Article 4. The IRB approaches apply to the exposures defined in Circular No. 3,644, of March 4, 2013, not classified in the trading book, according to the criteria established in Circular No. 3,354, of June 27, 2007, and to exposures classified in the trading book subject to counterparty credit risk.

§ 1. The use of the IRB approach does not apply to exposures:

I - weighted by the Risk Weighting Factor (RWF) of 0% (zero percent), in accordance with Articles 19 and 37, item I, of Circular No. 3,644, of 2013;

II - mentioned in Article 27, item II, of Circular No. 3,644, of 2013;

III - resulting from interdependent operations and other operations carried out with affiliated institutions with which consolidated financial statements are prepared;

IV - related to assets deducted from Reference Equity (PR), in accordance with current regulations;

V - related to the risk of the underlying asset resulting from investments in stocks and traded commodities (commodities) covered, respectively, by the RWAACS and RWACOM components of the RWAMPAD portion, as provided for in Resolution No. 4,193, of 2013;

VI - related to operations with financial derivatives in which the institution acts exclusively as an intermediary, not assuming any rights or obligations with the parties;

VII - not characterized as credit operations, equity participations or investments, derivative contracts, or as operations subject to counterparty credit risk;

VIII - related to quotas of funds, including Credit Rights Investment Funds (FIDC), co-obligations, and other modalities of retention of risks and benefits resulting from sales or transfers of financial assets that remain registered in the institution's assets, in accordance with current regulations;

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IX - related to historical residual balances, upon request by the institution and authorization by Desup;

X - related to adjustments associated with the variation in the value of derivatives due to changes in the credit quality of the counterparty (CVA);

XI - related to collateral deposited in clearing systems or clearing and settlement service providers and not separated from the assets of the depositary entity;

XII - related to participation in guarantee funds for clearing systems or clearing and settlement service providers;

XIII - related to exposures resulting from operations settled in clearing systems or clearing and settlement service providers, interposing the clearing house or service provider as a central counterparty, which meet the following characteristics:

a) are authorized by the Central Bank of Brazil, in accordance with Law No. 10,214, of March 27, 2001, and current regulations; or

b) are subject to regulation consistent with the principles established by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO).

§ 2. It is the institution's responsibility to document compliance with the provision of item “b” of item XIII of § 1.

§ 3. Exposures not subject to the IRB approaches must receive the treatment established in Circular No. 3,644, of 2013.

TITLE II
IRB APPROACHES

CHAPTER I
RISK PARAMETERS AND TYPES OF APPROACHES

Section I
Risk Parameters

Article 5. The IRB approaches use the following risk parameters:

I - Probability of Default (PD), a percentage corresponding to the long-term expectation of default rates, as defined in Article 15, for the 1 (one) year time horizon of borrowers of a certain level of credit risk or homogeneous risk group, as defined in § 1 of Article 44;

II - Exposure at Default (EAD), which corresponds to the value of the institution's exposure, whether actual or contingent, with the borrower or counterparty at the moment of the occurrence of the default event, gross of provisions and possible partial write-offs;

III - Loss Given Default (LGD), which corresponds to the percentage, relative to the observed EAD parameter, of the economic loss resulting from default, considering all relevant factors, including discounts granted for credit recovery and all direct and indirect costs associated with the collection of the obligation; and

IV - Effective Maturity (M), which corresponds to the remaining term of the operation weighted by the cash flows related to each future period as presented in Article 86.

Section II
Types of Approaches

Article 6. The IRB approaches comprise:

I - advanced IRB approach;

II - basic IRB approach;

III - simplified approach;

IV - VaR approach;

V - PD/LGD approach;

VI - internal rating-based approach (RBA); and

VII - supervisory formula approach (SF).

§ 1. The use of the advanced IRB approach implies the own estimation of the values of the PD, LGD, and EAD parameters, and the internal calculation of the value of the M parameter, when applicable.

§ 2. The use of the basic IRB approach implies the internal estimation of the value of the PD parameter, the internal calculation of the value of the M parameter, and the use of values published by the Central Bank of Brazil for the other risk parameters, unless otherwise provided.

§ 3. The IRB approach referred to in item I of the caput applies to exposures classified in the categories "sovereign entities", "financial institutions", "retail", and "wholesale", defined in Article 7.

§ 4. The IRB approach referred to in item II of the caput applies to exposures classified in the categories "sovereign entities", "financial institutions", and "wholesale", defined in Article 7.

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§ 5. The IRB approaches referred to in items III, IV, and V of the caput apply to exposures classified in the category "equity participations", defined in Article 7, and consist, respectively, in:

I - application of standardized risk weighting factors to certain types of exposure, for the simplified approach;

II - application of the Value at Risk (VaR) methodology to the quarterly returns of the value of stocks or risk factors representative of the exposures, for the VaR approach; and

III - use of standardized values for the LGD parameter and values for the PD parameter obtained through exposures to the same counterparty belonging to other exposure categories, or through external mapping techniques, for the PD/LGD approach.

§ 6. The IRB approaches referred to in items VI and VII of the caput apply to securitization exposures.

CHAPTER II
EXPOSURE CATEGORIES

Section I
Specification of Categories

Article 7. Exposures subject to the use of IRB approaches must be segmented into the following categories:

I - "sovereign entities", covering exposures to central governments of foreign countries and their respective central banks;

II - "financial institutions", covering exposures to financial institutions and other institutions authorized to operate by the Central Bank of Brazil with which consolidated financial statements are not prepared, exposures to financial institutions headquartered abroad with which consolidated financial statements are not prepared, and exposures to multilateral organizations and Multilateral Development Entities (MDE) not listed in item V of Article 19 of Circular No. 3,644, of 2013;

III - "retail", covering:

a) exposures to natural persons and legal entities with annual gross revenue below R$3,600,000.00 (three million and six hundred thousand reais), managed in a non-individualized manner through homogeneous risk groups, which take the form of financial instruments typically aimed at retail; and

b) exposures related to loans and financing to natural persons with residential real estate collateral;

IV - "equity participations", covering the acquisition of shares or quotas of companies, except for capital instruments issued by financial institutions and other institutions authorized to operate by the Central Bank of Brazil; and

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V - "wholesale", covering exposures to natural and legal persons who do not fit into the categories described in items I to IV.

Article 8. The "retail" category is divided into the following subcategories:

I - "residential", comprising loans and financing to natural persons with residential real estate collateral, regardless of the exposure value, limited to one residential unit per counterparty, always considering the first unit acquired;

II - "qualified retail revolving credit", comprising unsecured and revolving exposures with natural persons as counterparties, whose aggregate value per counterparty is below R$40,000.00 (forty thousand reais) and which present low volatilities in loss rates compared to the historical average volatility of losses of the subcategory "other retail exposures" identified in item III, especially in the low value ranges for the PD parameter; and

III - "other retail exposures", comprising exposures not classified in the subcategories described in items I and II.

Sole paragraph. Exposures classified in the "retail" category, except for the "residential" subcategory, must observe the limits for the value of operations with the same counterparty established in Article 24, § 1, items III and IV, of Circular No. 3,644, of 2013.

Article 9. The "wholesale" category is divided into the following subcategories:

I - "exposures to natural persons not classified in the 'retail' category and to small and medium-sized enterprises (SME)", comprising exposures to private legal entities with annual gross revenue below R$48,600,000.00 (forty-eight million and six hundred thousand reais);

II - "specialized financing", comprising "project financing", "specific object financing", "commodities financing", "revenue-generating real estate development", and the special subcategory "high volatility commercial real estate financing" (HVCRE); and

III - other wholesale exposures not classified in the subcategories described in items I and II.

§ 1. The "specialized financing" subcategory of the "project financing" type includes financing operations with the following characteristics:

I - the main source of payment for the operation consists of the revenues generated by the financed project itself and not by the sponsoring entity; and

II - in the case of non-financial collateral being pledged, as mentioned in Article 87, the main collateral of the operation consists of the physical facilities of the financed project itself.

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§ 2. The "specialized financing" subcategory of the "specific object financing" type includes credit operations for the acquisition of goods with the following characteristics:

I - the main source of resources for paying off the financing consists of the revenues generated by the acquired good itself and not by the sponsoring entity;

II - the main collateral of the operation consists of the acquired good itself; and

III - the borrower does not have resources to pay off the financing without the revenues generated by the financed good.

§ 3. The "specialized financing" subcategory of the "commodities financing" type includes short-term credit operations for the acquisition of commodities or receivables linked to commodities, with the following characteristics:

I - the main source of resources for paying off the financing consists of the revenue from the sale of the financed commodities or the receivables associated with them, as well as the financial results of the receivables themselves, and not the revenues generated by the entity acquiring the commodities; and

II - the borrower does not have resources to pay off the financing without the revenue from the sale of the commodities or without the financial results of the receivables associated with them.

§ 4. The "specialized financing" subcategory of the "revenue-generating real estate development" type includes financing operations for the acquisition and construction of real estate with the following characteristics:

I - the revenues generated by the real estate itself constitute the main source of payment for the financing;

II - the main collateral of the operation consists of the financed real estate development itself; and

III - there is a strong positive correlation between the possibility of paying off the financing and the expected degree of recovery in case of default, both of which depend primarily on the revenues generated by the financed units.

§ 5. The "specialized financing" subcategory of the "HVCRE" type includes financing operations for the acquisition or construction of commercial real estate with the following characteristics:

I - the historical loss rates of operations in the subcategory present higher volatilities than those observed in the "specialized financing" subcategory of the "revenue-generating real estate development" type, identified in § 4;

II - the main source of resources for payment at the time of granting the financing consists of the revenues, with a high degree of uncertainty, generated by the acquired real estate itself and not by the sponsoring entity;

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III - the main collateral of the operation consists of the financed real estate development itself; and

IV - the borrower does not have resources to pay off the financing without the revenues generated by the real estate development.

§ 6. The classification of operations in the "specialized financing" subcategory of the "HVCRE" type may be determined by Desup.

§ 7. For the purpose of the verification provided for in § 5, item I, the use of expected loss rates is admitted in the case of non-existence or insufficiency of the database.

§ 8. The individualized risk classification of a retail exposure during part of the risk management process does not exclude its classification as "retail", nor the treatment applicable to this type of exposures.

Article 10. Exposures related to the acquisition of receivables originating from exposures classifiable in the "retail" and "wholesale" categories must be highlighted for distinct treatment from other exposures in these categories, as provided for in Articles 58 and 59.

Sole paragraph. The highlighting mentioned in the caput is optional, provided that the following requirements are met:

I - proof of the non-existence of downgrade risk, as defined in § 1 of Article 61, or its total mitigation; and

II - existence of sufficient information for individualized analysis of receivable operations with the level of detail adequate to the characteristics of the "wholesale" or "retail" categories.

Section II
Use of IRB Approach for Exposure Categories

Article 11. The use of an IRB approach for a specific exposure category in a business unit implies the use of the same approach for all relevant exposures of the referenced category and respective subcategories in that unit.

§ 1. A business unit is defined as the structure used for managing portfolios with similar characteristics.

§ 2. The business unit defined in § 1 is not necessarily linked to the legal structure of the financial conglomerate or to the registration in the National Registry of Legal Entities (CNPJ).

§ 3. For exposures in business units that are not relevant in relation to the size of the institution and for exposure categories whose value is considered irrelevant in relation to the risk incurred, it may occur, exceptionally, at the discretion of Desup:

I - the use of an approach different from the previously authorized one; and

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II - the waiver of the use of the IRB approach for calculating the monthly value of the RWACIRB portion.

§ 4. The use of an IRB approach for any of the exposure categories implies its adoption also for the "equity participations" category, observing the materiality criterion.

§ 5. The use of an IRB approach for the "wholesale" category implies its use for the "specialized financing" subcategory.

Section III
Qualitative Requirements

Article 12. The IRB approach adopted for a specific category must meet the following requirements:

I - consistently measure credit risk, considering the characteristics of the borrower and the operation;

II - classify credit risk according to a consistent methodology;

III - be integrated, together with the estimates of risk parameters, into the credit risk management structure, as provided for in Resolution No. 3,721, of April 30, 2009, and be used together with the limits defined by the institution to measure, monitor, and control exposure to credit risk;

IV - support decisions and procedures resulting from adopted management policies and strategies;

V - employ technological infrastructure and controls compatible with the nature of operations, the complexity of products, and the size of the institution's exposure to credit risk;

VI - submit internal estimates of risk parameters to a validation process; and

VII - evaluate new products and discontinued businesses in a conservative manner.

Article 13. The institution that adopts an IRB approach must maintain a sufficient quantity of technically qualified professionals in its business, operational, lending, risk assessment and management, internal audit, information technology areas, as well as in those involved in the development, validation, evaluation, and use of internal risk classification systems.

Article 14. The use of an IRB approach implies the maintenance of adequate and updated descriptive documentation on all relevant aspects of the systems used, covering, at minimum:

I - policies and strategies adopted;

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II - theoretical basis;

III - evaluation, measurement, and monitoring methodologies, including those used in statistical models, comprising theoretical basis, premises, data source, statistical tests for system validation, and the circumstances under which the methodologies do not work satisfactorily;

IV - treatment provided to new products, including characteristics, evaluation, measurement, and monitoring methodologies, and performance reports;

V - credit portfolio segmentation, classification criteria, responsibility of involved professionals, frequency of classification review, and monitoring of the classification process;

VI - internal definitions of delay, default, loss, default, situations of exception to the classifications used internally, as well as all other definitions used to qualify clients and operations, demonstrating their consistency with regulatory definitions, when applicable;

VII - structure of the internal risk classification system;

VIII - internal controls;

IX - operational routines;

X - evaluation reports, including those from internal audit and validation processes;

XI - risk reports, including stress test reports;

XII - management reports that provide support for the decision-making process of the institution's board of directors and board of directors; and

XIII - history of changes made to the internal systems, including the validation process.

CHAPTER III
DEFAULT

Section I
Definition

Article 15. Default is defined as the occurrence of at least one of the following events:

I - for exposures classified in the "retail" category:

a) the institution considers that the borrower or counterparty will not honor the respective obligation in full without the institution resorting to actions such as the execution of pledged guarantees or collateral; or

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b) the respective obligation has been overdue for more than 180 (one hundred and eighty) days, in the case of exposures classified in the "residential" subcategory, or for more than 90 (ninety) days, in the case of exposures classified in the other subcategories;

II - for exposures related to loans and financing to natural persons with residential real estate collateral classified in the "wholesale" category:
a) the institution considers that the borrower or counterparty will not honor at least one obligation to the institution in full without the institution resorting to actions such as the enforcement of pledged guarantees or collateral; or b) at least one obligation of the borrower or counterparty to the institution related to loans and financing with residential real estate collateral has been overdue for more than 180 (one hundred and eighty) days;

III - for exposures classified in the other categories:
a) the institution considers that the borrower or counterparty will not honor at least one obligation to the institution in full without the institution resorting to actions such as the enforcement of pledged guarantees or collateral; or b) at least one obligation of the borrower or counterparty to the institution has been overdue for more than 90 (ninety) days.

§ 1st The indicators that a specific borrower or counterparty will not honor an obligation in full include:

I - the institution, on its own initiative and independently of regulatory requirement, ceases to accrue income related to the exposure;

II - the institution, on its own initiative and independently of regulatory requirement, recognizes significant deterioration in the credit quality of the borrower or counterparty;

III - the institution sells, transfers, or renegotiates with significant economic loss the credit rights related to the obligation, due to significant deterioration in the credit quality of the borrower or counterparty;

IV - the institution petitions for bankruptcy or takes similar action against the borrower or counterparty, based on non-compliance with credit obligations under agreed terms;

V - the borrower or counterparty requests any type of judicial measure that limits, delays, or prevents the fulfillment of its obligations under agreed terms; and

VI - the borrower or counterparty has suffered any type of judicial measure that limits, delays, or prevents the fulfillment of its obligations under agreed terms.

§ 2nd Obligations related to guaranteed accounts and similar exposures are considered overdue from the day the debtor balance exceeds the agreed limit.

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§ 3rd The methodology for counting the days an operation is overdue must be consistent over time and clearly documented.

§ 4th The criteria defined by the institution, both for marking and unmarking non-performing exposures, must be consistent with the requirements of this Circular and aligned with its credit risk management.

§ 5th The criteria for unmarking non-performance must include, at a minimum:

I - setting the minimum payment value for which non-performance can be unmarked;

II - setting the required period for which the exposure's non-performance can be unmarked after payment of the minimum value mentioned in item I; and

III - establishing processes that ensure non-performance is not double-counted, if payments cease to be made during the period determined in item II.

§ 6th For the purpose of calculating the RWACIRB component, the PD parameter value must be equal to 1 (one) for exposures within the period specified in item II of § 5th.

§ 7th Exposures belonging to the "specialized financing" subcategory previously established by the institution may receive distinct treatment for the purpose of determining non-performance, subject to specific approval by Desup.

Section II
Of the Renegotiation Policy

Art. 16. The institution using the IRB approach must have a consistent policy over time and clearly documented for the renegotiation of operations and similar provisions, in accordance with Resolution No. 2,682, of December 21, 1999, identifying, at a minimum:

I - those responsible for the policy and for monitoring reports, and the bodies responsible for approving the renegotiation;

II - the original operation and its monitoring, including in case of renegotiation;

III - the means of disseminating respective information within the institution;

IV - the effective minimum maturity period required for an operation to be renegotiated;

V - the limit for the level of delinquency for a renegotiation;

VI - the maximum number of renegotiations per operation;

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VII - the analysis of the debtor's payment capacity in a renegotiation; and

VIII - the analysis of the occurrence of losses in the present value of the operation, as well as changes in risk parameters.

Sole paragraph. The credit granting processes must be consistent with the policy mentioned in the main text.

TITLE III
OF CREDIT RISK

CHAPTER I
OF CREDIT RISK CLASSIFICATION SYSTEMS

Art. 17. The use of more than one credit risk classification system for different exposures belonging to the same category is permitted.

§ 1st Credit risk classification systems comprise methods, processes, controls, data storage, and information technology systems, intended to:

I - measure credit risk, including the assignment of value to risk parameters;

II - clearly define the various risk levels into which financial operations are segmented; and

III - allow the classification of financial operations into risk levels.

§ 2nd The definition mentioned in item II of § 1st for the categories "wholesale," "sovereign entities," and "financial institutions" must include a qualitative description of the risk levels and the typical profile of borrowers classified therein.

§ 3rd The choice of the classification system must be documented and based on the best risk level discrimination capability based on the characteristics of borrowers or counterparties and operations.

Art. 18. The criteria for defining risk levels must:

I - be plausible and justifiable;

II - result in significant differentiation among the various credit risk levels in the categories and subcategories to which such classification applies; and

III - be consistent with credit granting policies and policies for handling non-performing credits.

§ 1st The classification of operations must use timely and relevant information according to verifiable criteria.

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§ 2nd The criteria and procedures for credit risk classification must be periodically reviewed to ensure they remain applicable to the current portfolio composition, market conditions, and economic scenario.

§ 3rd Clear and sufficiently detailed documentation must be maintained regarding the definition of credit risk levels, in order to allow verification and replication of classifications.

§ 4th Exposures must be classified conservatively if adequate and sufficient information is not provided.

§ 5th Counterparties must be classified individually, except in the case of entities belonging to the same economic group and receiving uniform risk classification, at the institution's discretion and subject to Desup's assessment.

Art. 19. The classification of borrowers or counterparties must reflect not only the 1 (one) year period used to estimate the PD parameter value, but also the possibility of credit quality deterioration in horizons exceeding 1 (one) year.

Sole paragraph. The classification referred to in the main text must consider the effect of deteriorating economic conditions on the current situation and the occurrence of unexpected events, mainly on sectors most sensitive to fluctuations in these conditions.

Art. 20. Parametric risk quantification systems must:

I - be subject to continuous monitoring and periodic critical evaluations of results and processes, in order to ensure the use of all relevant information; and

II - be supplemented, when necessary, with qualitative adjustments intended to mitigate their limitations, following previously documented procedures.

§ 1st The models used, in particular the variables employed, must demonstrably possess high predictive capacity regarding the performance of borrowers or counterparties and the operations to which the institution is exposed.

§ 2nd The estimates produced by the models referred to in § 1st must not present significant bias.

§ 3rd The institution must establish a process for verifying the accuracy, completeness, and adequacy of the data used for classifying exposures to the current risk profile.

§ 4th The performance and stability of the models must be monitored, in a manner that allows comparison between the estimated values for risk parameters and their respective realized values.

§ 5th The risk classification process, when composed of various evaluation instances, must maintain records and justifications of the entire history of classifications of the same exposure.

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Art. 21. Idiosyncratic adjustments that override the institution's established risk quantification process (overrides) must be individually monitored for performance analysis.

Sole paragraph. The idiosyncratic adjustment referred to in the main text must occur within the scope of a predefined hierarchy system.

Art. 22. The data used for model construction must be demonstrably representative of the universe of borrowers or counterparties and current products.

Sole paragraph. If it is not possible to demonstrate the representativeness of the data, conservative adjustments must be made.

Art. 23. Changes in criteria, parameters, or procedures used for risk classification must be documented and made available for review by Desup.

Art. 24. A history of risk classification for borrowers or counterparties and guarantors must be maintained, covering the initial risk classification, the classification date, the methodology, the main data used, and the person responsible for the classification, with sufficient detail and data to allow retroactive classification in case of model change.

Art. 25. The process for classifying borrowers and operations must be supported by an appropriate incentive structure, in order to isolate it from pressures by persons who may benefit from it, and in particular, to prevent persons involved in the said process from obtaining gains arising from credit granting.

CHAPTER II
OF STRESS TESTS

Art. 26. The use of IRB approaches must include the performance of stress tests, which consider, at a minimum:

I - the occurrence of isolated events or changes in economic or market conditions that affect the institution's ability to withstand the risks of the exposures mentioned in the main text of Art. 4th; and

II - simulations of specific scenarios of relatively mild market credit deterioration that affect specific aspects of the adopted IRB approach and allow the quantification of the impact of such deterioration on the risk classifications of exposures and on the estimated value of the RWACIRB component.

§ 1st For the performance of the stress tests mentioned in item II of the main text, the respective data must allow estimation of the migration of exposures between risk levels.

§ 2nd The stress tests mentioned in item II of the main text must be applied with a minimum semi-annual periodicity.

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§ 3rd The minimum periodicity mentioned in § 2nd may be altered at Desup's discretion.

Art. 27. Sufficient and compatible PR must be maintained consistent with the results of the stress tests established in Art. 26.

CHAPTER III
OF GOVERNANCE

Section I
Of the Duties of the Board of Directors and the Board of Directors

Art. 28. It is the duty of the management and the board of directors of the institution using the IRB approach:

I - to define the guidelines for the operation of internal control activities, the levels of authorization necessary for assuming different risk levels, as well as the information and periodic reports to be submitted for their consideration; and

II - to verify the adequacy of the results produced within the IRB approach to the institution's risk profile.

Art. 29. It is the duty of the board of directors of the institution using the IRB approach or a specific committee designated by it:

I - to approve all essential and determining aspects of the risk classification and estimation processes; and

II - to understand the general aspects of the adopted IRB approach and to comprehend the management reports associated with the systems used.

Art. 30. It is the duty of the management of the institution using the IRB approach:

I - to possess adequate knowledge regarding the structure and operational process of the internal classification system, the adopted IRB approach, and the management reports associated with the systems used;

II - to monitor the process of using the IRB approach;

III - to verify the adequacy of the results of using the IRB approach to the current risk profile;

IV - to approve the adoption of practices related to internal credit risk classification systems that present significant differences from the originally established procedures;

V - to define the structure of risk limits assumed by the institution; and

VI - to verify the adequacy of the results of the internal credit risk classification systems to the institution's risk profile.

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Sole paragraph. The institution's management must inform the board of directors or the designated committee of any exception or modification in the established credit granting policies that may significantly affect the use or results of the adopted IRB approach.

Art. 31. Reports submitted to the institution's management and board of directors must include information regarding:

I - the risk profile of each classification level;

II - the migration matrix between classification levels;

III - estimates of the risk parameters relevant to each classification level; and

IV - comparison between the estimated values for each risk parameter and the values actually realized.

Sole paragraph. The frequency of reports must allow for the timely adoption of corrective measures.

Section II
Of the Credit Risk Control Units

Art. 32. The structuring, implementation, and management of the adopted IRB approach constitute the responsibility of one or more credit risk control units.

§ 1st The credit risk control units must have administrative independence and functional segregation from the area responsible for credit granting.

§ 2nd The activities referred to in the main text may be performed by the credit risk management unit referred to in Art. 8th of Resolution No. 3,721, of 2009.

§ 3rd The regular evaluations by the credit risk control unit, regarding the performance of the credit risk classification process, must be sufficiently documented, specifying the areas requiring improvement.

Art. 33. It is the function of the credit risk control unit:

I - to monitor the classification attributed to exposures over time;

II - to produce and analyze reports regarding the risk classification system, highlighting the following information:
a) historical default rates, ordered according to the risk classification at the time of default; b) historical default rates, ordered according to the risk classification in the period of, at least, 12 (twelve) months before the default event;

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c) analysis of migration rates between risk levels; and d) analysis of the behavior of key criteria for risk classification;

III - to implement procedures to verify the consistency of risk classifications among different business units and geographic areas;

IV - to review and document any change in the risk classification process, including the respective justifications;

V - to review classification criteria based on their predictive capacity regarding risk;

VI - to monitor actions taken to improve identified deficiencies; and

VII - to monitor overrides.

CHAPTER IV
OF THE MONTHLY VALUE OF THE RWACIRB COMPONENT

Art. 34. The monthly value of the RWACIRB component must correspond to the result of the following formula:

RWA_CIRB = Σ (Ki × EADi) × F

in which:

I - Ki = credit risk weighting factor associated with borrower or homogeneous risk group "i";

II - EADi = value of the Exposure at Default parameter associated with exposure "i" relative to the borrower or homogeneous risk group "i"; and

III - F = factor defined in Art. 4th of Resolution No. 4,193, of 2013.

CHAPTER V
OF THE CATEGORIES "WHOLESALE," "SOVEREIGN ENTITIES," AND "FINANCIAL INSTITUTIONS"

Section I
Of the Distribution of Exposures by Risk Levels

Art. 35. For the categories "wholesale," "sovereign entities," and "financial institutions," the IRB approach employed must provide a balanced distribution of exposures across risk levels, without excessive concentration in any particular level, considering two dimensions:

I - the default risk of the borrower or counterparty, determining the value of the PD parameter; and

II - the specific factors of the operation, determining the value of the LGD parameter.

§ 1st Significant concentration of exposures at one risk level must be justified by empirical evidence proving the reasonable homogeneity of borrowers or counterparties classified therein.

§ 2nd Institutions using the mapping of exposures classified in the "specialized financing" subcategory, in accordance with Art. 40, do not need to consider the dimensions mentioned in items I and II of the main text of this article.

§ 3rd Borrowers and operations must have their classification reviewed at least annually.

§ 4th Borrowers and operations with higher risk must be reviewed more frequently.

§ 5th Procedures must be established to ensure the continuous acquisition of new relevant information about their borrowers and the timely update of classifications.

Section II
Of the Dimension Related to the Borrower or Counterparty

Art. 36. The dimension related to the default risk of the borrower or counterparty, referred to in Art. 35, item I, must provide for the distribution of exposures in, at least, eight risk levels, of which seven levels must correspond to exposures for which no default is verified and one level must correspond to exposures for which default is verified.

§ 1st Each level must be associated with a specific estimate of the PD parameter.

§ 2nd Different exposures related to the same borrower or counterparty must be classified in the same risk level, regardless of differences in the characteristics of the respective operations, except in the following hypotheses:

I - country risk treatment, according to whether their exposures are denominated in local currency or foreign currency; and

II - treatment of exposures with suretyship collateral that imply a change in risk classification.

§ 3rd Desup may, at its discretion, determine the alteration of the number of risk levels considered in the IRB approach used.

Section III
Of the Dimension Related to Specific Factors of the Operation

Art. 37. The dimension related to specific factors of the operation, mentioned in Art. 35, item II, must consider exclusively the factors related to the operation that can influence the magnitude of potential losses.

Sole paragraph. In the case of using the basic IRB approach, the use of factors that jointly reflect characteristics of the operation and the borrower or counterparty is permitted.

Art. 38. The number of risk levels regarding the dimension related to specific factors of the operation must be sufficient to prevent exposures with large differences in LGD parameter values from being grouped in the same level.

Sole paragraph. The criteria used for the segregation of levels must be supported by empirical evidence.

Section IV
Of the Calculation of the K Factor Value

Art. 39. For exposures classified in the categories "wholesale," "sovereign entities," and "financial institutions," the K factor referred to in item I of Art. 34 must correspond to the result of the following formula:

K = LGD × [ N( N^-1(PD) + (R / sqrt(1-R)) * N^-1(0.999) ) / (1 - PD) ] * sqrt( (1 + (M-2.5)b) / (1 - 1.5b) )

in which:

I - N = cumulative normal distribution function;

II - N^-1 = inverse of the cumulative normal distribution function;

III - PD = Probability of Default parameter;

IV - LGD = Loss Given Default parameter;

V - M = Effective Maturity parameter;

VI - b = adjustment coefficient for parameter M, calculated according to the following formula: b = (0.11852 - 0.05478 * ln(PD))^2; and

VII - R = correlation factor.

§ 1st For the exposures mentioned in the main text, the correlation factor R must correspond to the result of the following formula:

R = 1 + 0.25 * i * 0.12 * ( (1 - e^(-50PD)) / (1 - e^(-50)) ) + 0.24 * ( 1 - ( (1 - e^(-50PD)) / (1 - e^(-50)) ) )

in which:

I - i = 1 in the case of exposures to:
a) financial institutions subject to the Internal Capital Adequacy Assessment Process (ICAAP), in accordance with Resolution No. 3,988, of June 30, 2011; and

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RWA_CIRB = Σ (Ki × EADi) × F

K = LGD × [ N( N^-1(PD) + (R / sqrt(1-R)) * N^-1(0.999) ) / (1 - PD) ] * sqrt( (1 + (M-2.5)b) / (1 - 1.5b) )

R = 1 + 0.25 * i * 0.12 * ( (1 - e^(-50PD)) / (1 - e^(-50)) ) + 0.24 * ( 1 - ( (1 - e^(-50PD)) / (1 - e^(-50)) ) )

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b) institutions not authorized by the Central Bank of Brazil that carry out activities conducted by financial institutions, such as the administration of consortia and credit cards, acquisition of credit operations, management of third-party resources, commercial factoring operations, leasing, securitization, provision of credit enhancement in securitization operations, custody of securities and marketable assets, and treasury; and II - i = 0, in other cases.

§ 2º For exposures classified in the "SME" subcategory, the correlation factor R must correspond to the result of the following formula:
R = 0.12 × [ (1 - e^(-50 × PD)) / (1 - e^(-50)) ] + 0.24 × [ 1 - (1 - e^(-50 × PD)) / (1 - e^(-50)) ] − 0.04 × [ 1 – (S - 3.6)/45 ], in which:
I - S = annual gross revenue of the legal entity, in millions of reais, limited to a minimum value of 3.6 (three and six tenths) and a maximum value of 48.6 (forty-eight and six tenths), with the value of S equal to 3.6 (three and six tenths) for natural persons; and II - e = Euler's number (neperian constant).

§ 3º For exposures classified in the "HVCRE" subcategory, the correlation factor R must correspond to the result of the following formula:
R = 0.12 × [ (1 - e^(-50 × PD)) / (1 - e^(-50)) ] + 0.30 × [ 1 - (1 - e^(-50 × PD)) / (1 - e^(-50)) ], in which:
I - PD = Probability of Default parameter; and II - e = Euler's number (neperian constant).

§ 4º The adoption of the advanced IRB approach for the "HVCRE" subcategory implies the adoption of the same approach for the "revenue-generating real estate developments" subcategory.

§ 5º The value of the K factor for defaulted exposures subject to the advanced IRB approach and classified in the "wholesale", "sovereign entities", and "financial institutions" categories must correspond to the result of the following formula:
K = max (0, LGD - EL), in which:
I - LGD = Loss Given Default parameter; and
II - EL = expected loss percentage, as established in Art. 110.

§ 6º The value of the K factor must be equal to 0 (zero) for defaulted exposures subject to the basic IRB approach classified in the "wholesale", "sovereign entities", and "financial institutions" categories.

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Art. 40. Classification of exposures in the "specialized financing" subcategory is permitted based on internal assessment regarding the degree of compliance with certain criteria associated with the types "project finance", "specific object finance", "commodity finance", "revenue-generating real estate development", and "HVCRE".

§ 1º The criteria for classification referred to in the caput are described in Annexes I to IV of this Circular.

§ 2º The classification methodology for exposures of the "HVCRE" type, from the "specialized financing" subcategory, must provide for their allocation into five risk levels, of which four levels must correspond to exposures where default is not observed and one level must correspond to exposures where default is observed, according to the following weighting (Pi):
I - Strong level, 95% (ninety-five percent);
II - Good level, 120% (one hundred twenty percent); III - Satisfactory level, 140% (one hundred forty percent); IV - Weak level, 250% (two hundred fifty percent); and V - Default level, 0% (zero percent).

§ 3º The classification methodology for exposures of the other types in the "specialized financing" subcategory must provide for the allocation of exposures into five risk levels, of which four levels must correspond to exposures where default is not observed and one level must correspond to exposures where default is observed, according to the following weightings (Pi):
I - Strong level, 70% (seventy percent);
II - Good level, 90% (ninety percent);
III - Satisfactory level, 115% (one hundred fifteen percent); IV - Weak level, 250% (two hundred fifty percent); and V - Default level, 0% (zero percent).

§ 4º The K factor for "HVCRE" type exposures that receive the treatment provided for in the caput must be calculated as follows:
Ki = F x Pi, in which:
I - F = factor defined in Art. 4 of Resolution No. 4,193, of 2013.
II - Pi = the P value associated with the exposure, among those mentioned in § 2º.

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§ 5º The K factor for other types in the "specialized financing" subcategory that receive the treatment provided for in the caput must be calculated as follows:
Ki = F x Pi, in which:
I - F = factor mentioned in item III of Art. 34; and II - Pi = the P value associated with the exposure, among those mentioned in § 3º.

Section V
Of Exposures Classified in the SME Subcategory and Exposures to Natural Persons

Art. 41. The Supervisory Department may exceptionally waive the individualized treatment required for exposures classified in the "SME" subcategory and exposures to natural persons not classified in the "retail" category, allowing their inclusion in a homogeneous risk group as defined in § 1º of Art. 44, provided that the management of these exposures is done in a non-individualized manner.

Sole Paragraph. In the case of the waiver mentioned in the caput, default is defined as the occurrence of at least one of the following events:
a) the institution considers that the borrower or counterparty will not fully honor the respective obligation without the institution resorting to actions such as the enforcement of pledged guarantees or collateral; or b) the respective obligation is overdue by more than 180 (one hundred eighty) days, in the case of exposures to natural persons with residential real estate guarantee, or by more than 90 (ninety) days, in the case of other exposures.

Section VI
Of Data Storage

Art. 42. The complete history of PD parameter estimates and the observed frequency of default for each risk level must be stored, as well as the history of migration of exposures between risk levels.

Art. 43. For the "wholesale", "sovereign entities", and "financial institutions" categories, the use of the advanced IRB approach implies the storage of the following information:
I - complete history of LGD and EAD parameter estimates associated with each operation; II - main data used for the estimation of risk parameters; III - identification of the person responsible or model used in the estimation process; IV - realized values of LGD and EAD parameters associated with each operation; and

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V - loss and recovery values for each defaulted exposure.

Sole Paragraph. The minimum storage period for the data mentioned in items I, IV, and V is 5 (five) years.

CHAPTER VI
OF THE "RETAIL" CATEGORY

Section I
Of the Homogeneous Risk Group

Art. 44. For exposures classified in the "retail" category, exposure classification systems according to credit risk must allow the association of each exposure to a homogeneous risk group, identified based on the following criteria:
I - risk characteristics of the borrower or counterparty; II - risk characteristics of the exposure, including the product type and existence of guarantees, among others; and III - delays in operations associated with the exposures.

§ 1º A "homogeneous risk group" is defined as the set of retail exposures with common characteristics for the purpose of assessing and quantifying credit risk, identified based on the criteria established in the caput.

§ 2º The distribution of exposures classified in the "retail" category must provide for significant risk differentiation and avoid concentrations in specific homogeneous risk groups.

§ 3º Significant concentrations in a homogeneous risk group must be justified by empirical evidence proving the reasonable homogeneity of the borrowers or counterparties and the operations classified therein.

§ 4º It must be ensured that the number of exposures classified in a given homogeneous risk group is sufficient to allow adequate measurement and validation of their risk parameters.

Art. 45. For each homogeneous risk group, the values of the PD and LGD parameters must be estimated, admitting the occasional occurrence of identical estimates for different homogeneous risk groups.

Sole Paragraph. External data and statistical models may be used as a complementary source of information, provided that strong correlation with the institution's risk profile and segmentation of exposures is demonstrated.

Art. 46. The values and characteristics of losses and the frequency of defaults associated with homogeneous risk groups must be reviewed, at least annually.

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§ 1º Exposures must remain allocated to correct homogeneous risk groups, for which purpose their classifications must be reviewed, at least annually.

§ 2º The review process referred to in the caput may be carried out using statistically representative sampling.

Section II
Of the Calculation of the K Factor Value

Art. 47. For exposures classified in the "retail" category, the value of the K factor must correspond to the result of the following formula:
K = LGD × N[ (N⁻¹(PD) + R × N⁻¹(0.999)) / √(1-R) ] - PD × LGD, in which:
I - N = cumulative normal distribution function; II - N⁻¹ = inverse of the cumulative normal distribution function; III - PD = Probability of Default parameter; IV - LGD = Loss Given Default parameter; and V - R = correlation factor.

§ 1º For exposures classified in the "residential" subcategory, the value of the correlation factor R is 0.15 (fifteen hundredths).

§ 2º For exposures classified in the "qualified revolving retail credit" subcategory, the value of the correlation factor R is 0.04 (four hundredths).

§ 3º For other retail exposures, the value of the correlation factor R must correspond to the result of the following formula:
R = 0.03 x (1 – e^(-35 x PD)) / (1 – e^(-35)) + 0.16 x [1 – (1 – e^(-35 x PD)) / (1 – e^(-35))], in which e = Euler's number (neperian constant).

§ 4º The value of the K factor for defaulted exposures subject to the advanced IRB approach and classified in the "retail" category must correspond to the result of the following formula:
K = max (0, LGD - EL), in which:
I - LGD = Loss Given Default parameter; and
II - EL = expected loss percentage, as established in Art. 110.

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Section III
Of Data Storage

Art. 48. The use of the IRB approach for exposures classified in the "retail" category implies the storage of the following information:
I - data used in the process of allocation to homogeneous risk groups, including data on the risk characteristics of the borrower and the operation, as well as data on delay; II - estimates of the values of the PD and LGD parameters associated with homogeneous risk groups; III - realized values for the LGD and EAD parameters and observed frequency of default; and IV - identification of the homogeneous risk groups in which defaulted exposures were allocated in the year prior to default.

Sole Paragraph. The minimum storage period for the data mentioned in items II and III is 5 (five) years.

CHAPTER VII
OF THE "CORPORATE PARTICIPATIONS" CATEGORY

Section I
Of General Provisions

Art. 49. For exposures classified in the "corporate participations" category, the option to use the simplified approach, the VaR approach, or the PD/LGD approach must be consistent with the amount and complexity of these exposures and with the size and complexity of the institution.

§ 1º The use of different approaches for different portfolios is admitted, provided they are consistent with their internal use, subject to evaluation by the Supervisory Department.

§ 2º The Supervisory Department may, at its discretion, determine the use of an approach different from that used by the institution among those established in the caput.

§ 3º The value of the EAD parameter must correspond to the book value of long positions in shares not classified in the trading book.

Section II
Of the Simplified Approach

Art. 50. In the simplified approach, the monthly value of the RWACIRB component must correspond to the result of the formula established in Art. 34, in which the Ki factor is obtained through the following formula:
Ki = K* x F, in which:

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I - K* = 300% (three hundred percent), for shares traded on an exchange, or 400% (four hundred percent), for other shares; and II - F = factor defined in Art. 4 of Resolution No. 4,193, of 2013.

Art. 51. Long positions in shares may be netted against short positions in the same shares and by financial derivative instruments not classified in the trading book, intended for hedging these shares, provided these have an effective maturity of at least 1 (one) year.

Section III
Of the VaR Approach

Art. 52. The use of the VaR approach is conditioned upon meeting the following minimum requirements:
I - robustness of loss estimates in the face of adverse and relevant market movements relative to the institution's portfolio long-term risk profile; II - adequacy of the VaR model used to the risk profile and complexity of the portfolio, explaining historical price variations, measuring non-linearity risk, considering adverse market conditions, and potential concentration risks; III - theoretical and empirical proof of techniques and processes for mapping exposures to risk factors, or proxies; IV - use of all relevant available data, information, and methodologies to estimate the volatilities of exposure returns; V - execution of a comprehensive stress testing program that subjects estimates to historical and prospective scenarios; and VI - establishment of policies, procedures, and controls that meet, at minimum, the following requirements:
a) integration of the approach into the risk and portfolio management of exposures included in the "corporate participations" category; b) independent and periodic review of the VaR model used; c) monitoring of limits and credit risk of operations classified in the "corporate participations" category; d) independence of the unit that develops and uses the VaR model from the units that manage investments; and e) allocation of qualified personnel to modeling processes.

Sole Paragraph. If the minimum requirements established in the caput cease to be met, the simplified approach referred to in Art. 50 must be used to calculate the monthly value of the RWACIRB component, an adjustment plan must be prepared, and approval for this must be obtained from the Supervisory Department.

Art. 53. In the VaR approach, the monthly value of the RWACIRB component must correspond to the potential loss obtained through a VaR model based on the 99th percentile and one-sided confidence interval of the difference between quarterly returns and the risk-free rate calculated over a long-term sample period.

§ 1º Data related to time horizons shorter than one quarter may be used, provided that conservative, consistent, empirically proven, and properly documented adjustment techniques are used.

§ 2º In the event of data limitations or technical limitations that produce results of doubtful quality, procedures must be adopted that generate conservative values for the respective RWACIRB component.

§ 3º The use of models with historical scenario analysis implies the ability to demonstrate that the methodology and quantification of results are in accordance with the parameters established in the caput.

§ 4º The use of factor models implies empirical proof that the factors are sufficient to measure general and specific risks.

§ 5º In the case of using multivariate VaR models, recognition of correlations between various risk factors is permitted, at the discretion of the Supervisory Department, provided they are documented and empirically proven.

Art. 54. The individual monthly value of the RWACIRB component calculated according to the VaR approach must be higher than that calculated using the following values for the K* factor:
I - 200% (two hundred percent), for shares traded on an exchange; and II - 300% (three hundred percent), for other shares.

Sole Paragraph. The value of the K factor defined in Art. 34, item I, is equal to the K* factor multiplied by the F factor defined in Art. 4 of Resolution No. 4,193, of 2013.

Art. 55. Validation of the VaR approach must ensure the accuracy and consistency of VaR models, modeling processes, and the database used, performing, at minimum:
I - periodic comparison of observed returns with estimates produced by VaR models and demonstration that these returns fall within expected ranges, both for the portfolio and for individual positions; II - use of quantitative validation tools; III - demonstration of the consistency of quantitative validation criteria over time;

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IV - maintenance of documentation of all relevant aspects of the validation process, including changes in the database and estimation methods; and V - continuous goodness-of-fit testing regarding the following elements:
a) internally predicted quarterly results and actually observed results; and b) return volatility estimates, supported by an appropriate database.

Sole Paragraph. The Supervisory Department may request that the goodness-of-fit tests defined in item V use a time horizon distinct from the quarterly one, as well as the conversion of quarterly result predictions to the new time horizon defined.

Art. 56. The use of the VaR approach implies the maintenance of descriptive and updated documentation, covering:
I - characteristics of the VaR model used, including methodology, theoretical basis, parameters, variables, data sources, and the statistical process for validating selected explanatory variables; II - determinants of the choice of the VaR model used; III - history of changes in the methodology of the VaR model used; and IV - circumstances in which the VaR model used does not function effectively.

§ 1º The documentation must demonstrate the adequacy of the approach employed to the minimum qualitative and quantitative standards required.

§ 2º The documentation must demonstrate that the proxies referred to in Art. 52, item III, do not lead to an underestimation of exposure risk.

Section IV
Of the PD/LGD Approach

Art. 57. The use of the PD/LGD approach is conditioned upon meeting the minimum requirements defined for estimating the PD parameter for exposures in the "wholesale" category, as provided for in Arts. 63, 64, and 66 to 73.

§ 1º The calculation of the RWACIRB component value, mentioned in Art. 34, via the PD/LGD approach must use:
I - the formula for calculating the K factor defined in the caput of Art. 39; II - the value of the LGD parameter equal to 90% (ninety percent); and

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III - the risk weighting adjusted for the M parameter value equal to 5 (five) years.

§ 2º The value of the PD parameter must be inferred as follows:
I - use of PD parameter values for exposures to the same counterparty belonging to other categories; or II - use of the PD parameter value obtained through the "external mapping" technique, defined in Art. 72, in the absence of exposures to the same counterparty belonging to other categories subject to the IRB approach.

§ 3º If the K factor value is obtained according to the provisions of § 2º, item II, of this article, its value must be multiplied by 1.5 (one and five tenths).

§ 4º For operations intended to provide hedge for exposures belonging to the "corporate participations" category, the LGD parameter value is equal to 90% (ninety percent) for the exposure to the hedge provider and the M parameter value is equal to 5 (five) years.

§ 5º Risk weighting factors (Ki) must not have a value greater than 1.

§ 6º The value of the K* factor must correspond to the result of the following formula:
K* = Ki / F, in which F is the factor defined in Art. 4 of Resolution No. 4,193, of 2013.

§ 7º The value of the EL* factor must correspond to the result of the following formula:
EL* = PD x LGD / F, in which:
I - PD = value of the Probability of Default parameter; II - LGD = value of the Loss Given Default parameter; III - F = factor defined in Art. 4 of Resolution No. 4,193, of 2013.

§ 8º The sum of the K* and EL* factors must be compared to the following minimum values:
I - 100% (one hundred percent), for corporate participations traded on an exchange, to be held for a minimum period of 5 (five) years and not intended to realize capital gains in the short term nor to anticipate extraordinary long-term gains; II - 100% (one hundred percent), for corporate participations not traded on an exchange, for which the return is obtained through regular cash flows not derived from capital gains and there is no expectation of future or immediate extraordinary gains; III - 200% (two hundred percent), for other corporate participations traded on an exchange, including short sales; and IV - 300% (three hundred percent), for other exposures.

§ 9. If the sum mentioned in § 8 is lower than the minimum values established in its items, the K* value must be equalized to the respective minimum values.

TITLE IV
OF ACQUIRED FINANCIAL RECEIVABLES

CHAPTER I
OF SEGREGATION

Art. 58. Acquired financial receivables must be segregated into retail financial receivables and wholesale financial receivables.

§ 1. The criteria for segregating retail financial receivables are the same as those for classifying exposures in the "retail" category.

§ 2. The criteria for segregating wholesale financial receivables are the same as those for classifying exposures in the "wholesale" category, including individualized treatment and analysis of the debtors of the receivables.

Art. 59. The calculation of the RWAcirb component related to the credit risk associated with portfolios of acquired financial receivables must follow the same treatment provided for the respective subcategory of the "retail" and "wholesale" categories in which these portfolios would be classified, had they been originated by the acquiring institution itself.

§ 1. If the minimum requirements for classifying the underlying assets in a specific subcategory of the "retail" and "wholesale" categories are not met, the treatment granted to the acquired financial receivables must be the same as that granted to the following subcategories:

I - "other retail exposures," as defined in Art. 8, item III, for retail receivables; and

II - "other wholesale exposures," as defined in Art. 9, item III, for wholesale receivables.

§ 2. If the set of receivables includes receivables associated with more than one exposure subcategory, each exposure must receive the treatment of the subcategory in which it should be classified.

§ 3. If the set of financial receivables includes receivables associated with more than one exposure subcategory and it is not possible for the institution to associate each exposure with its category, the treatment granted must be that which results in the highest RWAcirb component value.

§ 4. For retail financial receivables, the use of external data sources is permitted, provided they are complementary to internal analyses.

§ 5. For retail financial receivables, the database used to estimate the values of the PD and LGD parameters must disregard the effects of credit risk mitigation techniques used in conjunction with the receivables.

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§ 6. The provisions in the caput do not exempt the calculation of the RWAcirb component related to the reduction risk associated with exposures to acquired financial receivables, in accordance with Arts. 61 to 62.

Art. 60. The use of the advanced IRB approach for wholesale financial receivables is conditioned upon authorization of the same approach for the "wholesale" category.

CHAPTER II
OF REDUCTION RISK

Art. 61. In the calculation of the RWAcirb component, in addition to credit risk, the reduction risk associated with a set of financial receivables or individual financial receivables must be considered, according to the following criteria:

I - the estimated value for the EL associated with the reduction risk of the set of receivables must be estimated for a 1 (one) year horizon and expressed as a percentage of the total receivables, disregarding the effects of credit risk mitigation techniques used in conjunction with the receivables;

II - the value of the PD parameter associated with the reduction risk must be equal to the value for the EL associated with the reduction risk, considering the value of the LGD parameter associated with the reduction risk equal to 100% (one hundred percent); and

III - the receivables must meet the same quantitative requirements of the category or subcategory in which the underlying exposures are classified.

§ 1. Reduction risk is defined as the possibility of the occurrence of events that may reduce the value of the receivables, including the return or discount for defective or out-of-specification merchandise.

§ 2. For estimating the value of the EL associated with the reduction risk, the priority use of external data sources is permitted.

§ 3. The risk parameter values established in item II of the caput and the formulas used for calculating the K factor applicable to the respective exposure subcategory must be used to obtain the K factor associated with the reduction risk.

§ 4. The criteria established in the caput must be adopted for both retail and wholesale financial receivables.

§ 5. The value of the M parameter must be calculated as provided in Art. 86.

§ 6. In the event of proof that the reduction risk is effectively monitored and controlled, the value of the M parameter must be equal to 1 (one) year.

§ 7. At the discretion of Desup and upon proof of the irrelevance of the reduction risk to which the institution is exposed, the calculation of this risk may be waived.

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§ 8. The calculation of the reduction risk according to the caput does not imply the waiver of the calculation of the K factor associated with credit risk and the RWAcirb component value associated with a set of financial receivables or individual financial receivables.

Art. 62. Surety guarantees and credit derivatives associated with the receivables must receive the treatment established in Arts. 87 to 108.

Sole Paragraph. The surety guarantees referred to in the caput must observe the following additional procedures:

I - in the case where the guarantee covers both the credit risk and the reduction risk in full, the original risk weight used must be replaced by the guarantor's risk weight in the calculation of both risks;

II - in the case where the guarantee covers only the credit risk or the reduction risk in full, the guarantor's risk weight must only be used to calculate the RWAcirb component value associated with exposures whose risks were mitigated, which will be added to the RWAcirb component associated with exposures whose risk was not mitigated; and

III - in the case where the guarantee partially covers the credit risk or the reduction risk, the uncovered portion must be subject to the treatment provided in Arts. 58 to 61.

TITLE V
OF RISK PARAMETERS

CHAPTER I
OF ESTIMATES OF PD, LGD, AND EAD RISK PARAMETERS

Art. 63. The estimates of the values of the PD, LGD, and EAD parameters must meet the following requirements:

I - be based on historical data, empirical evidence, and complementary subjective aspects, if the latter are relevant;

II - consider all available quantitative and qualitative information, observing the relevance criterion;

III - incorporate relevant changes in credit granting criteria and processes or in recovery processes;

IV - reflect technical advances, changes in databases, and other relevant information;

V - use a database representative of the universe of its current borrowers and products, as well as its credit granting patterns;

VI - contemplate the economic, legal, and market conditions underlying the model, compatible with both the current scenario and predicted scenarios;

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VII - use a number of exposures in the sample and a sample period sufficient to ensure adequate precision and robustness to the estimates; and

VIII - adopt models that produce satisfactory results in "out-of-sample" tests.

§ 1. In case of data restrictions, the estimates must be made in a conservative manner.

§ 2. The estimates of the values of the PD, LGD, and EAD parameters must be reviewed at least annually.

Art. 64. Financial institutions must use internal data as the main source of information for estimating risk parameters.

Sole Paragraph. The use of external data and third-party statistical models as a complementary source of information is permitted, provided that good adherence to the institution's risk profile and exposure segmentation is demonstrated.

Art. 65. In the process of estimating risk parameters for the "retail" category, based on long-term observed losses, the following may be used alternatively:

I - the PD parameter to infer the value of the LGD parameter; and

II - the long-term observed loss rates given default to infer the value of the PD parameter.

Art. 66. The risk parameters associated with risk levels must remain, over time, within expected ranges, without presenting significant bias.

§ 1. For the purpose of verifying the provisions in the caput, the following comparisons (goodness-of-fit tests) must be performed at least annually:

I - realized default rates with PD parameter values associated with each risk level; and

II - observed LGD and EAD parameter values with their estimates for each risk level, in the event of using the advanced IRB approach.

§ 2. In the event of using the basic IRB approach, the comparison of risk parameters published by the Central Bank of Brazil with the respective realized values for the exposures must be considered.

§ 3. The comparisons provided for in § 1 must be adjusted to the characteristics of the models and the stage of the economic cycle and be adequately documented, including the methods and values of the risk parameters used.

§ 4. If the limits mentioned in the caput are not respected, an action plan must be established to correct the respective estimates.

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§ 5. During the execution of the action plan mentioned, the estimates of the risk parameters must be adjusted to their respective realized values.

CHAPTER II
OF THE ESTIMATION OF THE PD RISK PARAMETER

Section I
Of Values for the PD Parameter

Art. 67. For exposures classified in the "wholesale", "financial institutions", and "retail" categories, the minimum value for the PD parameter is 0.03% (three hundredths percent).

Art. 68. For exposures in default, the value for the PD parameter of the borrower or counterparty is 100% (one hundred percent).

Art. 69. The PD parameter may be adjusted based on the existence of surety guarantees, according to the criteria provided in Arts. 87 to 108.

Section II
Of Estimation Techniques

Art. 70. For the "wholesale", "sovereign entities", and "financial institutions" categories, the estimation of the PD parameter value must adopt a main technique among the following:

I - internal estimation;

II - external mapping; or

III - statistical method.

§ 1. The techniques mentioned in items II and III of the caput must be used as the main estimation technique only when adequate data for internal estimation are absent.

§ 2. The institution adopting the IRB approach must be able to combine the results of the aforementioned techniques, in order to perform comparisons, adjustments, and critical analyses, as well as make adjustments to the models due to limitations of these techniques or the available information and data.

§ 3. Techniques and information that reflect long-term conditions must be used throughout the process of estimating the PD parameter value.

§ 4. It is incumbent upon the institution adopting the IRB approach to prove that the technique used is consistent and adequate to the characteristics of the borrower or counterparty, the risk associated with it, and the database.

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Subsection I
Of Internal Estimation

Art. 71. The internal estimation technique must be based on the use of estimates based on the internal default history for estimating the PD parameter value.

§ 1. The use of the internal estimation technique is conditioned upon demonstrating that:

I - the databases are consistent with the definition of default adopted and with the profile of customers classified in the current portfolio; and

II - the estimates adequately reflect the financing granting policies and any differences between the classification system that generated the data and the current system used by the institution.

§ 2. In the case of limited available data and changes in financing granting policies or internal risk classification models, the estimation must be adjusted in a conservative manner.

Subsection II
Of External Mapping

Art. 72. In the external mapping technique, the analysis of information from credit rating agencies must consider information typically related to the borrower or counterparty and disregard information typically related to the nature of the operation performed.

§ 1. The external mapping technique consists of associating internal credit risk classifications with the classification structure adopted by a credit rating agency, comparing internal classifications to external classifications of this agency for the borrower or counterparty.

§ 2. Potential differences between internal definitions and methodologies and those adopted by the external credit rating agency used for the purposes of the caput must be analyzed and considered.

§ 3. The direct use of the following is prohibited:

I - ordering of risk levels used by an external credit rating agency; and

II - probabilities of default or similar measures produced by an external credit rating agency as internal PD estimates.

§ 4. The mapping process must be duly documented, including internal credit risk classifications and their associations with external classifications.

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Subsection III
Of the Statistical Method

Art. 73. The use of the statistical method technique is conditioned upon meeting the requirements established in Art. 20.

Sole Paragraph. The statistical method technique consists of using the average of individual estimates of default rates, obtained through statistical models, for counterparties belonging to each risk level.

CHAPTER III
OF THE ESTIMATION OF THE LGD RISK PARAMETER

Section I
Of the Basic IRB Approach

Art. 74. For exposures not associated with collateral and classified in the "wholesale", "sovereign entities", and "financial institutions" categories, the LGD parameter used in the basic approach must assume the following values:

I - 85% (eighty-five percent), for exposures to natural persons and companies with annual revenue less than or equal to R$3,600,000.00 (three million and six hundred thousand reais) not classified in the "retail" category;

II - 70% (seventy percent), for exposures to companies with annual revenue greater than or equal to R$48,600,000.00 (forty-eight million six hundred thousand reais);

III - the result of the following formula, for exposures to companies with annual revenue greater than R$3,600,000.00 (three million and six hundred thousand reais) and less than R$48,600,000.00 (forty-eight million six hundred thousand reais): LGD = 0.70 + 0.15 x [1 - (S - 3.6) / 45], where S = value of the annual gross revenue of the legal entity in millions of reais, limited to a minimum of 3.6 (three and six tenths) and a maximum of 48.6 (forty-eight and six tenths); and

IV - 45% (forty-five percent), for exposures classified in the "sovereign entities" category.

Section II
Advanced IRB Approach

Art. 75. The estimation of the LGD parameter value used in the advanced approach must meet the following requirements:

I - be individualized for each type of exposure;

II - take into account the particular characteristics of the exposures;

III - encompass a complete economic cycle, including periods characterized by high losses relative to the long-term average in credit operations;

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IV - be equal to or higher than the long-term weighted average of loss rates given default;

V - adopt conservative estimates, if a relevant positive correlation is observed between the frequency of default and the value of the LGD parameter or when it is not possible to demonstrate the absence of said correlation;

VI - adequately reflect collection procedures; and

VII - consider any differences between the collection procedures that generated the data and the current procedures used by the institution.

§ 1. The LGD parameter value of an exposure may be estimated jointly with that of other exposures.

§ 2. The weighting provided for in item IV of the caput must be performed through the annual default rate or the number of defaults, in a manner consistent and adequate to the characteristics of the periods considered.

§ 3. For exposures classified in the "retail" category, the LGD parameter value must be estimated for each homogeneous risk group, and may be obtained from the long-term observed loss rates and the PD parameter.

§ 4. The definition of the economic cycle must consider credit portfolio performance indicators, including:

I - portfolio growth; and

II - severity and frequency of default events.

§ 5. In calculating the LGD parameter relative to exposures whose credit risk is mitigated by financial receivables, the use of the cash flows from these receivables collected before the verification of default is permitted, subject to Desup authorization.

Art. 76. Potential dependencies between the credit risk of the borrower or counterparty and the provider of the collateral or the collateral itself, whether financial or non-financial, as per Art. 87, as well as mismatches in terms and currencies, must be considered in a conservative manner.

Art. 77. The estimates of the LGD parameter value must be based on historical recovery rates and consider:

I - potential mismatches between the market value of pledged collateral and its value upon liquidation;

II - potential restrictions on the timely liquidation of the collateral; and

III - potential impediments or difficulties in the transfer of the collateral.

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Art. 78. In the treatment of pledged collateral, additional internal requirements must be established beyond those established in Art. 36, §§ 1 and 2, of Circular No. 3,644, of 2013, for the management of these collaterals and the risks associated with them, including the verification of the legal certainty of the instruments.

Art. 79. The estimation of the LGD parameter value relative to an exposure in default must consider the occurrence of additional unexpected losses during the recovery period.

Subsection I
Of Surety Guarantees and Credit Derivatives

Art. 80. The use of the advanced IRB approach implies the estimation of the LGD parameter value, considering the existence of surety guarantees or credit derivatives.

§ 1. For the purposes of the caput, the treatment provided for in Arts. 101 to 106 is permitted.

§ 2. In the case of adopting credit risk mitigation instruments in the form of surety guarantees or credit derivatives, it must be proven that the following requirements are met for the adjustment of the LGD parameter value defined in the caput:

I - the criteria for guarantor eligibility must be clearly defined and documented; and

II - the guarantee contract must be:

a) non-rescindable by the guarantor;

b) valid until the total settlement of the underlying obligation, as well as the ancillary obligations arising from it; and

c) enforceable in a jurisdiction where the guarantor has liquid assets.

§ 3. In the case of adopting credit risk mitigation instruments in the form of credit derivatives, it must be proven that the following additional requirements beyond those established in § 2 are met:

I - the reference exposure used to calculate the settlement value of the credit derivative, in the event of default, must be the same exposure subject to the credit risk mitigation instrument, except in the cases provided for in Art. 104, § 1;

II - the exposure used to determine the default of the credit derivative must be identical to the exposure subject to the credit risk mitigation instrument, except in the case provided for in Art. 104, § 2;

III - a robust analysis of the payment structure of the credit derivative must be performed, considering its influence on the recovery process; and

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IV - satisfactory treatment of residual risks.

§ 4. The consideration of conditional surety guarantees for exposures subject to the advanced IRB approach is permitted, provided that adequate treatment of the potential reduction in the effect of credit risk mitigation related to the respective conditions is proven.

§ 5. Committed operations, securities financing, or other similar operations in which the institution, acting as an intermediary, provides a surety guarantee, must be considered as its own.

CHAPTER IV
OF THE ESTIMATION OF THE EAD PARAMETER

Section I
Of General Provisions

Art. 81. The estimates of the EAD parameter value must be greater than or equal to the current gross exposure net of provisions and any partial write-offs.

§ 1. For the purposes of the caput, it is defined:

I - current exposure is the sum of the effective exposure value and the portion of the EAD parameter associated with contingent exposure;

II - effective exposure is the exposure not associated with a credit limit, including credits to be disbursed within 360 (three hundred and sixty) days; and

III - contingent exposure is the exposure associated with a credit limit.

§ 2. An unconditional and unilateral non-cancellable credit limit is considered any formalized operation, including through a standard form contract, that presents the following characteristics:

I - the operation consists of a promise to disburse funds to a counterparty up to a specified amount;

II - the value to be drawn by the counterparty is uncertain;

III - the disbursement of funds up to the promised amount cannot be unilaterally and unconditionally denied by the institution.

§ 3. Credits to be disbursed are considered the future disbursements, provided for in contracted credit operations, regardless of whether they are conditioned on the debtor meeting pre-specified conditions.

§ 4. The value of the portion of the EAD parameter associated with contingent exposures is obtained by multiplying the contracted and unused value by the corresponding Credit Conversion Factor (CCF).

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§ 5 The value of the EAD parameter relative to exposures in derivatives, foreign currency, gold, securities and other assets subject to counterparty credit risk pending settlement must be determined in accordance with Circular No. 3,644, of 2013, for the determination of the respective exposure value.

§ 6 In determining the value of the EAD parameter relative to an exposure resulting from investment in investment fund shares, the active operations included in the fund's portfolio must be considered as exposures of the investing institution, proportionally to its participation in the fund's equity.

§ 7 If it is not possible to identify the active operations included in the fund's portfolio, for the purposes of the treatment established in § 4, the exposure resulting from investment in shares of the respective fund must receive the treatment established in Art. 17, §§ 2 to 9, of Circular No. 3,644, of 2013.

§ 8 For the determination of the value of the EAD parameter relative to an exposure resulting from investment in shares of investment funds specifically constituted (FIE) linked to open supplementary pension plans of the Free Benefit Generator Life (VGBL) or Free Benefit Generator Plan (PGBL) types, the values of the mathematical provisions for benefits to be granted of the respective plans must be deducted.

§ 9 The derivatives mentioned in § 3 include operations for the future settlement of purchase or sale of foreign currency, gold, or securities.

Art. 82. For effective exposures, the estimate of the EAD parameter value cannot be lower than the respective accounting balance at the time of determination, gross of provisions and any partial write-offs for losses.

Section II
Of the Credit Conversion Factors in the Basic IRB Approach

Art. 83. The use of the basic IRB approach implies the use of the following values for the CCF:

I - 0% (zero percent), for credit limits that are cancellable unconditionally and unilaterally; II - those provided for in Art. 9 of Circular No. 3,644, of 2013, for other credit limits; and III - 100% (one hundred percent) for suretyship, guarantee, joint liability, and other fidejussory guarantees for the fulfillment of third-party financial obligations.

Sole Paragraph. To use the CCF of 0% (zero percent), the institution must demonstrate the ability to actively monitor the borrower's financial conditions and the possibility of immediate cancellation of the offered credit limit in the event of evident deterioration of these conditions, for limits cancellable unconditionally and unilaterally.

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Section III
Estimation of the EAD Parameter in the Advanced IRB Approach

Art. 84. For contingent exposures, the probability of occurrence of withdrawals before the verification of default must be reflected in the estimates of the EAD parameter value.

Sole Paragraph. For contingent exposures, methodologies, processes, and procedures must be defined to estimate the possibility of additional disbursements after the occurrence of default.

Art. 85. The use of the advanced IRB approach implies compliance with the following minimum requirements for internal estimation of the EAD parameter value:

I - individualized estimation, through the long-term weighted average of the exposure values at the time default is verified, determined for sets of similar exposures and borrowers or counterparties, considering a sufficiently long time period; II - consideration of a complete economic cycle, including periods characterized by high losses in credit operations relative to the long-term average; III - adoption of conservative estimates, if a significant positive correlation is observed between the frequency of default and the EAD parameter value or when it is not possible to demonstrate the non-existence of said correlation; and IV - use of intuitive and plausible criteria, based on reliable internal analyses.

§ 1 The weighting provided for in item I of the caput must be made through the default rate or the number of defaults, in a manner consistent and adequate to the characteristics of the respective periods.

§ 2 The use of an internally calculated CCF is conditioned on compliance with the minimum requirements mentioned in the caput.

§ 3 The use of an internally calculated CCF is not permitted for exposures related to the provision of suretyship, guarantee, joint liability, and other fidejussory guarantees for the fulfillment of third-party financial obligations.

§ 4 The institution using the advanced IRB approach must be able to describe in a reasoned manner the calculation model for the EAD parameter value and its determining factors.

§ 5 The estimates of the EAD parameter value must be revised for each portfolio, at least annually, upon the occurrence of a relevant fact or at the discretion of Desup.

§ 6 The estimates of the EAD parameter value must be adjusted in a conservative manner in the case of identification of the existence of a positive correlation between the probability of default of a counterparty and the exposure value to that same counterparty, due to the specific characteristics of the operation.

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of default of a counterparty and the exposure value to that same counterparty, due to the specific characteristics of the operation.

§ 7 For the other cases mentioned in item I of the caput of Art. 83, the use of the CCF with a value of 0% (zero percent) is optional.

CHAPTER V
OF THE CALCULATION OF THE RISK PARAMETER M

Art. 86. The value of the M parameter must be limited to a minimum of 1 (one) year and a maximum of 5 (five) years and must correspond to the remaining term of the operation or, at the institution's discretion, to the result of the following formula:

M = (∑t t x FCt)/∑t FCt

, in which

I - t = time period, in years; and
II - FCt = Cash Flow (principal, interest, and fees provided for in contracts) with payment scheduled for period "t".

§ 1 For committed operations, securities financing, credit derivatives with daily margin adjustment, foreign exchange operations with spot settlement, and operations linked to foreign trade payable with an irrevocable letter of credit, after the shipment of the goods, issued by a large international bank, the minimum value for the M parameter must be equal to the greater value between one day and the effective maturity term, in years.

§ 2 The exposures eligible for determination of the M parameter value in the manner set forth in § 1 must be linked to an instrument allowing for immediate settlement in the event of default.

§ 3 For the purposes of § 1, irrevocable is understood as the letter of credit regarding which there is no conditionality that could pose an obstacle to payment.

§ 4 For contingent exposures, the value of the M parameter must correspond to the agreed final maturity, observing the limits mentioned in the caput.

§ 5 If there is no contractually stipulated maturity, the value of the M parameter must be equal to 5 (five) years.

TITLE VI
OF THE MITIGATION OF CREDIT RISK IN THE BASIC IRB APPROACH

CHAPTER I
OF RISK MITIGATORS

Art. 87. Differentiated treatment is optional for exposures covered by the following credit risk mitigation instruments, within the scope of the basic IRB approach:

I - eligible financial guarantee (financial collateral);

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II - eligible real guarantee (non-financial collateral); III - agreement for netting and settlement of obligations; IV - fidejussory guarantee; and V - credit derivative.

§ 1 The differentiated treatment referred to in the caput consists of the internal calculation of values for the LGD or EAD parameters and applies to the portion of the exposure covered by the credit risk mitigation instrument; the treatment provided for in the basic IRB approach must be applied to the remaining portion of the exposure.

§ 2 The use of the option provided for in the caput is conditioned on compliance with the following requirements:

I - the contract supporting the coverage of the exposure by the credit risk mitigation instrument must have legal basis in all relevant jurisdictions; II - the timely exercise of the rights provided for in the contract referred to in item I must be ensured through the adoption of formalized procedures; III - the risks of degradation of the credit risk mitigation instrument must be monitored and controlled; IV - the segregation between the assets of the custodial entity and the instruments custodied therein must be proven, in the case of using collateral; V - the ability to adequately control legal, operational, liquidity, market, and other residual risks resulting from the use of credit risk mitigation instruments must be demonstrated; VI - the credit risk mitigation instrument must not be provided by a related institution, with which consolidated financial statements are prepared; VII - all rights and obligations arising from the credit risk mitigation instrument must be formalized in a specific contract; VIII - the terms of the specific contract must allow for the adoption of all measures and procedures necessary for the timely execution of the credit risk mitigation instrument, including the liquidation or transfer of ownership of the pledged collateral in the event of counterparty default; and IX - the credit risk associated with the credit risk mitigation instrument or the value of the collateral must not present a significant positive correlation with the credit risk of the exposure.

§ 3 The credit risk mitigation instrument must be associated with a specific operation, except in the following cases:

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I - use of bilateral netting and settlement agreements; and II - exclusive association of the instrument to a set of exposures in which the default of one exposure belonging to the set directly implies the default of the other exposures.

§ 4 The mitigating effect of the instrument mentioned in item II of the caput must be disregarded when associated concomitantly with exposures of another institution.

§ 5 Collaterals may be pledged by the counterparty or by a third party in the name of that counterparty.

CHAPTER II
OF FINANCIAL COLLATERALS

Art. 88. The following financial instruments are considered financial collaterals:

I - securities issued by the National Treasury; II - securities issued by central governments of foreign countries and their respective central banks that meet the requirements established in Art. 21, item IX, of Circular No. 3,644, of 2013; III - private securities; IV - shares included or not in relevant stock exchange indices; V - investment fund shares with low risk profile administered by the institution itself; VI - demand deposits, time deposits, savings deposits, in gold, or in securities issued by the National Treasury that cumulatively meet the requirements established in Art. 36, § 3, item V, of Circular No. 3,644, of 2013; VII - securitization titles of senior class without substantial retention of risks, as provided for in Art. 115, items IV and XVI, associated with securitization processes; and VIII - shares of the State Participation Fund (FPE) or the Municipal Participation Fund (FPM), provided for in Art. 159 of the Federal Constitution.

Art. 89. In the case of using financial collateral as a credit risk mitigation instrument, the value of the exposure, considering the credit risk mitigation, must correspond to the result of the following formula:

E* = max{0, [E x (1 + He) - C x (1 - Hc - Hfx)]}, in which:

I - E* = value of the exposure, considering the credit risk mitigation;

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II - E = current value of the exposure, not considering the credit risk mitigation; III - C = current value of the financial collateral; IV - He = standardized adjustment factor associated with the exposure; V - Hc = standardized adjustment factor associated with the nature of the financial collateral used; and VI - Hfx = standardized adjustment factor associated with currency mismatch in which the exposure and the financial collateral used are referenced.

§ 1 The value of the standardized adjustment factor Hfx is 10% (ten percent) in the case of existence of currency mismatch in which the exposure and the financial collateral used are referenced, and 0% (zero percent) in the case of absence of this mismatch.

§ 2 The values of the standardized adjustment factors Hc and He must correspond to:

I - 3% (three percent), for sovereign titles whose effective maturity term is less than 1 (one) year and whose market absorption index is less than 20% (twenty percent); II - 4% (four percent), for sovereign titles whose effective maturity term is less than 1 (one) year and whose market absorption index is between 20% (twenty percent) and 40% (forty percent); and III - 5% (five percent), for sovereign titles whose effective maturity term is less than 1 (one) year and whose market absorption index is between 40% (forty percent) and 50% (fifty percent); IV - 10% (ten percent), for the standardized adjustment factor He relative to sovereign titles whose effective maturity term is less than 1 (one) year and whose market absorption index is greater than 50% (fifty percent); V - 5% (five percent), for sovereign titles whose effective maturity term is between 1 (one) and 5 (five) years and whose market absorption index is less than 20% (twenty percent); VI - 7% (seven percent), for sovereign titles whose effective maturity term is between 1 (one) and 5 (five) years and whose market absorption index is between 20% (twenty percent) and 40% (forty percent); VII - 8% (eight percent), for sovereign titles whose effective maturity term is between 1 (one) and 5 (five) years and whose market absorption index is between 40% (forty percent) and 50% (fifty percent); VIII - 16% (sixteen percent) for the standardized adjustment factor He relative to sovereign titles whose effective maturity term is between 1 (one) and 5 (five) years and whose market absorption index is greater than 50% (fifty percent);

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IX - 7% (seven percent), for sovereign titles whose effective maturity term is equal to or greater than 5 (five) years and whose market absorption index is less than 20% (twenty percent); X - 10% (ten percent), for sovereign titles whose effective maturity term is equal to or greater than 5 (five) years and whose market absorption index is between 20% (twenty percent) and 40% (forty percent); XI - 12% (twelve percent), for sovereign titles whose effective maturity term is equal to or greater than 5 (five) years and whose market absorption index is between 40% (forty percent) and 50% (fifty percent); XII - 24% (twenty-four percent) for the standardized adjustment factor He relative to sovereign titles whose effective maturity term is equal to or greater than 5 (five) years and whose market absorption index is greater than 50% (fifty percent); XIII - 6% (six percent), for private securities and securitization titles of senior class without substantial retention of risks whose effective maturity term is less than 1 (one) year and whose market absorption index is less than 20% (twenty percent); XIV - 8% (eight percent), for private securities and securitization titles of senior class without substantial retention of risks whose effective maturity term is less than 1 (one) year and whose market absorption index is between 20% (twenty percent) and 40% (forty percent); XV - 10% (ten percent), for private securities and securitization titles of senior class without substantial retention of risks whose effective maturity term is less than 1 (one) year and whose market absorption index is between 40% (forty percent) and 50% (fifty percent); XVI - 20% (twenty percent), for the standardized adjustment factor He relative to private securities and securitization titles of senior class without substantial retention of risks whose effective maturity term is less than 1 (one) year and whose market absorption index is greater than 50% (fifty percent); XVII - 10% (ten percent), for private securities whose effective maturity term is between 1 (one) and 5 (five) years and whose market absorption index is less than 20% (twenty percent); XVIII - 14% (fourteen percent), for private securities whose effective maturity term is between 1 (one) and 5 (five) years and whose market absorption index is between 20% (twenty percent) and 40% (forty percent); XIX - 16% (sixteen percent), for private securities whose effective maturity term is between 1 (one) and 5 (five) years and whose market absorption index is between 40% (forty percent) and 50% (fifty percent); XX - 32% (thirty-two percent), for the standardized adjustment factor He relative to private securities whose effective maturity term is between 1 (one) and 5 (five) years and whose market absorption index is greater than 50% (fifty percent);

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XXI - 14% (fourteen percent), for private securities whose effective maturity term is equal to or greater than 5 (five) years and whose market absorption index is less than 20% (twenty percent); XXII - 20% (twenty percent), for private securities whose effective maturity term is equal to or greater than 5 (five) years and whose market absorption index is between 20% (twenty percent) and 40% (forty percent); XXIII - 24% (twenty-four percent), for private securities whose effective maturity term is equal to or greater than 5 (five) years and whose market absorption index is between 40% (forty percent) and 50% (fifty percent); XXIV - 40% (forty percent), for the standardized adjustment factor He relative to private securities whose effective maturity term is equal to or greater than 5 (five) years and whose market absorption index is greater than 50% (fifty percent); XXV - 15% (fifteen percent), for shares included in the Ibovespa index or main stock exchange indices abroad and gold, whose market absorption index is less than 20% (twenty percent); XXVI - 22% (twenty-two percent), for shares included in the Ibovespa index or main stock exchange indices abroad and gold, whose market absorption index is between 20% (twenty percent) and 40% (forty percent); XXVII - 26% (twenty-six percent), for shares included in the Ibovespa index or main stock exchange indices abroad and gold, whose market absorption index is between 40% (forty percent) and 50% (fifty percent); XXVIII - 45% (forty-five percent), for the standardized adjustment factor He relative to shares included in the Ibovespa index or main stock exchange indices abroad and gold, whose market absorption index is greater than 50% (fifty percent); XXIX - 25% (twenty-five percent), for shares not included in the Ibovespa index or main stock exchange indices abroad, whose market absorption index is less than 20% (twenty percent); XXX - 36% (thirty-six percent), for shares not included in the Ibovespa index or main stock exchange indices abroad, whose market absorption index is between 20% (twenty percent) and 40% (forty percent); XXXI - 44% (forty-four percent), for shares not included in the Ibovespa index or main stock exchange indices abroad, whose market absorption index is between 40% (forty percent) and 50% (fifty percent); XXXII - 50% (fifty percent) for the standardized adjustment factor He relative to shares not included in the Ibovespa index or main stock exchange indices abroad, whose market absorption index is greater than 50% (fifty percent);

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XXXIII - (100% - Hfx) for the standardized adjustment factor Hc, whose market absorption index is greater than 50% (fifty percent), regardless of the type of financial collateral used; and XXXIV - 0% (zero percent), for demand deposits, time deposits, and savings deposits.

§ 3 The market absorption index (I(ABS)), determined on a daily basis, corresponds to the result of the following formula:

, in which

I - QiT = quantity of securities or financial instruments "i" pledged as collateral or associated with the exposure on the determination date "T"; II - TVMiT = unit market value of the security or financial instrument "i" on the determination date "T"; III - Nit = quantity of securities or financial instruments "i" traded in the market on date "t"; and IV - TVMit = unit market value of the security or financial instrument "i" on date "t".

§ 4 For exposures in fund shares, mentioned in Art. 88, item V, the standardized adjustment factor He must correspond to the highest standardized adjustment factor applicable to the assets eligible for acquisition according to the fund's regulations.

§ 5 For collaterals in the form of fund shares mentioned in Art. 88, item V, the standardized adjustment factor Hc to be used must correspond to the standardized adjustment factor Hc that results in the highest value for the sum of the standardized adjustment factors Hc and Hfx, when applicable, associated with the assets eligible for acquisition according to the fund's regulations.

§ 6 When the credit risk mitigation instrument consists of a set of financial collaterals, the following rule must be applied:

I - the standardized adjustment factor Hc to be applied to the set of collaterals must correspond to the sum of the respective standardized adjustment factors Hc weighted by the relative participation of each type of financial collateral in the set; and II - the standardized adjustment factor Hfx to be applied to the set of collaterals must correspond to the sum of the respective standardized adjustment factors Hfx weighted by the relative participation of each type of financial collateral in the set.

§ 7 For the purposes of item II of the caput, securities or financial instruments must be aggregated by counterparty.

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§ 8. In the case where pledged collateral consists of securities or marketable securities issued by an institution belonging to the financial consolidated group, the institution is permitted to consider a market absorption index lower than 20% (twenty percent) for these operations.

§ 9. For the purpose of calculating the market absorption index, the methodology for determining market value and traded volume is the responsibility of the institution and must be established based on consistent and verifiable criteria, taking into account independence in data collection relative to its commercial areas.

§ 10. Financial collateral does not include senior class securitization titles associated with re-securitization, as per Article 115, item XXV.

§ 11. The treatment provided for in this article is prohibited within the scope of the Advanced IRB Approach, except for portfolios that present few instances of default, when previously authorized by the Supervisory Authority (Desup).

Article 90. For exposures classified in the categories "wholesale," "sovereign entities," and "financial institutions" covered by financial collateral, the calculation of the K factor must use the value of the Effective Loss Given Default (LGD*) parameter, whose value corresponds to the result of the following formula:

LGD* = LGD x (E* / E), where:

I - LGD = standardized value of the Loss Given Default parameter, according to Article 74; II - E = current value of the exposure, without considering credit risk mitigation; and III - E* = value of the exposure after credit risk mitigation, calculated in accordance with Article 89.

Article 91. For exposures related to repurchase agreements, the standardized adjustment factors provided for in Article 89, items IV, V, and VI, may assume a value equal to 0% (zero percent), provided that the following requirements are met:

I - the counterparty must be a relevant market participant; II - the exposure and respective collateral must be in currencies or government securities that receive a Funding Premium Rate (FPR) equal to 0% (zero percent), as provided in Circular No. 3,644, of 2013; III - the exposure and collateral must be indexed to the same currency; IV - the term of the operation must be 1 (one) day, or the exposure and collateral must be marked to market daily; V - if conducted in Brazil, the operation must be registered in the Special Settlement and Custody System (Selic); and

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VI - if conducted abroad, the operation must meet the following requirements:
a) in the event of a counterparty margin replenishment failure, the time between the failure and the liquidation of the collateral must be less than 4 (four) business days; b) the settlement of the operation must be carried out in a settlement system adequate to the nature of the transaction; c) the operation must be governed by rules that establish its immediate termination in the event of counterparty failure to fulfill agreed obligations; d) the institution must have the option and legal right to appropriate and liquidate the collateral for its benefit in the occurrence of any default event; e) the operation must follow market standards and current rules for repurchase agreements; and f) the exposure must be subject to daily margin adjustments.

Sole Paragraph. For the purposes of the provision in the caput, the following are considered relevant market participants:

I - central governments and their respective central banks; II - banks, securities distribution companies (SDTVM), and securities brokerage companies (SCTVM); III - financial investment funds domiciled in Brazil; IV - financial investment funds domiciled abroad subject to government regulation and supervision, as well as to capital requirements or leverage limits; V - pension funds subject to government regulation and supervision; and VI - recognized clearing and settlement chambers, subject to government regulation.

CHAPTER III
ON NON-FINANCIAL COLLATERAL
Section I
On Types of Collateral

Article 92. For exposures classified in the categories "wholesale," "sovereign entities," and "financial institutions," non-financial collateral includes the following types:

I - "fiduciary alienation of commercial and residential real estate (CRE/RRE)"; II - "financial receivables";

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III - "fiduciary alienation of vehicles"; and
IV - "other non-financial collateral," specified in Article 99.

Article 93. For the purpose of obtaining the value of the LGD* parameter related to exposures covered by non-financial collateral, the collateralization ratio of the exposure (C/E) must be calculated.

§ 1. If the C/E ratio is lower than the minimum collateralization index (C*), the mitigating effect must be disregarded.

§ 2. If the C/E ratio is greater than the C* index, but lower than the minimum overcollateralization index (C), the mitigating effect must be considered partially, as follows:

I - the fraction of the exposure covered by collateral, with a value equivalent to the ratio (C/E) / C, must be associated with the minimum LGD parameter, referring to the type of collateral used; and II - the fraction of the exposure not covered by collateral must be associated with the value of the LGD parameter for exposures without collateral, as defined by the Central Bank of Brazil.

§ 3. If the C/E ratio is higher than the C index, the mitigating effect must be considered in its entirety, and the value of the exposure must be associated with the minimum LGD parameter referring to the type of collateral used.

§ 4. The C* index for non-financial collateral corresponds to the following values:

I - 0% (zero percent), for the type "financial receivables"; II - 30% (thirty percent), for the type CRE/RRE; III - 30% (thirty percent), for the type "fiduciary alienation of vehicles"; and IV - 30% (thirty percent), for the type "other non-financial collateral".

§ 5. The C index for non-financial collateral corresponds to the following values:

I - 125% (one hundred and twenty-five percent), for the type "financial receivables"; II - 140% (one hundred and forty percent), for the type CRE/RRE; and III - 140% (one hundred and forty percent), for the types "fiduciary alienation of vehicles" and "other non-financial collateral".

§ 6. The value of the minimum LGD parameter for non-financial collateral must correspond to:

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I - 45% (forty-five percent), for the type CRE/RRE; II - 50% (fifty percent), for the type "fiduciary alienation of vehicles"; III - 60% (sixty percent), for the type "financial receivables"; and IV - 70% (seventy percent), for the type "other non-financial collateral".

Article 94. If an operation is associated simultaneously with financial collateral and non-financial collateral of various types, including the type "financial receivables," the value of the exposure after credit risk mitigation (E*) must be segregated as follows:

I - portion covered by collateral belonging to the type "financial receivables"; II - portion covered by collateral belonging to the types CRE/RRE, "fiduciary alienation of vehicles," and "other non-financial collateral"; and III - portion covered by financial collateral.

§ 1. The credit risk mitigation effect of non-financial collateral of the types CRE/RRE, "fiduciary alienation of vehicles," and "other non-financial collateral" must be disregarded, if the following condition is verified:

(C+ / E) ≤ Cm*, where:

I - C+ = sum of the values of non-financial collateral of the types CRE/RRE, "fiduciary alienation of vehicles," and "other non-financial collateral"; II - E = portion of the value of E* covered by non-financial collateral of the types CRE/RRE, "fiduciary alienation of vehicles," and "other non-financial collateral"; and III - Cm* = 30% (thirty percent).

§ 2. The credit risk mitigation effect of non-financial collateral of the types CRE/RRE, "fiduciary alienation of vehicles," and "other non-financial collateral" must be considered partially, if the following condition is verified:
Cm* < (C+ / E**) < Cm**, where Cm = 140% (one hundred and forty percent).

§ 3. For the purposes of the provision in § 2, the following rules must be observed:

I - the value of the LGD parameter related to the part of the exposure covered by the set of collateral, with a value equivalent to (C+ / E**) / Cm**, must be equal to the value of the minimum LGD parameter associated with each type of collateral, in its respective proportion; and II - the value of the LGD parameter related to the part not covered by the set of collateral must be equal to the value of the LGD parameter of the respective category, as defined by the Central Bank of Brazil.

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§ 4. The credit risk mitigation effect of non-financial collateral of the types CRE/RRE, "fiduciary alienation of vehicles," and "other non-financial collateral" must use the minimum LGD parameter, defined in Article 93, § 6, associated with each type of collateral, in its respective proportion, if the following condition is verified:
Cm ≤ (C+ / E).

§ 5. The portion of the exposure covered by financial receivables is subject to the provisions of Article 93.

§ 6. The portion of the exposure covered by financial collateral is subject to the provisions of Articles 88 to 91.

Section II
On Operations Secured by Real Estate under Fiduciary Alienation Regime

Article 95. The association of non-financial collateral of the type CRE/RRE to exposures classified in the categories "wholesale," "sovereign entities," and "financial institutions" is conditioned on meeting the following requirements:

I - the risk of the operation must be linked to the borrower's ability to honor commitments through other sources, not depending significantly on the performance of the collateral; II - the collateral must be enforceable in all relevant jurisdictions; III - any right or encumbrance on the collateral must be legally enforceable, as well as timely registered; IV - all legal requirements for the establishment of rights or encumbrances on the collateral must be fully met; V - the contract linking the collateral to the legal process for enforcement must allow for liquidation within an adequate time interval; VI - the value of the collateral must not exceed the fair negotiated value between private parties under regular market conditions; and VII - the collateral must be subject to periodic revaluations, as follows:
a) the value of the collateral and any factors that may influence it, including elements of a fiscal and environmental nature, must be monitored with a minimum annual frequency; b) in the case of volatile markets or subject to significant changes, the frequency of evaluations must be adjusted to reflect such characteristics; and c) in the case of indications of substantial reduction in the value of the collateral relative to general market variations or the occurrence of credit events, including default, the asset must be evaluated by an expert.

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§ 1. In the case of using non-financial collateral of the type CRE/RRE, credit granting policies, including the types of CRE/RRE collateral accepted, must be clearly documented.

§ 2. Necessary measures must be adopted to ensure that non-financial collateral of the type CRE/RRE is adequately insured against damage and deterioration.

Section III
On Operations Secured by Financial Receivables

Article 96. Financial receivables with an original effective term of less than or equal to one year, whose payment consists of financial flows originating from commercial transactions in which the borrower is the creditor, are eligible as non-financial collateral of the type "financial receivables."

§ 1. The pledging of financial receivables as collateral, as provided in the caput, must occur through fiduciary assignment or assignment of credit rights.

§ 2. The financial receivables mentioned in the caput include checks, promissory notes, credit card invoices, and utility service invoices.

§ 3. The following financial receivables are not eligible as non-financial collateral of the type "financial receivables":

I - linked to securitization or credit derivatives; and II - drawn against affiliates of the borrower, including subsidiaries and employees.

§ 4. The legal instruments by which the collateral is constituted must ensure, unequivocally, the institution's rights to the revenues derived from the collateral.

§ 5. Procedures must be adopted that guarantee the execution and liquidation of rights over the collateral in all relevant jurisdictions.

§ 6. The legal framework in which the collateral is formalized must guarantee the institution's priority right over it.

§ 7. All documentation related to operations covered by the collateral must obligate the parties involved in the operation and be enforceable in any relevant jurisdiction.

§ 8. Periodic reviews must be carried out to verify and ensure the continuous legal sustainability of the collateral.

§ 9. All relevant aspects regarding collateralization through financial receivables must be duly documented.

§ 10. There must be robust control of the periodic receipt of revenues derived from the collateral.

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§ 11. The institution must have mechanisms that ensure compliance with the legal conditions necessary for the timely enforcement of the collateral.

§ 12. Adequate procedures must be adopted to determine the credit risk of the receivables used as collateral, including the analysis of the business, the borrower's sector of activity, and the types and profiles of customers with whom the borrower does business.

§ 13. The adequacy and credibility of the credit granting policy by the assignee of the receivables accepted as collateral must be reviewed, in cases where the institution depends on this policy to assess the credit risk of its clients.

§ 14. For risk management purposes, the degree of overcollateralization between the amount of the exposure and the value of the receivables must be defined, considering all appropriate factors, including the performance of the receivables, the concentration within the group of receivables pledged by the individual borrower, the potential concentration risk relative to the total of its exposures, and the degree of correlation of the borrower with the debtors.

Article 97. Each exposure, both effective and contingent, related to the collateral must be continuously monitored, including, when appropriate:

I - verification of the margins or levels of collateralization necessary relative to the total amount of receivables and their characteristics, including their quality; II - monitoring of payments and replenishments of receivables, as well as their respective terms; III - procedures for verifying receivables payments and confirming the existence of available credit lines; IV - monitoring and corroborative analysis of the collateral; V - monitoring of the concentration of a borrower's receivables relative to their debtors; VI - regular financial analysis of the borrowers; VII - regular financial analysis of the debtors of the receivables, especially when using a small number of high-value receivables; and VIII - periodic review of compliance with contractual clauses, legal restrictions, and other restrictions.

Sole Paragraph. Compliance with adopted exposure concentration limits must be periodically monitored.

Article 98. In the event of default, the enforcement of receivables used as non-financial collateral must occur according to a formalized and adequately documented process, applicable to situations of regularity and deterioration of the quality of the receivables.

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Section IV
On Other Non-Financial Collateral

Article 99. At the discretion of the Supervisory Authority (Desup), other instruments may be considered non-financial collateral of the type "other non-financial collateral," provided they meet the following additional requirements to those provided in Articles 92 and 93:

I - existence of a sufficiently liquid market for the sale of the collateral, in a timely and economically efficient manner, in the relevant jurisdiction; II - existence of verifiable market prices, which allow comparison between these and the amount received at the time of collateral enforcement, in its relevant jurisdiction; III - priority over any other creditors regarding revenues derived from the enforcement of the collateral; IV - detailed contractual description of the collateral, as well as specifications of the forms and frequency of its revaluations; V - adequate documentation of internal policies and procedures regarding the types of collateral accepted, including those regarding the amounts of each collateral and the respective mitigated exposure; and VI - adequacy of the credit granting policy to the characteristics of the operations performed, addressing:
a) the appropriate values of each collateral relative to the amount of exposures covered; b) the ability to timely liquidate the collateral; c) the ability to objectively determine the market price of the collateral; d) the ability to determine the frequency with which the value of the collateral can be promptly obtained, including evaluations and appraisals performed by qualified professionals; e) the ability to determine the volatility of the value of the collateral; and f) the assessment of the impact of factors such as obsolescence, deterioration, and loss of value of the collateral due to behavioral changes.

§ 1. Collateral constituted in the form of stocks or equipment must be insured or periodically revalued based on physical inspection.

§ 2. The collateral must not present significant discrepancies from the appraisal value relative to its market price and its liquidation value.

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CHAPTER IV
ON BILATERAL NETTING AGREEMENTS

Article 100. Bilateral agreements for the settlement and liquidation of obligations are eligible for use as instruments of credit risk mitigation, provided they meet the following additional requirements to those provided in Resolution No. 3,263, of February 24, 2005:

I - the performing party must have the right to immediately terminate operations supported by the agreement, in the event of default; II - the netting of exposures, including the values of the collateral, must result in a single net amount between the involved counterparties; III - the agreement must generate legal obligation in each relevant jurisdiction where default events may occur; IV - in the case of netting between exposures classified in the trading book and exposures not classified in the trading book, the following conditions must be met:
a) daily marking to market of all exposures subject to netting; and b) use of financial collateral; and V - the collateral can be liquidated in a timely manner, in the event of default.

§ 1. For the calculation of the K factor, the value of the EAD parameter must be used, considering the credit risk mitigation resulting from netting agreements (EAD*), whose value must correspond to the result of the following formula:

EAD* = EAD x (E* / E), where:

I - E* = value of the effective exposure, considering the credit risk mitigation associated with bilateral netting agreements, whose value must correspond to the result of the following formula: E* = max{0, [∑E - ∑C + ∑(ES x HS) + ∑(Efx x Hfx)]}; II - E = current value of the exposure, without considering credit risk mitigation; III - C = current value of financial collateral; IV - ES = absolute value of the net position in a specific operation; V - HS = standardized adjustment factor for the operation related to ES, according to the criteria defined in Article 89, § 2, items I to XXXIV;

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VI - Efx = absolute value of the exposure resulting from the difference between the total of purchased positions and the total of sold positions in currencies different from the settlement currency of the netting agreement; VII - Hfx = standardized adjustment factor defined in Article 89, item VI; and VIII - EAD = value of the EAD parameter, disregarding the credit risk mitigation resulting from netting agreements.

§ 2. The effect of credit risk mitigation produced by a netting agreement must not be reflected in an adjustment of the LGD parameter.

CHAPTER V
ON GUARANTEES AND CREDIT DERIVATIVES

Article 101. Guarantees and credit derivatives are eligible as instruments of credit risk mitigation, provided they meet the following requirements:

I - they represent personal and non-transferable obligations of the protection provider; II - they do not allow the unilateral discharge of the protection provider regarding the assumed obligation; and III - they prohibit the increase in protection costs due to the deterioration of the credit quality of the exposure subject to the credit risk mitigation instrument.

Article 102. The contracts supporting the credit risk mitigation instruments mentioned in Article 101 must meet the following conditions:

I - they cannot be rescinded;
II - they do not allow the unilateral discharge of the protection provider regarding the assumed obligation; and III - they prohibit the increase in protection costs due to the deterioration of the credit quality of the object of the credit risk mitigation instrument.

Article 103. Guarantees must meet the following additional requirements:

I - the right to timely receipt of payments from the guarantor is independent of the adoption of additional legal measures; and II - the coverage of the guarantee reaches all types of payments from the debtor in the operation, including margin adjustments.

Article 104. Credit derivatives must meet the following additional requirements:

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I - the list of credit events triggering the protection must include, at minimum:
a) non-payment of the amount due, according to the contractual terms agreed, except for any delay periods that do not constitute default; b) bankruptcy, insolvency, or inability of the debtor to pay its debt; and c) renegotiation of the debt resulting from forgiveness or deferral of principal, interest, and fees, which result in losses; II - the contract cannot expire before the deadlines required for the occurrence of default of the exposure subject to the credit risk mitigation instrument; III - expected losses must be estimated through a robust assessment process, in the case where the asset associated with the credit risk or the exposure for which protection was acquired is not delivered; IV - if payment is conditioned on the delivery of the asset associated with the credit risk or the exposure for which protection was acquired, the transfer must be carried out regardless of the debtor's consent associated with the exposure for which protection was acquired; V - the parties responsible for determining the occurrence of the credit event must be clearly identified; and VI - the protection buyer must have the right to determine the occurrence of a credit event to the seller.

§ 1º The exposure used as reference for calculating the settlement value of the credit derivative in the event of default must be the same exposure subject to the credit risk mitigation instrument, unless the following requirements are met:
I - the reference exposure has a pari passu credit classification to the exposure subject to the credit risk mitigation instrument or a lower degree of subordination; II - both exposures are associated with the same counterparty; and III - there are legal provisions that allow:
a) the declaration of default of the exposure subject to the credit risk mitigation instrument upon default of the reference exposure of the credit derivative and vice-versa; or b) the acceleration of the maturity of the exposure subject to the credit risk mitigation instrument upon default of the reference exposure of the credit derivative.

§ 2º The requirements mentioned in § 1º also apply to the exposure used to determine the default of the credit derivative.

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§ 3º Only credit swaps and total return swaps that meet the requirements established in Art. 3, § 1º, of Circular No. 3,106, of April 10, 2002, are eligible as credit risk mitigation instruments.

Art. 105. For the portion of the exposure covered by suretyship guarantees or credit derivatives, the institution must:
I - apply the treatment for the category or subcategory to which the guarantor belongs; and II - consider the value of the PD parameter relative to the guarantor as the value of the PD parameter of the exposure.

§ 1º In the absence of assurance of unrestricted and total substitution of the borrower by the guarantor, an intermediate value between the value relative to the underlying debtor and the value relative to the guarantor must be used as the value for the PD parameter.

§ 2º The value of the LGD parameter relative to the underlying debt may be replaced by the value of the LGD parameter relative to the guarantee, considering the degree of subordination of the guarantee.

Art. 106. For credit risk mitigation instruments referred to in Art. 101, in the case where the underlying obligation is denominated in a currency different from the reference currency of the instrument used, the value of the instrument (GA) must correspond to the result of the following formula:
GA = G x (1 - Hfx), where:
I - G = nominal value of the credit risk mitigation instrument; and II - Hfx = standardized adjustment factor, as defined in Art. 89, § 1º, associated with the currency mismatch in which the exposure and the credit risk mitigation instrument used are denominated.

Sole Paragraph. After performing the adjustment defined in the caput, the treatment provided for in Art. 100 must be applied to both the portion of the exposure covered by the credit risk mitigation instrument and the uncovered portion.

CHAPTER VI
OF MATURITY MISMATCH

Art. 107. The effective maturity dates of the credit risk mitigation instrument and the exposure subject to mitigation must be calculated conservatively.

§ 1º For the exposure covered by a credit risk mitigation instrument, the effective maturity must be the longest possible period for complete settlement of the obligation by the counterparty, including any grace period.

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§ 2º The effective maturity of the credit risk mitigation instrument must be the shortest among all those provided for contractually, including considering the existence of options.

§ 3º The residual effective maturity of the credit risk mitigation instrument must be equal to or greater than the residual effective maturity of the exposure subject to mitigation in the following cases:
I - the credit risk mitigation instrument has an original effective maturity of less than 1 (one) year; and II - the credit risk mitigation instrument has a residual effective maturity of less than 3 (three) months.

Art. 108. In the event of a mismatch between the effective maturity of the exposure and the effective maturity of the associated credit risk mitigation instrument, the value of the credit risk mitigation instrument (Pa) must correspond to the result of the following formula:
Pa = P x (t - 0,25) / (T - 0,25), where:
I - P = value of the credit risk mitigation instrument adjusted by the standardized adjustment factors referred to in Art. 89, items IV, V, and VI; II - t = min (T, residual effective maturity of the credit risk mitigation instrument in years); and III - T = min (5, residual effective maturity of the exposure in years).

Sole Paragraph. The provisions in the caput do not apply when the credit risk mitigation instrument consists of financial receivables with an effective maturity of less than 1 (one) year, as defined in Art. 96, whose financial resources remain under the custody of the institution until there is replacement with new receivables or settlement of the credit.

TITLE VII
OF LOSSES AND PROVISIONS

CHAPTER I
OF EXPECTED LOSS

Section I
Of Definition

Art. 109. For exposures subject to the IRB approach, the expected loss amount is defined as the result of multiplying the expected loss percentage (EL) by the value of the EAD parameter.

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Section II
Of Expected Loss in the "Wholesale", "Sovereign Entities", "Financial Institutions", and "Retail" Categories

Art. 110. For exposures classified in the "wholesale", "sovereign entities", "financial institutions", and "retail" categories, the estimated value for EL must be obtained by multiplying the value of the PD parameter by the value of the LGD parameter.

§ 1º For defaulted exposures, the value of the PD parameter is equal to 100% (one hundred percent).

§ 2º For defaulted exposures subject to the advanced IRB approach, the estimated value for EL is equal to the estimated expected loss, calculated in accordance with Art. 112.

§ 3º For the exposures referred to in Art. 40, § 3º, the estimated value for EL is obtained by multiplying the following values by the factor F mentioned in Art. 40, § 5º, item I:
I - Strong level, 5% (five percent);
II - Good level, 10% (ten percent);
III - Satisfactory level, 35% (thirty-five percent); IV - Weak level, 100% (one hundred percent); and V - Default level, 625% (six hundred and twenty-five percent).

§ 4º For the exposures referred to in Art. 40, § 2º, the estimated value for EL is obtained by multiplying the following values by the factor F mentioned in Art. 40, § 4º, item I:
I - Strong level, 5% (five percent);
II - Good level, 5% (five percent);
III - Satisfactory level, 35% (thirty-five percent); IV - Weak level, 100% (one hundred percent); and V - Default level, 625% (six hundred and twenty-five percent).

Section III
Of Expected Loss in the "Equity Participation" Category

Art. 111. For exposures classified in the "equity participation" category where the sum of the K* and EL* factors is greater than the values defined in Art. 57, § 8º, the estimated value for EL must be obtained by multiplying the value of the PD parameter by the value of the LGD parameter.

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Sole Paragraph. For other exposures, the estimated value for EL is equal to 0 (zero).

Section IV
Of Loss Estimation

Art. 112. The estimated value for EL for defaulted exposures must be calculated based on current economic circumstances and the status of the exposure.

§ 1º Cases where the estimated value for EL is lower than the sum of provisions related to the operation must be justified.

§ 2º The justification mentioned in § 1º may be made in an aggregated manner, provided it is duly substantiated.

§ 3º The status of the exposure mentioned in the caput consists of its characterization, considering the following aspects:
I - time elapsed since the occurrence of default; II - percentage already recovered; and III - prospects for recovery of the remaining balance.

Art. 113. The total expected loss corresponds to the sum of the expected loss amounts obtained for each exposure.

Sole Paragraph. The following do not integrate the total expected loss:
I - exposures classified in the "equity participation" category subject to the PD/LGD approach; and II - securitization exposures.

CHAPTER II
OF PROVISIONS

Art. 114. The total of provisions related to exposures subject to IRB approaches must be segregated from the total of provisions related to exposures receiving the treatment established in Circular No. 3,644, of 2013.

§ 1º Discrepancies between the segregated amount of eligible provisions related to exposures subject to IRB approaches and the respective expected loss amount, calculated in accordance with Art. 109, must be justified.

§ 2º The total of provisions related to exposures subject to IRB approaches does not include:
I - provisions related to exposures classified in the "equity participation" category; and

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II - provisions related to securitization exposures.

TITLE VIII
OF THE SECURITIZATION PROCESS

CHAPTER I
OF DEFINITIONS

Art. 115. For the purposes of treating traditional or synthetic securitization exposures through the use of IRB approaches, the following definitions apply:
I - traditional securitization is the process in which the cash flow associated with a pool of underlying assets is used to remunerate securitization titles structured in at least two tranches of payment priority, in which there is a transfer of the underlying assets to the issuing counterparty; II - synthetic securitization is the process in which the cash flow associated with a pool of underlying assets is used to remunerate securitization titles structured in at least two tranches of payment priority, in which the credit risk associated with the underlying assets is transferred through a credit derivative or any other instrument that allows such transfer; III - underlying assets are the credit rights, securities, and credit derivatives that serve as collateral for securitization titles; IV - securitization title is the security whose remuneration is associated with the cash flow of the underlying assets; V - originating counterparty is the natural or legal person that performs at least one of the following activities:
a) origination, direct or indirect, of underlying asset; b) administration or advisory to the issuing counterparty in the issuance of securitization titles; c) participation in the public offering of securitization titles; and d) provision of credit or liquidity enhancement to securitization titles issued by the issuing counterparty or retention of credit risk in any other form; VI - issuing counterparty is the financial or non-financial institution, company, or entity not part of the National Financial System (SFN) that issues securitization titles; VII - administrator of underlying assets is the institution responsible for processing payments and receipts of the securitization operation, which may also, among other activities, act in supporting the formalization of contracts and guarantees of the securitization process, as well as in the evaluation of these guarantees;

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VIII - credit enhancement is the instrument that guarantees, totally or partially, the cash flow of the underlying assets that serve as collateral for securitization titles; IX - liquidity enhancement is the instrument that guarantees, totally or partially, the timeliness of the payment flows of securitization titles; X - securitization exposure is the credit risk exposure in a securitization process, including:
a) holding securitization titles in portfolio; b) providing credit or liquidity enhancement to securitization titles; c) assuming the role of risk-receiving counterparty in a credit derivative operation; and d) entering into swap contracts directly or indirectly linked to securitization titles; XI - early call option is the contractual right to repurchase securitization titles by the issuing counterparty before their maturity; XII - securitization spread (SS) is the difference, measured in percentage, between the values received from the underlying assets, including yields from their reinvestment, and the values paid to the securitization titles, including expenses inherent to the securitization process; XIII - implicit support is the assumption, by the originating counterparty, of any non-contractual obligation, in order to cover investor losses on securitization titles; XIV - controlled early amortization is the contractual option for early redemption upon request of the securitization title holder, in the event of predetermined events, where the following conditions are met:
a) upon early amortization, the availability of sufficient resources for payment of the securitization titles must be ensured; b) throughout the early amortization period, charges, principal, expenses, losses, and recoveries must be previously and proportionally divided, based on the relative participations of each party in the remaining cash flows of the underlying assets; c) the period in which amortization occurs must be sufficient to amortize at least 90% (ninety percent) of the outstanding balance of the securitization titles or to recognize them as defaulted; and d) throughout the early amortization period, the value of each repayment installment to investors must not exceed what would occur in the case of linear amortization;

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XV - uncontrolled early amortization is the contractual option for early redemption upon request of the securitization title holder, in the event of predetermined events, where none of the conditions established in item XIV are met; XVI - junior tranche is the class of securitization titles that presents the lowest payment priority in the same issuance, compared to other classes; XVII - senior tranche is the class of securitization titles that presents the highest payment priority in the same issuance, compared to other classes; XVIII - mezzanine tranche is any class of securitization titles that presents a payment priority higher than the junior tranche and lower than the senior tranche, in the same issuance; XIX - accumulation point (AP) is the predetermined level of the securitization spread, above which the value corresponding to the spread excess is accumulated in a reserve fund intended for loss absorption; XX - reserve fund is the set of financial resources intended for loss absorption; XXI - substantial transfer of risks is the transfer of risks resulting from the sale or assignment of assets carried out according to the provisions of Resolution No. 3,533, of January 31, 2008; XXII - substantial retention of risks is the retention of risks resulting from the sale or assignment of assets carried out according to the provisions of Resolution No. 3,533, of 2008; XXIII - investor portion is the value of revolving assets ceded to the issuing counterparty that effectively constitute underlying assets in the securitization process; XXIV - originating portion is the value of revolving assets ceded to the issuing counterparty that do not constitute underlying assets in the securitization process; XXV - re-securitization is the securitization process whose underlying assets consist of securitization titles.

§ 1º The risk weighting factor (Ki) for securitization exposures is equal to the Ki* factor multiplied by the factor defined in Art. 4 of Resolution No. 4,193, of 2013.

§ 2º Securitization processes similar to those mentioned in items I and II that are structured in only one tranche of payment priority must be treated as an exposure to their underlying assets, and must be subject to the same treatment of the category or subcategory in which such assets would be classified.

§ 3º In the case of impossibility of identifying the underlying assets to the securitization processes mentioned in § 2º, the respective exposures must be subject to the treatment provided for in Art. 18 of Circular No. 3,644, of 2013.

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CHAPTER II
OF TRADITIONAL SECURITIZATION

Art. 116. In a traditional securitization process with substantial transfer of risks, the originating counterparty is permitted to exclude the respective underlying assets from the calculation of the RWACIRB component, conditioned on meeting the following requirements:
I - absence of effective control, direct or indirect, by the originating counterparty over the ceded underlying assets; II - absence of any co-obligation of the originating counterparty regarding the underlying assets; III - unrestricted right of the assignee to negotiate or pledge the underlying assets; IV - absence of obligations for the originating counterparty regarding the securitization titles, except when the obligations are exclusively related to the processing of receipts from the underlying assets; V - compliance with the conditions provided in §§ 2º and 3º of Art. 119, in the event of an early call option; VI - absence of obligation for the originating counterparty to replace the total or part of the ceded underlying assets, in order to reduce the credit risk of the respective pool of ceded assets; VII - prohibition on providing credit enhancement by the originating counterparty after the issuance of the securitization titles; and VIII - prohibition on increasing the return rate of the securitization titles, in order to compensate for deterioration in the credit quality of the underlying assets that causes prejudice to the originating counterparty or reduction in the return rate of the titles held by it.

Sole Paragraph. For the purposes of item I in the caput, it is considered that the originating counterparty holds effective control over the ceded underlying assets when contractual provision is made for the obligation of repurchase and retention of the risks associated with them.

Art. 117. In a traditional securitization process with provision for early amortization, whose underlying assets include revolving exposures, the originating counterparty must include the investor portion in the calculation of the RWACIRB component, observing the provisions of Art. 140, if the exercise of early amortization implies:
I - downgrade of the payment priority of the securitization titles held by the originating counterparty, compared to the priority of other title holders; or II - increase in the exposure of the originating counterparty to losses associated with the underlying assets.

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Sole Paragraph. The provisions in the caput do not apply to a traditional securitization process with provision for early amortization whose underlying assets include revolving exposures, that meets the requirements established in Art. 116 and falls into one of the following scenarios:
I - investors in the respective securitization titles completely assume the risk inherent to future draws of the investor portion, even in the event of early amortization; II - the exercise of early amortization results exclusively from an event unrelated to the performance of the underlying assets or to the credit quality of the issuing counterparty; and III - the reproduction of a payment structure of securitization titles backed by non-revolving underlying assets, associated with the exercise of early amortization, does not imply a reduction in the originating portion.

CHAPTER III
OF SYNTHETIC SECURITIZATION

Art. 118. In a synthetic securitization process, the recognition of credit risk mitigation instruments according to the provisions of Arts. 87 to 108 for the respective underlying assets is permitted, provided the following requirements are met:
I - the originating counterparty must substantially transfer the credit risk associated with the underlying assets; II - the transfer of credit risk of the underlying assets cannot be subject to restrictions or conditions that modify the portion of risk transferred, such as:
a) setting limits from which mitigation is not applicable, even in the occurrence of a credit event; b) option to cancel the credit risk mitigation instrument due to deterioration in the credit quality of the underlying assets; c) obligation to replace assets whose credit risk was transferred; d) provision for an increase in the cost of the credit risk mitigation instrument due to deterioration in the credit quality of the underlying assets; e) provision for an increase in the return rate of investors in the respective securitization titles, excluding the originating counterparty, due to deterioration in the credit quality of the underlying assets; and f) possibility of providing credit enhancement by the originating counterparty after the issuance of the securitization titles; III - contracts related to the securitization process must be subject to a qualified legal opinion supporting their enforceability in any relevant jurisdiction; and

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IV - compliance with the provisions of art. 119, in the event of an early repurchase option.

Sole paragraph. In the event of a maturity mismatch in a synthetic securitization process, the originator counterparty must observe the provisions of arts. 107 and 108.

CHAPTER IV
OF THE EARLY REPURCHASE OPTION

Art. 119. In the calculation of the RWACIRB component, the originator counterparty must consider the existence of the early repurchase option, in the case of a contractually established:

I - obligation to repurchase the underlying assets transferred to the issuing counterparty, if the option is exercised, in a traditional securitization process; and

II - cancellation of the credit derivative, if the option is exercised, in a synthetic securitization process.

§ 1º For the purposes of the provisions in the caput:

I - the underlying assets transferred to the issuing counterparty must be treated as transferred with substantial retention of risks; and

II - in synthetic securitization processes, the originator counterparty must consider the entire amount of underlying assets in the calculation of the RWACIRB component, disregarding the benefits arising from the credit derivative associated with the transaction.

§ 2º It is optional for the originator counterparty to disregard the early repurchase option in the calculation of the RWACIRB component, provided the following requirements are met:

I - the exercise of the option is conditioned on the existence of a debtor balance of the underlying assets or securitization titles not exceeding 10% (ten percent) of the original amount;

II - the exercise of the repurchase option is conditioned on the consent of the originator counterparty; and

III - the structure of the repurchase option does not evidence the objective of avoiding losses for the holders of the securitization titles or the issuing counterparty in the provision of credit enhancement.

§ 3º For the purposes of the provision in item I of § 2º, the value of the securitization titles must consider the current value of the reference exposures of the credit derivatives, in the case of synthetic securitization processes.

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CHAPTER V
OF IMPLICIT SUPPORT IN SECURITIZATION PROCESSES

Art. 120. The provision of implicit support in a securitization process implies treating all securitization exposures associated with it as exposures with substantial retention of risks.

§ 1º The originator counterparty must make public any implicit support provided, as well as the effects of this measure on the calculation of the RWACIRB component.

§ 2º The documentation related to a securitization process must evidence the voluntary nature and the observance of market prices in any purchase of underlying assets or securitization titles by the originator counterparty.

§ 3º For the purpose of proving the voluntary nature, the provision of implicit support must obtain approval from the institution's board of directors.

CHAPTER VI
OF CREDIT AND LIQUIDITY ENHANCEMENT LINES

Art. 121. The value of the exposure related to credit, liquidity, or resource advance enhancements must be determined by multiplying the value of the commitment assumed, deducting any drawdown of resources already made, by the respective Credit Conversion Factor (FCC), which must correspond to:

I - 0% (zero percent), in the case of resource advance provided by the administrator of the underlying assets, provided that the commitment is unconditionally cancellable, without the need for prior notice by the administrator;

II - 100% (one hundred percent), in the case of credit enhancement; and

III - 100% (one hundred percent), in the case of liquidity enhancement that meets the following requirements:

a) the scenarios for drawing down resources available for liquidity enhancement are clearly identified and limited;

b) the drawdown of resources available for liquidity enhancement is conditioned on the high probability of reimbursement of these resources upon the liquidation of the underlying assets or the provision of credit enhancement;

c) the resources available for liquidity enhancement are not used to cover exposures in default or losses associated with the underlying assets;

d) the securitization process is not structured in a way to guarantee the utilization of the resources available for liquidity enhancement;

e) the securitization titles covered by the liquidity enhancement, when externally rated, have a rating at least equivalent to investment grade, at the time of drawing down the available resources;

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f) no drawdown of resources available for liquidity enhancement occurs after the associated credit enhancement of the securitization process is exhausted; and

g) the reimbursement of resources drawn for liquidity enhancement has priority over all other obligations related to the securitization process and is not subject to subordination, forgiveness, or extinction of the debt.

§ 1º The requirements specified in items "a", "b", "c", "e", "f", and "g" of item III of the caput must be contractually stipulated.

§ 2º In the event of multiple liquidity or credit enhancements provided by the same institution in a securitization process, the calculation of the RWACIRB component relative to the overlap of enhancements must consider only the enhancement for which the highest FCC is assigned.

§ 3º If the liquidity enhancement does not meet the provisions of item III of the caput, its notional value must be multiplied by the risk weighting factor (Ki) with a value equal to 1 (one).

CHAPTER VII
OF APPROACHES FOR SECURITIZATION EXPOSURES

Section I
General Provisions

Art. 122. The determination of the RWACIRB component value for underlying assets through the IRB approach implies the use of the IRB approach also for calculating the RWACIRB component value for securitization exposures.

§ 1º In the event that the portfolios to which the set of underlying assets of a securitization exposure belong are treated, for the purpose of calculating the RWACIRB component, according to different IRB approaches, the approach used in the predominant portion of the asset set must be applied to the securitization exposure.

§ 2º An updated historical record of the composition of the set of underlying assets for each securitization exposure must be maintained, in order to support the choice of the approach used.

Art. 123. In the absence of specific treatment in the IRB approach for a type of underlying asset related to a securitization process, the respective exposure must receive the treatment established in Circular No. 3,644, of 2013.

Art. 124. In the event of using the IRB approach for securitization exposure by the originator counterparty, the maximum value of the RWACIRB component relative to this exposure must correspond to the value determined for the total of the respective underlying assets in the absence of securitization, according to the approach used for each portfolio.

Art. 125. In the case of partial risk retention, the maximum among the K factors associated with the tranche of the exposure retained by the institution and the underlying assets, in proportion to the risk retained, must be used.

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Art. 126. In the event that the institution acts as an investor in a securitization process whose underlying assets are classified in the "retail" category, the use of the treatment described in Circular No. 3,644, of 2013, is optional, given the proven impossibility of obtaining information for adequate measurement of the credit risk of said assets.

Sole paragraph. The use of the option provided in the caput is conditioned on prior authorization by Desup.

Section II
The RBA Approach

Art. 127. The RBA approach applies to securitization exposures in which it is possible to internally determine:

I - the credit risk of the underlying assets; and

II - the impacts of the subordination structure and other characteristics on the credit risk of the securitization exposures.

§ 1º The internal classification process of the RBA approach must allow the segregation of exposures into at least eleven Long-Term Credit Quality Levels (NQL) and three Short-Term Credit Quality Levels (NQC).

§ 2º The internal classification within the scope of the RBA approach must be compared with external classifications, when these exist, in order to identify any discrepancies.

Art. 128. Within the scope of the RBA approach, a Ki factor must be applied to each securitization exposure, considering the following aspects:

I - internal classification of the risk of the securitization exposure, assigned according to art. 127, § 1º;

II - maturity of the exposure;

III - relative degree of seniority among exposures classified in the same NQC or NQL; and

IV - granularity level of the set of underlying assets.

§ 1º For the purpose of determining the Ki factor to be applied to securitization exposures, the value established for the Ki* factor must be used:

I - in Annex V, for exposures classified as long-term; and

II - in Annex VI, for exposures classified as short-term.

§ 2º The degree of seniority of the exposure, mentioned in item III of the caput, must be used to obtain the values of the Ki* factor applicable to different classes of subordination that present identical values for NQL or NQC.

§ 3º The granularity level mentioned in item IV of the caput is determined based on the effective number of underlying assets (N), as defined in art. 133, in the following way:

I - if N is greater than or equal to 6 (six), the exposure is considered granular;

II - if N is less than 6 (six), the exposure is considered non-granular.

§ 4º In cases of internal long-term classification of the RBA approach below level NQL11 and internal short-term classification of the RBA approach below level NQC3, a risk weighting factor equal to 1,250% (one thousand two hundred and fifty percent) must be applied to the securitization exposure, regardless of the seniority of the class and the granularity of the set of underlying assets.

Section III
The Supervisor’s Formula (SF) Approach

Art. 129. The SF approach applies to securitization exposures in which the institution is not able to consider the impacts of the subordination structure and other characteristics of the securitization process for the purpose of credit risk classification.

Art. 130. The value of the RWACIRB component calculated for a securitization title class through the use of the SF approach is given by the multiplication of the total value of the securitized underlying assets by the greater of the following values:

I - 0.07 x T; or

II - 1/F{S[L + T] - S[L]}, in which:

a) T = exposure width; and

b) L = credit enhancement level.

§ 1º The function S[.] mentioned in item II of the caput is defined by:

S[L] = { L if L <= KIRB
{ KIRB + (L - KIRB) * [1 - Beta(KIRB; a,b)] / (1 - Beta(KIRB; a,b)) if L > KIRB

in which:

I - KIRB = risk weighting factor for securitization exposure, determined through the SF approach;

II - ω = 20;

III - d = 1 - (1 - h) x (1 - Beta[KIRB; a,b]); where Beta [KIRB; a,b] is the cumulative Beta probability distribution of parameters "a" and "b", defined in items "d" and "e" of item IV, evaluated at the variable KIRB; and

IV - K[L] = (1 - h) x ((1 - Beta[L; a,b]) x L + Beta[L; a + 1,b] x c), in which:

a) h=((1-KIRB)/LGD(SEC))^N

b) N = effective number of underlying assets of the securitization exposure;

c) Beta [L; a, b] = Cumulative Beta probability distribution of parameters "a" and "b" evaluated at the variable L;

d) a = g x c;

e) b = g x (1 - c);

f) c = KIRB/(1-h);

g) g = -1;

h) f = (v+KIRB)/2

i) v = (LGD(SEC)-KIRBKIRB + 0.25(1-LGD(SEC))*KIRB)/N

j) τ = 1.000; and

k) LGD(SEC) = LGD parameter applicable to securitization exposures.

§ 2º The width of the securitization exposure (T) corresponds to the ratio between the nominal value of the securitization title class held and the notional value of the underlying assets.

§ 3º For securitization exposures whose underlying assets are retail exposures, it is optional to assign the value 0 (zero) to the parameters "h" and "v", mentioned in items "a" and "i" of item IV of § 1º of this article.

§ 4º The use of the option provided in § 3º is conditioned on the authorization of Desup.

Art. 131. The value of the KIRB factor mentioned in art. 130 must correspond to the result of the following formula:

KIRB = (F x RWA(SEC) + EL(SEC)) / V(SEC) , in which:

I - RWA(SEC) = value of the RWACIRB component relative to the underlying assets;

II - EL(SEC) = expected loss amount relative to the underlying assets; and

III - V(SEC) = total value of the underlying assets.

§ 1º The determination of the value of V(SEC) must include the value of the EAD parameter associated with undrawn credit commitments.

§ 2º The values of RWA(SEC) and EL(SEC) must correspond to their respective values for RWACIRB and EL relative to the underlying assets, obtained through the same IRB approach used and considering the effects of any credit risk mitigation instrument employed.

§ 3º For securitization structured through the use of a special purpose vehicle (SPV), the underlying assets must include any resources eventually segregated by the SPV in a reserve fund.

§ 4º In cases where the institution constitutes a provision relative to the securitization exposure or there is a non-refundable discount on the purchase price of an underlying asset, the value of the factor V(SEC) must be equal to the gross amount of the asset, disregarding the provision or the discount.

Art. 132. The credit enhancement level (L) mentioned in art. 130 corresponds to the ratio between the amount of all classes subordinate to the class of the exposure held and the total value of the underlying assets to the securitization exposure.

§ 1º In determining the value of L, the effects of any credit enhancements and reserve funds capitalized through future receivables of the underlying assets that do not have a balance must be disregarded.

§ 2º In determining the value of L, it is optional to include the balance of a reserve fund composed of accumulated cash flows from the underlying assets, associated with the class of exposure whose degree of subordination is higher than that of the class of the exposure held.

Art. 133. The effective number of underlying assets (N) of the securitization exposure mentioned in art. 130, § 1º, item IV, item "b", must correspond to the result of the following formula:

N = Σ (EADi^2) / Σ (EADi^2)

in which:

EADi = value of the EAD parameter relative to each underlying asset associated with the borrower or homogeneous risk group "i".

§ 1º In the case of re-securitization, the calculation of N must consider the securitization titles used in the process.

§ 2º In the event that the weight of the underlying asset with the highest participation in the asset set (C1) is known, it is optional to consider the value of N equal to the ratio 1/C1.

Art. 134. The value of the LGD(SEC) parameter mentioned in art. 130, § 1º, item IV, item "k", is calculated through the following formula:

LGD(SEC) = Σ (LGDi × EADi) / Σ (EADi)

in which:

LGDi = average value of the LGD parameter relative to all underlying assets associated with the borrower or homogeneous risk group i.

Sole paragraph. The value of the LGD(SEC) parameter must be equal to 100% (one hundred percent) for securitization exposures related to re-securitization.

Art. 135. In the event that the weight C1 mentioned in art. 133, § 2º, is less than or equal to 0.03 (three hundredths), it is optional to use the following values for the parameters LGD(SEC) and N:

I - LGD(SEC) = 50% (fifty percent); and

II - N = (C1 x Cm + [(Cm – C1)/(m-1)] x max {1-m x C1,0})^-1

in which:

a) m = number of highest participation assets in the set of underlying assets, fixed by the institution; and

b) Cm = weight of the "m" largest assets in the set of underlying assets.

Sole paragraph. In the event that only C1 is determined and its value is less than or equal to 0.03 (three hundredths), it is optional to use the following values for LGD(SEC) and N:

I - LGD(SEC) = 50% (fifty percent); and

II - N = 1 / C1.

Art. 136. For the SF approach, in the case of underlying assets constituted by acquired receivables, the values of KIRB associated with credit and downgrade risks must be determined separately through the use of their respective risk parameters, estimated according to the provisions of arts. 58 to 62.

§ 1º In the event that the credit and downgrade risks associated with acquired receivables are covered by aggregate collateral in a securitization process, including credit or liquidity enhancements common to both risks, the value of the LGD(SEC) parameter must be determined through the following formula:

LGD(SEC) = Σ (LGDi × Ki + Kdi) / Σ (Ki + Kdi)

in which:

I - LGDi = average value of the LGD parameter relative to all underlying assets associated with the borrower or homogeneous risk group i;

II - Ki = risk weighting factor for credit risk associated with the borrower or homogeneous risk group "i"; and

III - Kdi = risk weighting factor for downgrade risk associated with the borrower or homogeneous risk group "i".

§ 2º For the purposes of the provisions in the caput and § 1º, the provision in § 1º of art. 115 does not apply.

CHAPTER VIII
OF THE IMPOSSIBILITY OF USING THE RBA OR SF APPROACHES

Art. 137. A risk weighting factor equal to 1,250% (one thousand two hundred and fifty percent) must be applied to securitization exposures whose underlying assets are predominantly subject to the IRB approaches mentioned in art. 6º, for which the RBA or SF approaches cannot be used.

CHAPTER IX
OF CREDIT RISK MITIGATION FOR SECURITIZATION EXPOSURES

Art. 138. The provision of credit risk mitigation to a securitization exposure implies treating the exposure subject to mitigation as a own exposure, for the purpose of determining the value of the RWACIRB component.

Sole paragraph. The provision in the caput does not apply to the originator counterparty.

Art. 139. The use of the SF or RBA approaches implies the treatment of credit risk mitigation instruments according to the provisions of arts. 87 to 108.

Sole paragraph. The effects of credit risk mitigation instruments must be associated with the senior class of securitization titles, with the option to associate them with classes with a higher degree of subordination when intended for protection relative to:

I - first losses; or

II - losses of each class of securitization titles in a proportional manner.

CHAPTER X
OF THE RWACIRB COMPONENT RELATIVE TO EARLY AMORTIZATION

Art. 140. If early amortization is provided for, according to the provisions of art. 115, item XIV, the respective value of the RWACIRB component must correspond to the product of the following factors:

I - value of the investor tranche;

II - appropriate FCC, according to §§ 2º and 3º; and

III - KIRB factor, mentioned in art. 130, § 1º, item I.

§ 1º For the determination of the value of the EAD parameter relative to securitization exposures, the values of current, effective, and contingent exposures must be determined relative to the investor tranche.

§ 2º For the purposes of the provisions in the caput, the following FCCs must be applied to underlying assets of a revolving nature in securitization processes with controlled early amortization:

I - 90% (ninety percent), when the underlying assets consist of commitments not associated with retail credit; and

II - 90% (ninety percent), when the underlying assets consist of commitments not unconditionally cancellable without prior notice associated with retail credit; and

III - the value corresponding to the ratio between the 3 (three) month average of the securitization spread and the accumulation point (SS90/PA), when the underlying assets consist of commitments unconditionally cancellable without prior notice associated with retail credit, according to the following values:

a) 0% (zero percent), if the SS90/PA ratio is greater than 133.33% (one hundred and thirty-three and thirty-three hundredths percent);

b) 1% (one percent), if the SS90/PA ratio is less than or equal to 133.33% (one hundred and thirty-three and thirty-three hundredths percent) and greater than 100% (one hundred percent);

c) 2% (two percent), if the SS90/PA ratio is less than or equal to 100% (one hundred percent) and greater than 75% (seventy-five percent);

d) 10% (ten percent), if the SS90/PA ratio is less than or equal to 75% (seventy-five percent) and greater than 50% (fifty percent);

e) 20% (twenty percent), if the SS90/PA ratio is less than or equal to 50% (fifty percent) and greater than 25% (twenty-five percent); and

f) 40% (forty percent), if the SS90/PA ratio is less than or equal to 25% (twenty-five percent).

§ 3º For the purposes of the provisions in the caput, the following FCCs must be applied to underlying assets of a revolving nature in securitization processes with uncontrolled early amortization:

I - 100% (one hundred percent), when the underlying assets consist of commitments not associated with retail credit;

II - 100% (one hundred percent), when the underlying assets consist of commitments not unconditionally cancellable without prior notice associated with retail credit; and

III - the value corresponding to the SS90/PA ratio, when the underlying assets consist of commitments unconditionally cancellable without prior notice associated with retail credit, according to the following values:

a) 0% (zero percent), if the SS90/PA ratio is greater than 133.33% (one hundred and thirty-three and thirty-three hundredths percent);

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b) 5% (five percent), if the SS90/PA ratio is less than or equal to 133.33% (one hundred thirty-three and thirty-three hundredths percent) and greater than 100% (one hundred percent); c) 15% (fifteen percent), if the SS90/PA ratio is less than or equal to 100% (one hundred percent) and greater than 75% (seventy-five percent); d) 50% (fifty percent), if the SS90/PA ratio is less than or equal to 75% (seventy-five percent) and greater than 50% (fifty percent); and e) 100% (one hundred percent), if the SS90/PA ratio is less than or equal to 50% (fifty percent).

§ 4º In the absence of a contractual accumulation point, its value is set at 4.5 (four and five tenths) percentage points higher than the securitization spread value that allows investors in securitization notes to exercise early amortization.

§ 5º For the purposes of the provision in § 4º, if the exercise of early amortization is not directly linked to the securitization spread value, the accumulation point value is set at 4.5% (four and five tenths percent).

TITLE IX
OF THE USE OF IRB APPROACHES

CHAPTER I
OF THE DATABASES

Art. 141. The use of an IRB approach implies the storage of data by the institutions for the following periods:
I - for exposures classified in the "retail" category, the calculation of estimates for the PD, LGD, and EAD parameters must consider, at minimum, data from the previous 5 (five) years; II - for exposures classified in the "corporate equity" category, the calculation of estimates for the PD parameter used in the PD/LGD approach must consider, at minimum, data from the previous 5 (five) years; and III - for other exposures:
a) the calculation of estimates for the PD parameter must consider, at minimum, data from the previous 5 (five) years; and b) the calculation of estimates for the LGD and EAD parameters must consider data from, at minimum, the previous 7 (seven) years, preferably encompassing a complete economic cycle.

Art. 142. The use of external databases and external classifications of exposures according to credit risk is admitted as complementary information sources for calculating risk parameter estimates, provided that the compatibility of the external data and classifications with the risk factors to which the institution's own exposures are subject is demonstrated.

Art. 143. The use of models developed by third parties is admitted as part of the internal classification process of exposures according to credit risk.

§ 1º The use of models developed by third parties must meet the same requirements for validation of the use of internally developed systems, observing the following additional requirements:
I - the documentation of the level of integration of the models into the internal classification process of exposures must be satisfactory; and II - the degree of understanding of the models, their results, and implications must be adequate for their use in the risk classification and measurement system.

§ 2º The validation process referred to in Arts. 147 to 155 must prove the adequacy of the models developed by third parties to the nature of the institution's own exposures and to the methodology adopted in the internal classification process of exposures.

§ 3º The performance of models developed by third parties and the integrity of the data used in the internal classification process of exposures must be periodically reviewed.

Art. 144. The use of data shared among financial institutions is permitted.

Sole paragraph. For the use of the option provided in the caput, the adequacy between the shared data and the internal classification system used must be demonstrated.

CHAPTER II
OF THE PROOF OF USE

Art. 145. The institution using an IRB approach must prove the continuous, integrated, and comprehensive use of this approach, at minimum, in the following processes:
I - definition of tolerated risk levels;
II - establishment and alteration of limits;
III - decision-making regarding the assumption of risks; IV - changes in strategy and policies for credit risk management, as provided in Resolution No. 3,721, of 2009; V - preparation of management reports;

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VI - performance of the Internal Capital Adequacy Assessment Process (ICAAP), in accordance with Resolution No. 3,988, of 2011; VII - planning and execution of simulations of extreme conditions (stress tests); VIII - pricing and measurement of profitability of operations; and IX - granting and monitoring of credit.

§ 1º The proof referred to in the caput comprises the identification, description, and documentation of the continuous, integrated, and comprehensive use of the risk parameters associated with the IRB approach used.

§ 2º The documentation mentioned in § 1º must be kept up to date.

Art. 146. The practices and criteria associated with the classification system must be aligned with the various areas of the institution involved in the credit process, including risk management and commercial areas, considering:
I - the criteria used for segmentation of exposure categories, as well as those used for defining risk levels and homogeneous risk groups; II - the values and procedures related to recovery and collection processes; and III - the measurement techniques and parameters used for calculating expected losses.

Sole paragraph. The final risk classification must consider the analyses performed at the evaluation instances to which the exposure was submitted.

CHAPTER III
OF THE VALIDATION PROCESS

Art. 147. The use of an IRB approach is conditioned on the performance of a validation process for the internal classification models and credit risk systems, with the aim of proving their adequacy to the current risk profile, scope, and consistency.

§ 1º The proof referred to in the caput comprises a critical analysis of the following aspects, at minimum:
I - methodologies, premises, and theoretical foundations used in the models; II - adequacy of the internal credit risk classification system development process, including the models adopted, their logical foundation, and the variables used; III - main definitions adopted internally, including criteria for default and portfolio segmentation and risk parameters;

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IV - accuracy and adequacy of estimated values for risk parameters and losses; V - segmentation of portfolios into risk levels sufficient for significant risk differentiation; VI - use of all relevant information for adequate measurement of credit risk; VII - identification of historical intervals supporting risk parameter estimates; VIII - scope, consistency, integrity, and reliability of input data for models and information technology systems and data base construction processes; IX - existence of processes that assess the potential impact on credit risk arising from new products; X - adequacy of goodness-of-fit tests and stress tests; XI - assessment of the proof defined in Art. 145 and compliance with the provisions of Art. 146 and its respective documentation; XII - adequacy of internal controls of the systems to their complexity; XIII - compatibility of calculations performed by information technology systems and operational logic with the premises and methodologies adopted; XIV - adequacy of technological infrastructure and operation of information technology systems used in models, including tests, homologations, and certifications; XV - integrity, scope, and consistency of documentation of models used; XVI - content and scope of periodic risk measurement reports, goodness-of-fit tests, and stress tests; XVII - adequacy of the critical analysis and approval process referred to in Art. 157; XVIII - adequacy of the capital calculation for exposures submitted to IRB approaches; and XIX - compliance with the requirements mentioned in Arts. 141 to 144.

§ 2º The validation process is the exclusive responsibility of the institution, which must demonstrate to the Supervisory Authority (Desup) the adequacy and fit of the models used to its risk profile.

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§ 3º The validation process must analyze the maximum tolerable deviations between the estimates of risk parameters, mentioned in Art. 66, and their realized values, considering the current moment in the economic cycle and systematic variations in default rates.

Art. 148. The validation process must be performed at least every 3 (three) years and, in particular, whenever any relevant changes occur in the systems, models, the institution's risk profile, or the institution's monthly RWACIRB component value.

Sole paragraph. The relevance of changes mentioned in the caput must be defined according to consistent and verifiable criteria, adequately documented, and subject to evaluation by the Supervisory Authority (Desup).

Art. 149. The validation process must be independent of the system and model development processes and the use of their results.

Art. 150. The validation process must be conducted by technically qualified personnel and submitted to an appropriate incentive structure, with the aim of ensuring:
I - critical and effective analysis; and
II - absence of pressure from external and internal agents of the institution who may benefit from specific results arising from the validation process.

Art. 151. The validation process must include information technology systems acquired from third parties.

Art. 152. Restriction of the validation process to aspects affected by relevant changes in systems, models, or the institution's risk profile is permitted, provided that a prior critical analysis of these changes and an adequate diagnosis of their consequences on the IRB approach used is prepared.

§ 1º The exercise of the option referred to in the caput is subject to approval by the Supervisory Authority (Desup).

§ 2º Non-approval by the Supervisory Authority (Desup) of the restricted validation process under the terms of the caput implies the performance of a validation process comprising the critical analysis of the aspects mentioned in Art. 147, § 1º.

Art. 153. The validation process must consider the use of alternative quantitative validation methodologies and resort to comparisons with appropriate and updated external data sources, covering an adequate observation period.

Art. 154. The validation process must be adequately documented and its results submitted to the institution's board of directors and board of administration.

Sole paragraph. Changes in validation methods and information used, regarding both databases and collection intervals used, must be clearly documented and justified.

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Art. 155. The institution using an IRB approach must implement a structure responsible for the validation process.

Sole paragraph. The institution must designate a person responsible for the validation process.

Art. 156. Relevant changes in the risk profile of the institution using an IRB approach, as well as the relevant changes described in Art. 148, including in the validation process, and those that cause a significant impact on the calculation of the institution's monthly RWACIRB component value, must be communicated to the Supervisory Authority (Desup).

Sole paragraph. The provision in the caput also applies to changes that are not relevant in isolation but are relevant when combined.

CHAPTER IV
OF THE CRITICAL ANALYSIS PROCESS

Art. 157. Changes that do not necessitate the performance of the validation process described in Arts. 147 to 155 must be submitted to a previously defined and documented critical analysis and approval process.

CHAPTER V
OF AUDIT

Art. 158. The internal risk classification system must be submitted to internal audit evaluation with a minimum annual frequency, covering, at least:
I - effectiveness of the validation process referred to in Arts. 147 to 155; II - performance of validation processes in cases of relevant changes in the model or the institution's risk profile, as per Art. 148; III - organization of the credit risk management structure; IV - use of systems and models in a continuous, integrated, and comprehensive manner in granting and monitoring credit; V - inclusion of stress tests in risk management; VI - integrity of goodness-of-fit tests and their effective use in verifying performance and improving systems and models; VII - observance of risk management policies and strategies, including compliance with limits and related procedures; VIII - sufficiency and technical qualification of professionals in business, operational, risk management, information technology areas, as well as any others involved in the development, validation, and use of systems and models; IX - integrity and adequacy of management information systems;

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X - involvement of the institution's board of directors in the credit risk management process; XI - timeliness and quality of information provided to the board of administration; XII - processes for obtaining estimates of PD, LGD, and EAD parameter values and their adequacy to the institution's risk profile; XIII - degree of compliance with the requirements established in this Circular; and XIV - adequacy of the critical analysis and approval process mentioned in Art. 157.

§ 1º The internal audit evaluation process must be conducted by technically qualified personnel, independently.

§ 2º The provisions of items I, II, and VIII of the caput must be performed independently of the validation process referred to in Arts. 147 to 155.

§ 3º The internal audit evaluation activity must be documented.

TITLE X
OF REGISTRATION

CHAPTER I
OF REQUIREMENTS

Art. 159. At the time of requesting the authorization referred to in Art. 2º, the institution must have been using, for a minimum period of 1 (one) year, internal credit risk classification systems and parameter estimation aligned with the minimum requirements for using IRB approaches, observing the provision of Art. 12, item III, covering, at minimum, 60% (sixty percent) of the exposures in the scope of application weighted by the respective Risk Weight Factors (RWFs) established in Circular No. 3,644, of 2013.

§ 1º During the prior use period referred to in the caput, the IRB approach is subject to the provisions of Art. 145.

§ 2º IRB approaches must be adopted for, at minimum, 90% (ninety percent) of the exposures in the scope of application weighted by the respective RWFs established in Circular No. 3,644, of 2013, within a maximum period of 5 (five) years, from the request referred to in the caput, through a progressive implementation plan.

§ 3º For exposures classified in the "wholesale", "sovereign entities", and "financial institutions" categories, the use of the Advanced IRB approach is not conditioned on the prior use of the Basic IRB approach.

§ 4º Authorization for the use of the Advanced IRB approach is conditioned on proof of coverage of, at minimum, 50% (fifty percent) of the total exposures classified in the "wholesale", "sovereign entities", and "financial institutions" categories, weighted by the respective RWFs established in Circular No. 3,644, of 2013.

§ 5º During the progressive implementation conducted according to the plan mentioned in § 2º, exposures classified in a category for which the use of the Basic IRB approach is initially authorized may migrate to the Advanced IRB approach, subject to prior authorization by the Supervisory Authority (Desup), observing the provision of § 4º.

Art. 160. The inclusion of financial products in the use of IRB approaches must be communicated to the Supervisory Authority (Desup), observing relevance criteria.

Art. 161. Exceptionally, for authorization requests for the use of IRB approaches submitted until December 31, 2013, the minimum data coverage periods shall be as follows:
I - for exposures classified in the "retail" category, PD, LGD, and EAD parameter estimates must consider data from the previous 3 (three) years; II - for exposures classified in the "wholesale", "financial institutions", "sovereign entities", and "corporate equity" categories, PD parameter estimates must consider data from the previous 3 (three) years; and III - for exposures classified in the "wholesale", "financial institutions", and "sovereign entities" categories, LGD and EAD parameter estimates must consider data from the previous 5 (five) years.

Sole paragraph. The minimum periods established in items I, II, and III will be increased by 1 (one) year for authorization requests for the use of IRB approaches submitted between January 1, 2014, and December 31, 2014.

CHAPTER II
OF THE AUTHORIZATION REQUEST

Art. 162. Institutions applying for the use of IRB approaches must request the respective authorization through a petition signed by the institution's president and the director indicated in the form of Art. 12 of Resolution No. 3,721, of 2009.

§ 1º The request referred to in the caput must explicitly discriminate:
I - the categories, subcategories, business units, and the respective IRB approaches for which authorizations are requested; and II - the portfolios and their respective classification systems for which authorizations are requested.

§ 2º During the progressive implementation plan provided for in Art. 159, § 2º, the extension of the IRB approach used for new systems or the migration from Basic IRB to Advanced IRB, whether provided for in said plan or not, are subject to proof of continuous, integrated, and comprehensive use established in Art. 145 and authorization by the Supervisory Authority (Desup).

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§ 3º The request referred to in the caput must be accompanied by the following documentation:
I - declarations attesting:
a) knowledge that, once the use of IRB approaches for certain exposures is authorized, the methodology established in Circular No. 3,644, of 2013, for calculating the RWA amount component for these exposures can no longer be used, except with prior authorization from the Supervisory Authority (Desup); b) compliance with the minimum requirements established in this Circular and knowledge that eventual non-compliance with specific aspects does not compromise the consistency in the use of IRB approaches and in credit risk management; c) prior use, for a minimum period of 1 (one) year, of the specified IRB approach for risk classification and risk parameter estimation, as provided in Art. 159, for at minimum 60% (sixty percent) of the exposures in the scope of application weighted by their respective RWFs; and d) truthfulness and integrity of the information sent; II - a progressive implementation plan for the subsequent 5 (five) years for IRB approaches for 90% (ninety percent) of the exposures belonging to the scope of application weighted by their respective RWFs, containing schedule, measures, and responsibilities for its implementation; III - a report prepared based on the document "Information on Internal Credit Risk Classification Systems", to be published by the Supervisory Authority (Desup); IV - an adequacy plan, containing schedule, measures, and responsibilities for full compliance with the specific aspects mentioned in item I, letter "b"; and V - an internal audit opinion, containing conclusions on the evaluation established in Art. 158.

Art. 163. Authorization requests for the use of IRB approaches will be submitted to a selection and prioritization process by the Supervisory Authority (Desup).

Sole paragraph. In the selection and prioritization process referred to in the caput, the following criteria will be taken into consideration:
I - completeness and adequacy of the documents mentioned in Art. 162, § 3º, to the requirements established in this Circular; II - the institution's history regarding risk assessments and controls, economic-financial solidity, transparency in relationships, compliance with regulations, and timely compliance with determinations; III - degree of development of the credit risk management structure, risk parameter estimation, and internal credit risk classification systems;

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IV - relative participation of the institution's RWACIRB component value in relation to the aggregated RWA amount of the Financial System (SFN); V - amount of the institution's assets; and VI - date of the authorization request.

Art. 164. During the analysis process by the Supervisory Authority (Desup) of the request for use of an IRB approach, the institution must:
I - promptly provide any additional information; II - inform, in the manner to be established by the Supervisory Authority (Desup), the monthly RWACIRB component value calculated using the requested IRB approach; and III - facilitate access to people, documents, and systems involved in the development and use of the requested IRB approach.

Art. 165. The use of an IRB approach and the estimation of risk parameter values for calculating the RWACIRB component shall occur only for portfolios expressly authorized by the Supervisory Authority (Desup) and after the date stipulated in the respective authorization.

Art. 166. The relevant changes mentioned in Art. 148, as well as the change of approach whose use was previously authorized, are subject to prior authorization by the Supervisory Authority (Desup).

CHAPTER III
OF THE PROGRESSION PERIOD

Art. 167. During the progression period, the monthly RWACIRB component value must correspond to the result of the following formula:
RWACIRB = Max [RWA(PRO); S x RWACPAD], where:
I - RWA(PRO) = monthly RWACIRB component value determined using the IRB approach, as provided in Art. 34; II - RWACPAD = monthly RWACPAD component value determined according to the provisions of Circular No. 3,644, of 2013, relating to the same exposures for which the RWA(PRO) component was determined; and III - S = progression factor.

§ 1º The progression period begins on the date stipulated according to the provision of Art. 165 and ends on the date when the progression factor S assumes the value zero.

§ 2º The value of the progression factor S is equal to:
I - 0.90 (ninety hundredths), during the first year after the authorization date;

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Circular nº 3.648, de 4 de março de 2013 Página 90 de 120 II - 0,80 (eighty hundredths), over the second year after the authorization date; III - 0,70 (seventy hundredths), over the third year after the authorization date; and IV - 0 (zero), from the fourth year after the authorization date. § 3º The Desup may extend the periods during which the progression factor S assumes the values listed in items I to III of § 2º, considering, at a minimum, the following criteria:
I - consistency and evolution of the database used; II - compliance with the progressive implementation plan; III - alignment of management practices with the IRB approach used; IV - adequacy and results of goodness-of-fit tests; V - consistency of stress tests; and VI - adequacy of the internal control structure related to credit processes.

TITLE XI
ON THE DISCLOSURE OF INFORMATION

CHAPTER I
ON GENERAL INFORMATION

Art. 168. The following information must be evidenced in a public access report:
I - categories, subcategories, portfolios, and business units subject to the IRB approaches used; II - risk levels related to the main portfolios subject to IRB approaches; III - description of internal estimates for other purposes not related to the calculation of the PRE; IV - description of the risk management and recognition process for credit risk mitigants; and V - control mechanisms for the IRB approaches used, including aspects related to independence, assignment of responsibilities, and procedures for system and model reviews.

Art. 169. The report referred to in Art. 168 must contain a brief description of the main methodologies used to classify the credit risk of exposures classified into the categories "sovereign entities", "banking institutions", "wholesale", "corporate holdings", and "retail".

Circular nº 3.648, de 4 de março de 2013 Página 91 de 120 § 1º The description referred to in the caput must cover the subcategories "SME", "specialized financing", of the "wholesale" category, wholesale financial receivables, and the subcategories "residential", "qualified retail revolving credit", and "other retail exposures", of the "retail" category.

§ 2º For each of the categories and subcategories mentioned in § 1º, the description referred to in the caput must include, at a minimum:
I - nature of the operations included in them; II - definitions, methods, and other relevant information used in the estimation of values and validation of PD, LGD, and EAD parameters, according to the IRB approach used; III - maximum tolerable deviations, mentioned in Art. 147, § 3º; IV - values of contingent exposures and estimates of the EAD parameter value, in the case of using the advanced IRB approach; V - values related to losses occurred in the period prior to disclosure, including comparison with past loss experience and analysis of factors that affected the losses; and VI - comparative analysis between the estimated values of the PD, LGD, EAD parameters, and the expected loss amount EL and the respective values actually realized, considering a sufficiently long historical period.

Art. 170. An adequate number of PD parameter ranges must be defined in each category and subcategory mentioned in Art. 169, and informed, at a minimum, for each defined PD range:
I - the total value of exposures, considering for this purpose:
a) the amount of accounting balances of exposures classified in the "corporate holdings" category; and b) the sum of the drawn balance with the total of contingent exposures; II - the average value of the K factor weighted by the value of each exposure belonging to the range; and III - the average percentage value of the LGD parameter weighted by the value of each exposure belonging to the range, in the case of using the advanced IRB approach.

Sole paragraph. The information referred to in Art. 169 regarding the "retail" category and its subcategories must be disclosed with the following segregation:
I - by homogeneous risk groups; or

Circular nº 3.648, de 4 de março de 2013 Página 92 de 120 II - by expected loss ranges defined in each subcategory.

Art. 171. The institution that also employs the treatment established in Circular No. 3.644, of 2013, must additionally disclose a description of portfolios in each category or subcategory of exposure that are subject to the following approaches:
I - treatment established in Circular No. 3.644, of 2013; II - basic IRB approach; and III - advanced IRB approach.

Art. 172. For exposures classified in the subcategory "specialized financing" subject to the weighting criteria published by the Central Bank of Brazil or those belonging to the "corporate holdings" category subject to the simplified approach, the total value related to:
I - exposures receiving a 300% (three hundred percent) weighting, defined in Art. 50; II - exposures receiving a 400% (four hundred percent) weighting defined in Art. 50; and III - each weighting associated with the categories defined in Art. 40, §§ 2º and 3º.

CHAPTER II
ON INFORMATION ABOUT CREDIT RISK MITIGANTS

Art. 173. The report referred to in Art. 168 must contain the following qualitative information about credit risk mitigation instruments associated with exposures subject to IRB approaches:
I - description of policies and the degree of use, both for contingent exposures and effective exposures, in the event of using netting and settlement agreements; and II - description of the main types of collateral used.

Art. 174. For each of the categories and subcategories subject to the IRB approach, the following quantitative information must be made available:
I - total net value of the effects of netting agreements after applying standardized adjustment factors for exposures associated with financial collateral and other collateral; and II - total net value of the effects of netting agreements for exposures covered by suretyship guarantees or credit derivatives.

Sole paragraph. Exposures subject to IRB approaches are not subject to the provisions of Art. 7, item II, of Circular No. 3.477, of 2009.

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CHAPTER III
ON COUNTERPARTY CREDIT RISK INFORMATION

Art. 175. The report referred to in Art. 168 must describe the policies for identification, treatment, and capital management, as provided in Resolution No. 3.988, of 2011, for operations subject to counterparty credit risk, in the case of positive correlation between:
I - the counterparty's probability of default and market variations; and II - the probability of default of a counterparty and the value of exposure to that same counterparty, due to the specific characteristics of the operation.

CHAPTER IV
ON ADDITIONAL INFORMATION

Art. 176. The institution must disclose additional information it deems relevant, in order to ensure:
I - appropriate transparency in the management and measurement of credit risk; II - adequacy of the PR to the risks incurred; and III - adequacy of the IRB approach used to the current credit risk profile.

§ 1º Information related to the IRB approach used must include any relevant changes involving quantitative aspects since the last disclosure.

§ 2º The Desup may determine the disclosure of additional information beyond that provided in this Circular regarding the IRB approach used.

CHAPTER V
ON THE PERIODICITY OF INFORMATION

Art. 177. The qualitative information referred to in Arts. 168 to 176 must be updated with a minimum annual periodicity.

Sole paragraph. Qualitative information related to relevant changes in the IRB approach used must be disclosed within 90 (ninety) days after the authorization for its use.

Art. 178. The quantitative information referred to in Arts. 168 to 176 must be updated with a quarterly periodicity, relative to the base dates of March 31, June 30, September 30, and December 31.

Sole paragraph. The update of information must occur within a maximum period of 60 (sixty) days from the base dates of March 31, June 30, and September 30, and 90 (ninety) days from the base date of December 31.

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Art. 179. The information referred to in Arts. 168 to 172 must be available in a single location, of public access and easy location, preferably on the institution's website on the internet.

§ 1º The availability referred to in the caput applies to information related to the current year and, at a minimum, to the last 5 (five) years.

§ 2º Information related to the last 5 (five) years must be accompanied by a comparative evaluation and explanation for relevant variations that occurred.

§ 3º Information must be available together with that related to the risk management structure, as provided in Resolutions Nos. 3.380, of June 29, 2006, 3.464, of June 26, 2007, and 3.721, of 2009.

§ 4º Information about the location where the information referred to in the caput is available must be published together with the financial statements.

Art. 180. After the authorization referred to in Art. 2º, the information referred to in Arts. 168 to 176 must be available together with that provided in Circular No. 3.477, of 2009.

CHAPTER VI
ON FINAL PROVISIONS

Art. 181. The director indicated in the terms of Art. 12 of Resolution No. 3.721, of 2009, is responsible for the information referred to in Art. 168.

Art. 182. This Circular enters into force on October 1, 2013.

Art. 183. Circular No. 3.581, of March 8, 2012, is revoked, effective October 1, 2013.

Luiz Awazu Pereira da Silva Anthero de Moraes Meirelles Director of Regulation of the Financial System Director of Supervision

This text does not replace that published in the DOU of 3/8/2013, Section 1, p. 25-44, and in Sisbacen.

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ANNEX I TO CIRCULAR NO. 3.648, OF MARCH 4, 2013
Risk classification criteria for specialized financing of the "project financing" type

Aspect I - Financial strength of the project
Criteria
Requirements to be met for the assessment grade Strong Good Satisfactory Weak Market conditions.
The demand is strong and growing. The project has few competitors or presents a substantial and durable comparative advantage regarding items such as location, cost, or technology. The demand is strong and stable. The project has few competitors or presents an occasional comparative advantage regarding items such as location, cost, or technology. The demand is adequate and stable. The project does not present a comparative advantage regarding items such as location, cost, or technology. The demand is weak and declining. The project presents a comparative disadvantage regarding items such as location, cost, or technology. Financial indicators (debt service coverage, loan extension coverage, project extension coverage, debt-to-project value ratio). The financial indicators are solid, considering the project's risk level. The economic premises are very robust. The financial indicators vary between solid and good, considering the project's risk level. The economic premises are robust. The financial indicators are median, considering the project's risk level. The financial indicators are weak, considering the project's risk level. Stress analysis. The project has conditions to honor its financial obligations, even in the face of a persistent and severe economic or sectoral stress scenario. The project has conditions to honor its financial obligations in the face of a normal economic or sectoral stress scenario. The possibility of its default is associated with the occurrence of usual economic conditions. The project is vulnerable to a usual stress scenario over an economic cycle. The possibility of its default is associated with severely adverse economic conditions. The project has a high probability of entering default if economic or sectoral conditions do not improve rapidly.

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Aspect II - Financial structure of the project Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Duration (duration) of credit compared to the duration of the project. The useful life of the project significantly exceeds the duration of its financing. The useful life of the project exceeds the duration of its financing. The useful life of the project exceeds the duration of its financing. The useful life of the project may not exceed the duration of its financing. Form of amortizations. The debt is continuously amortized. The debt is continuously amortized. A large part of the debt is continuously amortized and a small part is amortized only at maturity. A small part of the debt is continuously amortized and a large part is amortized only at maturity.

Aspect III - Political and legal environment
Criteria
Requirements to be met for the assessment grade Strong Good Satisfactory Weak Political risk, including transfer risk, considering the business plan and mitigators. The exposure to risk is very low. There are very effective mitigating instruments, if necessary. The exposure to risk is low. There are satisfactory mitigating instruments, if necessary. The exposure to risk is moderate. There are some mitigating instruments of moderate effectiveness. The exposure to risk is high. The mitigation instruments are weak or non-existent. Force majeure risk (war, social upheaval, etc.). The exposure to risk is very low. The exposure to risk is low. Protection is considered standard. The risks are significant and not fully mitigated. Government support and importance of the project for the country in the long term. The project has strategic importance for the country (preferably export-oriented). There is strong government support. The project is important for the country. There is good government support. The project is not strategic, but brings unquestionable benefits to the country. Government support may not be explicit. The project is not essential for the country. There is little or no government support. Legal and regulatory stability (risk of law changes). The regulatory environment is favorable and stable in the long term. The regulatory environment is favorable and stable in the medium term. Regulatory changes can be predicted with a reasonable degree of certainty. Current or future regulatory issues may affect the project. Obtaining the necessary support and approval of local laws of interest to the project. There is full certainty regarding the obtaining of support and the approval of local laws. There is limited certainty regarding the obtaining of support and the approval of local laws. There is limited certainty regarding the obtaining of support and the approval of local laws. There are broad doubts regarding the obtaining of support and the approval of local laws. Degree of legal support for contracts, guarantees, and titles. Contracts, guarantees, and titles have broad legal support. Contracts, guarantees, and titles have broad legal support. Contracts, guarantees, and titles have legal support, even if there are certain non-essential elements. There are essential elements that generate uncertainty regarding the legal support of contracts, guarantees, and titles.

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Aspect IV - Characteristics of transactions
Criteria
Requirements to be met for the assessment grade Strong Good Satisfactory Weak Design and technology risk.
The project's design and technology have broad approval.
The project's design and technology have broad approval.
The project's design and technology are approved. Initial problems are mitigated by robust technical support.
The project's design and technology have not been tested. There are problems related to technology or the design is complex.
Authorizations and permits.
All authorizations or permits have been obtained.
Some authorizations or permits are pending, but their obtaining is likely.
Some authorizations or permits are pending, but the obtaining process is well-established and routine.
Some essential authorizations or permits for the project's operation are missing, and their obtaining is not routine.
Additional conditions may be imposed.
Type of construction contract.
The contract is a single turnkey contract, with fixed prices and a fixed delivery date. All material purchases are the responsibility of the contractor.
The contract is a single turnkey contract, with fixed prices and a fixed delivery date. All material purchases are the responsibility of the contractor.
The contract is one or more turnkey contracts, with fixed prices and a fixed delivery date. Material purchases may not be the responsibility of the contractor. Prices are freely or partially fixed. There is interrelation among the various service providers. Completion guarantees. The financial strength of the project supports high costs of liquidation for non-completion of the work. The completion guarantee is solid and provided by a sponsor with an excellent credit history. The financial strength of the project supports significant costs of liquidation for non-completion of the work. The completion guarantee is provided by sponsors with a good credit history. The financial strength of the project adequately supports the costs of liquidation for non-completion of the work. The completion guarantee is provided by sponsors with a good credit history. The financial strength of the project does not adequately support the costs of liquidation for non-completion of the work. The completion guarantee is provided by sponsors with a deficient credit history. Previous experience and financial capacity of the contractor in executing similar projects. The contractor has proven previous experience and financial capacity. The contractor has proven previous experience and financial capacity. There is a limitation in the contractor's previous experience or financial capacity. There is no evidence of the contractor's previous experience or financial capacity. Scope and nature of Operation and Maintenance (O&M) contracts. There is a well-structured long-term O&M contract, preferably including performance incentives. There are O&M reserve accounts. There is a long-term O&M contract. There are O&M reserve accounts. There is a limited-term O&M contract. There is an O&M reserve account. There is no O&M contract. There is a risk that high operational costs will exceed the coverage of mitigators. Technical capacity, history, and financial capacity of the project operator Very strong. There is total commitment to technical assistance from the sponsors. Strong. There is limited commitment to technical assistance from the operators. Reasonable. There is no record of the operators' capacity for technical assistance. Limited or weak. The operator depends on local authorities. Guaranteed purchase contract with fixed price or "take-or-pay" clause. The contractual buyer has an excellent credit history. The contractual cancellation clauses are very well defined and the contract term significantly exceeds the debt maturity. The contractual buyer has a good credit history. The contractual cancellation clauses are very well defined and the contract term exceeds the debt maturity. The contractual buyer has a reasonable credit history. The contractual cancellation clauses are usual and the contract term equals the debt maturity. The contractual buyer has a deficient credit history. The contractual cancellation clauses are weak and the contract term is less than the debt maturity.
Guaranteed purchase contract without fixed price or without "take-or-pay" clause. The project produces essential services or a commodity widely sold on a global scale. The production is readily absorbable at projected prices, even with market growth rates below historical ones. The project produces essential services or a commodity widely sold on a regional scale. The production is regionally absorbable at projected prices, given the historical market growth rates. The commodity is sold in a limited market, which can absorb the production only at prices below the projected ones. The estimated production is demanded by only one buyer or few buyers, or is not commonly sold in organized markets. Price, volume, and risk of basic inputs. History and financial capacity of the supplier. The supply contract is long-term and the supplier has excellent financial capacity. The supply contract is long-term and the supplier has good financial capacity. The supply contract is long-term and the supplier has good financial capacity, although with some risk of price variation. The supply contract is short-term or the supply contract is long-term, but with a supplier of low financial capacity. There is a high risk of price variation. Input risk. There are independently audited, confirmed, and operated input reserves, exceeding the debt maturity There are independently audited, confirmed, and operated input reserves, exceeding the project's life time. The proven input reserves are sufficient until the debt maturity. The project depends, to some extent, on unproven or unexploited input reserves.

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Aspect V - Strength of the leading company of the project Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak History and financial capacity or reputation of the project sponsor. The project sponsor has an excellent history and high financial strength. The project sponsor has a good history and good financial strength. The project sponsor has an adequate history and good financial strength. The project sponsor is deficient in terms of history and financial strength. Project support capacity by the sponsor, evidenced by equity, shareholding control level, and incentive to inject additional resources, when necessary. The project is highly strategic for the sponsor, considering its main area of activity and its long-term strategy. The project is strategic for the sponsor, considering its main area of activity and its long-term strategy. The project is important for the sponsor, considering its main area of activity. The project is not essential for the long-term strategy of the sponsor or for its main area of activity. Aspect VI - Structure of guarantees Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Scope of contracts and accounting records. Contracts and accounting records are fully comprehensive. Contracts and accounting records are fully comprehensive. There are gaps in the scope of contracts, which do not compromise the execution of the project. Accounting records are comprehensive. There are serious gaps in the scope of contracts and deficiencies in accounting records.

Circular No. 3,648, of March 4, 2013 Page 102 of 120 Commitment of assets, considering their quality, value, and liquidity.
There is total certainty regarding the ability to appropriate the assets given as collateral, including the preference over any third party relative to contracts, assets, and accounts necessary for the operation of the project. There is robust certainty regarding the ability to appropriate the assets given as collateral, including the preference over the majority of third parties, relative to contracts, assets, and accounts necessary for the operation of the project. There is acceptable certainty regarding the ability to appropriate the assets given as collateral, including the preference over a relevant part of third parties, relative to contracts, assets or accounts necessary for the operation of the project. There are few real or fiduciary guarantees. The contractual clauses are not capable of unequivocally preventing the borrower from incurring new debt that could put at risk the payment of obligations relative to the project. Lender control over the project's cash flows (withdrawals of resources, independent tied accounts, etc.). The lender has total control over the cash flows of the project. The lender has limited control over the cash flows of the project. The lender has limited control over the cash flows of the project. The lender has no control over the project's cash flows. Binding power of contractual clauses (mandatory prepayments, payment deferrals, dividend restrictions, etc.). The binding nature is robust for the type of project. The project is prevented from incurring new debt. The binding nature is satisfactory for the type of project. The project can only incur new debt under very restrictive conditions. The binding nature is reasonable for the type of project. The project can only incur new debt under restrictive conditions. The binding nature is insufficient for the type of project. There is no restriction on the project incurring new debt. Reserve funds (destined for debt service, operation & maintenance, renovation, change, force majeure events, etc.). The coverage period of the reserve funds is greater than the average. The funds are constituted in currency or letter of credit provided by a bank with excellent credit rating. The coverage period of the reserve funds corresponds to the average. The resources of the reserve funds are fully funded. The coverage period of the reserve funds corresponds to the average. The resources of the reserve funds are fully funded. The coverage period of the reserve funds is less than the average. The resources of the reserve funds depend on the operational revenues.

Circular No. 3,648, of March 4, 2013 Page 103 of 120 Presence of SPE.
Presence of SPE since the pre-operational phase of the project.
Presence of SPE since the operational phase of the project.
Absence of SPE, but inclusion of other clauses that guarantee the separation of the project's assets and the sponsor's (affected assets, for example).
Absence of
SPE, as well as other clauses that guarantee the separation of the project's assets and the sponsor's (affected assets, for example).

Circular No. 3,648, of March 4, 2013 Page 104 of 120
ANNEX II TO CIRCULAR NO. 3,648, OF MARCH 4, 2013
Risk classification criteria for specialized financings of the types "revenue-generating real estate venture" and "high volatility commercial real estate financings (HVCRE)" Aspect I - Financial strength of the venture Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Market conditions. There is a good balance between supply and demand for the type and location of the venture. The number of competing ventures is equal to or less than the projected demand. There is a good balance between supply and demand for the type and location of the venture. The number of competing ventures is close to the projected demand. There is a precarious balance between supply and demand for the type and location of the venture. There is supply of competing ventures and others are in planning. The configuration and functionality of the venture may be inferior to those of new competitors. Market conditions are weak and there is uncertainty regarding their improvement and the return to equilibrium. The venture loses tenants upon contract expiration. The terms of new leases are less favorable if compared to the expired ones. Financial indicators (debt service coverage, loan coverage, venture coverage, debt-to-value ratio of the venture). The coverage indicator for debt service is strong and the debt-to-value ratio of the venture is low, given the type of real estate. If there is a secondary market, the transaction is standardized. The coverage indicator for debt service and the debt-to-value ratio of the venture are satisfactory. If there is a secondary market, the transaction is pa- The coverage indicator for debt service is decreasing and the debt-to-value ratio of the venture is increasing. There is a significant decline in the coverage indicator for debt service and the debt-to-value ratio of the venture is well below the standard pa-

Circular No. 3,648, of March 4, 2013 Page 105 of 120 venture). the transaction is standardized. dronized. para new financings.
Stress testing.
The venture's resources, including contingent resources, and its liabilities structure allow it to honor its financial obligations, even in the face of a severe economic stress scenario (such as high interest rates and low growth). The venture is capable of honoring its financial obligations in the face of a normal economic stress scenario. Default is likely only in the face of severely adverse economic conditions. In the face of adverse economic conditions, the decline in the venture's revenues would compromise its ability to cover expenses, significantly increasing the risk of default. The financial situation of the venture is strained. There is a high risk of default, if the economic or sectoral conditions do not show rapid improvement. Predictability of cash flow for completed and stabilized real estate. Contracts are long-term, with solvent tenants and dispersion of maturity dates. There is a history of tenant retention at the end of the contract and the vacancy rate is low. Expenses for maintenance, security, insurance, and taxes are predictable. Most of the contracts are long-term, with tenants with a variable degree of solvency. Tenant turnover at the end of the contract is normal and the vacancy rate is low. Expenses are predictable. Most of the contracts are medium-term, with tenants with a variable degree of solvency. Tenant turnover at the end of the contract and the vacancy rate are moderate. Expenses are relatively predictable, but vary in relation to revenues. Contracts have variable terms and tenants have a variable degree of solvency. Tenant turnover at the end of the contract is elevated and the vacancy rate is high. There are high expenses to prepare the space for new tenants. Predictability of cash flow for completed, but not stabilized real estate. Leases and their values equal or exceed projections. The venture must achieve stabilization in the near future. Leases and their values equal or exceed projections. The venture must achieve stabilization in the near future. Leases and their values reach projections. The venture should not achieve stabilization in the near future. Leases and their values are inferior to projections. Even if the projected occupancy rate is reached, the cash flow is restricted due to reduced revenue. Predictability of cash flow during the construction phase. The property was previously and entirely leased until the maturity of the financing or previously sold to a buyer classified as investment grade or the institution has a firm commitment from an institution classified as investment grade for the financing of the commercialization phase of the venture. The property was previously and entirely leased or sold to a tenant or buyer with a good credit history, or the institution has a firm commitment for financing by a lender with a good credit history. Leases and their values reach projections, but the property may not be previously leased and there may be no financing for commercialization. The
institution itself is the only financier of all phases of the venture. The property suffers deterioration due to excessive costs, worsening market conditions, cancellation of leases or other factors. There may be litigation with the institution responsible for financing the commercialization phase of the venture. Aspect II - Asset characteristics Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Location. The property is located in a highly desirable and convenient location for services demanded by tenants. The property is located in a desirable and convenient location for services demanded by tenants. The location of the property does not constitute a comparative advantage. The location, configuration or maintenance of the property entail difficul-

Circular No. 3,648, of March 4, 2013 Page 106 of 120 demanded by tenants. ties for the venture.
Configuration and condition.
The property is favored due to its design, configuration, and maintenance.
The property is highly competitive compared to new ventures.
The design, configuration, and maintenance of the property prove adequate.
The property is competitive compared to new ventures.
The design, configuration, and maintenance of the property prove adequate.
There are deficiencies in the design, configuration or maintenance of the property.
Property under construction.
The construction budget is conservative and technical risks are limited.
Executors are highly qualified.
The construction budget is conservative and technical risks are limited.
Executors are highly qualified.
The construction budget is adequate and the executors have average qualification.
The project exceeds the budget or is unrealistic due to its technical risks. The executors have insufficient qualification.
Aspect III - Strength of the leading company of the venture Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Financial capacity and willingness to support the venture. The sponsor/developer employed substantial financial resources in the construction or acquisition of the venture. The sponsor/developer possesses substantial resources, and its liabilities and The sponsor/developer employed financial resources in the construction or acquisition of the venture. The developer/entrepreneur possesses sufficient resources to sustain the venture in the event of a cash flow deficit in the same. The sponsor/developer's contribution may be irrelevant or non-financial. The sponsor/developer's resources are modest. The sponsor/developer has no capacity or interest in sustaining the venture.

Circular No. 3,648, of March 4, 2013 Page 107 of 120 contingent liabilities are limited.
The sponsor/developer's real estate holdings have geographic and nature diversification. ventures of the developer/entrepreneur are diversified only in geographic terms. Reputation and history with similar ventures. Management is experienced and sponsors have high qualification. Their reputation is elevated, with a long history of success in similar ventures. Management and sponsor qualification is appropriate, with a history of success in similar ventures. Management and sponsor qualification is average. Their history is not a cause for greater concern. Management is inefficient and the qualification of sponsors is deficient. There is a history of difficulties for management and sponsors in conducting similar ventures. Relationship with main participants in the real estate market. The relationship is robust with the main agents of the rental market. The relationship is good with the main agents of the rental market. Adequate relations with main real estate brokers and other real estate service providers. The relationship is precarious with the main agents of the rental market or other real estate service providers.

Circular No. 3,648, of March 4, 2013 Page 108 of 120 Aspect IV - Structure of guarantees Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Degree of enforceability of guarantees. Guarantees have the highest degree of subordination possible and priority over other creditors. Guarantees have the highest degree of subordination possible and priority over other creditors. Guarantees have the highest degree of subordination possible and priority over other creditors. There are restrictions on the ability to execute collateral. Appropriation of rents. Rents are committed to the institution. Information on tenants is updated, so as to allow direct and uninterrupted payment. Rents are committed to the institution. Information on tenants is updated, so as to allow direct and uninterrupted payment. Rents are committed to the institution. Information on tenants is updated, so as to allow direct and uninterrupted payment. Rents are not committed to the institution. Information on tenants is not updated, which may compromise direct and uninterrupted payment. Quality of insurance coverage. The insurance value is greater than or equal to the exposure value and the maturity date of the insurance is equal to or later than the maturity date of the exposure. The insurance value is greater than or equal to the exposure value and the maturity date of the insurance is equal to or later than the maturity date of the exposure. The insurance value is greater than or equal to the exposure value and the maturity date of the insurance is equal to or later than the maturity date of the exposure. The insurance value is less than the exposure value or the maturity date of the insurance is earlier than the maturity date of the exposure.

Circular No. 3,648, of March 4, 2013 Page 109 of 120
ANNEX III TO CIRCULAR NO. 3,648, OF MARCH 4, 2013
Risk classification criteria for specialized financings of the type "specific object financing" Aspect I - Financial strength of the object Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Market conditions. Demand is strong and growing, with high barriers to entry and low sensitivity to technological changes and to alterations in the economic scenario. Demand is strong and stable, with moderate barriers to entry and moderate sensitivity to technological changes and to alterations in the economic scenario. Demand is adequate and stable, with limited barriers to entry and significant sensitivity to technological changes and to alterations in the economic scenario. Demand is weak and declining, with vulnerability to changes in technology and to alterations in the economic scenario. There is a high degree of uncertainty. Financial indicators. Financial indicators are robust, considering the risk level of the object, and economic premises are very robust. Financial indicators vary between robust and good, considering the risk level of the object, and economic premises are robust. Financial indicators correspond to the standard, considering the risk level of the object. Financial indicators are deficient, considering the risk level of the object. Stress testing. Revenues are stable in the long term and sufficient to honor financial obligations, even in the face of severe stress scenarios over an economic cycle. Revenues are satisfactory in the short term and sufficient to honor financial obligations in the face of a common economic stress scenario. Default is likely only in the face of economic conditions severely adverse. Revenues are uncertain in the short term and vulnerable to a usual stress scenario over an economic cycle. Default is highly likely under usual adverse conditions. Revenues are highly uncertain. The probability of default is elevated, if economic conditions do not show rapid improvement.

Circular No. 3,648, of March 4, 2013 Page 110 of 120 Market liquidity.
The market is global and assets have high liquidity.
The market is global or regional and assets are relatively liquid.
The market is regional and short-term perspectives limit liquidity.
The market is local or little relevant, and assets are illiquid or have low liquidity, especially in sectorized markets.
Aspect II - Political and legal environment
Criteria
Requirements to be met for the assessment grade Strong Good Satisfactory Weak Political risk, including transfer risk.
Exposure to risk is very low and has very efficient mitigating instruments, if necessary.
Exposure to risk is low and has satisfactory mitigating instruments, if necessary.
Exposure to risk is moderate and has mitigating instruments of moderate efficacy.
Exposure to risk is high and mitigating instruments for risk are weak or absent.
Legal and regulatory risks.
The jurisdiction favors asset recovery and contract fulfillment.
The jurisdiction favors asset recovery and contract fulfillment.
The jurisdiction generally favors asset recovery and contract fulfillment, although the process may be long or difficult.
The jurisdiction may hinder, delay or make impossible the recovery of assets or the fulfillment of contract.
The legal and regulatory environment is weak or unstable.

Circular No. 3,648, of March 4, 2013 Page 111 of 120 Aspect III - Transaction characteristics Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Financing term compared to the economic life of the asset. The payment flow is stable. Amortization only at maturity is reduced. There is no grace period. Amortization only at maturity maintains a satisfactory level. Amortization only at maturity is significant, with potential grace periods. Amortization only at maturity is high or total. Aspect IV - Operational risk Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Permits and licenses. All licenses have been obtained. Assets meet current and predictable safety standards. All licenses have been obtained or are in the process of being obtained. Assets meet current and predictable safety standards. Most licenses have been obtained or are in the process of being obtained. Obtaining the remaining licenses is considered routine. Assets meet current safety standards. There are problems in obtaining some licenses.
Part of the configuration or planned operations may need revision.
Nature and scope of operation and maintenance
(O&M) contracts.
The long-term O&M contract is well established, preferably including performance incentives and the use The O&M contract is long-term and includes the use of reserve accounts (if necessary). The O&M contract has limited term or provides for limited use of reserve accounts (if necessary). There is no O&M contract, resulting in high operational cost risk and the occurrence of non-co-

Circular No. 3,648, of March 4, 2013 Page 112 of 120

Circular No. 3,648, of March 4, 2013 Page 113 of 120 of reserve accounts (if necessary). covered by mitigants.
Financial capacity, prior experience in managing the type of asset and capacity to rehire the asset in the market at the end of the contract.
The history is excellent and the capacity to rehire the asset in the market is strong.
The history is satisfactory and the capacity to rehire the asset in the market is certain.
The history is weak or short and there is uncertainty regarding the capacity to rehire the asset in the market.
There is no history nor capacity to rehire the asset in the market.
Aspect V - Asset Characteristics
Criteria
Requirements to be met for the assessment grade Strong Good Satisfactory Weak Configuration, size, design and maintenance compared to other assets in the same market. There is a great advantage in design and maintenance. The standardized configuration entails market liquidity for the object. The design and maintenance exceed the average. The standardized configuration (with possible limited exceptions) entails market liquidity for the object. The design and maintenance are median. The configuration has specificities that may result in a more restricted market for the object. The design and maintenance are below the average. The asset is close to the end of its economic life. The configuration is very specific and the market for the object is very restricted. Resale value. The current resale value is significantly higher than the debt value. The current resale value is moderately higher than the debt value. The current resale value is slightly higher than the debt value. The current resale value is lower than the debt value. Sensitivity of the value and liquidity of the asset to the The value and liquidity of the asset are relatively insensitives to the economic cycles. The value and liquidity of the asset are sensitive to economic cycles. The value and liquidity of the asset are very sensitive to economic cycles. The value and liquidity of the asset are extremely

Circular No. 3,648, of March 4, 2013 Page 114 of 120 economic cycles. sensitive to economic cycles. sensitive to economic cycles. sensitive to economic cycles. sensitive to economic cycles. Aspect VI - Strength of the Financed Company Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Financial capacity, prior experience in managing the type of asset and capacity to sell the asset at the end of the contract. The history is excellent and the sales capacity is great. The history and the sales capacity are satisfactory. The history is weak or short and the sales capacity is uncertain. There is no history nor capacity to sell the asset. History or reputation of the incorporating company and financial strength. The history and reputation are excellent and financial strength is elevated. The history and the reputation are good and financial strength is good. The history and the reputation are reasonable and financial strength is good. There is no history or the reputation is questionable. There is no financial strength. Aspect VII - Guarantee Structure Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Control of the asset. Legal documentation grants the lender effective control of the asset or the company that owns it (example: priority of appropriation of the asset in case of default). Legal documentation grants the lender effective control of the asset or the company that owns it (example: priority of appropriation of the asset in case of default). Legal documentation grants the lender effective control of the asset or the company that owns it (example: priority of appropriation of the asset in case of default). The contract provides little security to the lender, resulting in risk of loss of control over the asset.

Circular No. 3,648, of March 4, 2013 Page 115 of 120 Rights and means available to the lender to monitor the location and condition of the asset.
The lender has unrestricted capacity to monitor the location and condition of the asset (regular reports, possibility of conducting inspections).
The lender has unrestricted capacity to monitor the location and condition of the asset.
The lender has unrestricted capacity to monitor the location and condition of the asset.
There are limitations to the lender's capacity to monitor the location and condition of the asset.
Insurance against damage.
The insurance coverage is broad, including damage to third parties, and provided by companies of the highest quality.
The insurance coverage is satisfactory (does not include damage to third parties) and provided by insurance companies of good quality.
The insurance coverage is median
(does not include damage to third parties) and provided by insurance companies of acceptable quality.
The insurance coverage is inadequate (does not include damage to third parties) or provided by insurance companies of low quality.

Circular No. 3,648, of March 4, 2013 Page 116 of 20
ANNEX IV TO CIRCULAR NO. 3,648, OF MARCH 4, 2013
Classification criteria for specialized financing of the "traded commodities (commodities) financing" type Aspect I - Financial strength of the project Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Degree of overcollateralization of the business. The value of the pledged collateral exceeds significantly the value of the exposure. The value of the pledged collateral exceeds the value of the exposure. The value of the pledged collateral is sufficient to cover the exposure. The value of the pledged collateral is insufficient to cover the exposure. Aspect II - Political and legal environment Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Country risk. There is no country risk. The exposure to country risk is limited (in particular, external reserves located in emerging countries). The exposure to country risk is median (in particular, external reserves located in emerging countries). The exposure to country risk is high (in particular, domestic reserves in emerging countries). Mitigation of country risk. The mitigation is very high, through robust mechanisms for obtaining resources abroad. The commodities have strategic value and the buyer is of excellent quality. The mitigation is strong, through mechanisms for obtaining resources abroad. The commodities have strategic value and the buyer is of high quality. The mitigation is acceptable, through mechanisms for obtaining resources abroad. The commodities have moderately strategic value and the buyer is of acceptable quality. The mitigation is partial and does dispose of mechanisms for obtaining resources abroad. The commodities do not have strategic value and the buyer is of low quality.

Circular No. 3,648, of March 4, 2013 Page 117 of 120 Aspect III - Asset Characteristics Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Liquidity and susceptibility to damage. The commodity is quoted on an organized market. Hedging is possible in futures markets or through over-the-counter instruments. The commodity is not susceptible to damage. The commodity is quoted on an organized market. Hedging is possible through over-the-counter instruments. The commodity is not susceptible to damage. The commodity is not quoted on an organized market, but presents liquidity. The possibility of hedging is uncertain. The commodity is not susceptible to damage. The commodity is not quoted on an organized market and its liquidity is limited, given the size of the market. Hedging is not possible. The commodity is susceptible to damage. Aspect IV - Strength of the Trading Company Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Financial capacity of the intermediary. Very robust, considering the risks and business philosophy. The intermediary presents sustainable financial capacity in the long term. The intermediary presents sustainable financial capacity in the short term. There is no evidence of the financial capacity of the intermediary. Prior experience, including the capacity to manage the logistical process. There is extensive experience with the type of transaction. The track record of success in operations and cost efficiency are robust. There is sufficient experience with the type of transaction. The track record of success in operations and cost efficiency are above the average. There is limited experience with the type of transaction. The track record of success in operations and cost efficiency are median. Experience with the type of transaction is limited or uncertain. Costs and profits are volatile. Intermediation controls and hedging policies. The standards of se- The standards of se- Past agreements did not present problems or the problems that occurred were not significant. Past agreements presented problems that resulted in considerable losses.

Circular No. 3,648, of March 4, 2013 Page 118 of 120 lection of counterparty, hedging and monitoring are rigid. lection of counterparty, hedging and monitoring are adequate. Quality of financial information disclosed. The financial information is comprehensive and clear. The financial information is clear, but not comprehensive. The financial information is insufficient or unclear. The financial information is insufficient or unclear. Aspect V - Guarantee Structure Criteria Requirements to be met for the assessment grade Strong Good Satisfactory Weak Control over the asset. There is total certainty regarding the capacity to appropriate, at any time, the assets given as collateral, including the prevalence over any third party. There is total certainty regarding the capacity to appropriate at any time the assets given as collateral, including the prevalence over any third party. At some point in the process, the lender loses legal control of the asset. The loss of control is mitigated by knowledge of the intermediation process or through the assumption of the operation by third parties. Contractual gaps generate risk of loss of effective control over the asset. The recovery of control may not occur. Insurance against damage. The insurance coverage is broad, including damage to third parties, and provided by companies of the highest quality. The insurance coverage is satisfactory (does not include damage to third parties) and provided by insurance companies of good quality. The insurance coverage is median (does not include damage to third parties) and provided by insurance companies of acceptable quality. The insurance coverage is inadequate (does not include damage to third parties) or provided by insurance companies of low quality.

Circular No. 3,648, of March 4, 2013 Page 119 of 120
ANNEX V TO CIRCULAR NO. 3,648, OF MARCH 4, 2013
Table 1 - K* Factor for long-term internal rating in the RBA approach
Internal
Rating
K* Factor for exposure to class with highest degree of seniority and whose set of underlying assets is granular K* Factor for exposure to class with lowest degree of seniority and whose set of underlying assets is granular K* Factor for exposure whose set of underlying assets is non-granular NQL1 7% 12% 20% NQL2 8% 15% 25% NQL3 10% 18% 35% NQL4 12% 20% NQL5 20% 35% NQL6 35% 50% NQL7 60% 75% NQL8 100% NQL9 250% NQL10 425% NQL11 650%

Circular No. 3,648, of March 4, 2013 Page 120 of 120
ANNEX VI TO CIRCULAR NO. 3,648, OF MARCH 4, 2013
Table 1 - K* Factor for short-term internal rating in the RBA approach
Internal
Rating (illustrative)
K* Factor for exposure to class with highest degree of seniority and whose set of underlying assets is granular K* Factor for exposure to class with lowest degree of seniority and whose set of underlying assets is granular K* Factor for exposure whose set of underlying assets is non-granular NQC1 7% 12% 20% NQC2 12% 20% 35% NQC3 60% 75% 75%