Financial Intermediation Institutions – Credit Equivalent of Linear Financial Derivatives and Acquired Call Options - Article 161 of the RNRCSF

Montevideo, December 30, 2024 Ref: FINANCIAL INTERMEDIATION INSTITUTIONS – CREDIT EQUIVALENT OF LINEAR FINANCIAL DERIVATIVES AND ACQUIRED CALL OPTIONS - ARTICLE 161 OF THE RNRCSF

The market is informed that the Superintendence of Financial Services, on December 20, 2024, adopted the following resolution:

1. SUBSTITUTE in Chapter II – Minimum Net Equity, of Title II – Equity, of Book II – Stability and Solvency of the Compilation of Regulations and Controls of the Financial System, Article 161 with the following:

ARTICLE 161 (CREDIT EQUIVALENT OF LINEAR FINANCIAL DERIVATIVES AND ACQUIRED CALL OPTIONS).

1. General Criterion

The credit equivalent of linear financial derivatives and acquired call options shall be calculated – following the current exposure method – as the maximum between the fair value of the financial instrument and zero, plus an additional amount. This additional amount shall be determined by applying a conversion factor – which will depend on the underlying asset and the residual maturity of the instrument – to the notional amount of the contract. Under this framework, the credit equivalent of instrument-i shall be given by:

Credit Equivalent_i = Max(Fair Value_i, 0) + Additional Amount_i

Where,

• Credit Equivalent_i = credit equivalent of instrument-i.
• Fair Value_i = fair value of instrument-i.
• Additional Amount_i = additional amount corresponding to instrument-i.
• Conversion Factor_i = applicable conversion factor for the notional amount of instrument-i.
• Notional Amount_i = notional amount of instrument-i.

The applicable conversion factor, in each case, shall be determined according to Table 1.

Table 1:

Residual Maturity (x) in Years	Interest Rates	Criterion 1 Currencies (1)	Criterion 2 Currencies (2)	Stocks	Commodities
x ≤ 1	0	1	1.5	6	10
1 < x ≤ 5	0.5	5	7.5	8	12
x > 5	1.5	7.5	15	10	15

(1) Criterion 1 = both currencies from countries with rating ≥ AA, euro, or gold. (2) Criterion 2 = at least one currency does not correspond to countries with rating ≥ AA, euro, or gold.

The following considerations shall be taken into account:

a. Instruments traded on stock exchanges subject to daily settlement: The additional amount shall be zero.

b. Interest rate swap contracts in the same currency and those that obligate daily settlement of market value adjustments: The additional amount shall be zero.

c. Contracts with capital amortization on different dates: The additional amount shall correspond to the sum of each amortization amount weighted by the conversion factor corresponding to the residual term of each of those amortizations.

d. Contracts that establish the obligation to settle on certain dates the market value adjustment that has accumulated during a specific period: It is considered as a contract with a maturity equal to the date of the next settlement.

e. Contracts containing a clause that grants the institution the option to terminate it on a specific date and the right to receive or pay in full the accumulated market value adjustment up to that date: It is considered as a contract with a maturity equal to the period remaining until the next date on which that right can be exercised.

f. When the institution holds shares in investment funds that are part of the trading portfolio as established in Article 162, the linear financial derivatives and acquired call options in which the fund invests shall be treated as if they were direct exposures, taking into account the share that the institution holds in the total investment fund. These instruments shall be considered together with the other exposures maintained by the institution and, for the purpose of calculating the credit equivalent, the provisions of this Article shall apply.

2. Specific Criterion: Bilateral Netting Master Agreements

When a set of contracts, with the same counterparty, have been entered into under a bilateral netting master agreement – those recognized by the Superintendence of Financial Services in the instructions issued – the mitigating effect on counterparty risk may be taken into account in the calculation of the credit equivalent.

Under this framework, the credit equivalent of instruments-i with the same counterparty-j, under master agreement-j, shall be calculated as:

Credit Equivalent_agreement_j = Max(Fair Value_portfolio_j, 0) + Net Collateral_j + Additional Amount_agreement_j

Where,

• Credit Equivalent_agreement_j = credit equivalent of agreement-j.
• Fair Value_portfolio_j = fair value of instrument-i.
• Net Collateral_j = net collateral (collateral received from the counterparty net of collateral constituted by the institution in favor of the counterparty within the framework of agreement-j).
• Additional Amount_agreement_j = additional amount corresponding to agreement-j.
• Additional Amount_i = additional amount corresponding to instrument-i.
• Conversion Factor_i = applicable conversion factor for the notional amount of instrument-i.
• Notional Amount_i = notional amount of instrument-i.
• Net to Gross Ratio_j = “net to gross ratio” corresponding to agreement-j.

The following instruments are admissible as collateral:

(a) Cash and certificates of deposit issued by local banks or banks from abroad rated in a category equal to or higher than AA- in national currency, foreign currency from countries rated in a category equal to or higher than AA-, or in Euros.

(b) Securities: (b.1) National public securities in national currency; (b.2) Non-national public securities rated in a category equal to or higher than AA- or equivalent issued by central governments and central banks.

Institutions shall keep available to the Superintendence of Financial Services the documentation supporting the determination of the credit equivalent (in particular, the master agreements that enable the calculation of the equivalent according to the specific case).

2. VALIDITY: The provisions of the preceding item 1 shall govern from January 1, 2025.

CHRISTIAN SALVARREY Strategic and Operational Management 2024-50-1-01985