6.3 Specific counterparty credit risk
Contents Foreword Management report Corporate governance
Consolidated Financial Statements
Company Financial Statements
Pillar 3
Counterparty credit risk (CCR) arises from the credit risk
in transactions such as repo and securities financing, and
derivatives. It is the risk that a counterparty will default on
a transaction prior to the expiration of the contract and will be
unable to make all contractual payments.
In this section we present disclosure requirements as set
out in Article 439 of CRD IV/CRR, both from a qualitative and
quantitative point of view.
6.3.1 Qualitative information counterparty credit risk
and credit risk mitigation
Credit limits on counterparty credit exposures
Exposures arising from counterparty credit risk are monitored
against specific limits set up at counterparty level for
derivatives and repo and securities financing products.
These limits are part of the overall credit limit of a counterparty.
The limits are determined by considering parameters such
as counterparty rating, close out netting documentation,
collateral documentation, product restrictions and regulatory
requirements. The amount of the limit is also dependent on
Rabobank's overall risk appetite.
Internally Rabobank measures exposure as the replacement
cost at given time points over the life of the transaction under
the assumption that market rates move adversely. Rabobank
uses a Monte Carlo simulation at 97.5% confidence level for
calculating Potential Future Exposure (PFE) for the majority of
the portfolio. For a few smaller portfolios an add-on approach
is applied. The exposure will take into account netting and
collateral when agreements are enforceable in the relevant
jurisdictions. This exposure is subject to on-going monitored
against the counterparty limits.
Regulatory treatment of counterparty credit exposures
Since 2011, Rabobank has used the Internal Model
Method (IMM) to calculate Exposure-At-Default (EAD) for
regulatory purposes for the majority of the portfolio. Portfolios
currently not under IMM follow Mark-to-Market method and are
expected to migrate to IMM in the near term.
The same Monte Carlo simulation used to calculate PFE, is
the basis for EAD calculations under IMM. The IMM model has
been extended with a separate Credit Value Adjustment (CVA)
capital model. This model is based on the advanced CVA Risk
methodology. The CVA addresses potential deterioration in
the creditworthiness of a counterparty. Mitigation effects from
collateral and netting on counterparty credit risk exposures
are incorporated when agreements are enforceable in the
relevant jurisdiction. Effect of collateral is recognised in repo
and securities financing transactions using Financial Collateral
Comprehensive Method. Internal stochastic models are annually
back tested by comparing the simulated results with the
realised results. Any observed inefficiencies will be taken into
account in the model recalibration.
Wrong-way risk
Specific wrong-way risk arises when the exposure on derivatives
and repo/securities financing transactions is correlated with
the creditworthiness of the counterparty. General wrong-way
risk refers to the correlation of likelihood of default by
counterparties is positively correlated with general market
risk factors.
Internal policies dictate for certain products that correlations
between the counterparty and the underlying asset should
be avoided. Correlations between the counterparty exposure
and collateral posted should be avoided as well. As part
of Rabobank's stress testing framework, wrong-way risk is
addressed for all counterparties by calibrating the parameters
on a stressed period with respect to our counterparties and
assessing the impact on their EAD. Next to this, qualitative (e.g.
based on the risk factor stress scenarios) and counterparty's
exposure profile analysis are performed to gain additional
insight into the general wrong-way risk towards counterparties.
Impact of Rabobank rating downgrade on collateral
The impact of a Rabobank rating downgrade for the Over-
The-Counter (OTC) derivatives is reported on a monthly basis
from a liquidity perspective. A rating downgrade could derive
in additional margin calls under existing netting agreements.
The overall impact is considered to be limited under current
conditions. As per December 2016, one notch downgrade of
Rabobank credit rating for OTC derivative translates into around
EUR 51.6 million of additional posted collateral.
edtf30 Counterparty Credit Risk Mitigation
Rabobank uses a wide range of credit mitigation
techniques to reduce counterparty credit risk.
The principal form of credit mitigation is close out netting
and the use of collateral agreements. Rabobank has a strong
preference for the International Swaps and Derivatives
Association (ISDA) and Credit Support Annex (CSA) agreements
for derivative portfolios. For the purposes of exposure
calculation, only transactions governed by a clean netting/
collateral agreement, with positive legal opinion from the legal
department, will be netted and subject to further reduction
by any collateral held under CSA clauses. Rabobank also uses
a number of other derivative risk mitigation techniques to limit
333 6. Credit Risk