9.1 Trading Market Risk Inhoudsopgave Voorwoord Bestuursverslag Corporate governance EDTF23 Market Risk arises from the risk of losses on trading book positions affected by movements in interest rates, equities, credit spreads, currencies and commodities.These movements have an impact on the value of the trading portfolios and could lead to losses. Risk positions acquired from clients can either be redistributed to other clients or managed through risk transformation (hedging).The trading desks are also acting as a market-maker for secondary markets (by providing liquidity and pricing) in interest rate derivatives and debt, including Rabobank Bonds and Rabobank Certificates. Market risk in the trading environment is monitored daily within the market risk framework. Rabobank's market risk is relatively small as evidenced by the low Risk Weighted Exposure Amounts (RWEA) compared to that of credit risk and, to a lesser extent, operational risk. Table 42: Value at Risk. Value at Risk in millions of euros 31 December 2016 31 December 2015 Markets 4.0 4.4 Treasury 1.0 1.0 Other Diversification (0.7) (0.3) Total 4.3 5.1 9.1.1 Trading Market Risk framework The market risk framework is put in place to measure, monitor and manage market risk in the trading books. Market Risk is governed by the Market Risk Policy and the Market Risk Standards.The Executive Board determines Rabobank's risk appetite and its risk limits on an annual basis. A cascading limit structure with an increasing granularity of limits is implemented from Rabobank Group consolidated level down to Business Areas Markets and Treasury Rabobank Group and portfolio level.The Limit and Control Structures (LCS) defines the trading strategy, explains the objective and the nature of trading activities and hedging activities which a business area or a portfolio is allowed to operate.Together with LCS, the market risk functional document, new business/product approval process, provide the input to the material risk within the books which can be measured and monitored via Limits and Controls. Due to Rabobank's strategy of client risk redistribution, risk transformation (hedging) and the low secondary market activity, the real market risk exposure of the trading portfolio is well within the risk appetite boundaries. On consolidated level, the risk appetite is defined for VaR, event risk and Interest Rate Delta. In addition to the VaR limits, an extensive system of other limits and trading controls for each book is in place. Consolidated Financial Statements Company Financial Statements Pillar 3 These controls include tenor basis swap risk, commodity and equity cash delta, interest rate (IR) delta bucket limits, notional limits and FX exposure limits, to ensure that risks that offset each other or are not covered by the VaR framework are not overlooked. In order to weigh the risk of'abnormal' market conditions, the effects of certain extreme events (event risk) are calculated daily.These extreme events can be historical events or plausible hypothetical scenarios affecting the positions in the trading portfolios. Market Risk Exposures are calculated on a daily basis according to the approved methodologies for the respective risk measure. Monitoring of market risk exposures occurs on both portfolio level, division level (where applicable) and Rabobank Group Consolidated against the approved Limit and Controls structures or approved Risk Appetite Statement. Any limit excesses need to follow the defined sign off and reporting procedure. Regular risk reporting to Risk Management Committees and Senior Management is in place to ensure the communication of key risk developments takes place. Risk developments that require ad hoc attention are communicated accordingly outside the regular reporting cycle. Internal VaR Model The internal VaR model forms a key part of Rabobank's market risk framework. Rabobank has opted to apply a VaR model based on historical simulation for which one year of historical data is used. The major benefit of a VaR model based on historical simulation is that no assumptions need to be made in terms of distribution of possible value changes of the various risk factors. A drawback is that a certain period of historical market movements needs to be selected, which may affect the level of the calculated VaR. Further to the requirements of the supervisory authority and after internal research, Rabobank has opted for the most recent period of one year. For internal risk management purposes, Rabobank has opted for a confidence level of 97.5% and a time horizon of one day. The VaR used in the calculation of the capital requirement for market risk uses a confidence interval of 99% and a holding period of 10 days as prescribed by the regulator. Figure 6 shows the development of market risk during 2016, as measured by the VaR with a one day holding period and 97.5% confidence level. In 2016, the VaR fluctuated between EUR 3.5 million and EUR 6.9 million, the average being EUR 4.4 million. On 31 December 2016, the consolidated VaR was EUR 4.3 million.This relatively limited position was well within the internal VaR limit. Also during the year, the VaR was well within the limit. VaR has moved little during the year with 352 Rabobank Jaarverslag 2016

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Jaarverslagen Rabobank | 2016 | | pagina 353