RESOLUTION No. 003464

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Provides for the implementation of a market risk management structure

The CENTRAL BANK OF BRAZIL, pursuant to art. 9 of Law No. 4,595 of 31 December 1964, makes public that the NATIONAL MONETARY COUNCIL, in a session held on 26 June 2007, based on arts. 4, item VIII, of the said law, 2, item VI, 8 and 9 of Law No. 4,728 of 14 July 1965, and 20 of Law No. 4,864 of 29 November 1965, Law No. 6,099 of 12 September 1974, with the amendments introduced by Law No. 7,132 of 26 October 1983, Law No. 10,194 of 14 February 2001, with the amendments introduced by Law No. 11,110 of 25 April 2005, and art. 6 of Decree‑Law No. 759 of 12 August 1969,

RESOLVES:

Article 1

Financial institutions and other institutions authorized to operate by the Central Bank of Brazil must implement a market risk management structure.

Sole Paragraph. The structure referred to in the main clause must be compatible with the nature of the operations, the complexity of the products, and the magnitude of the institution’s market risk exposure.

Article 2

For the purposes of this resolution, market risk is defined as the possibility of losses resulting from fluctuations in the market values of positions held by a financial institution.

Sole Paragraph. The definition in the main clause includes the risks of operations subject to exchange‑rate variation, interest‑rate changes, stock‑price movements, and commodity‑price movements.

Article 3

The market risk management structure must provide for:

1. Policies and strategies for market risk management clearly documented, establishing operational limits and procedures intended to keep market risk exposure at levels considered acceptable by the institution;
2. Systems to measure, monitor and control market risk exposure, both for operations included in the trading portfolio and for other positions, which must cover all relevant sources of market risk and generate timely reports for the institution’s board;
3. Conduct, at a minimum annually, tests to evaluate the systems referred to in item II;
4. Prior identification of the risks inherent to new activities and products and a prior analysis of their suitability to the procedures and controls adopted by the institution;
5. Execution of simulations of extreme market conditions (stress tests), including the breakdown of assumptions, whose results must be considered when establishing or revising policies and limits for capital adequacy.

Sole Paragraph. The policies and strategies for market risk management must be approved and reviewed, at least annually, by the institution’s board and by the board of directors, if any.

Article 4

The trading portfolio referred to in Article 3, item II, consists of all operations with financial instruments and commodities, including derivatives, held with the intention of trading or destined for hedging other elements of the trading portfolio, and that are not subject to limitation of their marketability.

Sole Paragraph. Operations held with the intention of trading are those destined to:

• I – resale;
• II – obtaining benefit from price movements, actual or expected; or
• III – performing arbitrage.

Article 5

The institutions mentioned in Article 1 must have a clearly defined policy to determine which operations will be included in the trading portfolio, as well as procedures to ensure that the classification criteria for the trading portfolio are observed consistently.

• § 1 – If the institution does not have operations permanently classified in the trading portfolio, the policy and procedures referred to in the main clause must ensure the absence of operations carried out with the intention of trading.
• § 2 – In defining the policy and procedures referred to in the main clause, minimum criteria to be established by the Central Bank of Brazil must be observed.
• § 3 – Compliance with the policy and procedures referred to in the main clause must be properly documented and subject to verification by internal audit.

Article 6

The description of the market risk management structure must be disclosed in a publicly accessible report, with a minimum annual frequency.

• § 1 – The board of directors or, in its absence, the institution’s management must state in the report mentioned in the main clause its responsibility for the disclosed information.
• § 2 – The institutions mentioned in Article 1 must publish, together with the semi‑annual financial statements, a summary of the description of their market risk management structure, indicating the location of the report cited in the main clause.

Article 7

The market risk management structure must identify, assess, monitor and control the risks associated with each individual institution and with the financial conglomerate, in accordance with the Accounting Plan of Institutions of the National Financial System – COSIF, as well as identify and monitor the risks associated with the other companies that are part of the economic‑financial consolidated group, as defined in Resolution No. 2,723 of 31 May 2000.

Article 8

The market risk management activity must be carried out by a specific unit within the institutions mentioned in Article 1.

Sole Paragraph. The unit referred to in the main clause must be segregated from the trading units and from the internal audit execution unit, as referred to in Article 2 of Resolution No. 2,554 of 24 September 1998, with the wording given by Resolution No. 3,056 of 19 December 2002.

Article 9

Regarding the risk management structure, the constitution of a single unit responsible is permitted:

• I – for the management of market risk of the financial conglomerate and its constituent institutions;
• II – for the activity of identifying and monitoring market risk of the non‑financial companies that are part of the economic‑financial consolidated group.

Article 10

The institutions mentioned in Article 1 must designate a director responsible for market risk management.

• § 1 – For the purposes of the responsibility referred to in the main clause, it is permitted that the designated director perform other functions in the institution, except those related to the administration of third‑party resources and treasury operations.
• § 2 – For institutions that are part of a conglomerate that have opted for the constitution of a single risk management structure under Article 9, only the institution where the mentioned structure is located must designate a responsible director.

Article 11

The market risk management structure must be implemented by 30 June 2008, observing the following schedule:

1. Until 31 December 2007: designation of the responsible director and definition of the organizational structure for implementing market risk management;
2. Until 31 March 2008: definition of the institutional policy, processes, procedures and systems necessary for its effective implementation;
3. Until 30 June 2008: full implementation of the market risk management structure.

Sole Paragraph. The definitions mentioned in items I and II must be approved by the management of the institutions referred to in Article 1 and by the board of directors, if any.

Article 12

The Central Bank of Brazil may:

• I – determine the adoption of additional controls if it deems the market risk controls implemented by the institutions mentioned in Article 1 inadequate or insufficient;
• II – impose more restrictive operational limits on any institution that fails to observe, within the established deadline, the determination referred to in item I.

Article 13

Article 8 of Resolution No. 3,380 of 29 June 2006 is amended to read as follows:

Article 8 The institutions mentioned in Article 1 must indicate a director responsible for operational risk management.

§ 1 For the purposes of the responsibility referred to in the main clause, it is permitted that the designated director perform other functions in the institution, except those related to the administration of third‑party resources.

§ 2 For institutions that are part of a conglomerate that have opted for the constitution of a single risk management structure under Article 7, only the institution where the mentioned structure is located must indicate a responsible director. (NR)

Article 14

This resolution enters into force on the date of its publication.

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Brasília, 26 June 2007.

Henrique de Campos Meirelles
President