Normative Instruction BCB No. 257 of March 30, 2022

CIRCULAR NO.

NORMATIVE INSTRUCTION BCB NO. 257, OF MARCH 30, 2022

Provides for the information that must be included in the report referred to in Circular No. 3,646, of March 4, 2013.

The Heads of the Strategic Management and Specialized Supervision Department (Degef) and the Banking Supervision Department (Desup), using the authority granted to them by art. 23, item I, letter “a” of the Internal Regulations of the Central Bank of Brazil, annexed to Ordinance No. 84,287, of February 27, 2015,

R E S O L V E:

Art. 1º The document "Information on the Internal Market Risk Model" referred to in item III, of the sole paragraph of art. 30 of Circular No. 3,646, of March 4, 2013, is available in the Annex to this Normative Instruction.

Art. 2º Circular Letter No. 3,695, of February 12, 2015, is hereby revoked.

Art. 3º This Normative Instruction enters into force on the date of its publication.

Adalberto Felinto da Cruz
Junior Belline Santana
Head of Degef Head of Desup

ANNEX

Information on the Internal Market Risk Model

I - INSTRUCTIONS

The following information must compose a report to be provided by financial institutions that request authorization to use internal market risk models to calculate the daily value regarding the RWAMINT portion of risk-weighted assets (RWA), as provided for in Resolution No. 4,958, of October 21, 2021.

1 - The concepts used refer to those contained in Circular No. 3,646, of March 4, 2013. The institution must describe, clearly and succinctly, the practices and procedures that demonstrate compliance with the minimum requirements provided for in the aforementioned Circular.

2 - If within the scope of application different internal market risk models coexist, for example, for different business units or for different types of risk, a set of information must be provided for each model.

3 - For each item, sufficient information must be provided for a good understanding, with references to external documents, annexed or not, being prohibited, except in cases explicitly requested or absolutely necessary.

4 - The report and all the requested annexes must be provided, on digital media protected by password, to the headquarters of the Banking Supervision Department – Desup, located at Avenida Paulista 1,804, 15th floor, São Paulo - SP. A printed copy of the report must also be delivered, without the annexed documents cited in Section IV.

5 - Although the request may be made by a prudential conglomerate, this document uses the generic nomenclature of “institution” for reasons of simplicity.

6 - In this document, the word risk refers to market risk.

7 - Additional information on processes, procedures and calculation methodologies, as well as reports and other evidence related to market risk management, may be requested at any time by the Central Bank.

8 - This report must be accompanied by the other documents mentioned in art. 30 of Circular No. 3,646, of 2013.

9 - Questions regarding the preparation of the report may be addressed to the supervisor responsible for the financial institution.

II - INSTITUTION IDENTIFICATION

Name of the institution or conglomerate;

Name and phone number of the risk management director (CRO), as established in art. 44 of Resolution No. 4,557, of February 23, 2017;

Name, position and phone number of the contact person for issues related to this request.

III - INFORMATION

1. Scope

1.1 Coverage

Conglomerate companies with relevant exposure to market risk, justifying the relevance.

1.2 Exclusions

Justification for the exclusion of institutions, business portfolios or risk factors, if the scope of the request does not include all exposures of the conglomerate or institution.

1.3 Risk segmentation

VaR of each financial and non-financial institution included in the internal model. Use a position from a recent day that represents a typical portfolio. If VaR by institution is not available, present values following the segmentation used for risk management. Present values without considering effects of correlation between institutions or segments.

2. Administrative structure,
   policies and strategies

2.1 Senior management

2.1.1 Main committees
involved in risk management, indicating composition, meeting frequency and responsibilities;

2.1.2 Inventory of the main
reports or presentations used to communicate matters related to risk management to senior management, indicating purpose, brief description of content, recipients and frequency.

2.2 Units involved in
risk management

Regarding the units involved in risk management, such as treasury, market risk, audit, back-office, validation and others, inform:

2.2.1 Responsibilities of each
unit;

2.2.2 Number of people who
work in it;

2.2.3 Main managers,
respective positions and contact phone numbers;

2.2.4 Human resources policy
for these areas, such as job profiles, turnover, retention, training, management remuneration and development.

2.3 Risk management policies

2.3.1 Summarized description
of the main documents that establish guidelines, policies and procedures for market risk management;

2.3.2 Procedures for
approval of changes in processes and policies related to market risk management and measurement models.

2.4 Treasury

2.4.1 Treasury Activity

a. Policies, strategies and objectives of the treasury area, indicating the main instruments for its implementation and monitoring;

b. Segmentation of portfolios and trading desks.

2.4.2 Operation classification

a. Policy for classifying operations in the trading portfolio provided for in art. 27 of Resolution No. 4,557, 2017;

b. Procedures adopted to verify compliance with this policy;

c. Situations in which
reclassification is permitted.

2.4.3 Use of derivatives and hedge policy

a. Policy for hedge operations;

b. Policy for the use of derivative instruments, especially non-standardized ones;

c. Strategies used for
trading with greeks, if applicable;

d. For the case of conglomerates:
information on mitigation and transfer of exposures to risk among the various institutions.

2.4.4 New products

a. Process for development and approval of new products;

b. Monitoring procedures after approval.

3. VaR Models

Note: for the following items, if the institution trades non-linear instruments, detail the treatment given.

3.1 Methodology

3.1.1 Approach type

a. VaR approach used for VaR and for stressed VaR;

b. In the case of using
Monte Carlo Simulation:

i. Models
adopted for simulating the behavior of risk factors.

c. For stressed VaR:

i. Description of
the method used to determine the historical stress period;

ii. Frequency of
review of the historical period;

iii. Frequency
of stressed VaR calculation.

3.1.2 Risk factors

a. Risk factors used;

b. Discussion of their sufficiency in relation to the institution's risk profile.

3.1.3 Other risk measurement
tools used by the institution, if any.

3.2 Parameters and data

3.2.1 Internal parameters

a. Time horizon

i. Methodology for
estimating market risk within the regulatory horizon (minimum maintenance period of 10 business days);

ii. Treatment given
to less liquid exposures and the form of impact on VaR.

b. Historical period of data

i. Justification
for the selection of the historical observation period of data and the frequency of its update;

ii.
Data weighting techniques for calculating volatilities and correlations, if applicable.

c. Confidence levels
for which VaR is estimated and a brief account of the application of each of them.

3.2.2 Market data

a. Briefly cite the market variables captured, indicating the sources of information;

b. Describe the calculations and methodologies used for pricing instruments, such as: obtaining curves, treatment of instruments with low liquidity, spread of private bonds, volatility smile, non-standardized derivative instruments, etc.

3.2.3 Position data

a. Procedures for mapping the cash flows of instruments;

b. Methodology for decomposition or mapping into risk factors, with specification of calculations by product type;

c. Treatment given to
options in the VaR calculation, if applicable.

3.3 Limitations of the risk
measurement process

3.3.1 Limitations of the methodology
and model assumptions regarding the characteristics of traded products;

3.3.2 Other limitations related
to the market risk measurement process;

3.3.3 Impact of these limitations
on the VaR calculation.

4. Stress tests

4.1 Process description

4.1.1 Definition and approval
of stress scenarios (including those responsible for tasks and review deadlines);

4.1.2 Assumptions of the
current stress scenarios;

4.1.3 Frequency of conducting
tests.

4.2 Use of results

4.2.1 Use of results in
establishing policies, risk acceptance limits and contingency plans;

4.2.2 Examples, if any,
of stress analyses conducted in the last 24 months with significant implications for market risk acceptance, limit setting, capital maintenance, among others.

5. Backtesting –
   backtesting

5.1 Process description

5.1.1 Frequency of conducting;

5.1.2 Observation periods;

5.1.3 Confidence intervals;

5.1.4 Level of disaggregation
(business units, treasury desks, risk factors, products, or others);

5.1.5 Unit responsible
for execution;

5.1.6 Detailed procedure
for obtaining actual and hypothetical results.

5.2 Analysis procedures

5.2.1 Analyses performed
in addition to counting the number of exceptions;

5.2.2 Examples, if any,
of situations in which backtesting was used to improve the model, in the last 24 months.

6. Limits

6.1 Structure and levels

6.1.1 Limits for market
risk management and current values;

6.1.2 Procedures for
determining limits and decision-making levels (include review frequency).

6.2 Communication and procedures
in case of breach

6.2.1 Method of communication
to trading desks regarding changes in their positions throughout the day and their status regarding limits;

6.2.2 Procedure adopted
in case of limit breach. In case of convening a high-level committee, mention the list of essential participants, meeting deadline and decision-making deadline.

6.2.3 Indication of the five
most recent breaches and measures adopted.

7. Risk area reports

Inventory of the main reports used by the market risk area, indicating purpose, brief description of content, recipients and frequency.

8. Technological environment
   and information integrity control

8.1 Description of the
technological environment inherent to the model

8.1.1 Explanatory diagram
and brief description of the systems and other sources of information involved in the calculation of treasury results, in the calculation of prices of traded financial instruments, in obtaining model input data and in measuring and controlling market risk.

8.1.2 Information flow
between the aforementioned systems, specifying automatic and manual interfaces. For the latter, describe the existing compensating controls and the plan for automation of processes.

8.2 Controls

Note: in all items below, the persons responsible for executing the control must be indicated.

8.2.1 Routine analysis and
validation procedures, both automatic and manual, that seek to identify errors in the capture of position data, market data or internal calculations (such as volatilities and correlations).

8.2.2 Operational routines
(back-office):

a. Confirmation procedures, documentation, registration and settlement of treasury operations, with comments regarding the processes that assess the quality of the execution of these routines;

b. Description of automatic locks inserted into treasury systems, if any, specifying at what level they are implemented (by operator, by portfolio, etc.).

8.2.3 Information integrity

a. Procedures and technological infrastructure intended to ensure the availability and integrity of information, even in contingency situations;

b. Reconciliation process between operation positions (front-office), the accounting system and the input data of the risk management system. Application systems used and existing controls, including access controls.

9. Business continuity plans

9.1 Plan description

9.1.1 Business continuity
plans for treasury and for the areas involved in market risk management;

9.1.2 Approval and
update procedures for the aforementioned plans.

9.2 Tests and application
examples

9.2.1 Procedures and frequency
established for testing the continuity plans;

9.2.2 Situations in which
the plans were activated in the last 24 months, if applicable.

10. Validation and internal
    audit

10.1 Validation

10.1.1 Responsible for
validation of the internal model;

10.1.2 Stages of the internal
model validation process;

10.1.3 Policy that defines
the frequency and circumstances in which validations must be performed.

10.2 Internal audit

Procedures adopted for the evaluation of the validation process and market risk management.

IV. ANNEXED DOCUMENTS

Include the documents listed in the table below, numbering them according to the first column. The second column describes the required document. The last column indicates the report section to which the requested document refers, when related to one of the items.

Cite which area is responsible for the preparation of each of the documents.

Item	Description of documents	Reference topic
1	Organizational chart of the conglomerate or institution, indicating director positions and names of officeholders	2.1
2	Last three minutes of each meeting of the committees cited	2.1
3	Reports or presentations used to communicate matters related to market risk management to senior management (last copy of each type)	2.1
4	Organizational charts of all units involved in market risk management	2.2
5	Resume of the main managers involved with internal models	2.2
6	Documents establishing guidelines, policies and procedures for risk management	2.3
7	History of relevant changes made to the internal model, as well as its validations, occurring in the last 12 months	2.3
8	Manuals related to trading, hedge, products, operation classification and development of new treasury products	2.4
9	Main reports used by treasury for risk control and monitoring of results, traded volumes and positions (last copy of each type)	2.4
10	Documentation regarding the development and approval of the last three products traded by treasury	2.4
11	Manuals related to the methodologies used for measuring and controlling risk (including its theoretical basis) and to complementary analysis procedures to VaR	3.1 and 3.2
12	Financial instrument pricing manuals	3.2.2
13	Position mapping manuals	3.2.3
14	Stress testing manual	4.1
15	Most recent stress testing report	4.2
16	Backtesting testing manual	5.1
17	Last set of backtesting reports, with indication and explanatory analysis of exceptions occurring at the available disaggregation levels	5.2
18	Manual or policy for defining and reviewing limits	6.1
19	Manual addressing the treatment given to limit breaches or minutes in which it was formalized	6.2
20	Main reports used by the market risk area (last copy of each type)	7
21	Documentation of systems involved in risk management (including operational manuals)	8.1
22	Manuals of procedures and operational control routines, including the position reconciliation process	8.2
23	Reports on the evaluation of the risk management technological environment produced by internal audit and external agents (independent auditors and/or consultants)	8.2
24	Documentation on business continuity plans for treasury and for the areas involved in risk management	9.1
25	Reports of the last tests of the continuity plans	9.2
26	Validation manual	10.1
27	Reports of the most recent validation process	10.1
28	Internal audit manuals regarding the evaluation of the validation process and market risk management	10.2
29	Internal audit reports regarding the evaluation of the validation process and market risk management	10.2
30	Other internal audit reports, prepared in the last 12 months, regarding market risk and treasury areas, if any	10.2
31	Reports produced by external agents (independent auditors and/or consultants), in the last 12 months, regarding market risk and treasury areas, if any

NOTE

The regulation of this subject addresses the possibility of financial institutions requesting the use of internal market risk models for the calculation of the daily value regarding the RWAMINT portion, as provided for in Resolution No. 4,958, of October 21, 2021. In Circular Letter No. 3,695, of February 12, 2015, information is provided that must be included in the report provided for in Circular No. 3,646, of March 4, 2013. However, some provisions cited in the Circular Letter were revoked by others, so that it is necessary to update them with those currently in force.

2.                 The  
   

Decree No. 10,139, of November 28, 2019, establishes the obligation for federal public administration direct, autarchic and foundation bodies to review and consolidate normative acts issued within the scope of their respective competencies. This measure aims to review, update, simplify and consolidate normative acts, in order to rationalize the regulatory stock. Based on the cited decree, we proceeded with the update.

3.                 Keeping in mind that the terms of this Normative Instruction are considered low impact, serving only as a means to specify the procedure for executing the option contained in Resolution No. 4,958, of 2021, and Circular No. 3,646, of 2013, without causing, therefore, an increase in costs for economic agents, users, budgetary or financial expenses, nor impacting the public policy executed, in accordance with item III of art. 4 of Decree No. 10,411, of June 30, 2020, there is no need to prepare a regulatory impact analysis (RIA) as provided for in art. 5 of Law No. 13,874, of September 20, 2019.
   

Adalberto Felinto da Cruz
Junior
Head of the Strategic Management and Specialized Supervision Department (Degef)

Belline Santana
Head of the Banking Supervision Department (Desup)