ING Bank Śląski | Annual Report 2014


ING BANK ŚLĄSKIAnnual Report 2014

11. Identification of Credit Risk Connected with Derivatives

Each client concluding a derivative transaction with the Group parent company (Bank) must be assigned a relevant transaction limit by the Bank. The transaction limits are assigned pursuant to the credit procedures and authorities binding in the Bank, as for all other credit exposures. 

ACR system (Adaptiv Credit Risk) is used to monitor the risk connected with transactions concluded by the Bank’s counterparties. ACR is a global system, used by the entire ING Group in which all the FM (“Financial Markets”) limits and transactions concluded by dealers are registered. 

The transactions that generate risk on the counterparty’s side (settlement and pre-settlement risk), and that are input to the Bank systems, require registration in ACR. 
From the perspective of risk measurement, it may be divided into:

  • pre-settlement – arising for FX and derivative transactions as well as transactions in securities as a result of exchanging the transaction on the market at a potentially unfavourable price,
  • credit risk – connected with placing money on the market (deposits).

11.1. Pre-settlement Risk 

The pre-settlement risk derives from a breach of transaction terms by the Counterparty, before its settlement, which makes it necessary to exchange this transaction with a transaction with another Counterparty, according to the market price (potentially unfavourable).

To control the Counterparty’s risk, not only the cost of exchange in case of breach is determined (current market value “MtM”), but also the growth of MtM during the transaction duration. 

Since the financial markets are not fully predictable and one cannot be 100% sure about the set maximum MtM, statistical models are used to define the level of trust. Pursuant to the policy of ING Group, this trust level is 97.5%.

11.2. Money Market Risk

The Money Market Risk arises when the Bank places deposits with another counterparty (bank). The Bank loses funds in case of terms being breached by the counterparty. Due to this, the risk is measured simply as the deposit face value.

11.3. Settlement Risk 

The settlement risk is a risk at which the counterparty will not deliver the assets that they are obliged to deliver due to the transaction settlement and the Bank may lose up to 100% of the expected value. This risk arises when the exchange of value is to take place (funds or other instruments) on the same or different delivery date and this delivery is unchecked or expected till the moment when the Bank delivers an irrevocable instruction of payment or the Bank has paid itself or delivered its part of the liability deriving from the transaction.

Some products always generate the settlement risk, some never do, and there are also such products for which the occurrence of this risk is connected with the mechanism of settlements. The settlement risk always arises when the transaction involves a bilateral exchange of funds/ securities but this exchange is not made on the DVP basis (Delivery Versus Payment).

11.4. Risk Connected with Securities Purchase/ Sales

The risk connected with securities purchase/sales emerges when the exchange of funds into securities does not take place on the DVP basis. Then the settlement risk arises on the day of transaction settlement, unless the settlement is made in such a way that the Bank can control the transactions so as not to allow the flow of funds/ securities before confirming the obligation execution by the Counterparty. 

11.5. Risk Weights 

Risk Weights used to monitor the utilisation of individual limits are defined for single products, currencies and transaction duration at the level of ING Group. Risk Weights constitute an estimation of the potential future exposure (PFE) for the “at-the-money” contract, as a part of the transaction face value in the period of time remaining till its settlement.

Pre-settlement risk at the transaction level is calculated as:

Pre-settlement risk = Market Value + Face Value x Risk Weight,

where risk weight is based on the period of time remaining till the transaction settlement.

Risk weights are “used” by ACR system to monitor the level of the counterparty limits utilisation.

The portfolio of transactions concluded with the Bank’s counterparties, covered by ACR (unsettled transactions), is as follows (all data in EUR million):

  end of 2014 end of 2013
Money Market 29.2 58.6
MtM gross* 1,273.3 598.2
MtM net** 198.8 -17.1
Present Value + FM Value 531.0 476.3

*) MtM - Gross amount - transactions where the Bank is  „at-the-money”.
**) MtM - Net amount - all transactions where the Bank is  „at-the-money” and “out-of-the-money”. 

11.6. Credit risk connected with derivative instruments

In view of an existing credit risk in derivative transactions (mainly FX options) made by the Group with clients, the Group regularly reviews the portfolio of those instruments. 

The approach adopted by the Group to estimate the credit risk generated by derivative instruments is described in chapter IV. Significant accounting policies in point 2.2. Credit risk connected with derivative instruments.

The valuation adjustment of unmatured derivatives with Group’s customers for 2014 amounted to PLN -1.2 million (against PLN +4.5 million in 2013) and was presented in the consolidated financial statements in the item Net income on financial instruments measured at fair value through profit and loss and FX result.

In addition, for transactions matured or terminated and unsettled as at the balance sheet date, the Group made charges using the methodology for assessing the risk of impaired loans. In 2014, the net balance of provisions amounted to PLN 0.1 million compared to PLN -3.0 million in 2013 and was included in the consolidated financial statements as Impairment losses and provisions for off-balance sheet liabilities.

The item Loans and receivables to customers in the consolidated statement of financial position presents receivables resulting from restructuring of derivative transactions made by the Group with customers. The due amounts equaled to PLN 194.5 million as at 31 Dec 2014 against PLN 211.8 million as at 31 Dec 2013. The carrying value of impairment losses connected with transactions on derivatives amounted to PLN 184.6 million as at 31 Dec 2014 against PLN 188.3 million as at 31 Dec 2013.


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