Market Risk Management Structure

MARKET RISK MANAGEMENT STRUCTURE

According to Resolution 3.464/2007, of the National Monetary Council, the Risk Management Structure Market of Banrisul. In its art. 11, it says in its sole paragraph that it must be approved by the Board of Executive Officers and by the Board of Administration, as follows:

"The definitions mentioned in items I and II must be approved by the board of executive officers of the institutions mentioned in art. 1 and by the board of administration, if there is any."

INTRODUCTION

In June 2007, the National Monetary Council issued, through the Central Bank of Brazil, the Resolution No. 3464, which determines the policy setting and the implementation of market risk management structure in the financial institutions.

Market risk was defined as the possibility of losses resulting from fluctuations in the market values ​​of positions held by a financial institution.

The market risk management structure provides:

Policies and strategies for the market risk management clearly documented, to establish operating limits and procedures to maintain the exposure to market risk at levels considered acceptable by the institution;

System to measure, monitor and control exposure to market risk, both for operations included in the trading book and for the other positions, covering all relevant sources of market risk and generate timely reports to the board of executive officers of the institution.

Realization, at least once a year, of assessment tests of Market Risk Management systems.

Previous identification of the risks attached to new activities and products and previous analysis of their suitability to the procedures and controls adopted by the institution; and,

Simulations of extreme market conditions (stress tests), including the breakdown of assumptions, which results should be considered when establishing or reviewing policies and limits for capital adequacy.

In Banrisul, the activities of measurement, monitoring and control of the limits for exposure to market risk are totally segregated from the Business Units, being conducted by the Corporate Risks Management Unit, specifically in Market Risk Management Area.

Among the assignments, the area is responsible for the assessment and control of the Market Risk of the Bank and Conglomerate, through the model of Value at Risk (VaR), which is used to measure of the fixed interest rate risk of the Banking Book Portfolio, and of the Maturity Ladder model, to the foreign currency coupon, price indexes and interest rate.

The management rules established for each portfolio includes market risk limits as well as rules for the specific management for the currency exposure. The daily calculation of the exposures requires daily reporting to senior management, of the commitment level of Required Reference Equity, for the risk coverage, having therefore, continuous monitoring in the compliance of those parameters.

Below, the market risk management structure in the institution:

Policy

Banrisul’s corporate policy of market risk defines the set of principles, guidelines and strategies, limits methodologies and responsibilities applicable in the control of the exposures, in order to ensure proper management of the risks according to the complexity of the business of the institution.

The policy is in line with Resolution No. 3.464/07, and Circular No. 3.354/07 National Monetary Council, which sets out the criteria for the classification of financial instruments in the trading book and banking book.

Strategy

The unit responsible for the market risk management proposes and manages the operational limits of exposure, assess the risks related to new products and performs simulations of extreme market conditions (stress tests), taking into consideration when establishing or reviewing the limits for adaptation institution‘s capital and the conglomerate.

Responsibilities

The Risk and Control Officer is responsible for the activities involved in managing market risk of Banrisul and Conglomerate, and must keep the Board of Executive Officers and the Board of Administration informed about the implementation and the risks management in the Institution.

The Board of Executive Officers must approve the actions aimed at improving the market risk management structure, as well as provide the resources necessary to fulfill its aims to identify, assess, monitor and control the risks associated with each individual institution and the conglomerate as defined by Resolution No. 3.464/07.

According to Resolution No. 3.464/07, Article 6, paragraph 1, and subtitle paragraph 6.1 of Banrisul’s Market Risk Institutional Policy, determine that the Board of Administration or, in his absence, the board of executive officers of the institution are responsible for the information provided and disclosed.

RISK IDENTIFICATION AND ASSESSMENT

The identification of market risks in the institution is carried out through operational processes, considering the lines of business, the risk factors of the positions, the contracted amounts and deadlines, as well as the classification of financial instruments in the trading book or banking book.

Trading Book

Consists of all transactions with financial instruments including derivatives, held with the intention of trading or to hedge other positions in the trading portfolio and wich are not subjected to negotiability limits.

Banking Book

It consists of all transactions with financial instruments not classified in the trading portfolio, highlighting structural operations (treasury operations, credit operations, deposits, foreign funding etc) and derivatives not classified as trading.

EXPOSURES CALCULATION PROCEDURES

The measurement of exposures in the trading portfolio are performed using the methodology set by the Central Bank of Brazil (VaR - Value at Risk and Maturity Ladder, among others for stocks and commodities.

For the exposures and the Required Reference Equity calculation of the institution to hedge market risk there were observed procedures published by the Central Bank, through the Circulars:

  • 3.361 - Exposures subjected to change in interest rate (PJUR1);
  • 3.362 - Exposures subjected to variation in rate coupons of foreign currencies rate (PJUR2);
  • 3.363 - Exposure subjected to rate price index coupons variation (PJUR3);
  • 3.364 - Exposure subjected to rate interest rate coupon variation (PJUR4);
  • 3.366 - Exposure subjected to stock prices variation (PACS);
  • 3.368 - Exposure subjected to prices of commodities variation (PCOM);
  • 3.389 - Exposures in gold, foreign currency and assets and liabilities subjected to foreign exchange variation (PCAM).

In addition, there are observed the criteria set out in the Circular Letters:

3.309 - Explains the methodology used in the calculation of volatility and standard multipliers used to calculate the PJUR1.

3.310 - Explains the methodology used in calculating the plots concerning the PJUR 2, 3 and 4.

In the case of the banking portfolio the operational processes for calculating exposures follow the requirements defined in Circular No. 3.365/07.

STRESS TESTS

Banking Portfolio

Banrisul also conducts historical stress testing of the transactions not classified in the trading portfolio, by estimating the percentage change in the market value of the banking portfolio in relation to the Reference Equity, with the use of shock compatible with the 1st and 99th percentiles of a historical range of variations in interest rates, given holding period of 1 year and the observation period of 5 years, as required by Circular No. 3.365/07.

Moreover, it is also estimated the amount of base points of parallel shocks of interest rate needed to cause reductions in the market value of the banking portfolio corresponding to 5%, 10% and 20% of the Reference Equity.

Trading Portfolio

PJUR1: Stressed VaR is performed in accordance with Circular n. º 3568, of December 21, 2011.

PACS: The stress is applied on the actions that make up the portfolio of the bank. There are two types of stress: historical and projected.

The first, based on the larger negative variations with the use of percentiles.

The second, called projected stress, is inserted as a supplement to the model, since the historical stress takes into account only the variations in the past. Projected stress allows that macroeconomic variables are stressed according to analyzes conducted by Banrisul managers.

Currency Exposure

The stress is applied in PCAM over the exchange of currencies in which the Institution is exposed. There are two types of stress: historical and projected.

The first, called historical stress is based on the largest variations with the use of percentiles 1st and 99th, so that operations are reevaluated considering two extreme and opposite scenarios, allowing to identify the behavior of the portfolio in these two scenarios according to the net exposures (long or short).

The second, called projected stress, is inserted as a supplement to the model, since the historical stress takes into account only the variations in the past. Projected stress allows the exposures are stressed according to analyzes conducted by Banrisul managers.

Banco do Estado do Rio Grande do Sul

Corporate Risks Management Unit

Market and Liquidity Risk Management Area