Resolution SBS No. 1737-2006: Regulation for the Negotiation and Accounting of Financial Derivative Products in Financial System Companies

Lima, December 28, 2006
Resolution S.B.S.
No. 1737 -2006

The Superintendent of Banks, Insurance and Private Pension Fund Administrators:

CONSIDERING:

That numeral 16 of article 221 of the General Law of the Financial System and of the Insurance System and Organic Law of the Superintendence of Banking and Insurance, Law No. 26702 and its amendments, hereinafter General Law, authorizes financial system companies to take or provide coverage of "commodities", futures and financial derivative products;

That numeral 42 of article 221 of the General Law allows financial system companies to carry out operations on their own account of financial derivative products;

That, pursuant to article 283 of the same Law, for the carrying out of the operations included in the referred numerals of article 221, companies must have authorization from the Superintendence, with the prior opinion of the Central Reserve Bank;

That, according to article 290 of the General Law, only companies included in Module 3 may request the special authorization referred to in article 283 of the same Law;

That, pursuant to the Regulation for the Expansion of Operations, approved by SBS Resolution No. 1122-2006, companies of multiple operations of the financial system other than banks are allowed to carry out coverage operations through futures or other financial derivative products, subject to special authorization from this Superintendence, subject to compliance with the requirements established therein;

That, with the aim of contributing to adequate risk management, it is necessary to establish guidelines so that financial system companies negotiate and register financial derivative products, in accordance with the guidelines established in International Accounting Standard No. 39 "Financial Instruments: Recognition and Measurement";

Having received the favorable opinion of the Adjunct Superintendencies of Banking and Microfinance, of Risks and of Legal Advice, as well as of the Department of Economic Studies; and,

In exercise of the powers conferred by numerals 7, 9 and 13 of article 349 of the General Law;

RESOLVES:

Article First.- Approve the Regulation for the Negotiation and Accounting of Financial Derivative Products in Financial System Companies, which is part of this Resolution.

Article Second.- This Resolution enters into force on January 1, 2007, with an adaptation period until March 31, 2007.

Register, communicate and publish,

JUAN JOSÉ MARTHANS LEON
Superintendent of Banks, Insurance and Private Pension Fund Administrators

REGULATION FOR THE NEGOTIATION AND ACCOUNTING OF FINANCIAL DERIVATIVE PRODUCTS IN FINANCIAL SYSTEM COMPANIES

CHAPTER I
GENERAL ASPECTS

Scope
Article 1.- This standard applies to companies included in letters A and B of article 16 of the General Law, to the Guarantee Fund for Small Industry Loans (FOGAPI), to the Development Financial Corporation (COFIDE), to the National Bank, to the Agricultural Bank and to the MIVIVIENDA S.A. Fund, hereinafter companies.

Definitions
Article 2.- For the purposes of this device, the following definitions are considered:
a. Firm Commitment: Mandatory agreement to exchange a certain amount of resources at a determined price on a specified future date or dates. b. Foreseen Transaction: Anticipated future operation but not committed.
c. Commodities: Primary or basic goods consisting of physical products, which can be exchanged in a secondary market, including precious metals but excluding gold, which is treated as a currency.
d. CONASEV: National Commission for the Supervision of Companies and Securities. e. Credit Derivative: Financial instrument whose payments depend on the credit quality of the issuer of a reference asset. This instrument allows a party, called the risk transferor, to transfer the credit risk of a reference asset to another party, called the risk acceptor, without the sale of the asset being required. f. Implicit Derivative: Component of a combined financial instrument 2 that also includes a non-derivative main contract (host contract), the effect of which is that some of the cash flows of the combined financial instrument vary in a manner similar to the financial derivative product considered independently. A financial derivative product that is attached to a non-derivative main contract, but that is contractually transferable independently or has a different counterparty, is itself a separate financial derivative product. g. Freely Accessible Price Sources: Those provided through Bloomberg, Reuters, Datatec or other financial information systems of similar characteristics that provide services in the country. h. General Law: General Law of the Financial System and of the Insurance System and Organic Law of the Superintendence of Banking and Insurance, Law No. 26702 and its amendments.
i. Settlement by Differences: That which is carried out based on the change in the value of the financial assets subject to the contract.
j. Financial Derivative Product: Financial instrument that meets the following conditions: (a) its fair value fluctuates in response to changes in the level or price of an underlying asset, (b) it does not require a net initial investment or only obliges to make an investment lower than that which

1 Article substituted by SBS Resolution No. 1349-2008 of May 6, 2008, SBS Resolution No. 7033-2012 of September 19, 2012 and SBS Resolution No. 8182-2012 of October 25, 2012.
2 In accordance with what is stated in SBS Resolution No. 8182-2012 of October 25, 2012, any reference to "hybrid instruments" will be replaced by "combined financial instruments". The replacement has been made in articles 2 and 9 of the Regulation.

would be required in contracts that respond in a similar manner to changes in market variables and (c) is settled on a future date. k. Accounting Manual: Accounting Manual for Financial System Companies, approved by SBS Resolution No. 895-98 of September 1, 1998 and its amendments.
l. Investment Regulation: Regulation for the Classification and Valuation of Investments of Financial System Companies. 3
m. Fair Value: Amount for which an asset can be exchanged or a liability settled between interested parties, duly informed and in conditions of mutual independence. n. Debt Representative Instrument: Value that represents an obligation on the part of the issuer, has a nominal value and is amortizable. The yield of these values is associated with an interest rate, another value, basket of values or index of debt representative values. o. Capital Representative Instrument: Value whose yield is directly associated with the result of the economic exercise of the issuer or with the yield of another value, basket of values or index of capital representative values.

Excluded Operations
Article 3.- This regulation governs all financial derivative products contracted by companies except those referred to employee benefit plans and remuneration based on capital representative instruments of the company.
Conventional purchases or sales of financial assets, including spot exchange operations, whose settlement date occurs up to three (3) business days after their trade date, shall not be considered financial derivative products, unless they require or allow settlement by differences. If they require or allow settlement by differences, they will be accounted for as derivatives during the period between the contracting date and the settlement date.

Permitted Underlying Assets
Article 4.- Companies may contract financial derivative products on the following underlying assets:
a. Currencies. b. Interest rates.
c. Commodities.
d. Debt and capital representative instruments included in numerals 17, 19, 20, 21 and 22 of article 221 of the General Law and those that meet the requirements of the Standards for the Investment of Instruments Traded through Non-Centralized Trading Mechanisms. e. Stock market indices supervised by CONASEV or bodies of similar competence. f. Others authorized by this Superintendence through a general nature norm with the opinion of the Central Bank, upon request of a supervised company. The interest rates and indices mentioned in letters (b) and (e) respectively, must be of public knowledge, quoted and widely recognized in active financial markets and have a historical series disseminated in freely accessible price sources. Companies shall not contract financial derivative products whose fair value cannot be determined reliably.

Counterparties in Financial Derivative Product Operations 4

3 Letter modified by SBS Resolution No. 7033-2012 of September 19, 2012.
4 Article substituted by SBS Resolution No. 1349-2008 of May 6, 2008.

Article 5.- Companies may contract financial derivative products traded on and off exchange. In the former, contracts must have clearing houses as counterparties and the exchanges must be registered and supervised by CONASEV or bodies of similar competence. In the case of over-the-counter contracts, when the counterparty is a company of the financial system or the insurance system of the country or abroad, it must be duly authorized, regulated and supervised by this Superintendence or another body of similar competence.

CHAPTER II
ACCOUNTING OF FINANCIAL DERIVATIVE PRODUCTS

IAS No. 39
Article 6.- The articles comprising this chapter reflect essential aspects of the International Accounting Standard (IAS) No. 39 in force regarding the accounting of financial derivative products. In everything else, insofar as it does not oppose this Regulation, said IAS and its Guide are applicable.

Classification of Financial Derivative Products
Article 7.- All financial derivative products must be registered accounting on the trade date.
Upon registration, financial derivative products must be classified into one of the following two categories for accounting purposes: (a) financial derivative products for trading or (b) financial derivative products for hedging purposes. Unless the company adequately and timely documents the hedging strategy as established in article 15 of this standard, all contracted financial derivative products will be assumed for trading.

Accounting of Financial Derivative Products for Trading 5
Article 8.- The initial measurement of a financial derivative product for trading will be carried out at its fair value. Subsequently, any change in the fair value of said derivative will affect the results of the exercise. To this end, the valuation at buyer price (bid) or seller price (ask) must be estimated for open positions, depending on whether the position is long (active) or short (passive). For those positions that compensate market risks among themselves and for those foreign currency forward operations with a contractual maturity less than or equal to one (1) year, the valuation at mid-market prices (mid) may be estimated.

To estimate bid and ask prices, one may start from a mid-price valuation (using rate curves or mid-prices) and apply mid-to-bid and mid-to-ask valuation adjustments that allow approximating said prices and appropriately reflect the exit price of the position in the financial derivative instrument, or one may directly value long positions at bid prices and short positions at ask prices.

To apply mid-prices, it is considered that financial derivative instruments that compensate market risks among themselves are those that represent opposite positions in the same underlyings and that coincide in all their critical terms (nominal amounts, flows, maturities, currencies and interest rates). It can be considered that a group of derivatives compensates with a single

5 Article substituted by SBS Resolution No. 1292-2022 of April 20, 2022, effective June 1, 2022, granting an adaptation period until December 31, 2022.

derivative or another group of derivatives if they meet the conditions indicated above, taking into account that the aggregate nominal amount of a group of derivatives must coincide with the nominal of the derivative or aggregate nominal of another group of derivatives with which they compensate.

Accounting of Financial Derivative Products for Hedging Purposes 6
Article 8-A.- The initial measurement of a financial derivative product for hedging purposes will be carried out at its fair value. Subsequently, changes in the fair value of said derivative will affect the results of the exercise or equity, as established in articles 16, 17 and 18 of this Regulation. The valuation may be estimated at buyer price (bid) or seller price (ask) depending on whether the position is long (active) or short (passive), according to the methodologies indicated in Article 8, or it may also be estimated at mid-market prices (mid).

Implicit Derivatives 7
Article 9.- An implicit derivative must be separated from the host contract and, consequently, treated accounting as an independent derivative if and only if the following three conditions are met simultaneously:
a. The economic characteristics and inherent risks of the implicit derivative are not closely related to those of the host contract. b. A separate instrument with the same conditions as the implicit derivative would meet the definition of financial derivative product.
c. The combined instrument is not accounted for at fair value with changes in results.

If a company, being obliged to separate the implicit derivative from the host contract, could not measure the implicit derivative separately or its measurement is not reliable, either at the acquisition date or subsequently, it must treat the entire combined instrument as an investment at fair value with changes in results or a liability measured at fair value with changes in results.

When their separation occurs, implicit derivatives must be registered and valued as financial products for trading, except their designation for hedging purposes. In either case, they must be reported separately in Annex No. 8 "Positions in Financial Derivative Instruments" of the Accounting Manual.

Financial assets or liabilities whose yield is indexed to the behavior of a foreign currency and are payable in another currency different from it, including the new sol, will be considered combined instruments, where the embedded foreign currency financial derivative product (forward or option, depending on whether there is leverage or not) must be separated from the host contract and accounted for at its fair value.

Types of Accounting Hedges
Article 10.- Accounting hedges subject to this Regulation may be of two types:
a. Fair value hedges: Cover exposure to changes in the fair value of recognized assets or liabilities or firm commitments not recognized, or of an identified portion of said assets, liabilities or firm commitments, which can be attributed to a particular risk and can affect the result of the period. As long as the effectiveness of the hedge can be measured, only a percentage of the fair value of the instrument subject to the hedge can be considered as the hedged item. b. Cash flow hedges: Cover exposure to the variation of cash flows that is attributed to a particular risk associated with a recognized asset or liability or a highly probable foreseen transaction and that can affect the result of the period. As long as the effectiveness of the hedge can be measured, the uncertainty about only some of the future flows of the instrument subject to the hedge or even about a portion of them (for example, those related to a given reference rate) can be considered as the hedged item.
c. Hedge of a net investment in a foreign entity: The definitions of foreign business and net investment in a foreign entity are the same as those indicated in IAS 21 "The Effects of Changes in Foreign Exchange Rates". Hedges of a net investment in a foreign business, including the hedge of a monetary item that is accounted for as part of a net investment, will be accounted for similarly to cash flow hedges. 8

The hedge of foreign currency risk of a firm commitment can be accounted for alternatively as a fair value hedge or as a cash flow hedge.

Effectiveness of Accounting Hedges
Article 11.- A financial derivative product that seeks to achieve financial coverage of a certain risk may be designated accounting as for hedging purposes if, at its negotiation, it is expected that changes in its fair value or in its cash flows will be highly effective in compensating changes in the fair value or in the cash flows of the hedged item directly attributable to the risk covered from the beginning and during the period that the hedging relationship lasts.

The effectiveness of a hedge must be measured reliably prospectively, at the time of designation of the financial derivative product for hedging purposes, and retrospectively, with a minimum monthly frequency. For the carrying out of prospective tests, statistical techniques that the company considers relevant to capture the probable future effectiveness of the hedge in question during its entire validity may be used. For similar hedges, the company must use the same prospective methodology, unless it appropriately justifies the use of other methodologies.

The results of retrospective tests must be in the 80%-125% range for the hedge to be considered effective. For the calculation of said tests, entities will use the method or methods that best suit their risk management strategy and may even adopt different methods for different classes of hedge. The documentation on the methods used and the strategy followed by the entity must include procedures to evaluate efficiency and must be available to this Superintendence.

Hedged Items
Article 12.- A hedged item exposes the company to the risk of changes in fair value or in future cash flows and is designated to be hedged. A hedged item may be:
a. A single asset or liability, firm commitment or highly probable foreseen transaction; or b. A group of assets or liabilities, firm commitments or highly probable foreseen transactions with similar risk characteristics designated as covered. In this case, the change in fair value attributable to the covered risk for each individual item in the group must be

6 Article incorporated by SBS Resolution No. 1292-2022 of April 20, 2022, effective June 1, 2022, granting an adaptation period until December 31, 2022.
7 Article modified by SBS Resolution No. 7033-2012 of September 19, 2012.
8 Letter incorporated by SBS Resolution No. 7033-2012 of September 19, 2012.
9 Paragraph substituted by SBS Resolution No. 1349-2008 of May 6, 2008

approximately proportional to the total change in fair value attributable to the risk of the group of items.
c. A monetary amount of financial assets or liabilities that make up a hedged portfolio, exclusively in the case of interest rate risk in fair value hedges, as provided for in Article 18 of this standard.
Therefore, a financial derivative product cannot be a hedged item of another financial derivative product.
By its nature, a Maturity Financial Investment can only be the object of hedging for foreign currency risk or credit risk. Likewise, an investment accounted for by the equity method cannot be a hedged item in a fair value hedge.
On the other hand, if the item to be hedged is a non-financial asset or liability, such as commodities, it may be designated as a hedged item alternatively for its foreign currency risk or for all its risks, due to the difficulty of isolating and appropriately measuring the portion of its cash flows or changes in fair value attributable to specific risks other than foreign currency risk.

Designation of Financial Derivative Products for Hedging Purposes
Article 13°.- Under no circumstances may a financial derivative product be designated as a hedge only for a period during which it remains issued. Likewise, with the following two exceptions, a hedging relationship must be designated by the company for a financial derivative product in its entirety:
a. By separating the intrinsic value and the time value of an option contract and designating only the change in the intrinsic value of the option as for hedging purposes. b. By separating the interest rate component from the spot component in a forward.
Likewise, a financial derivative product may be designated as a hedge for more than one type of risk provided that (a) the risks covered can be clearly identified, (b) the effectiveness of the hedge can be demonstrated, and (c) it is possible to ensure that there is a specific designation of the hedging instrument and of the different risk positions. Likewise, a combination of financial derivative products may be designated as a hedging instrument, provided that they do not result in a net written option. This is because a net written option will always be considered a financial derivative product for trading.

Hedge Accounting under Consolidation Rules
Article 14°.- Hedge accounting may only be applied when one of the parties involves an external party to the company, in the case of individual financial statements, or an external party to the reporting group, in the case of consolidated financial statements. This is because all these transactions will be eliminated in consolidation, unless an exposure to foreign currency risk is hedged that cannot be completely eliminated when consolidating the financial statements because the company uses a functional currency different from the presentation currency.

Documentation of the Accounting Hedge Strategy
Article 15°.- Within a maximum period of three (3) business days following the negotiation of the financial derivative product designated and registered for hedging purposes, the trading area, or another area with similar functions, must document the hedging relationship and the objective and risk management strategy to undertake the hedge. Such documentation must allow for a precise identification and description of the following elements at a minimum:

a. Type of hedge. b. Terms of the hedged item.
c. Risk covered.
d. Date of designation of the hedging relationship. e. Duration of the hedge. f. Terms of the financial derivative product for hedging purposes. g. Methodology used in the prospective test, specifying, if applicable, the risk factors excluded from the measurement. h. Methodology to be used in the retrospective test, specifying, if applicable, the risk factors excluded from the measurement.
i. Development of the prospective test and effectiveness obtained.
The methodologies by which the company will measure the effectiveness of such hedge, both prospectively and retrospectively, must be previously approved by the company's Risk Unit.
This documentation must be kept available to the Superintendency. If this Superintendency considers the documentation of the strategy unsatisfactory or finds weaknesses in the methodologies used in the tests that jeopardize its effectiveness, it may immediately require the dissolution of the hedge strategy and the simultaneous registration of the financial derivative product as for trading purposes. 10 However, a financial derivative product for hedging purposes that meets all the conditions and requirements described in this Regulation for this type of derivative, may be registered accounting-wise as a derivative instrument for trading. The option to account for a financial derivative for hedging purposes or for trading purposes can be taken only once at the moment the operation is agreed upon. 11

Fair Value Hedge Accounting
Article 16°.- A properly designated, documented, and highly effective fair value accounting hedge will be accounted for as follows:
a. The gain or loss resulting from the revaluation of the financial derivative product for hedging purposes will be recognized in the results of the period. b. The gain or loss on the hedged item attributable to the risk covered will adjust its book value against the results of the period, even if, had the hedge not been designated, the item would be valued at its amortized cost or would be an Available-for-Sale Negotiable Investment, according to the definition of the Investment Regulation. In these cases, the compensated variations in the "clean price" of the hedged item will be carried to the results of the period as well as their accrued interest. If (i) the hedge designation is revoked or (ii) it ceases to be effective according to the retrospective tests or (iii) the financial derivative product for hedging purposes matures or is sold, settled, or exercised, the company will prospectively interrupt the accounting of the hedge. For these purposes, the substitution or successive renewal of a hedging instrument by another, or the incorporation of a new contract, is not an expiration or settlement if such substitution, renewal, or incorporation of a new contract constitutes part of the initial hedge strategy.

10 Paragraph replaced by Resolution SBS No. 4034-2022 published on December 30, 2022.
11 Paragraph included by Resolution SBS No. 8182-2012 of October 25, 2012.

If this were to occur, in the case of a hedged item carried at amortized cost, the adjustment made to the book amount will be amortized against results following the effective interest rate method, recalculated on the date amortization begins. As an exception, when it concerns a fair value hedge of the exposure to interest rate risk of a portfolio, provided for in Article 18 of this standard, and amortization using a recalculated effective interest rate is impracticable, the adjustment will be amortized linearly.

Cash Flow Hedge Accounting
Article 17°.- A properly designated, documented, and highly effective cash flow accounting hedge will be accounted for as follows:
a. The portion of the gain or loss of the financial derivative product for hedging purposes determined retrospectively as an effective hedge will be recognized directly in equity.
To this end, its measurement will be carried out at "clean prices." In this way, the component of equity separated associated with the hedged item will be adjusted so that it is equal (in absolute values) to the amount that is lesser between (i) the accumulated gain or loss (fair value) of the hedging derivative since the beginning of the hedge and (ii) the accumulated change in the fair value (present value) of the expected future cash flows of the hedged item since the beginning of the hedge. b. The ineffective portion of the gain or loss of the financial derivative product for hedging purposes will be recognized in the results of the period, as well as the normal accrual of interest of the hedged item. Thus, any excess of coverage above the permitted range in the retrospective test will affect the results of the period. The accumulated gains or losses of the hedging derivatives recognized in the separated component of equity will remain in that account until their recognition in results in the periods in which the hedged items affect results, unless the hedge corresponds to a forecast transaction that ends in the recognition of a non-financial asset or liability, in which case the amounts recorded in equity will be included in the cost of the asset or liability when it is acquired or assumed. If it is expected that all or part of a loss temporarily recorded in equity cannot be recovered in the future, such amount will be reclassified immediately to results. If (i) the hedge designation is revoked or (ii) it ceases to be effective according to the retrospective tests or (iii) the financial derivative product for hedging purposes matures or is sold, settled, or exercised, the company will prospectively interrupt the accounting of the hedge. For these purposes, the substitution or successive renewal of a hedging instrument by another, or the incorporation of a new contract, is not an expiration or settlement if such substitution, renewal, or incorporation of a new contract constitutes part of the initial hedge strategy. If this were to occur, in the case of a hedged item carried at amortized cost, the accumulated gain or loss of the hedging derivative that continues to be recognized directly in equity from the period in which the hedge was effective will continue to be recognized separately in equity until the forecast transaction takes place. When this occurs, the accumulated gain or loss of the hedging derivative will be reclassified to results.

Fair Value Hedges for Interest Rate Risk of a Portfolio (Macro-hedges)
Article 18°.- A monetary amount of financial assets or financial liabilities of similar risk characteristics that make up a portfolio with exposure to interest rate risk in fair value hedges will be the hedged item. The portfolio itself, which may combine assets and liabilities, does not qualify as a hedged item. Likewise, it must be fulfilled that each of the elements from which the designated amount is extracted, had it been designated individually, would have qualified as a hedged item according to what is indicated in Article 12 of this Regulation. Therefore, although to determine the amount of assets or liabilities to be hedged the portfolio may include obligations whose payment is due by the creditor (such as demand and savings deposits), the amount designated as a hedged item cannot include demand obligations.
For the time distribution of the flows of the hedged amount, the expected repricing dates will be used, in accordance with the provisions of SBS Circular No. B-2087-2001 and the instructions of Annex No. 7 "Measurement of Interest Rate Risk" of the Accounting Manual. Regarding this, the hedged amount in a determined currency will be designated for each time band, and bands different from those required in Annex No. 7 may be used as long as consistency is maintained. In these cases, the documentation of the accounting hedge strategy will cover the same points specified in Article 15 of this standard and, additionally:
a. The number of interest rate repricing periods and their expected term. b. The methodology used to determine the amount of assets or liabilities designated as a hedged item, as well as the criteria used to separate them.
c. Whether the company will calculate effectiveness for each individual repricing period separately, globally for the set of periods, or through some mixed formula.
If, on the date of the periodic review of hedge effectiveness, the assumptions regarding the estimated repricing dates for the cash flows of the hedged financial assets or financial liabilities are updated, the gain or loss of the hedged amount will be calculated with the following steps:
i. The percentage that the hedged amount represents over the total amount of financial assets or financial liabilities of the portfolio included in the respective period will be determined according to the estimated cash flow dates when the previous effectiveness evaluation was performed.
ii. The amount resulting from applying the calculated percentage to the total amount of financial assets or financial liabilities included in the corresponding period calculated according to the new estimated cash flow dates will be obtained.
iii. The variation in the fair value of the amount calculated in the previous number attributable to the risk covered will be estimated.
When evaluating the effectiveness of the hedge, only variations due to modifications in the estimated cash flow dates of the financial instruments will be taken into consideration, without considering those due to the recognition of new financial assets and financial liabilities.

Recording of Financial Derivative Products in Off-Balance Sheet Accounts 12
Article 19°.- In addition to their registration within the balance sheet, financial derivative products must be registered in contingent accounts 7106 and 7206 or in order accounts 83 and 8409, as applicable, at their nominal value converted to initial spot prices. The registration will be made by contract.
All contracts denominated in foreign currency must be updated to the spot exchange rate at the presentation of Financial Statements. When a contract involves two currencies different from the national currency (cross operation), it will be treated as a purchase or a sale depending on the position (long or short, respectively) in the currency different from the American dollar (for positions in American dollars and another foreign currency) or in the currency in which the agreed nominal amount is expressed (for positions in two foreign currencies different from the American dollar).

12 Article replaced by Resolution SBS No. 1349-2008 of May 06, 2008.

CHAPTER III 13
AUTHORIZATION FOR THE CONTRACTING OF FINANCIAL DERIVATIVE PRODUCTS Authorization to operate with financial derivative products 14
Article 20°.- The types of authorization to operate with Financial Derivative Products are the following:
a. Authorization for trading purposes b. Authorization for hedging purposes: This is the type of authorization granted to companies so that they can operate with financial derivative products, provided that the company's intention is to compensate or mitigate the risk of losses derived from future fluctuations in a risk factor. With hedging, risks that have an inverse correlation with the risks to be covered are assumed. The Superintendency will grant authorizations by type of contract (forwards, futures, swaps, or options) and by underlying asset, which may comprise more than one type of contract and underlying. To initiate the authorization procedure, companies must submit a request signed by the General Manager, which must be accompanied by the following: 15 a) Certified copy of the agreement of the competent social body where the authorization granted for the realization of new financial derivative products is recorded. b) Minutes of modification of the company's bylaws, if applicable. c) Report with the opinion of the Internal Audit Unit on the realization of new operations and/or services. d) "Report to carry out operations with Financial Derivative Products" referred to in Article 22 of this standard, with all the information and documentation required therein. e) Minutes of the Risk Committee in which the approval of the "Report to carry out operations with Financial Derivative Products" is recorded. f) Other requirements that the Superintendency deems pertinent, in order to demonstrate the company's capacity to operate with financial derivative products. Once the complete documentation is received, this Superintendency will evaluate it and, provided it finds no objection to its approval, will forward it to the Central Bank for opinion. In its evaluation, this Superintendency will consider the intention of its contracting, the complexity of trading (if applicable), position control, fair value measurement, accounting registration, and risk monitoring of the requested products, among other factors. Additionally, to evaluate the granting of the authorization resolution, the Superintendency will take into account the minimum capital, corporate governance, risk management, among other criteria it considers relevant. Once the opinion of the Central Bank is received, this Superintendency will analyze it and notify the company of its final decision.

Exceptions to the Authorization to Operate with Financial Derivative Products
Article 21°.- Companies will not require authorization from this Control Body to contract financial derivative products in the following cases:

13 Chapter incorporated by Resolution SBS No. 1349-2008 of May 06, 2008.
14 Article modified by Resolution SBS No. 8182-2012 of October 25, 2012.
15 Paragraph replaced by Resolution SBS No. 4465-2016 of August 20, 2016.
16 Paragraph replaced by Resolution SBS No. 4465-2016 of August 20, 2016.

a. When it concerns Market Makers, for the realization of forwards of sovereign bonds and global bonds issued by the Peruvian Government and Certificates of Deposit of the Central Bank, as stated in Resolution SBS No. 981-2005. b. 17
c. When it concerns financial derivative products that the company had carried out under the protection of Article 246º paragraph q) of Legislative Decree No. 770, as well as those subsequently approved by this Superintendency with the opinion of the Central Bank within the framework of the General Law.

Report to carry out operations with Financial Derivative Products 18
Article 22°.- The "Report to carry out operations with Financial Derivative Products" must be coordinated in the company with the Trading, Registration, Accounting, Legal, Internal Audit, and Risk Unit or their equivalents areas, and be approved by the Risk Committee before its submission to this Superintendency.
The minimum content of the aforementioned Report will depend on the intention of contracting the financial derivative product. In case a company requests simultaneous authorization to operate with financial derivative products for trading purposes and for hedging purposes, the "Report to carry out operations with Financial Derivative Products" must include differentiated evaluations in aspects such as risk management and accounting registration. The following presents the minimum content of the aforementioned report:
Report to carry out operations with Financial Derivative Products – Authorization for trading purposes

1. Executive Summary: main aspects of the impact study on the company's risk profile.
2. Description of the financial derivative product
   2.1. Types of contracts requested (forwards, futures, swaps, or options).
   2.2. Underlying Assets of the contracts.
3. Fair value measurement
   3.1. Methodology for its fair value measurement.
   3.2. Availability of prices and rates for its fair value measurement in freely accessible price sources.
4. Risk management
   4.1. Identified risks of the requested products (market, credit, operational, liquidity, etc.).
   4.2. Methods and systems for the measurement of identified risks.
   4.3. Internal limits, alerts, mitigants, and other tools established to control identified risks.
5. Operational aspects
   5.1. Description of the responsibilities of the officials who will participate directly in the trading, registration, fair value measurement, and risk control and audit of the requested products, specifying their location within the company's organization and reporting line.
   5.2. Relevant training received by the officials who will participate directly in the trading, registration, fair value measurement, risk control, and audit of the requested products.

17 Literal eliminated by Resolution SBS No. 5790-2014, of 01-09-2014.
18 Article modified by Resolution SBS No. 8182-2012 of October 25, 2012.

5.3. Accounting circuit of the requested products, specifying the analytical accounts involved in accordance with the Accounting Manual, for their recognition, periodic measurement, and settlement.
5.4. Master and specific contracts, similar to those approved by the International Swaps and Derivatives Association and other internationally recognized organizations, provided they do not conflict with local regulations.
5.5. Description of the electronic systems or other means to be used in their negotiation.
5.6. Description of the computer programs to be used for monitoring their positions.
5.7. Description of the recording systems used for their accounting.

6. Market Aspects
   6.1. Analysis of the demand for the financial derivative product.
   6.2. Description of the available markets for its negotiation.

Report to Carry Out Operations with Financial Derivative Products – Authorization for Hedging Purposes

1. Executive Summary: main aspects of the impact study on the company's risk profile.

2. Description of the financial derivative product
   2.1. Types of contracts requested (forwards, futures, swaps, or options).
   2.2. Underlying assets of the contracts.

3. Fair Value Measurement
   3.1. Methodology for its fair value measurement.
   3.2. Availability of prices and rates for its fair value measurement from free-access price sources or other reliable sources (for example, exchange rates from the Superintendency's website).

4. Risk Management
   4.1. Identified risks of the requested products (market, credit, operational, liquidity, etc.).
   4.2. Methods for measuring the identified risks.
   4.3. Internal limits, alerts, and other tools established to control the identified risks.

5. Operational Aspects
   5.1. Description of the responsibilities of the officials who will participate directly in the negotiation, recording, fair value measurement, risk control, and auditing of the requested products, specifying their location within the company's organization and reporting line.
   5.2. Relevant training received by the officials who will participate directly in the contracting, recording, fair value measurement, risk control, and auditing of the requested products.
   5.3. Accounting circuit of the requested products, specifying the analytical accounts involved in accordance with the Accounting Manual, for their recognition, periodic measurement, and settlement.
   5.4. Master and specific contracts, similar to those approved by the International Swaps and Derivatives Association and other internationally recognized organizations, provided they do not conflict with local regulations.

Revocation of Authorization
Article 23rd.- Without prejudice to what is provided in the current Sanctions Regulation, this Control Body will order the revocation of the authorization granted for the contracting of financial derivative products when it determines that the company does not fully comply with the provisions of this regulation and, in particular, when there is evidence that the company is not adequately managing the risks of its financial derivative products, is carrying out operations outside the scope of its authorization, or is inadequately applying hedge accounting.

CHAPTER IV 19
GLOBAL LIMIT ON FINANCIAL DERIVATIVE PRODUCTS
Global Limit on Financial Derivative Products
Article 24th.- For the calculation of the global limit provided for in numeral 3 of article 200th of the General Law, the absolute value of the minimum resulting between zero (0) and the sum of fair values of all positions in financial derivative products registered for trading, as the numerator, and the last effective equity remitted by the company and without observations by this Superintendency, as the denominator, will be considered. The fair values must correspond to those reported in Annex No. 8 of the Accounting Manual.

FINAL AND TRANSITIONAL PROVISIONS
First.- Upon the entry into force of this Regulation, companies must identify their financial derivative product contracts registered until then for hedging purposes. Subsequently, the company must measure and document the effectiveness of these hedges from their inception, in accordance with what is established in articles 11th and 15th of this regulation. The accumulated ineffectiveness of the hedges must be taken immediately to results, while the effective portion of cash flow hedging operations will be recognized in equity.

Second.- This Superintendency will issue the necessary accounting standards to adapt the Accounting Manual to this Regulation.

19 Chapter incorporated by Resolution SBS No. 1349-2008 of May 6, 2008.