Resolution CMN No. 2692 — Establishes Criterion for Calculating Required Equity (PLE) to Cover Interest Rate Risk

RESOLUTION NO. 2692

Establishes criterion for calculating Required Equity (PLE) to cover the risk arising from the exposure of operations recorded in accounting statements to variations in market interest rates, for the institutions referred to in the Regulation Annex IV to Resolution No. 2,099, of 1994.

THE CENTRAL BANK OF BRAZIL, in accordance with Article 9 of Law No. 4,595, of December 31, 1964, makes public that the NATIONAL MONETARY COUNCIL, in a session held on February 24, 2000, considering the provisions of Article 4, items VIII and XI, of the aforementioned Law, in Law No. 4,728, of July 14, 1965, in Article 20 of Law No. 4,864, of November 29, 1965, in Law No. 6,099, of September 12, 1974, with the amendments introduced by Law No. 7,132, of October 26, 1983, and in Article 6 of Decree-Law No. 759, of August 12, 1969,

RESOLVES:

Art. 1. Establish that the calculation of Required Equity (PLE) referred to in the Regulation Annex IV to Resolution No. 2,099, of August 17, 1994, must encompass the risk arising from the exposure of operations recorded in the accounting statements of the institutions referred to in that Regulation, to variations in market interest rates.

Art. 2. Amend the Regulation Annex IV to Resolution No. 2,099, of 1994, and subsequent amendments, which shall now read as follows:

"Regulation Annex IV to Resolution No. 2,099, of August 17, 1994, which establishes the Obligation of Maintenance, by Financial Institutions and other Institutions authorized to operate by the Central Bank of Brazil, of a Value of Equity, adjusted in accordance with current regulation, Compatible with the Risk Level of the Structure of their Assets, Liabilities, and Compensation Accounts.

Art. 1. Financial institutions and other institutions authorized to operate by the Central Bank of Brazil, except for credit cooperatives and micro-entrepreneur credit societies, in addition to the minimum limits of paid-in capital and equity established in current regulation, must maintain an adjusted equity value compatible with the risk level of the structure of their assets, liabilities, and compensation accounts.

Sole Paragraph. The obtaining of the value referred to must take into consideration, with respect to credit risk, the weighting of the institution's active operations by the risk attributed to them.

Art. 2. The calculation of the equity value referred to in Art. 1 shall follow the following formula:

PLE = F.Apr + F'.Σ(RCD_i) + F".max((Σ(Aprc_i) - 0.2.PLA); 0) + Σ(EC_i) i=1 i=1 i=1

where:

PLE = required equity;

F = factor applicable to Apr, equivalent to 0.11 (eleven hundredths);

Apr = Risk-weighted Asset = total of the product of the titles of Current Assets and Long-Term Receivables (code 1.0.0.00.00-7 of the Accounting Plan of the Institutions of the National Financial System - COSIF) by the corresponding risk factors + product of Permanent Assets (code 2.0.0.00.00-4 of COSIF) by the corresponding risk factor + product of titles of Co-obligations and Risks in Granted Guarantees (code 3.0.1.00.00-4 of COSIF) by the corresponding risk factors;

F' = factor applicable to the credit risk of swap operations, equal to 0.20 (twenty hundredths);

n_i = number of swap operations registered in account 3.0.6.10.60-4 of COSIF;

RCD_i = credit risk of the i-th swap operation registered in account 3.0.6.10.60-4 of COSIF, consisting of the weighting of the reference value of the operation at the time of its respective contracting (VNi) by the corresponding potential risk factor, considering its remaining term, given by the formula:

RCD_i = VN_i * √(Ra_i² + Rp_i² - 2 * ra_i * rp_i * Ra_i * Rp_i),

where:

Ra_i = risk of the active reference of the i-th operation; Rp_i = risk of the passive reference of the i-th operation; ra_i * rp_i = correlation between the active and passive references of the i-th operation;

F" = factor applicable to operations with gold and with assets and liabilities referenced in exchange rate variation, including those carried out in derivative markets, equal to 0.50 (fifty hundredths);

n_2 = number of net positions in each currency and in gold;

Aprc_i = value of net positions of operations with gold and with assets and liabilities referenced in exchange rate variation, including those carried out in derivative markets;

PLA = adjusted equity, calculated in accordance with Resolution No. 2,543, of August 26, 1998;

n_3 = number of portions representing the value of PLE to cover interest rate market risk in a specific currency/remuneration base;

EC_i = portion representing the value of PLE to cover interest rate market risk in a specific currency/remuneration base.

Paragraph 1. For the purpose of calculating the risk of swap operations (RCD_i), the values regarding the risks of the underlying references, as well as their correlations, shall be calculated and disclosed in the manner to be defined by the Central Bank of Brazil.

Paragraph 2. For the purpose of calculating Apr, the risks of active operations shall follow the classification contained in the table annexed to this Regulation.

Paragraph 3. For the purpose of calculating PLE to cover market risk related to interest rates, the methodology, formulas, and parameters established by the Central Bank of Brazil shall be used.

Art. 3. The following do not integrate the calculation base of PLE, for the purpose of calculating credit risk:

I - operations with guarantees carried out in systems administered by stock exchanges or commodity and futures exchanges;

II - operations in which the institution acts exclusively as an intermediary, not assuming any rights or obligations with the counterparty.

Art. 4. The Central Bank of Brazil is authorized to:

I - alter the table referred to in Art. 2, Paragraph 2, as well as the factors F, F', and F", and other parameters contained in the formula established in the main text of said article;

II - assign risk factors to accounting titles contained in COSIF;

III - disclose the calculation methodology for determining the value of each of the portions representing the value of PLE to cover interest rate market risk in a specific currency/remuneration base;

IV - issue recommendations aimed at the evaluation and management of risks of financial institutions and other institutions authorized by it to operate, in order to provide better understanding and implementation of the instruments necessary for the control and supervision of financial operations in general, and those carried out in derivative markets in particular."

Art. 3. The procedures and controls related to the calculation of the limits established in Resolution No. 2,606, of May 27, 1999, and in this Resolution constitute the responsibility of a technically qualified administrator responsible for the risk management of the institution, observed the provisions of Resolution No. 2,554, of September 24, 1998.

Art. 4. The institutions referred to in Art. 1 shall have until June 30, 2000, to adapt their respective PLE values to the conditions established in this Resolution.

Art. 5. In the event that the value of PLE, calculated in accordance with Art. 2 of the Regulation Annex IV to Resolution No. 2,099, of 1994, with the wording given by Art. 2 of this Resolution, is found, on the date of entry into force of this Resolution, to be higher than the value of PLA referred to in the same article, the excess must be eliminated as operations are liquidated, and the institution is prohibited from assuming new positions that burden said value, until its effective compliance.

Art. 6. Non-observance of the minimum capital and equity standards referred to in this Resolution and complementary regulation subjects the institution to the provisions of Article 2 of Resolution No. 2,099, of 1994, and Article 11 of Resolution No. 2,212, of 1995.

Art. 7. The Central Bank of Brazil is authorized to issue norms and adopt measures necessary for the compliance with the provisions of this Resolution.

Art. 8. This Resolution enters into force on the date of its publication.

Art. 9. Articles 1 of Resolution No. 2,212, of November 16, 1995, Articles 2, 3, and 5 of Resolution No. 2,399, of June 25, 1997, Articles 2 and 3 of Resolution No. 2,606, of 1999, and Article 2 of Resolution No. 2,607, of May 27, 1999, are hereby repealed.

Brasília, February 24, 2000

Arminio Fraga Neto
President

Note. In the formulas of Art. 2, the letter S corresponds to summation.

--------------------------------------------------------------------- Obs.: Re-transmitted due to correction in the deadline date of Art. 4