Circular No. 3809 — Procedures for Recognizing Mitigating Instruments in the Calculation of Risk-Weighted Assets for Credit Risk Exposures under the Standardized Approach

CIRCULAR Nº 3.809, OF AUGUST 25, 2016

Establishes the procedures for the recognition of mitigating instruments in the calculation of the risk-weighted assets (RWA) portion related to credit risk exposures subject to the capital requirement calculation using the standardized approach (RWACPAD), as provided for in Resolution No. 4,193, of March 1, 2013.

The Collegiate Board of the Central Bank of Brazil, in a session held on August 10, 2016, based on the provisions of Arts. 9, 10, item IX, and 11, item VII, of Law No. 4,595, of December 31, 1964, and Arts. 3, § 2, and 15 of Resolution No. 4,193, of March 1, 2013,

RESOLVES:

TITLE I
PRELIMINARY PROVISIONS

SINGLE CHAPTER
OF THE OBJECT AND SCOPE OF APPLICATION

Art. 1. This Circular establishes the procedures for the recognition of mitigating instruments in the calculation of the risk-weighted assets (RWA) portion related to credit risk exposures subject to the capital requirement calculation using the standardized approach (RWACPAD), as provided for in Resolution No. 4,193, of March 1, 2013.

TITLE II
OF THE RECOGNITION OF MITIGATING INSTRUMENTS AND FORMS OF MITIGATION

CHAPTER I
GENERAL PROVISIONS

Art. 2. For the purposes of calculating the RWACPAD portion, credit risk mitigation is recognized through the following instruments, provided that the requirements established in this Circular are met:

I - financial collateral;
II - bilateral agreement for netting and settlement of obligations; III - guarantee; IV - credit derivative.

§ 1. The use of the mitigating instrument must be formalized in a contractual instrument and be conditioned on compliance with the following requirements:

I - the contract supporting the coverage of the exposure by the instrument must have legal basis in all relevant jurisdictions, including other countries where it must or may produce effects; II - the timely exercise of rights provided for in the contract must be ensured through the adoption of formalized procedures; III - the risks of degradation of the mitigating 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 the use of financial collateral; V - the capacity for adequate control of legal, operational, liquidity, market, and other residual risks resulting from the use of the instrument must be demonstrated; VI - the instrument cannot be provided by an affiliated entity, with which consolidated financial statements are prepared; VII - all rights and obligations arising from the use of the instrument must be provided for in the contract, except those arising directly from the law; VIII - the terms of the instrument must allow for the adoption of all measures and procedures necessary for the timely execution of the contract, including the settlement or transfer of ownership of the financial collateral that mitigates the exposure, in the event of counterparty default; and IX - the credit risk associated with the instrument or the value of the financial collateral must not present a relevant positive correlation with the credit risk of the exposure.

§ 2. The mitigating instrument must be associated with a single specific exposure, except in the following cases:

I - use of a bilateral netting and settlement of obligations agreement; II - exclusive association of the instrument to a set of exposures where the default of one exposure belonging to the set directly implies the default of the other exposures; or III - use of a guarantee or credit derivative associated with more than one exposure, provided that the execution of the mitigating instrument for one or more exposures does not compromise the credit risk mitigation of the others.

§ 3. If more than one mitigating instrument is associated with the same specific exposure, the calculation of the RWACPAD portion must observe the division of the exposure into portions proportional to the coverage of the respective mitigators.

§ 4. For the purpose of calculating the RWACPAD portion, daily mark-to-market, when provided for in the assessment of credit risk mitigation, must be performed in a consistent and verifiable manner, even if not adopted for accounting purposes.

§ 5. For the purposes of this Circular, the definition of default provided for in Art. 15 of Circular No. 3,648, of March 4, 2013, is used.

CHAPTER II
OF FINANCIAL COLLATERALS

Art. 3. In the use of financial collateral for credit risk mitigation, the institution must choose between the Simple Approach and the Comprehensive Approach, described respectively in Arts. 5 and 8, with the mandatory use of the chosen approach in all exposures mitigated by financial collateral.

§ 1. The choice for the Simple or Comprehensive Approach must occur in the fiscal year in which it will be in force and be applied from the beginning of that fiscal year.

§ 2. Real estate credit companies cannot choose the Comprehensive Approach.

§ 3. Financial collateral may be offered by the counterparty or by third parties in favor of that counterparty.

Art. 4. For the purposes of this Circular, the following financial instruments are recognized as financial collaterals:

I - demand deposits, savings deposits, and gold deposits, maintained in the institution itself and credit-linked notes; II - time deposits, financial bills, real estate credit bills, agribusiness credit bills, lease bills, and certificates of structured operations (COE), when these instruments are of own issuance and maintained in the institution itself or custodied in its favor by third parties; III - federal public bonds; IV - bonds issued by central governments of foreign jurisdictions and their respective central banks as provided for in Art. 19, item VII, of Circular No. 3,644, of March 4, 2013; V - credit instruments, issued by entities listed in Art. 19, item V, of Circular No. 3,644, of 2013; VI - credit instruments issued by non-financial entities that possess:
a) shares in relevant stock market indices subject to government regulation and supervision; and b) adequate capacity to honor their financial obligations as agreed; VII - credit instruments issued by financial institutions as provided for in Art. 23, items I and II, of Circular No. 3,644, of 2013, that meet the following requirements:
a) do not possess subordination clauses; and b) be issued by a financial institution that:
1. possesses adequate capacity to honor its financial obligations as agreed; and
2. meets the minimum capital requirements and other operational limits established in the regulation;
VIII - shares included in relevant stock market indices recognized by the supervisory authority or convertible bonds therein; IX - senior class securitization bonds, without substantial retention of risks, in which the underlying assets can be identified and that have a weighted average Risk Weighting Factor (RWF) lower than 100%; and X - investment fund shares that have their values disclosed daily, observing the provisions of §§ 5 and 6 of this article.

§ 1. The financial collaterals referred to in the caput:
I - must be marked to market; and
II - can only be moved by order of the creditor institution.

§ 2. Senior class securitization bonds associated with re-securitization, as defined in Art. 115, item XXV, of Circular No. 3,648, of 2013, are not recognized as financial collaterals.

§ 3. The credit-linked notes mentioned in item I of the caput must be of own issuance, have been fully paid in cash, and meet all provisions applicable to credit derivatives mentioned in Arts. 19, 20, and 24.

§ 4. In the use of COE as financial collateral, its market value must be considered, limited to the portion related to the protected nominal value, as provided for in Resolution No. 4,263, of September 5, 2013.

§ 5. In the use of investment fund shares as financial collateral:
I - at least 95% (ninety-five percent) of the fund's assets must be composed of the financial collaterals referred to in items I to IX of the caput and by financial derivative instruments used for hedging their assets; and II - only the portion of the share value composed of the instruments referred to in item I must be recognized in the risk mitigation.

§ 6. Investment fund shares in which the asset is composed of a financial derivative instrument are not recognized as financial collaterals, observing the provision in item I of § 5.

§ 7. The financial collaterals listed in items II to X of the caput, to be admitted as a credit risk mitigating instrument, must:
I - be subject to centralized registration or deposit in an entity that exercises activities of centralized registration or deposit of financial assets or securities, authorized by the Central Bank of Brazil or by the Securities and Exchange Commission (CVM); or II - in the event that they are custodied abroad, have information maintained in a financial market infrastructure regulated and supervised by a competent authority in its jurisdiction.

§ 8. The procedures provided for in § 7 must ensure the identification of the issuance characteristics, the holders of rights over the collateral, and the types of liens and encumbrances constituted.

Section I
Of the Simple Approach

Art. 5. In the Simple Approach, the following must be applied:
I - specific RWF to the portion of the exposure covered by financial collateral; and II - original RWF attributed to the exposure, according to Circular No. 3,644, of 2013, to the portion not covered by financial collateral.

§ 1. The specific RWF to be applied to the portion of exposure covered by financial collateral must correspond:
I - to the RWF defined in this Circular; or II - in the absence of the RWF defined in this Circular, to the RWF defined by Circular No. 3,644, of 2013, for an exposure of the same nature as the collateral.

§ 2. The RWF applied to the portion of the exposure covered by financial collateral cannot be lower than 20%, except for the exceptions provided for in Arts. 6, 7, 10, and 11.

§ 3. The effective residual maturity of the financial collateral must be equal to or greater than the effective residual maturity of the exposure subject to mitigation.

§ 4. To the portion of the exposure covered by financial collateral referred to in Art. 4, items IX and X, the weighted average RWF of the exposures that make up the collateral must be applied, respecting the provisions of Arts. 17 and 18 of Circular No. 3,644, of 2013.

Art. 6. To the portion of exposure covered by the financial collaterals referred to in Art. 4, items I, II, III, IV, and V, observing the provision in Art. 7, the following must be applied:
I - RWF of 0% (zero percent), if there is no mismatch between the currencies in which the exposure and the respective financial collateral are denominated or indexed; or II - RWF of 20% (twenty percent), if there is a mismatch between the currencies in which the exposure and the respective financial collateral are denominated or indexed.

Sole Paragraph. For the application of the RWF of 0% (zero percent) mentioned in item I of the caput, the financial collaterals referred to in Art. 4, items III, IV, and V must have their market value reduced by 20% (twenty percent).

Art. 7. To the portion of exposure covered by the financial collaterals referred to in Art. 4, items III, IV, and V, which results from an operation with a financial derivative instrument carried out in the over-the-counter market marked to market daily, the following must be applied:
I - RWF of 10% (ten percent), if there is no mismatch between the currencies in which the exposure and the respective financial collateral are denominated or indexed; or II - RWF of 20% (twenty percent), if there is a mismatch between the currencies in which the exposure and the respective financial collateral are denominated or indexed.

Section II
Of the Comprehensive Approach

Subsection I
General Provisions

Art. 8. In the Comprehensive Approach, the value of the exposure must be calculated considering the effects of credit risk mitigation through financial collateral, for subsequent application of the RWF defined by Circular No. 3,644, of 2013, corresponding to the original characteristics of the exposure.

Subsection II
Of the Calculation of Exposure

Art. 9. In the Comprehensive Approach, the value of the exposure, considering the effect of credit risk mitigation, must correspond to the result of the following formula:

E* = max {0, [E x (1 + He) - C x (1 - Hc - Hfx) x FP]}, in which:
I - E* = effective exposure, considering the effects of credit risk mitigation; II - E = value of the exposure calculated according to Circular No. 3,644, of 2013, disregarding credit risk mitigation; III - C = 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; VI - Hfx = standardized adjustment factor associated with the mismatch in currencies in which the exposure and the financial collateral used are denominated or indexed; and VII - FP = maturity adjustment factor defined in Art. 26, observing the provision in Art. 25.

§ 1. The value of the standardized adjustment factor Hfx, observing the provisions of §§ 4 and 5 of this article, must be:
I - 8% (eight percent), if there is a mismatch between the currencies to which the exposure and the financial collateral are denominated or indexed; or II - 0% (zero percent), in the absence of the mismatch referred to in item I.

§ 2. The value of the standardized adjustment factor Hc, observing the provisions of §§ 4 and 5 of this article, must be defined as follows:
I - for the financial collaterals referred to in Art. 4, items I and II, the value of the standardized adjustment factor is 0% (zero percent); II - for the financial collaterals referred to in Art. 4, items III, IV, and V, the value of the standardized adjustment factor is:
a) 0.5% (half percent), when the effective residual maturity is less than or equal to 1 (one) year; b) 2% (two percent), when the effective residual maturity is less than or equal to 5 (five) years; and c) 4% (four percent), when the effective residual maturity is greater than 5 (five) years; III - for the financial collaterals referred to in Art. 4, item VI, the value of the standardized adjustment factor is:
a) 15% (fifteen percent), when the effective residual maturity is less than or equal to 10 (ten) years; and b) 20% (twenty percent), when the effective residual maturity is greater than 10 (ten) years; IV - for the financial collaterals referred to in Art. 4, item VII, the value of the standardized adjustment factor is:
a) 2% (two percent), when the effective residual maturity is less than or equal to 1 (one) year; b) 4% (four percent), when the effective residual maturity is less than or equal to 3 (three) years; c) 6% (six percent), when the effective residual maturity is less than or equal to 5 (five) years; d) 12% (twelve percent), when the effective residual maturity is less than or equal to 10 (ten) years; and e) 20% (twenty percent), when the effective residual maturity is greater than 10 (ten) years; V - for the financial collaterals referred to in Art. 4, item VIII, the value of the standardized adjustment factor is 20% (twenty percent); and VI - for the financial collaterals referred to in Art. 4, item IX, the value of the standardized adjustment factor is 25% (twenty-five percent).

§ 3. The standardized adjustment factor He must correspond:
I - to the value attributed to the standardized adjustment factor Hc defined in § 2, for exposures to assets listed as financial collateral in Art. 4, observing the provisions in items IV and V of this paragraph; II - to 25% (twenty-five percent), for exposures related to bonds, securities, financial derivative instruments, investment fund shares, or structured operations, not listed in Art. 4; III - to 0% (zero percent), for exposures not related to bonds, securities, and financial derivative instruments, investment fund shares, and structured operations; IV - to the average of the standardized He factors weighted by the relative participations of each type of asset held by the fund, for exposure to fund shares listed as financial collateral in Art. 4, if it is possible to identify the assets comprising the investment fund portfolio, in accordance with Art. 17, §§ 1 and 2, of Circular No. 3,644, of 2013; or V - to the highest standardized adjustment factor applicable to the assets eligible for acquisition according to the fund's regulations, for exposure to fund shares listed as financial collateral in Art. 4, if it is not possible to identify the assets comprising the investment fund portfolio.

§ 4. For the financial collaterals referred to in item X of Art. 4, the adjustment factors Hc and Hfx must correspond:
I - to the average of the standardized factors Hc and Hfx weighted by the relative participations of each type of asset held by the fund, if it is possible to identify the assets comprising the investment fund portfolio, in accordance with Art. 17, §§ 1 and 2, of Circular No. 3,644, of 2013; or II - to the highest result for the sum of Hc and Hfx applicable to the asset eligible for acquisition according to the fund's regulations.

§ 5. When the credit risk mitigating instrument consists of a set of financial collaterals, the adjustment factors Hc and Hfx must correspond to the average of the standardized adjustment factors Hc and Hfx, respectively, weighted by the relative participations of each type of financial collateral in the set.

Section III
Of Repo and Securities Lending Operations

Subsection I
RWF of 0% and 10%

Art. 10. In repo and securities lending operations, for the portion of the exposure covered by financial collateral, the application of an RWF of 0% (zero percent) is optional in the Simple Approach, and of standardized adjustment factors corresponding to 0% (zero percent) in the Comprehensive Approach, when the following requirements are met:
I - the counterparty must be a relevant market participant; II - the exposure must be in currency or bond that receives an RWF of 0% (zero percent), according to the provision in Circular No. 3,644, of 2013; III - the respective financial collateral must be provided for in Art. 4, items I to V; IV - there must be no mismatch between the currencies in which the exposure and the respective financial collateral are denominated or indexed; V - the original term of the operation must be one day or the exposure and financial collateral must be marked to market daily; VI - if carried out in Brazil, the operation must be registered in the Special Settlement and Custody System (Selic) or in a system of registration and financial settlement of assets authorized by the Central Bank of Brazil or by the Securities and Exchange Commission (CVM); and VII - if carried out abroad, the operation must meet the following requirements:
a) in the event of failure to replenish the counterparty's margin, the period between the failure and the settlement of the financial collateral must be less than 4 (four) business days; b) its settlement must be carried out in a system adequate for the nature of the transaction; c) 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 the financial collateral and settle it for its benefit in the event of any default event; e) follow market standards and the rules applicable, respectively, to repo and securities lending operations; and f) the exposure must be subject to daily margin adjustment.

§ 1. For the purposes of the provision in the caput, relevant market participants are considered:
I - central governments and their respective central banks; II - financial institutions and other institutions authorized to operate by the Central Bank of Brazil, as well as financial institutions headquartered in the jurisdictions referred to in Art. 19, item VII, of Circular No. 3,644, of 2013; III - financial investment funds domiciled in Brazil; IV - investment funds headquartered in the jurisdictions referred to in Art. 19, item VII, of Circular No. 3,644, of 2013 subject to government regulation and supervision, as well as to capital requirements or leverage limits; V - pension funds in Brazil or headquartered in the jurisdictions referred to in Art. 19, item VII, of Circular No. 3,644, of 2013, subject to government regulation and supervision; and VI - entities referred to in Art. 20, of Circular No. 3,644, of 2013.

§ 2. In repo and securities lending operations, the financial collateral corresponds:
I - to the asset traded in repurchase agreements or received by loan; and II - to the financial resources received in reverse repo operations or in securities lending.

§ 3. In the Simple Approach, if the requirements referred to in items II to VII of the caput are met, the 20% (twenty percent) reducer, provided for in the sole paragraph of Art. 6, is not applied to the value of the financial collateral used in the repo or securities lending operation.

Art. 11. In repo and securities lending operations, for the portion of the exposure covered by financial collateral, an RWF of 10% (ten percent) must be applied in the Simple Approach when the requirements contained in items II to VII of the caput of Art. 10 are met.

Subsection II
Of other repo and securities lending operations

Art. 12. The use of financial collaterals, in the mitigation of credit risk of repo and securities lending operations not covered by Arts. 10 and 11, must observe the provisions in Arts. 5 to 9 of this Circular.

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CHAPTER III
BILATERAL AGREEMENTS FOR NETTING AND SETTLEMENT OF OBLIGATIONS

Section I
General Provisions

Art. 13. Bilateral agreements for netting and settlement of obligations are eligible for use as credit risk mitigation instruments, provided they meet the following additional requirements to those set forth in § 1 of Art. 2:

I - the performing party must have the right to immediately terminate operations covered by the agreement in the event of default; and

II - the institution must monitor and control relevant exposures, considering the net exposure after risk mitigation.

Art. 14. In the use of bilateral agreements for netting and settlement of obligations as a mitigant, the calculation of the effective exposure value (E*) must be performed based on the formula contained in the caput of Art. 9, wherein:

I - the sum of rights must be treated as exposure and the sum of obligations as financial collateral;

II - the adjustment factors He and Hc must correspond to zero;

III - the standardized adjustment factor Hfx must be 8% (eight percent) if there is a currency mismatch, or 0% if there is none; and

IV - the tenor adjustment factor FP must be equal to 1 (one).

§ 1º In the determination of the sum referred to in item I of the caput, the value of each right must consider the tenor adjustment referred to in Art. 26, observing the provisions of Art. 25, if the effect of a mitigating instrument associated with it is considered.

§ 2º The standardized adjustment factor Hfx referred to in item III of the caput must be applied only to the portion of obligations that present a currency mismatch.

Art. 15. The determination and netting of rights and obligations must be performed considering the following categories:

I - repo transactions and securities lending transactions;

II - derivatives; and

III - other rights and obligations.

§ 1º After netting the rights and obligations of each category in the manner established in Art. 14, a single net amount must be determined between the counterparties involved in the agreement.

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§ 2º For those opting for the Advanced Approach, the value to be determined for the category of repo transactions and securities lending transactions must observe the provisions of Art. 16.

§ 3º The FPR defined by Circular No. 3,644, of 2013, corresponding to the counterparty, must be applied if the netting provided in § 1 results in exposure.

Section II
Repo Transactions and Securities Lending Transactions Covered in the Advanced Approach by Bilateral Agreements for Netting and Settlement of Obligations

Art. 16. In the use of bilateral agreements in the netting and settlement of repo transactions and securities lending transactions in the Advanced Approach, the effective exposure value (E*), considering credit risk mitigation, must correspond to the result of the following formula:

E* = ΣE - Σ (C x FP) + Σ (ES x HS) + Σ (Efx x Hfx); wherein:

I - E = value of exposure, disregarding credit risk mitigation;

II - C = value of financial collateral;

III - FP = tenor adjustment factor, defined in Art. 26, observing the provisions of Art. 25;

IV - ES = absolute value of the net position in a specific repo or securities lending transaction;

V - HS = standardized adjustment factor for the operation relative to ES, according to the criteria defined in Art. 9, §§ 2 to 4;

VI - Efx = absolute value of the exposure resulting from the difference between the total of long positions and the total of short positions in currencies different from the settlement currency of the netting agreement; and

VII - Hfx = standardized adjustment factor defined in Art. 9, item VI and § 1.

§ 1º 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:

I - daily mark-to-market of all exposures subject to netting; and

II - use of financial collateral.

§ 2º The adjustment factor HS must correspond to zero if the requirements of the caput of Art. 10 are met.

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CHAPTER IV
GUARANTEES AND CREDIT DERIVATIVES

Section I
General Provisions

Art. 17. The use of guarantees and credit derivatives in credit risk mitigation allows the application of the FPR of the guarantor or the risk-receiving counterparty to the portion of the mitigated exposure.

Art. 18. The following are recognized as credit risk mitigation instruments: guarantees or credit derivatives provided by:

I - central governments and their respective central banks;

II - entities mentioned in Art. 19, item V, of Circular No. 3,644, of 2013;

III - financial institutions and other institutions authorized to operate by the Central Bank of Brazil, as well as financial institutions headquartered in the jurisdictions referred to in Art. 19, item VII, of Circular No. 3,644, of 2013; or

IV - private entities subject to an FPR of 85% (eighty-five percent) under the terms of Art. 24-A of Circular No. 3,644, of 2013.

§ 1º In exposures arising from investments in securitization securities, special purpose entities are not recognized as providers of mitigation.

§ 2º If a guarantee fully guarantees another credit risk mitigation instrument, or is embedded therein, the application of the lower FPR associated with the guarantee or the instrument is permitted, provided the other provisions of this Circular are met.

Art. 19. For the purposes of recognition as a credit risk mitigation instrument, guarantees and credit derivatives are eligible as credit risk mitigation instruments, provided they meet the following requirements:

I - they represent personal and non-transferable obligations of the protection provider;

II - they are formalized through contracts that cannot be unilaterally rescinded by any of the parties;

III - they do not allow the unilateral release of the protection provider from the obligation assumed; and

IV - they prohibit the increase in protection costs due to deterioration of the credit quality of the exposure subject to the credit risk mitigation instrument.

Art. 20. For the credit risk mitigation instruments referred to in Art. 17, the value of the instrument (GA) must correspond to the result of the following formula:

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GA = G x (1 - Hfx) x FP, wherein:

I - G = nominal value of the credit risk mitigation instrument;

II - Hfx = standardized adjustment factor defined in Art. 9, item VI and § 1; and

III - FP = tenor adjustment factor, defined in Art. 26, observing the provisions of Art. 25.

Sole Paragraph. In the event of the agreement provided for in Art. 13, the calculation defined in the caput must be performed prior to netting.

Section II
Guarantees

Art. 21. Guarantees are considered to include aval, suretyship, or any other form of personal guarantee, and co-obligation in the assignment of credits.

Art. 22. Guarantees must ensure the right to timely receipt of payments due from the guarantor regardless of the adoption of additional legal measures.

Section III
Credit Derivatives

Art. 23. Only credit derivative operations in the following modalities are recognized as mitigation instruments:

I - credit default swap, when the risk-receiving counterparty is remunerated based on a protection rate; and

II - total return swap, when the risk-receiving counterparty is remunerated based on the cash flow of receipt of charges and consideration linked to the underlying asset.

Art. 24. A credit derivative is recognized as a credit risk mitigation instrument in which the institution acts as the risk-transferring counterparty, provided the following requirements are met:

I - the list of credit events triggering the protection must include, at minimum:

a) non-payment of the amount due, according to contractual terms, except for eventual payment delay periods that do not constitute default;

b) bankruptcy, insolvency, or inability of the debtor to pay its debt; and

c) debt renegotiation resulting from forgiveness or deferral of principal, interest, and fees, which result in losses;

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II - the contract cannot expire before the periods required to characterize the default of the exposure subject to the credit risk mitigation instrument;

III - loss estimates must be determined through a robust assessment process, in the event that there is no delivery of the asset associated with the credit risk or the exposure for which protection was acquired;

IV - if payment is conditioned on the delivery of the asset associated with the credit risk or the exposure for which protection was acquired, such delivery must be performed 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 inform the seller of the occurrence of a credit event.

§ 1º The exposure used as reference for determining 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 or contractual 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 § 1 also apply to the exposure used to determine the default of the credit derivative.

TITLE III
TERMS

SINGLE CHAPTER
METHOD OF CALCULATION

Art. 25. The effective maturity dates of the credit risk mitigation instrument and the exposure subject to mitigation must be determined in a conservative manner.

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

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

§ 3º The effective residual maturity term of the credit risk mitigation instrument must be equal to or greater than the effective residual maturity term of the exposure subject to mitigation in the following cases:

I - in the use of the Simple Approach;

II - in the case where the credit risk mitigation instrument has an original effective maturity term of less than 1 (one) year; or

III - in the case where the credit risk mitigation instrument has an effective residual maturity term of less than 3 (three) months.

Art. 26. For all forms of credit risk mitigation provided in the caput of Art. 2, respecting the provisions of Art. 25, § 3, if the effective residual maturity term of the credit risk mitigation instrument is less than the effective residual maturity term of the exposure, the tenor adjustment factor (FP) must correspond to the result of the following formula:

FP = (t - 0,25) / (T - 0,25), wherein:

I - t = min (T, effective residual term of the credit risk mitigation instrument in years); and

II - T = min (5, effective residual term of the exposure in years).

Sole Paragraph. For other cases not provided in the caput, FP must be equal to 1 (one).

TITLE IV
OTHER PROVISIONS

Art. 27. An FPR of 0% (zero percent) must be applied to the portion of exposure covered by the following credit risk mitigation instruments:

I - guarantee provided by the National Treasury or the Central Bank of Brazil;

II - guarantee provided by funds or any other credit risk coverage mechanisms established by the Federal Constitution or federal law, by law of the Federal District, state, or municipality, or created by official or private entities, provided that the resources guaranteeing the operations are available or invested in assets with immediate liquidity and segregated in an amount equivalent to that of the guarantees provided by said funds or mechanisms, so as to immediately cover any default by the respective borrower;

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III - guarantee provided by the Fund for the Promotion of Competitiveness (FGPC), created by Law No. 9,531, of December 10, 1997, to financing operations carried out by the National Bank for Economic and Social Development (BNDES) or through pass-through financial institutions; and

IV - guarantee constituted by resources from the State Participation Fund (FPE) or the Municipal Participation Fund (FPM), provided for in Art. 159 of the Federal Constitution.

§ 1º The liquidity and segregation conditions established in item II of the caput do not apply to funds established by the Federal Constitution or federal law that contain contributions from the Union.

§ 2º The acceptance of the mitigation instrument referred to in item IV of the caput is conditioned on compliance with the provisions of Complementary Law No. 101, of May 4, 2000.

Art. 28. An FPR of 20% (twenty percent) must be applied to the portion of exposure covered by a guarantee provided by public companies with the following characteristics, cumulatively:

I - they are directly controlled by the Union;

II - their main object is the granting of guarantees against risks and the administration and management of funds with the characteristics listed in Art. 30, item II;

III - they limit the amount of guarantees provided, adjusted for risk, to a maximum of five times their net worth, so as to safeguard their assets, even in situations of high default; and

IV - they do not provide for a limitation on the coverage of default supported by their assets (stop-loss).

Art. 29. An FPR of 20% (twenty percent) must be applied to the portion of exposure of a cooperative bank or credit cooperative covered by a guarantee provided by a credit cooperative or cooperative bank belonging to the same cooperative system.

Art. 30. An FPR of 50% (fifty percent) must be applied to the portion of exposure covered by the following guarantees:

I - guarantee provided by funds with the following characteristics, cumulatively:

a) their purpose, alternatively or cumulatively, is to guarantee risk in credit operations, directly or indirectly;

b) they are constituted, administered, managed, and represented judicially and extrajudicially by a financial institution controlled, directly or indirectly, by the Union, except those classified under Art. 28;

c) they limit the amount of guarantees provided (limited leverage), so as to safeguard the assets of the fund, even in situations of high default; and

Circular No. 3,809, dated August 25, 2016 Page 18 of 18

d) if they provide for a limitation on the coverage of default supported by the fund (stop-loss), they establish the respective limits in a manner that allows for the effective mitigation of credit risk of the guaranteed operations;

II - guarantee provided by funds with the following characteristics, cumulatively:

a) their purpose, alternatively or cumulatively, is to guarantee risk in credit operations, directly or indirectly;

b) they are constituted, administered, managed, and represented judicially and extrajudicially by a public company, directly controlled by the Union and whose main object is the granting of guarantees against risks and the administration and management of guarantee funds;

c) they limit the amount of guarantees provided, adjusted for risk, to a maximum of five times their net worth, so as to safeguard their assets, even in situations of high default; and

d) they do not provide for a limitation on the coverage of default supported by the fund (stop-loss); and

III - pass-through of discounts on payroll or on retirement and death pension benefits, carried out by federal government institutions of the Legislative, Executive, and Judicial branches or by the Union's Public Ministry, linked to payroll credit operations.

Art. 31. Securities issued by the National Treasury received as financial collateral in renegotiated credit operations under the auspices of Resolution No. 2,471, of February 26, 1998, are exempt from mark-to-market and the application of any reducer or standardized adjustment, for the purposes of their recognition as a credit risk mitigation instrument, while they are not subject to negotiation under the terms of letters “a” and “b” of item IV of the Annex to the aforementioned resolution.

TITLE V
FINAL PROVISIONS

Art. 32. This Circular enters into force on January 1, 2017.

Art. 33. Articles 36 to 39 of Circular No. 3,644, of March 4, 2013, are repealed, effective January 1, 2017.

Otávio Ribeiro Damaso
Director of Regulation

This text does not replace the published version in the DOU of 8/26/2016, Section 1, p. 21-23, and in Sisbacen.