The fundamental principle of operations in the Treasury area is capital preservation, which entails prioritizing prudent risk management over high returns. This principle is the foundation of the Bank’s policy of not setting return targets for the Treasury area, especially given that the area serves as the platform for providing technical support and market intelligence to the Bank’s other businesses.

Functions of the Treasury Area

• Support the Credit and Funding areas. This involves (a) structuring and pricing derivatives and other products; (b) facilitating access to markets; (c) promoting the exchange of research and financial technology; (d) hedging the loan portfolio; and (e) setting the price levels at which the Bank can tap the market for funding;
• Invest shareholders’ equity and manage cash by investing cash balances and managing mismatches between assets and liabilities;
• Operate with recurring revenues by investing in relatively low-risk instruments that yield consistent and predictable returns;
• Invest in medium and long-term directional positions. These positions are discussed in various committees with senior executives and based on detailed analysis from the Research area. The Treasury’s directional positions are governed by the Bank’s investment policy, which requires the area to comply with (a) VaR limits and (b) liquidity thresholds when formulating investment decisions. The policy is sufficiently flexible to allow for investment in different markets and asset classes provided the above conditions are met.

Treasury Operations

The Bank´s Treasury takes proprietary positions in investments in Brazil as well as in G7 countries and emerging markets, through fixed-income instruments and stocks and through trading in currency and derivatives. Management believes that sound business practices and rigorous management thresholds underpin the Bank´s Treasury operations, enabling it to achieve results that are solid and replicable in a market that is often volatile. Banco BBM´s Treasury almost exclusively trades liquid assets, allowing it to quickly react to events and market volatility.

Though it does not have a fixed target for returns, the Treasury area has historically contributed significantly to the Bank´s net operating income, partly due to what Management considers a conservative approach to risk by its ‘head traders’, a majority of whom are managing partners with significant investments in the Bank. Among other risk-management metrics, the Bank employs VaR to monitor its exposure. The VaR limit is determined every six months by the Executive Board and monitored daily by the Risk area. The Bank´s Chief Financial Officer may spread this limit across various trading books when deemed appropriate.

Research

Banco BBM puts particular emphasis on having a comprehensive in-house knowledge base covering all risk factors to which it is actually or potentially exposed.
The Bank has invested substantially in developing its research capabilities and operates with a first-class team of seasoned analysts covering the domestic and global economies, industries, currencies, individual companies, and financial institutions.

The Research area comprises four main areas:

• Macroeconomic research (domestic and international) - provides support to Treasury operations and Asset Management, and formulates the Bank’s overall view on macroeconomic trends;
• Equity research - supports Treasury and Asset Management;
• Credit research - supports the Commercial area in assessing counterparty and industry risks, and acts as a critical element in the credit risk management process;
• Quantitative research - provides technical analysis to support all business areas and the Risk Management area.

The principle of BBM´s research framework is ‘bottom-up’, in the sense that the scenario formulation process relies upon rigorous analysis of detailed primary data. The Bank has a well-developed infrastructure for generating and internalizing primary data.

The Research area’s coverage is global, consistent with the Bank’s view that understanding global economic trends is crucial for effective operation in the its main market, Brazil.

All risk allocation decisions draw on the input of the Research area. The Executive Officer responsible for the Credit Research area is a standing member of the Corporate Credit Committee, which defines and approves counterparty credit limits. The Research area is also represented on the Market Risk Committee, which sets market scenarios for the purposes of market risk management, and the Finance Committee, which formulates the Bank’s internal view on macroeconomic outlook.

The Bank’s public client-focused research product, launched in 2007, will serve the Asset Management business, and rely upon the Bank’s existing research infrastructure.