Credit, Liquidity and Market Risks Management Policy
|Version:||Date of Review:||History:|
|2||04/20/2018||Change of title from “Credit Risk and Liquidity Risk Management” to “Credit, Liquidity and Market Risks Management”; Inclusion of market risk and update of the credit and liquidity risk guidelines.|
Set forth the basic guidelines referring to the credit, liquidity and market risks management, in compliance with applicable rules and the best market practices.
This document shall apply to the Risk Management and Compliance Executive Board, the Treasury Management, all Management (statutory or non-statutory officers, members of the Board of Directors, members of the Advisory Committees and other managers) and all the employees involved in this process.
1. Credit Risk
1.1. Concerning the Credit Risk management, Cielo:
1.1.1. identifies the issuers of non-guaranteed branded cards representing credit risk, defines the volumes of guarantees to be presented and obtains these guarantees.
1.1.2. controls and assesses the outstanding volumes of issuers of non-guaranteed branded cards versus the guarantees tendered.
1.1.3. defines the financial reserve of merchants, with or without deferred sales, operating with ARV.
1.1.4. identifies the sub-acquirers representing credit risk by analyzing their creditworthiness, defining the volumes of guarantees which shall be submitted thereby.
1.1.5. controls the Financial Investments Portfolio, according to the rules, indexes, and limits laid down in the Financial Investments Rule.
1.1.6. Credit Recovery Plan:
Cielo executes the guarantees in the event of default and/or acts jointly with intervenor aiming at recovering the defaulting amounts from issuers of non-guaranteed branded cards.
Cielo carries out merchants recovery of credit with or without deferred sales operating with ARV and Sub-acquirers.
Cielo conducts the recovery of credit of the Financial Investments Portfolio prompting the Credit Guarantee Fund and/or the intervenor/liquidator of the defaulting financial institution.
Cielo implements procedures to recover credits of defaulting customers.
1.1.7. Involves the Management in the monitoring and in decision-making process referring to the credit risk management which may impact the compliance with commitments and/or businesses of the Company.
2. Liquidity Risk
2.1. Concerning the Liquidity Risk management, Cielo:
2.1.1. maintains a solid process to update the liquidity levels, which comprise proper financial assumptions and future projections based on budget and forecast updates.
2.1.2. daily updates the cash flows, with an average estimate of the next one hundred and eighty (180) days.
2.1.3. observes the limits of indebtedness set out by Board of Directors.
2.1.4. monthly conducts a sensitivity analysis of the loans and financing operations according to the limits of indebtedness.
2.1.5. observes the liquidity targets of the financial investments stipulated in the Financial Investments Rule.
2.1.6. ensures an adequate level of liquidity to comply with the Company’s obligations and for continuity of ARV operations at the levels demanded by merchants.
2.1.7. ensures the granularity and appropriate currencies for the liquidity risk management and captures eventual contingent and unexpected exposures in its measurement.
2.1.8. submits information referring to the Liquidity Risk Management to the appropriate bodies of Cielo’s risk management governance structure for information, assessment, and recommendation.
2.1.9. maintains acceptable levels of liquidity not impacting the Company’s operations.
2.1.10. involves the senior management in the monitoring and in the decision-making process referring to liquidity management, warning it in advance on any eventual drop in the levels of liquidity which may impact the observance of the Company’s commitments and/or businesses.
2.1.11. may prompt a Liquidity Contingency Plan, if necessary.
3. Market Risk
3.1. Concerning the Market Risk, Cielo:
3.1.1. manages the indexes contracted from financial instruments, assets and liabilities, in local and foreign currencies, relating to the indexes available on the market, aiming at identifying market opportunities for a better financial management of the Company, therefore, it may contract new financial instruments, and/or settle current financial instruments.
3.1.2. seeks to maintain financial assets reporting indexes and interest rates consistent with the financial liabilities exposure.
3.1.3. seeks to mitigate the foreign-exchange risk deriving from card transactions made by foreigners in Brazil or any liability in foreign currency not pegged to derivative instruments or other hedge instruments, through specific financial operations or through assets in foreign currency meeting the liquidity prerogatives set out in the Financial Investments Rule corresponding to their exposure.
3.1.4. uses hedge instruments solely to protect effective exposures, mandatorily bound to an unsecured asset or liability, always without speculative purposes.
3.1.5. conducts a diligent monitoring of mark-to-market of derivative instruments, and reflects the appropriate variations in the accounting records;
3.1.6. submits the derivative instruments (Hedge) to the assessment of accounting criteria to be classified as Hedge Accounting aiming at reducing or eliminating the volatility incurred in the company’s accounting results.
3.1.7. seeks to contract loan and funding operations aiming at supporting the need of working capital, the investments, and refinancing of current debts. Their limits are approved yearly by the Board of Directors as set forth by the Company’s Bylaws.
3.1.8. submits to the approval of the Board of Directors, by means of the Finance Committee, any liability financial operation different from those previously approved.
3.1.9. involves the senior management in the monitoring and in the decision-making process referring to the market risk management which may impact the observance of the Company’s commitments and/or businesses.
The exceptions, where applicable, shall be treated by Board of Executive Officers and/or Board of Directors, depending on the case.
- Management and employees involved in the process:
Ensure the separation and definition of duties, assignments of responsibilities and delegation of authorities to subsidize an effective management of credit, liquidity and market risks.
Comply with and oversee the Policy, and when necessary, prompt the areas involved in the process for consultation on situations involving conflict with this Policy or by means of the occurrence of situations which may jeopardize the Company.
- Treasury Management:
Coordinate and carry out the activities related to credit risk involving: issuers of non-guaranteed branded cards, sub-acquirers, merchants with or without deferred sales operating with ARV and financial investments portfolio, considering the guarantees and the limits established for operations subject to credit risk.
Make and control the Company’s financial investments, according to the rules, indexes, and limits of the Financial Investment Rules.
Control the Company’s liquidity levels, ensuring the existence of sufficient funds to cover its financial liabilities and controlling the exposure to the liquidity risk in different timeframes.
Monitor the fluctuation of interest rates, foreign exchange and other financial indexes pegged to financial instruments held by the Company.
- Risk Management and Compliance Executive Board:
Monitor and manage the credit risk involving: issuers of non-guaranteed branded cards; sub-acquirers; merchants with or without deferred sales operating with ARV; and financial investments portfolio, considering the guarantees and the limits established for the operations subject to credit risk.
Manage the Company’s liquidity risk, monitoring the existence of sufficient funds to cover its financial liabilities and controlling the exposure to the liquidity risk in different timeframes.
Monitor and manage the market risk, by tracking the fluctuation of interest rates, foreign exchange and other financial indexes pegged to the financial instruments held by the Company.
Propose methodologies, metrics, and controls related to the credit, liquidity and market risks management.
Monitor and report to the risk management governance bodies the indexes and limits of exposure to credit, liquidity and market risks.
Ensure the previous identification and proper assessment of the exposure to credit, liquidity and market risks inherent to the products.
Elaborate the Liquidity Contingency Plan.
- Backoffice Engineering and Collection Management:
Carry out collection and credit recovery procedures for merchants with outstanding debts with Cielo (defaulters).
VI. Additional Documentation
- BACEN Circular 3.681, of November 4, 2013.
- Financial Investment Rules
VII. Concepts and Acronyms
- ARV (Purchase of Sales Receivables): A product offered by Cielo which allows merchants to receive in advance future receivables from credit card sales.
- Non-guaranteed brands: These are brands not guaranteeing the card transactions, in eventual cases of default of any card issuer, exposing the Company to credit risks and potential financial losses.
- Finance Committee: An advisory body of the Company’s Board of Directors, which aims, within the context of this Policy, the analysis of the Limit of its Annual Indebtedness estimated and proposed by the Chief Financial Officer and related monitoring.
- Counterparty: Within the context of this document, counterparty means the card issuers, merchants, sub-acquirers and commercial banks.
- Default: Counterparty’s full or partial default.
- Risks Forum: An advisory body of Cielo’s Board of Executive Officers, which aims at analyzing the processes and controls involved in the Risk Management and advise on eventual actions to mitigate the risks identified.
- Hedge: Strategy adopted to mitigate the risks relating to fluctuations of contractual indexes, such as currencies, interest rates, commodities, amongst others.
- Hedge Accounting: Accounting operation which recommends the application of specific accounting standards which make feasible the reduction or elimination of the volatility incurred in the accounting results deriving from the accounting for derivative instruments through income fair value.
- Limit of Annual Indebtedness: These are the maximum volumes of indebtedness estimated for the year to deal with commitments assumed by the Company and meeting the merchants’ demand for the ARV product.
- Standard on Financial Investments: Normative instrument, which mainly determines the type of investments authorized, the eligible financial institutions and the allocation of funds per institution and product.
- Outstanding volumes of card issuers: These are financial volumes deriving from credit card transactions (lump sum and by installments), debit and prepaid card, pending payment (not overdue) between the card issuers and the Company.
- Financial Reserve: Amount in value or percentage calculated according to a specific methodology and registered at the ARV system aiming at preventing merchant to anticipate credits from its agenda of receivables, besides the established amount and as protection against eventual chargebacks/sales cancelations which may occur over anticipated amounts.
- Risk of Concentration: This occurs when certain assets or financial instruments show a relevant percentage of interest in respective portfolios, it may represent eventual potentiation of loss risk. Such risk according to this document refers to the following:
Credit Concentration Risk;
Market Concentration Risk; and,
Liquidity Concentration Risk.
- Credit Risk: This refers to the eventual occurrence of losses coupled with the counterparty’s failure to comply with its respective financial liabilities under the terms agreed upon, the reduction of gains or remunerations, advantages granted in negotiation and recovery costs, including:
End user’s default before the issuer of a postpaid payment instrument;
Issuer’s default before postpaid payment instrument accreditor; and,
Default of debtor payment institution of another payment institution due to interoperability agreement between different arrangements.
- Liquidity Risk: It refers to the possibility of the Company not being able to efficiently honor its expected and unexpected, current and future liabilities without affecting its daily operations and without incurring significant losses.
- Market Risk: It refers to the possibility of occurring losses due to the fluctuation in market values of instruments held by the Company, as well as revenues and expenses which may be impacted in view of the variation in the interest rates, stock prices and foreign exchange variation.
- Sub-acquirers: Merchants accredited by Cielo who operate as acquirers of another establishments not directly affiliated to Cielo, which amongst other obligations shall transfer the resources received from Cielo to their affiliated establishments referring to card sales.
- Deferred Sales: Credit card sales made by merchants with the delivery of goods/services at a future date.
It shall be incumbent upon the Company’s Board of Directors to amend this Policy whenever necessary.
This Policy takes effect on the date of its approval by the Board of Directors and revokes any contrary rules and procedures.