Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
10.1 Types of derivative instruments used by Rabobank
Forward currency and interest rate contracts are contractual
obligations to receive or pay a net amount based on changes
in exchange or interest rates, or to purchase or sell foreign
currency or a financial instrument on a future date at a fixed
specified price in an organised financial market. Since collateral
for forward contracts is provided in the form of cash, cash
equivalents or marketable securities, and changes in the value
of forward contracts are settled daily, mainly via a central
counterparty clearing house, the credit risk is low. The credit
risk exposure for Rabobank is represented by the potential
cost of replacing the swaps if the counterparties default.
The risk is monitored continuously against current fair value,
a portion of the notional amount of the contracts and the
liquidity in the markets. As part of the credit risk management
process, Rabobank employs the same methods for evaluating
counterparties as it does for evaluating its own lending activities.
Forward rate agreements are individually agreed forward
interest rate contracts under which the difference between
a contractually agreed interest rate and the market rate on
a future date has to be settled in cash, based on a notional
principal amount.
Currency and interest rate swaps are commitments to exchange
one set of cash flows for another. Swaps entail an economic
exchange of currencies or interest rates (such as a fixed rate
for one or more variable rates), or a combination (i.e. a cross-
currency interest rate swap). Except in certain currency swaps,
no transfer of the principal amount takes place.
Currency and interest rate options are contracts under which
the seller (known as the writer) gives the buyer (known as
the holder) the right, entailing no obligation, to purchase (in
the case of a call option) or sell (in the case of a put option)
a specific amount of foreign currency or a specific financial
instrument on or before an agreed date or during an agreed
period at a price set in advance. As consideration for accepting
the currency or interest rate risk, the writer receives a payment
(known as a premium) from the holder. Options are traded on
exchanges or between Rabobank and clients (OTC). Rabobank is
only exposed to credit risks as an option holder and only up to
the carrying amount, which is equivalent to the fair value.
Credit default swaps (CDSs) are instruments by means of which
the seller of a CDS undertakes to pay an amount to the buyer.
This amount is equal to the loss that would be incurred by
holding an underlying reference asset if a specific credit event
were to occur (i.e. the materialisation of a risk). The buyer is
under no obligation to hold the underlying reference asset.
The buyer pays the seller a credit protection fee expressed in
basis points, with the size of the fee depending on the credit
spread of the reference asset.
10.2 Derivatives issued or held for trading
The derivatives held or issued for trading are those used to
hedge economic risks but which do not qualify as hedge
accounting instruments and derivatives that corporate
customers have contracted with Rabobank to hedge interest
rate and currency risks, for example.The resulting exposures are
largely mitigated by entering into reverse positions with one or
more professional counterparties, within the trading limits set.
10.3 Derivatives held as hedges
Rabobank contracts various financial derivatives that serve to
hedge economic risks, including interest rate and currency
risks, which qualify as a fair value hedge, cash flow hedge or net
investment hedge.
Fair value hedges
The main components of the fair value hedge at Rabobank
are interest rate swaps and cross-currency interest rate swaps
which serve as protection against a potential change in the fair
value of fixed-income financial assets and liabilities in both local
and foreign currencies. The net fair value of these interest rate
swaps on 31 December 2015 was -9,374 (2014: -12,869).The net
fair value of the cross-currency swaps on 31 December 2015
was 2,190 (2014: 3,900).
Rabobank tests the hedge effectiveness on the basis of
statistical regressive analysis models, both prospectively and
retrospectively. At year-end 2015, the hedge relations were very
effective within the range set by IAS 39.
The IFRS ineffectiveness for the year ended 31 December 2015
was 130 (2014: -164).The result on the hedging instrument
amounted to 1,466 (2014: -5,242), with the result from the
hedged position, allocable to the hedged risk, amounting to
-1,336 (2014: 5,078).
Cash flow hedges
Rabobank's cash flow hedges consist mainly of cross-currency
interest rate swaps which serve to protect against a potential
change in cash flows from financial assets in foreign currencies
with floating interest rates.
Rabobank tests the hedge effectiveness on the basis of
statistical regressive analysis models, both prospectively and
retrospectively. At year-end 2015, the hedge relations were
very effective within the range set by IAS 39. On 31 December
2015, the net fair value of the cross-currency interest rate swaps,
classified as cash flow hedges was -707 (2014: -2,660).
In 2015, Rabobank accounted for an amount of 659 (2014: 548)
after taxation in equity as effective changes in the fair value
of derivatives in cash flow hedges. In 2015, an amount of
-709 (2014: -586) after taxation of cash flow hedge reserves was
218 Rabobank Annual Report 2015
