The hedging strategies of SNS Bank NV are mostly aimed at managing the interest rate risk. Under IFRS, derivatives are measured at fair value in the balance sheet and any changes in the fair value are accounted for in the income statement. In the event that changes in fair value of hedged risks are not recognised through the income statement, an accounting mismatch occurs, causing volatility in the results. In these cases, hedge accounting is applied to the extent possible to mitigate the accounting mismatch and volatility.
The nominal amounts of the derivatives used for hedging purposes presented in the table below reflect the degree to which SNS Bank NV is active in the relevant markets. Derivatives held for trading purposes are not included in this overview.
Derivatives for hedging purposes 2013
Nominal amounts Fair value
In € millions < 1 year 1 - 5 years > 5 years Total Positive Negative
Interest rate contracts
- Swaps and FRAs 13,320 77,844 30,194 121,358 2,243 (2,492)
- Options 1,585 4,500 1,265 7,350 49 -
Currency contracts
- Swaps 777 168 45 990 33 (35)
Total 15,682 82,512 31,504 129,698 2,325 (2,527)
Derivatives for hedging purposes 2012
Nominal amounts Fair value
In € millions < 1 year 1 - 5 years > 5 years Total Positive Negative Interest rate contracts
- Swaps and FRAs 30,250 69,041 39,219 138,510 3,263 (3,343)
- Options 245 4,775 1,315 6,335 41 -
Currency contracts
- Swaps 71 951 211 1,233 98 (32)
Total 30,566 74,767 40,745 146,078 3,402 (3,375)
The nominal amounts show the units of account that relate to the derivatives, indicating the relationship with the underlying values of the primary financial instruments. These nominal amounts provide no indication of the size of the cash flows, the market and credit risks related to the transactions.
21.2.1 Hedging
SNS Bank NV uses derivatives for the following objectives:
•
To hedge the basic risk;•
To manage the duration of the shareholders’ equity. The policy is that this duration ranges between 0 and 8;•
To hedge specific embedded options in the mortgages. This relates to mortgages of which the interest rate is capped or where movements in interest rates are not completely passed on to customers;•
To convert fixed-rate funding into floating-rate funding;•
To hedge the risks related to hybrid savings products;•
To hedge the quotation risk when offering mortgages when these is substantial and the new business of fixed-rate mortgages is substantial;21.2.2 Hedge accounting
With regard to the majority of the hedge strategies explained above, SNS Bank NV applies hedge accounting. In addition to the main distinction between fair value hedges and cash flow hedges, there is also a distinction between micro hedges and macro hedges in hedge accounting. In micro hedges, risks on separate contracts are hedged. In macro hedges, the risk on a portfolio of contracts is hedged. SNS Bank NV applies the following types of hedge accounting:
Fair value hedges
Hedging the interest rate risk in the banking book (macro hedge)
The portfolio hedged consists of fixed-rate mortgages of SNS Retail Bank. These are mortgages that have a fixed-rate interest period of more than 6 months. The hedging instruments are interest rate swaps entered into within the framework of the interest rate risk management in the ALM process. The risk designated as being hedged is the risk of change in fair value of the portfolio attributable to movements in market interest rates.
Hedging embedded derivatives in mortgages (macro hedge)
The mortgage portfolio contains mortgages with interest rate derivatives embedded in the mortgage. These ‘embedded options’ are hedged by purchasing mirrored interest rate derivatives in the market. The two where accounting is applied hedge are the Rentedemperhypotheek and the Plafondhypotheek mortgages. The hedge covers the interest rate risk that occurs as a result of writing the embedded interest rate option to the customer.
Hedging the interest rate risk on funding (micro hedge)
SNS Bank NV applies micro hedging to convert fixed-rate funding into floating interest rates using interest rate swaps. If such funding is denominated in a foreign currency, cross-currency swaps are applied. Besides, SNS Bank NV also uses derivatives to convert structured funding into floating-rate funding. In structured funding, the funding charge is related to, for example, developments in an equity index or inflation. Interest rate structures such as floating-rate coupons with a multiplier or a leverage factor also fall under the funding programme. SNS Bank fully hedges the interest rate risk on these structures.
Hedging the interest rate risk on investments (macro hedge)
Interest rate risk on fixed-income investments (government bonds) is hedged by swapping the coupon to a floating rate using interest swaps and by selling interest rate futures. The country or credit spread is not hedged. The hedges provide protection for the accumulated revaluation reserve of the relevant fixed-income investments.
Cash flow hedges
Hedging the quotation risk of mortgages
The mortgage quotation risk is hedged using swaptions and forward starting swaps. The risk being hedged is the variability of the interest rate up to the time of financing. The intrinsic market value movements of the derivatives until the moment of payment of the mortgage (up to 3 months) are taken to shareholders’ equity. After termination of the hedge relationship the value accrued in the hedge is amortised to the result over the remaining term to maturity of the funding. The accrued value in shareholders’ equity was € 5.6 million negative (gross) as at 31 December 2013.
Hedging floating interest rate cash flows
The risk of variability in the floating interest rate cash flows on the liquidity position, floating interest rate mortgages, property finance loans and funding are hedged by entering into interest rate swaps and basis swaps. The accumulated value of the derivatives during the term of the hedge is included in equity. The accumulated value in shareholders’ equity as at 31 December 2013 was € 70.2 million positive (gross).