9.1 Trading Market Risk
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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