Resolution No. 334

Resolution BCB No. 334, of August 16, 2023

Establishes minimum requirements and prudential adjustments to be observed by a prudential conglomerate classified as Type 3 in the process of pricing financial instruments measured at fair value.

The Collegiate Board of the Central Bank of Brazil, in a session held on August 16, 2023, based on arts. 9, items II and IX, and 15 of Law No. 12,865, of October 9, 2013, and taking into account the provisions of arts. 3, item VII, and 14 of Resolution No. 4,282, of November 4, 2013,

RESOLVES:

Art. 1. This Resolution provides for minimum requirements to be observed in the process of pricing financial instruments measured at fair value and regarding the adoption of prudential adjustments by the leading institution of a prudential conglomerate classified as Type 3 that is composed of at least one multiple bank, commercial bank, investment bank, or exchange bank.

Sole Paragraph. The financial instruments mentioned in the caput include:

I - securities classified in the categories "trading securities" and "available-for-sale securities", according to Circular No. 3,068, of November 8, 2001;

II - financial derivative instruments, as provided for in Circular No. 3,082, of January 30, 2002; and

III - other financial instruments measured at fair value, regardless of their classification in the trading portfolio, as provided for in Resolution BCB No. 265, of November 25, 2022.

Art. 2. The minimum requirements referred to in Art. 1 include the adoption of systems and controls that must be guided by criteria of prudence and reliability.

§ 1. The systems and controls referred to in the caput must include clearly documented and updated policies and procedures, encompassing, at a minimum:

I - definition of the responsibilities of each area involved in the pricing process;

II - continuous review of market information sources;

III - guidelines on the use of unobservable market data that reflect the assumptions used by the institution in the pricing process;

IV - pricing procedures;

V - independent verification procedures;

VI - processes for identifying financial instruments that meet the conditions for admissibility provided for in § 1 of Art. 8;

VII - procedures for considering the hedge strategies provided for in § 8 of Art. 8; and

VIII - procedures for incorporating the adjustments provided for in Art. 8 of this Resolution.

§ 2. The independent verification procedures provided for in item V of § 1 consist of the regular verification of the accuracy of prices, indices, rates, and other data used in the pricing process, whether observable in the market or resulting from assumptions established by the institution, and the identification and correction of errors or biases in pricing methodologies, and must also:

I - be carried out, at least monthly, by a unit independent of those responsible for the trading desks; and

II - employ a degree of accuracy appropriate to the objective of the pricing.

§ 3. To ensure the accuracy of prices, indices, and rates used in the pricing process, the independent verification procedures provided for in item V of § 1 must consider, at a minimum:

I - the complexity of the financial instruments and the nature of the markets in which they are traded;

II - the independence of the data sources; and

III - consistency with the values used in the preparation of monthly balance sheets and other financial statements.

§ 4. The institution must be able to prove the independence between the pricing and verification procedures provided for in items IV and V of § 1.

§ 5. The institution must use the results of the independent verification procedures in the revision of pricing methodologies.

Art. 3. The systems referred to in Art. 2 must be integrated with the other risk management processes of the prudential conglomerate.

Sole Paragraph. The structure responsible for the pricing process must report to a member of the board of directors independently of the areas responsible for the trading desks.

Art. 4. The pricing processes referred to in this Resolution must use market valuation methodologies or pricing model methodologies.

§ 1. Market valuation presupposes the pricing, at least daily, of financial instruments that have price quotes, indices, and rates immediately available for non-forced transactions and originating from independent sources.

§ 2. Pricing by model presupposes pricing, at least daily, and involves the use of mathematical methods that use market benchmarks and unobservable market data in the production of their estimates.

Art. 5. The pricing process must, whenever possible, use market valuation, using quotes based on criteria of prudence, relevance, and reliability.

Art. 6. Pricing by model may be adopted when the relevance or availability of market benchmarks is insufficient for the exclusive use of market valuation methodologies, provided it observes the following conditions:

I - use of pricing methodologies widely accepted in the market, whenever available;

II - the use of a model valuation methodology must be consistent and verifiable;

III - respect for the criteria established in Art. 5 in all market benchmarks and other data used in model valuation;

IV - the adequacy of market benchmarks and other data used in the model valuation of each instrument must be reviewed regularly;

V - knowledge, by the institution's board of directors and board of trustees, if any, of the financial instruments subject to the model valuation methodology and the materiality of the uncertainties generated by this approach for risk management and performance purposes;

VI - knowledge, by those involved in the institution's risk management, of the limitations of the models employed and their effects on pricing results;

VII - submission of the models used to periodic reviews that assess the adequacy of their assumptions and results in relation to values available in the market; and

VIII - adoption of a degree of conservatism higher than that required for market valuation methodologies.

Sole Paragraph. The periodic reviews referred to in item VII must be carried out at least annually or whenever there is a relevant change in the assumptions, parameters, or results of the model, in order to ensure its accuracy and adequacy.

Art. 7. When developed by the institution itself, the pricing methodology provided for in Art. 6 must:

I - be approved by a unit independent of the areas responsible for the trading desks; and

II - be submitted to an assessment of the validity of the assumptions, mathematical methods, and information systems employed, carried out by a unit independent of the areas responsible for development.

Art. 8. The institution referred to in Art. 1 must establish and maintain procedures for assessing the need for adjustments to the value of the financial instruments referred to in this Resolution, regardless of the pricing methodology adopted, observing criteria of prudence, relevance, and reliability.

§ 1. It is admitted that, for financial instruments measured at fair value, provided they are traded actively and frequently and whose prices are based on independent information sources, in which the price adequately reflects the estimated net realizable value of the financial instrument, the adjustments mentioned in the caput are not carried out.

§ 2. The assessment referred to in the caput must consider, at a minimum, the following elements:

I - settlement costs of positions, which refer to the difference between the estimated net realizable value and the average value of firm buy and sell offers, when available, or estimated by adopting a pricing technique or model;

II - credit risk spread, which consists of the differential over the risk-free rate or reference value attributable to the credit quality of the issuer or counterparty;

III - effective costs of deploying and raising funds, which refer to costs associated with margin replenishment, reinvestments, or refinancing;

IV - prepayment risk and waiver risk, which refer to costs associated with the possibility of exercising options, even if not contractually provided for;

V - future administrative costs, which refer to the costs of maintaining the financial instrument management structure when its time in the portfolio exceeds the expected;

VI - operational risk events, in accordance with Resolution BCB No. 265, of 2022, directly related to the pricing process of financial instruments; and

VII - model risk related to the possibility of losses attributable to uncertainties in the specification of the pricing models used and their respective parameters.

§ 3. The adjustments resulting from the assessment provided for in this article must be deducted from Core Capital when not recognized in the accounting records in accordance with the accounting regulation applicable to institutions authorized to operate by the Central Bank of Brazil.

§ 4. The policies and procedures referred to in § 1 of Art. 2 must be compatible with accounting practices and regulations and specify the nature of the adjustments that are accounted for and those that are deducted from Core Capital.

§ 5. Additionally, for the purpose of adjustments to Core Capital, the institution referred to in Art. 1 must consider the following elements, without prejudice to others considered relevant:

I - time required to settle positions held or to offset, in whole or in part, the risks arising through hedge operations;

II - volatility in buy and sell offer prices;

III - availability of independent quotes;

IV - average and volatility of trading volumes, including in stress periods;

V - market concentrations;

VI - time positions remain in the portfolio;

VII - relevance of positions subject to model marking methodologies in the pricing process; and

VIII - model risks not included in the assessment provided for in item VII of § 2.

§ 6. In the procedures for assessing the need for adjustments referred to in the caput, stress scenarios or the need for immediate liquidation of the total positions must not be considered as assumptions.

§ 7. The assessment of the need for prudential adjustments referred to in the caput must consider the relevance and liquidity of positions in financial instruments measured at fair value, observing the following criteria:

I - relevance and liquidity must be defined by the institution according to consistent and verifiable criteria;

II - the analysis of the relevance of financial instruments must consider, at a minimum, the size of the respective position in the institution in relation to the total in the markets in which they are traded and in relation to the total exposure in the institution itself; and

III - the analysis of the liquidity of financial instruments must consider the following aspects, without prejudice to others considered relevant:

a) their nature and complexity;

b) the liquidity conditions of the markets in which they are traded; and

c) the institution's ability to trade them under current market conditions, considering the size of the position and the time necessary to settle it.

§ 8. The assessment of the adjustments mentioned in the caput may consider the hedge strategies adopted by institutions.

§ 9. The assessment of the need for adjustments referred to in the caput must be carried out consistently and with a frequency compatible with the nature of the operations, the complexity of the products, and the changes in the relevance and liquidity of positions in financial instruments measured at fair value.

§ 10. It is admitted that, in the assessment of the need for adjustments provided for in the caput, the institution considers the extent to which the elements mentioned in this article are already reflected in the calculation of the RWA amount provided for in Resolution BCB No. 200, of March 11, 2022, and the coverage of interest rate variation risk for instruments classified in the banking book (IRRBB), as provided for in Art. 14 of said Resolution.

§ 11. In specific cases where the institution assesses that the risks associated with the elements mentioned in this article are already adequately incorporated in the calculation of the RWA amount, the results of this assessment must be demonstrated in detail.

Art. 9. The pricing methodologies provided for in Art. 4, even if developed externally, and the assessment of the need for prudential adjustments provided for in Art. 8 are the exclusive responsibility of the institution.

Art. 10. If impropriety or inconsistency is found in the assessment of the need for adjustments to the value of financial instruments and in the calculation of their amount, in accordance with this Resolution, the Central Bank of Brazil may determine, at any time, the revision of the adjustment and, where applicable, its accounting recognition.

Art. 11. Circular No. 3,681, of November 4, 2013, is hereby revoked.

Art. 12. This Resolution enters into force on:

I - September 1, 2023, regarding Art. 11; and

II - January 1, 2024, regarding the other provisions.

Otávio Ribeiro Damaso
Director of Regulation