- - - - - - About this Report Chairman's Foreword Corporate Management Report Appendices Governance Consolidated Financial Company Financial Statements Statements 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, which is put in place to measure, monitor and manage market risk in the trading books. This framework contains all derivatives in trading books, as well as the loan syndication books, the short term funding books, securities finance repo books and the bond trading books. An important part of the framework is an appropriate system of limits and trading controls. The relevant risk appetite limits are translated into limits and trading controls at book level and are monitored on a daily basis by the market risk departments. 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. If limits are breached, remedial actions will be stipulated which decrease the chance of large actual losses. The risk position is reported to senior management and discussed in the various risk management committees each month. Risk developments that require ad hoc attention are communicated accordingly outside the regular reporting cycle. On consolidated level, the risk appetite is defined for VaR, event risk, event risk underwriting and interest rate delta. The VaR indicates the maximum loss fora given confidence level and horizon under'normal' market conditions, based on oneyear of historical market movements. Daily risk management uses a confidence level of 97.5% and a horizon of 1 day. Under this method, VaR is calculated on the basis of historical market movements and the positionstaken.Thetable below presents the composition of the VaR. In 2018, the VaR fluctuated between EUR 1.9 million and EUR 3.9 million, the average being EUR 2.6 million. The VaR amounted to EUR 3.4 million on December 31, 2018. VaR mostly changed due to client related deals and increased risk levels due to volatility in the financial markets. VAR (I day, 97.5%) (amounts in millions of euros) Interest Credit 2018- December 31 2.3 2.9 2018 - average 2.2 1.5 2018 - Highest 3.4 3.0 2018 - Lowest 1.7 0.7 2017 - December 29 2.9 0.8 2017- average 3.4 0.8 2017 - highest 4.7 1.3 2017 - lowest 2.6 0.6 In addition to the VaR, there are several other important risk indicators. The interest rate delta is a measure of the change in the value of positions if there is a parallel increase in the yield curve of1 basis point (i.e. 0.01 percentage point).The interest ratedelta table below shows the sensitivity to changes in the yield curves for the major currencies. On December 31,2018, the interest rate delta for trading books was EUR 0.6 million positive. The interest rate delta remained well within the set limit during the reporting period. Interest Rate Delta 31 December 31 December Amounts in millions of euros 2018 2017 EUR 0.4 0.5 USD 0.1 0.0 CHF 0.1 0.1 Other 0.0 0.1 Total 0.6 0.7 Currencies Shares Commodities Diversification Total 0.1 0.0 0.2 (2.1) 3.4 0.1 0.0 0.1 2.6 0.6 0.1 0.7 3.9 0.0 0.0 0.1 1.9 0.2 0.0 0.1 (0.8) 3.1 0.2 0.0 0.2 3.8 1.2 0.1 2.4 4.9 0.0 0.0 0.1 3.0 Rabobank uses stress testing to complement the VaR. It is instrumental in gauging the impact of extreme, yet plausible predefined moves in market risk factors on the P&L of individual trading and investment portfolios. These moves are reflected in scenarios which capture risk drivers such as tenor basis swap spreads, interest rates, foreign exchange, credit spreads, volatility and interest rate curve rotation. Depending on the scenario, individual risk factors or multiple risk factor categories will be stressed at the same time. The event risk, which is measured by performing sensitivity analyses and stress tests was EUR 128 million on December 31, 2018, well within the set limit. It fluctuated between EUR 103 million and EUR 157 million with an average of EUR 129 million. Within the Trading Book, the tenor basis swap position remains a large concentrated position with a substantial impact on Rabobank's event risk. Due to Rabobank's increased Annual Report 2018 - Consolidated Financial Statements 160

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Annual Reports Rabobank | 2018 | | pagina 162