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.|
|3||03/15/2019||Inclusion of “Servinet Serviços Ltda.” and “Aliança Pagamentos e Participações Ltda.” in the Scope of this Policy. Description of the process for deliberating on the exceptions related to the guidelines of this Policy.|
|4||04/29/2020||Updating Items I. Purpose, II. Scope; III. Guidelines – sub-items 1.1.2, 1.1.5, 1.1.6, 1.2, 1.2.1, 1.2.2, 1.2.3, 2.1.3, 2.1.6, 2.1.11 and 3.1.4; IV. Exceptions; V. Responsibilities; VI. Additional Documents; VII. Concepts and Acronyms.
Including sub-items 2.1.9 and 3.1.9 in item III. Guidelines.
Set forth the main guidelines regarding the credit, liquidity and market risks management, with the purpose to comply with applicable and current rules and regulations, the best market practices, as well as to protect the Company’s business and economic and financial situation.
All members of the Management (Executive Board, Executive Superintendents, members of the Board of Directors and members of the Advisory Committees), members of the Fiscal Council and employees of the companies Cielo S.A., Servinet Serviços Ltda., Aliança Pagamentos e Participações Ltda. and Stelo S.A., hereinafter (“Cielo” or “Company”).
All the Company’s Subsidiaries must establish their directives based on the guidance provided in this Policy, considering the specific needs and legal and regulatory aspects to which they are subject.
Regarding the Affiliated Companies, the Company’s representatives working in the Management of Affiliated Companies should make efforts to set their directives based on the guidance provided for in this Policy, considering the specific needs and legal and regulatory aspects to which they are subject.
1. Credit Risk
1.1. Regarding the Credit Risk management, Cielo:
1.1.1. Considers the alignment between the risk profile, the risk appetite and the company’s strategy.
1.1.2. Segregates the credit risk management activities of the executive areas of the Company and the Auditor, remaining independent in the performance of its function.
1.1.3. Identifies and assesses the credit risk of card issuers, defines the volumes of guarantees that must be presented and obtains the necessary guarantees when authorized by the respective regulations of the brands.
1.1.4. Controls and assesses the outstanding volumes of issuers versus the guarantees tendered.
1.1.5. Defines the financial reserve of commercial clients, with or without deferred sales, operating with ARV (Purchase of Receivables from Sales).
1.1.6. Identifies and assesses the credit risk of Sub-accreditors, establishing specific conditions in an instrument to signed by Cielo and Sub-accreditors to establish obligations related to (i) presentation of guarantees through credit analysis and risk exposure values AND (ii) monitoring information regarding the conclusion of the settlement, by the Sub-accreditor, to the clients accredited to the Sub-accreditor, among other provisions.
1.1.7. Assess exposure to credit risk in relation to new or changing products and services.
1.1.8. Submits information referring to Credit Risk Management to the relevant bodies of Cielo’s risk management governance structure for information, assessment and recommendation, as well as involves the senior management in the monitoring and in the decision-making process referring to credit risk management that may impact the fulfillment of the Company’s commitments and/or businesses.
1.1.9. Evaluates the credit risk of the financial investments portfolio.
1.2. Credit Recovery:
1.2.1. Executes the guarantees in the event of default and/or acts jointly with the card issuers intervenor aiming at recovering the defaulting amounts.
1.2.2. Executes the guarantees of Sub-accreditors in situations of lack of liquidity.
1.2.3. Conducts the credit recovery of amounts from the financial investments portfolio triggering the Credit Guarantee Fund and/or the intervenor/liquidator of the defaulting financial institution.
1.2.4. Implements procedures to recover credits of defaulting customers.
2. Liquidity Risk
2.1. Regarding the Liquidity Risk management, Cielo:
2.2. Considers the alignment between the risk profile, the risk appetite and the company’s strategy.
2.2.1. Segregates the liquidity risk management activities of the executive areas of the Company and the Auditor, remaining independent in the performance of its function.
2.2.2. Maintains a solid process to update liquidity levels, including proper financial assumptions and future projections based on budget and forecast updates.
2.2.3. Daily updates cash flow, with a minimum estimate of the next 180 (one hundred and eighty) days, in order to determine the expected levels of liquidity.
2.2.4. Observes the limits of indebtedness set out by the Board of Directors.
2.2.5. Conducts a monthly sensitivity analysis of the loans and financing operations according to the limits of indebtedness.
2.2.6. Observes the liquidity targets of the financial investments set out in the Financial Investment charter.
2.2.7. Ensures an adequate level of liquidity, even with the prior contracting of immediate access credit lines, in order to comply with the Company’s obligations and for the continuity of “ARV” operations at the levels demanded by commercial clients.
2.2.8. Ensures liquidity by brand, domicile, card issuer and appropriate currencies for the liquidity risk management, as well as captures eventual contingent and unexpected exposures in its measurement.
2.2.9. Assess exposure to liquidity risk in relation to new or changing products and services.
2.2.10. Submits information referring to Liquidity Risk Management to the relevant bodies of Cielo’s risk management governance structure for information, assessment and recommendation, as well as involves the Board of Executive Officers and the Board of Directors in the monitoring and in the decision-making process referring to liquidity risk management, warning them about any eventual drop in liquidity levels that may impact the fulfillment of the Company’s commitments and/or businesses.
2.2.11. Maintains the Liquidity Contingency Plan updated and approved by the competent corporate governance bodies, and may be triggered pursuant to the rules previously established in the Liquidity Risk Management charter.
3. Market Risk
3.1. Regarding the Market Risk management, Cielo:
3.2. Considers the alignment between the risk profile, the risk appetite and the company’s strategy.
3.2.1. Segregates the market risk management activities of the executive areas of the Company and the Auditor, remaining independent in the performance of its function.
3.2.2. Manages the indexes of contracted financial instruments, assets and liabilities, in local and foreign currencies, in relation to market indexes, aiming at identifying market opportunities for improvements in the Company’s financial management, which may contract new financial instruments, and/or settle current financial instruments.
3.2.3. Maintains financial assets reporting indexes and interest rates in line with the financial liability exposure.
3.2.4. Mitigate the foreign exchange risk 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 Investment charter corresponding to their exposure.
3.2.5. Uses hedge instruments solely to reduce effective exposures, mandatorily bound to an unsecured asset or liability, always without speculative purposes.
3.2.6. Conducts the diligent monitoring of mark-to-market of derivative instruments, as well as reflects the appropriate variations in accounting records.
3.2.7. Submits derivative instruments 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.
3.2.8. Contracts loan and funding operations aiming at supporting working capital needs, investments, and refinancing of current debts. Their limits are approved on an annual basis by the Board of Directors as set forth by the Company’s Bylaws.
3.2.9. Assess exposure to market risk in relation to new or changing products and services.
3.2.10. Submits information referring to Market Risk Management to the relevant bodies of Cielo’s risk management governance structure for information, assessment and recommendation, and involves the Executive Board and Board of Directors in the monitoring and in the decision-making process referring to market risk management that may impact the fulfillment of the Company’s commitments and/or businesses.
Exceptions not foreseen in this Policy must be submitted to the Executive Board for resolution and subsequently reported to the Risk Committee.
- Management and employees involved in the process:
- Ensure the segregation and definition of duties, assignments of responsibilities and delegation of authorities to subsidize an effective management of credit, liquidity and market risks.
- Comply and ensure compliance with this policy, and when necessary, consult the areas involved in the process regarding situations conflicting with this policy or situations that may jeopardize the Company’s business.
- Treasury Management:
- Make and control the Company’s financial investments, according to the rules, indexes, and limits of the Financial Investment charter.
- Control the Company’s liquidity levels, ensuring the existence of sufficient funds and credit lines to cover its financial liabilities and controlling the exposure to the liquidity risk in different timeframes.
- Monitor the fluctuation of interest rates, foreign exchange rates and other financial indexes pegged to financial instruments held by the Company.
- Trigger the liquidity contingency plan.
- Risk Management and Compliance Executive Board:
- Monitor the alignment between the risk profile, the risk appetite and the company’s strategy.
- Identify, measure, monitor, control and mitigate credit, liquidity and market risks in an integrated manner.
- Coordinate and carry out the activities related to credit risk involving: issuers of cards, Sub-accreditors, considering the definitions of volumes of guarantees, as well as commercial clients, with or without deferred sales operating with ARV
- Monitor and manage credit risk exposure involving: card issuers, Sub-accreditors, commercial clients with or without deferred sales;
- Execute guarantees, together with the Legal Superintendence, in case of default of the Card Issuers;
- Work, together with the Legal Superintendence, with the intervener of Card Issuers under intervention, to recover defaulting amounts.
- Execute guarantees, together with the Legal Superintendence, from Sub-accreditors in situations of lack of liquidity.
- Manage the Company’s liquidity risk exposure, monitoring the existence of sufficient funds to cover its financial liabilities and controlling the exposure to liquidity risk in different timeframes.
- Monitor the exposure to market risk by tracking the fluctuation of interest rates, foreign exchange rates 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 risk management.
- Monitor and report to Cielo’s risk management governance bodies the indexes and limits of exposure to credit, liquidity and market risk.
- Assess exposure to credit, liquidity and market risk in relation to new or changing products and services.
- Prepare, review and request the triggering of the liquidity contingency plan.
- Prepare an annual report on the management of financial risks and submit it to the Risks Committee and to the Board of Directors.
- Backoffice Engineering and Collection Management:
- Carry out collection and credit recovery procedures for commercial clients with outstanding debts (defaulters).
- Legal and Government Relations Superintendence:
- Execute guarantees in- and out-of-court in case of default of Card Issuers, after engaging the Risk and Compliance Board;
- Work, together with the Risk and Compliance Board, with the intervener of Card Issuers under intervention, to recover defaulting amounts.
- Execute guarantees from Sub-accreditors in- and out-of-court, after engaging the Risk and Compliance Board, in situations of lack of liquidity.
VI. Additional Documentation
- BACEN Circular Nr. 3681/2013.
- Internal rules, which are constantly improved, approved by competent bodies and available to all employees.
- Policy on Corporate Risk Management and Internal Controls;
VII. Concepts and Acronyms
- Purchase of Receivables from Sales (ARV): A product which allows commercial clients to receive in advance future receivables from credit card sales, with future settlement date. A product which allows commercial clients to receive in advance future receivables from credit card sales, through the purchase of receivables from commercial clients (accredited customers) by a Credit Rights Investment Fund (FIDC), of which Cielo is a paying agent.
- Risk Committee: Advisory body of the Company’s Board of Directors which aims to monitor the quality and efficiency of risk management and minimum capital requirements applicable to the Company, ensuring that its social objectives and values are in line with the basic principles of corporate governance.
- Counterparty: Within the context of this Policy, counterparties are card issuers, commercial clients, Sub-accreditors and Financial Institutions and the Like.
- Default: Counterparty’s full or partial default.
- Hedge: Strategy adopted to mitigate the risks relating to fluctuations of contractual indexes, such as currencies, interest rates, commodities, among 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 of derivative instruments through income fair value.
- Financial Reserve: Total amount or percentage calculated according to a specific methodology and registered at the ARV system aiming at preventing merchants to anticipate credits from their agenda of receivables, in addition to the established amount, as protection against eventual chargebacks/sales cancelations that may occur over anticipated amounts.
- Credit Risk: Refers to the possibility of losses associated with the counterparty’s failure to comply with its respective financial liabilities under the terms agreed upon, the reduction of gains or remuneration, advantages granted in negotiation and costs of recovery, including:
- Default by the bearer with the issuer of a postpaid payment instrument;
- Default by the issuer before the accreditor; and,
- Default by a debtor payment institution of another payment institution due to interoperability agreement between different arrangements.
- Liquidity Risk: Refers to the possibility of the Company not being able to efficiently comply with its expected and unexpected, current and future obligations without affecting its daily operations and without incurring significant losses.
- Market Risk: Refers to the possibility of losses arising from fluctuations in market values of instruments held by the Company, as well as revenues and expenses that may be impacted as a result of variations in interest rates, stock prices and foreign exchange rates
- Affiliated Companies: Companies in which the Company has significant influences, pursuant to Article 243, Paragraph 4 and 5 of the Brazilian Corporation Law, (i) there is a significant influence when the Company holds or exercises the power to participate in the decisions of a company’s financial or operating policies, without, however, controlling it; and (ii) the significant influence will be assumed when the Company owns twenty percent (20%) or more of the voting capital of the said company, without controlling it.
- Subsidiaries: Companies in which the Company, directly or indirectly, holds rights as partner or shareholder, which permanently guarantee to the Company the preponderance in corporate resolutions and the power to elect the majority of the members of the Management, pursuant to Article 243, Paragraph 2 of the Brazilian Corporation Law.
- Sub-accreditor: Refers to commercial clients accredited by Cielo that act as accreditors of commercial clients and that, among other obligations, must transfer the funds received from Cielo to their respective affiliated commercial clients.
- Deferred Sales: Credit card sales made by commercial clients with the delivery of goods/services at a future date.
VIII. General Provisions
The Company’s Board of Directors is responsible for amending 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.