Introduction

Sofisa’s Market Risk Management Policy was prepared in accordance with the principles of Resolution no. 3464/07 of the Brazilian Monetary Council and Basel II. It sets forth its guidelines as to the subject matter of the report, the nature of the unit responsible for it and respective procedures, attributions and responsibilities.

Definition

Market Risk can be defined as the possibility of losses resulting from fluctuation in market values of positions held by a Financial Institution, including risks from operations subject to foreign exchange variation, interest rate, share prices and commodity prices.

Market risk management aims at mitigating the possibility of loss occurrence, increasing the Institution’s efficiency and contributing to improve its results, strengthening the Institution and its shareholders’ equity.

The indicators related to market risk aim at indicating, to management structure components, situations which may cause losses, according to probable scenarios, taking into consideration possible changes in businesses, market or legislation.

Structure

Sofisa’s market risk management structure is carried out by a specific unit subordinated to the CEO, which reports to the Presidency. It is independent from the trading units and compatible with the nature of operations, the complexity of products and the scope of the Bank’s market risk.

Based on the guidelines of Bacen’s rules and the experience resulting from the Operating Risk Management structure, Sofisa organized its market risk management with consultation and participation of the Audit unit and Sofisa’s senior management.

Roles and Responsibilities

The activities developed by the market risk management are included in a set of which other units take part, according to their roles and responsibilities:

  • Board of Directors: approves and revises the policies and strategies for market risk management annually, jointly with the Executive Board.
  • Market Risk Director: responsible for compliance with market risk management policies, analyzing the reports related to the matter and resolving, when necessary, on measures to be taken in order to reduce risk exposure.
  • Market Risk Management Unit: responsible for the activities of identification, assessment, monitoring and control of market risk within Sofisa and its affiliates’ scope.
  • Internal Audit: verifies compliance and consistency of control procedures and policy of Sofisa’s portfolio.

Monitoring

In order to monitor the market risk, operations are classified first, grouped in the trading book – when there is intention for trading – destining other positions to the portfolio named banking book.

The trading book is comprised of all operations with financial instruments and commodities, including derivatives, held with intention to trade (focused on resale, obtaining benefits resulting from price oscillation or carrying out arbitration) or focused on the hedging of other elements in the trading portfolio, which are not subject to limiting its tradability.

Credits related to fees, commissions, interest, dividends and margins on derivative instruments traded at stock exchanges and which are directly related to risk characteristics shall also comprise the trading book.

Occasional improvements in the classification of operations in the trading book are carried out in compliance with the applicable legislation, duly documented by means of minutes to the meeting held by the Full Financial Committee.

Management and Controls

Sofisa’s market risk management aims at:

  • documenting policies and procedures which set forth operating limits destined to maintaining market risk exposure at acceptable levels;
  • using stress tests as subsidies to revise policies and limits;
  • daily following compliance between the market value of operations and the operating limits established semiannually by the Full Financial Committee;
  • keeping the Market Risk Director informed about the operations made, also highlighting changes in operations in the trading book;
  • monthly checking the compliance of criteria for classification of operations in the trading portfolio, comparing the records of operations carried out with the criteria described in the classification policy;
  • improving instruments which guarantee compliance with the criteria and procedures related to the classification of operations in the trading book, and the records of such controls are purpose of verification by the Internal Audit unit;
  • revising the classification policy in the trading book, semiannually, by members of the Full Financial Committee;
  • previously identifying the risks inherent to new activities and products, analyzing its adequacy to procedures and controls adopted;
  • measuring and controlling market risk exposure;
  • ascertaining regulatory capital allocation to market risk.

Management Improvement

Sofisa permanently pursues to improve its market risk management mechanisms, investing in its structure, control and management tools, training, integration among units, process analysis and preparation of reports.