9 Financial assets designated at
fair value
10 Derivatives
Contents Foreword Management report Corporate governance
in millions of euros
2016
2015
Other debt securities
32
791
Purchased loans
854
1,006
Venture capital (equity instrument)
314
270
Other equity instruments
121
129
Total
1,321
2,196
The change In the current year In the fair value of the loans
designated as being at fair value with adjustments in the
income statement that is allocable to the changes in the credit
risk amounts to 1 (2015: 5). The cumulative change is -28 (2015:
-29). Any changes in fair value are calculated by discounting
future cash flows. When setting the discount rate, account is
taken of expected losses, liquidity mark-ups and the risk margin.
No use is made of credit derivatives to hedge the purchased
loans designated at fair value.
Derivatives are used at Rabobank for the purpose of mitigating
at least a portion of the risks arising from the bank's various
operations. Examples of this include interest rate swaps used
to hedge interest rate risks arising from the difference in
maturities between assets and liabilities. Another example are
cross-currency swaps, which are used to hedge the currency
risk to which the bank is exposed after issuing debt instruments
in foreign currencies. The bank's hedging policy is designed
to protect its net interest income within the risk appetite
framework. Additionally to hedging purposes derivatives are
also contracted for the bank's customers.
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 prevailing
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
Consolidated Financial Statements Company Financial Statements Pillar 3
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 largely
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. The exposures from derivatives with
corporate customers are normally hedged by entering into
reverse positions with one or more professional counterparties,
within 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.
214 Rabobank Annual Report 2016