Non-trading derivatives

The following table describes the fair values of derivatives held for risk management purposes by type of instrument.

 

2021

2020

 

Assets

Liabilities

Assets

Liabilities

Instrument type

 

 

 

 

Interest rate

 

 

 

 

Designated in fair value hedges

17,675

2,757

-

6,344

Other derivatives

308

-

24

-

Total interest rate

17,983

2,757

24

6,344

 

 

 

 

 

Foreign exchange

 

 

 

 

Designated in a net investment hedge

-

2,568

-

2,407

Other derivatives

1,667

1,622

1,771

1,701

Total foreign exchange

1,667

4,190

1,771

4,108

 

 

 

 

 

Total non-trading derivatives

19,650

6,947

1,795

10,452

Fair-value hedges of interest rate risk

Triodos Bank uses interest rate swaps to hedge its exposure to changes in the fair values of fixed-rate euro loans and advances in respect of a benchmark interest rate (mainly Euribor). As of 1 January 2020, Triodos Bank applies the EU carve-out under IAS 39.

Triodos Bank applies macro fair-value hedge accounting, designating hedge items and hedging instruments on a portfolio basis into fair-value hedge relationships.

Triodos Bank determines hedged items by identifying portfolios of homogeneous loans based on their contractual interest rates, maturity and other risk characteristics. Loans within the identified portfolios are allocated to repricing time buckets based on expected, rather than contractual, repricing dates. The hedging instruments (pay fix/receive floating rate interest rate swaps) are designated appropriately to those repricing time buckets. Hedge effectiveness is measured on a monthly basis, by comparing fair-value movements of the designated proportion of the bucketed loans due to the hedged risk, against the fair-value movements of the derivatives, to ensure that they are within an 80% to 125% range.

At the time of designation of the hedge relationship for macro hedge accounting, a prospective test of the hedge relationship is performed to evidence the existence of an economic relationship. Fair value of hedged items and hedging instruments is calculated as at the designation date. In addition, the fair values are recalculated by applying at +/-50bps shift on the EURIBOR zero-curve and the OIS zero-curve. If the changes in fair value of hedged item and hedging instrument are within 80-125% of each other, the hedge relationship can be expected to be highly effective.

The retrospective test is periodically performed by calculating the fair value of the hedged items and hedging instruments with the curves applicable as at that date (month end). The hedge relationship is considered to be highly effective if the deltas in fair value between hedging instrument and hedged item as per designation date and as per period end date are in the 80% – 125% bandwidth, the so-called dollar-offset method.

When the outcome of the effectiveness test is outside of the bandwidth, the hedge relationship for the tested month is discontinued. This means that the fair-value changes of the hedging instruments continue to be recorded through profit and loss, but no offsetting fair value adjustment is recognised on the hedged items. At de-designation, the fair-value hedge accounting adjustments are amortised on a straight-line basis over the original hedged life. The bank has elected to commence amortisation at the date of de-designation.

Triodos Bank discloses its risk management related to interest rate risk in Market risk management.

Hedge relationships designated under this policy are expected to be highly effective. However, some degree of ineffectiveness is expected due to:

  • Discounting of assets with the curve of the payment frequency where the swaps are discounted using the OIS curve

  • Fair value changes in the floating leg of the swaps

2021

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffective-
ness

Interest rate swaps – portfolio hedge accounting

1,042,400

17,675

2,757

20,525

34

2021

Nominal amount

Fair value hedge adjustments

Hedged item

Assets

Debit adjustment

Credit adjustment

Change in fair value

Loans and advances to customers

1,042,400

-

14,709

-20,491

2020

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffective-
ness

Interest rate swaps – portfolio hedge accounting

295,175

-

6,344

-2,216

111

2020

Nominal amount

Fair value hedge adjustments

Hedged item

Assets

Debit adjustment

Credit adjustment

Change in fair value

Loans and advances to customers

295,975

5,286

-

2,327

Net investment hedge

Triodos Bank entered into GBP foreign currency forward contracts as of April 2019 to hedge the currency risk of the UK subsidiary equity participation of Triodos Bank. In order to maintain an effective hedging relationship, the hedge may be lower than the full value of the UK subsidiary equity participation. Triodos Bank hedges up to a maximum of 100% of the UK subsidiary.

Triodos Bank discloses its risk management related to foreign exchange risk in Market risk management.

Triodos Bank ensures that the foreign currency in which the hedging instrument is denominated is the same as the functional currency of the net investment. This qualitative assessment is supplemented quantitatively using the hypothetical derivative method for the purposes of assessing hedge effectiveness. Triodos Bank assesses effectiveness by comparing past changes in the fair value of the derivative with changes in the fair value of a hypothetical derivative. The hypothetical derivative is constructed to have the same critical terms as the net investment designated as the hedged item and a fair value of zero at inception. The net investment is held for a period longer than the maturity of the forward foreign exchange contracts, Triodos Bank hedges the net investment only to the extent of the nominal amount of the foreign exchange leg of the derivative.

2021

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffective-
ness

Foreign currency forward contracts (EUR:GBP)

186,300

-

2,568

13,120

-

2021

 

Carrying amount

 

 

Hedged item

Nominal amount

Assets

Liabilities

Change in fair value

Foreign currency translation reserve

GBP net investment in UK subsidiary

186,886

222,140

-

-13,196

-4,364

2020

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffective-
ness

Foreign currency forward contracts (EUR:GBP)

180,100

-

2,407

-10,200

-

2020

 

Carrying amount

 

 

Hedged item

Nominal amount

Assets

Liabilities

Change in fair value

Foreign currency translation reserve

GBP net investment in UK subsidiary

181,351

202,497

-

11,408

-4,440