BC’s public consultation: Third phase of the new prudential framework for market risk published

On August 20, 2024, the Central Bank of Brazil (“BC”) published Public Consultation Notice (“ECP”) No. 102/2024, which proposes normative changes to CMN Resolution No. 4,958, of October 21, 2021, and to BCB Resolution No. 200, of March 11, 2022. In addition, ECP No. 102/2024 introduces a new BCB resolution addressing the calculation of the portion of risk-weighted assets (“RWA”) relating to the calculation of the capital required for market risk exposures of instruments classified under the trading book (“RWAsens”).

The proposed changes seek to locally implement the new market risk regulatory framework – known as the Fundamental Review of the Trading Book (FRTB) – which integrates the Basel III measures.

The drafts of this public consultation are mainly based on the following documents:

• Standardized approach: general provisions and structure (MAR20);
• Standardized approach: sensitivities-based method (MAR21); and
• Standardized approach: residual risk add-on (MAR23).

The new regulation will apply to institutions classified under Segments 1 (S1), 2 (S2), and 3 (S3), as provided for in Resolution No. 4,553, of January 30, 2017, and in BCB Resolution No. 197, of March 11, 2022.

The changes in CMN Resolution No. 4,958, of 2021, and BCB Resolution No. 200, of 2022, seek to create a new portion of risk-weighted assets – called RWAsens – specifically aimed at calculating the capital required for market risk exposures of the instruments classified under the trading portfolio.

The new BCB resolution introduces a standardized approach based on the concept of sensitivity, replacing the current methodology based on exposure. These changes aim to improve market risk management and align Brazilian regulatory practices with international standards.

The public consultation, published on August 20, 2024, will last 90 days and is open for contributions at https://www3.bcb.gov.br/audpub/HomePage?1.

Demarest’s Banking and Finance team is available to provide any further clarifications on the topic as may be necessary.