Mark to Market Procedures (06, 2017)

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1 Mark to Market Procedures (06, 207) Risk Maagemet Baco Sumitomo Mitsui Brasileiro S.A

2 CONTENTS SCOPE 4 2 GUIDELINES 4 3 ORGANIZATION 5 4 QUOTES 5 4. Closig Quotes Opeig Quotes 5 5 MARKET DATA 6 5. CDI SELIC Iterest Rates Covetios Iterpolatio of Iterest Rates 9 6 METHODOLOGY 9 6. Brazilia Govermet Bods LTN NTN-F LFT CDB 6.2. CDB Type S CDB Type N, M ad Subordiated LF ad LFS Repo Fuds of Fuds 4

3 Date Author Amedmets Ju/205 Ju/206 Ju/207 Risk Maagemet Departmet Risk Maagemet Departmet Risk Maagemet Departmet New documet. Aual revisio. No chages. Aual revisio. Chages i MtM methodology for fiacial issuaces (CDBs ad LFs)

4 4 SCOPE The purpose of this documet is to defie the Mark to Market ( MtM ) procedures for SMBCB Asset Maagemet ( SMBCB ). MtM refers to the evaluatio of the fair value of all assets, i order to prevet the trasfer of wealth betwee the quota holders. 2 GUIDELINES SMBCB adopts the followig guidelies i order to adhere to market best practices: All assets are subject to the MtM evaluatio; Wheever possible SMBCB will evaluate the fair value of the assets usig quoted prices. I case quoted prices are ot available SMBCB will make the best effort to evaluate the fair value of the assets by usig mathematical models; The choice of the market data ad methodology will be drive by priciple of equality of all quote holders; The frequecy of MtM procedures will be at least the same as the periodicity of the quota publicatio; Risk Maagemet Departmet is resposible for the methodology of MtM procedures; The source of prices ad parameters will be preferably exteral ad idepedet; I case a fixed icome asset postpoe or cacel ay iterest or pricipal paymet, the asset will be cosidered to be i Default. I case of a default evet it will be aalyzed if the fud will accept ew ivestmets from quota holders, which will be subject to: o Type of the fu: ope fud or exclusive fud ; o Percetage of the default asset compared to the total equity of the fud. MtM methodologies are available to the public ad ca be foud at The methodology must be cosistet for all fuds.

5 5 3 ORGANIZATION MtM procedures are defied by Risk Maagemet Departmet, which is idepedet from the Asset Maagemet Departmet. MtM evaluatio activities are performed by Risk Maagemet Departmet, followig the procedures cotaied i this documet. 4 QUOTES MtM procedures for all assets must be cosistet with each fud rules. 4. Closig Quotes MtM procedures will be evaluated at ed of day, usig ed of day prices. Example for a fixed icome asset: Ed of day market iterest rate equals to 0% per aum; Number of busiess days for maturity of the asset equals to 0. DF = ( + i) = ( + 0,0) 0 = 0, i is the yield curve for term ; is the umber of busiess days; DF is the uitary price (price for oe uit). 4.2 Opeig Quotes MtM procedures will be evaluated at start of day, usig previous day ed of day prices. So for a fixed icome asset the Market Iterest Rate will be the same for Closig Quotes fuds ad

6 6 Opeig Quotes fuds, however Opeig Quotes fuds will have ear the iterest from oe day to the other. Usig the same example above: Previous day ed of day market iterest rate equals to 0%; Number of busiess days for maturity of the asset equals to 9. DF = ( + i) = ( + 0,0) 9 = 0, i is the yield curve for term ; is the umber of busiess days; DF is the uitary price (price for oe uit). 5 MARKET DATA Market data is a essetial iput for pricig of fiacial products. The mai sources of market data are: ANBIMA; BM&FBOVESPA; Bloomberg; Brazilia Cetral Bak ( BACEN ); CETIP. 5. CDI CDI rate is a overight iterbak deposit rate that is published by CETIP ( CDI accumulated factor is give by the formula:

7 7 CDI factor = { { ( + CDIi) x p + } } x ( + s) i= CDI factor - accumulated factor for the period ( mius CDI factor equals to the accumulated CDI iterest); CDIi - CDI rate for day i usig covetio expoetial. I case oe is projectig future value of a product the CDI i is the expected CDI rate that is obtaied from PRE curve; p - percetage of CDI (example: 95% of CDI, the p equals to 95%); s - spread of CDI (example: CDI + 2%, the s equals to 2%). 5.2 SELIC SELIC rate is a overight repo rate, backed by Brazilia govermet bods, that is published by BACEN ( SELIC accumulated factor is give by the same formula as CDI accumulated factor (sectio 5.). 5.3 Iterest Rates Covetios Most commo iterest rate covetios: Expoetial : iterests are compouded daily. year has busiess days. Formula: Iterest = ( + i) DF = ( + i) - Iterest: is the accumulated iterest over time

8 8 - i: is the yield curve for term - : is the umber of busiess days - DF: is the uitary price (price for oe uit). By defiitio DF is /Iterest Expoetial 360: iterests are compouded daily. year has 360 caledar days. Formula: Iterest = ( + i) 360 DF = ( + i) Iterest: is the accumulated iterest over time - i: is the yield curve for term - : is the umber of caledar days - DF: is the uitary price (price for oe uit). By defiitio DF is /Iterest Liear 360: iterests are ot compouded. year has 360 caledar days. Formula: Iterest = ( + i x 360 ) DF = ( + i x 360 ) - Iterest: is the accumulated iterest over time - i: is the yield curve for term - : is the umber of caledar days - DF: is the uitary price (price for oe uit). By defiitio DF is /Iterest

9 9 Liear 365: iterests are ot compouded. year has 365 caledar days. Formula: Iterest = ( + i x 365 ) DF = ( + i x 365 ) - Iterest: is the accumulated iterest over time - i: is the yield curve for term - : is the umber of caledar days - DF: is the uitary price (price for oe uit). By defiitio DF is /Iterest 5.4 Iterpolatio of Iterest Rates SMBCB uses Flat Forward Iterest Rate Iterpolatio: f(t) = f(i to j) = costat f(t) - forward curve at time t where i<t<j f(i to j) - forward curve betwee vertices i ad j The rate of the covetio is preserved so for a liear 360 iterest rate curve, the f(t) ad f(i to j) use liear 360 covetio as well. 6 METHODOLOGY 6. Brazilia Govermet Bods Brazilia local govermet bods issued i BRL.

10 0 6.. LTN LTN is a zero coupo fixed iterest rate bod which pays R$.000/bod at maturity. PV = 000 x Q (+i) ( du ) PV: preset value; Q: quatity of bods; du: umber of busiess days from date of aalysis util maturity of the bod; i: ed of day bod yield that is published by ANBIMA ( NTN-F NTN-F is a fixed iterest rate bod which pays semi-aual coupos ad pricipal at maturity. ( ( + Coupo) 2 ) PV = Q x 000 x { + [ ( + i) (du T ) ( + i) (du t i= ) ] } PV: preset value; Q: quatity of bods; du T : umber of busiess days from date of aalysis util maturity of the bod; du t : umber of busiess days from date of aalysis util each coupo date; i: ed of day bod yield that is published by ANBIMA ( LFT LFT is a zero coupo floatig iterest rate bod idexed to SELIC.

11 date Price PAR = Price INI x ( + SELIC ) ( ) PV = Price PAR x Q (+i) ( du ) =dtii PV: preset value; Q: quatity of bods; Price PAR : price cosiderig that the bod trades at par (o discout or premium); Price INI : iitial date bod price (or referece price); : umber of busiess days which SELIC accrues; i: ed of day bod discout rate or bod premium rate that is published by ANBIMA ( 6.2 CDB CDB (Certificado de Depósito Bacário) is a deposit that is issued i BRL currecy by Brazilia baks. There are four types of CDBs: S: repurchase commitmet from the issuer at CDB Rate; N: o repurchase commitmet from the issuer; M: repurchase commitmet from the issuer at market rate; Subordiate: it s a Subordiated Debt for the issuer. No repurchase is allowed CDB Type S PV = Price PAR x N PV: preset value; N: otioal;

12 2 Price PAR : price cosiderig that iterests accrue at the CDB Rate. Calculatios are give by CDI formula i sectio CDB Type N, M ad Subordiated PV = Price PAR x N x CD factor PV: preset value; N: otioal; Price PAR : price cosiderig that iterests accrue at the CDB Rate. Calculatios are give by CDI formula i sectio 5.; CD factor : discout factor that is applied accordig to the methodology below. Procedure to fid out the ew market price for CDB: The data sample used for the formatio of ew market yields will cosist of issuaces made by other fiacial istitutios; The model will utilize issuaces made i the observatio moth, registered i Cetip ad / or BM&F, provided that the ew issuaces do ot have a cosiderable time differece betwee the assets priced ad the issuace; I additio, prices observed i the secodary market may be used withi the moth of observatio; The weighted average of the trades will be take ito accout for calculatio purposes; If there are o ew data i the moth of observatio, issuaces from the previous moths may be used; If there is still isufficiet data for the pricig, peer groups ca be set up to defie the ew markup yield; For the creatio of peer groups of the issuers, mai aspects such as : ratig, mai activity, etc. will be take ito accout. Fud maager may also perform relevat trades (at least BRL 5mm), ad these will be take ito accout i the Pricig Committee for the defiitio of the ew yields;

13 3 From the selected samples, the mark-to-market rates of CDBs for differet term bads ad differet issuers will be formed, so as to adequately associate the market yields with their respective levels of risk; Yields may be iterpolated betwee buckets usig liear iterpolatio; Model may apply a spread differetiatio betwee LFs ad CDBs of the same term, provided there is trade evidece showig that the egotiated market yields are differet from the issuaces yields; New market rates will be ratified i the Pricig Committee ad recorded i meetig miutes. CD factor = { ( + PRE) x p INI + } x ( + s INI ) { ( + PRE) x p NEW + } x ( + s NEW ) PRE: PRE rate for maturity date of CDB. PRE curve: currecy BRL, expoetial, locatio Brazil, iterpolatio method flat forward. Source: DI futures settlemet prices from BM&FBOVESPA; p INI : iitial CDB rate i percetage of CDI (example: 05% of CDI, the p equals to 05%); s INI : iitial CDB spread over CDI (example: CDI + 2%, the s equals to 2%); p NEW : ew CDB rate i percetage of CDI (example: 0% of CDI, the p equals to 0%); s NEW : ew CDB spread over CDI (example: CDI + 3%, the s equals to 3%). 6.3 LF ad LFS LF (Letra Fiaceira) ad LFS (Letra Fiaceira Subordiada) are liabilities issued i BRL currecy by Brazilia baks. The mai differece betwee CDBs ad LFs is the fact that miimum maturity date of LF equals to 2 years, where CDBs ca be issued for ay maturity. Also the issuer ca oly repurchase 5% of total LF issuace prior to maturity.

14 4 For MtM purposes of LF ad LFS, SMBCB uses the same methodology as CDB. 6.4 Repo A repurchase agreemet (Repo) is the sale of securities together with a agreemet for the seller to buy back the securities at a later date. The repurchase price should be greater tha the origial sale price, the differece effectively represetig iterest, sometimes called the repo rate. The seller is effectively actig as a borrower, usig Brazilia govermet bods as collateral. Reverse Repo is the purchase of securities together with a agreemet for the buyer to sell back the securities at a later date. PV = Notioal + Iterest Accrued PV: preset value; Notioal: amout at iceptio; Iterest Accrued: Iterest accrued amout sice iceptio. 6.5 Fuds of Fuds The value of the o-exchaged traded fuds quotas are give by the admiistrators of these fuds, so SBMCB updates these values o the same frequecy as published by the admiistrators. I case SMBCB has a fud that ivest i other fuds, the MtM procedures might differ from the procedures documeted i this documet ad it will be resposibility from the Asset Maagemet that is resposible to maage the ivested fuds.

CHAPTER 2 PRICING OF BONDS

CHAPTER 2 PRICING OF BONDS CHAPTER SUARY This chapter will focus o the time value of moey ad how to calculate the price of a bod. Whe pricig a bod it is ecessary to estimate the expected cash flows ad