Non-trading derivatives and hedge accounting

Non-trading derivatives

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

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). Triodos Bank applies the EU carve-out under IAS 39 and applies macro fair-value hedge accounting. In this hedge relationship, hedged items and hedging instruments are designated 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.

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 performed each month-end by calculating the fair value of the hedged items and hedging instruments at that date. 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 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 or 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.

Triodos Bank discloses its risk management related to interest rate risk in Market risk management on page 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; and

• Fair value changes in the floating leg of the swaps.

The significant increase of the market interest rates has resulted in a sharp increase of the fair values of the interest rate swaps that has offset the decrease in fair value of the fixed rate loans. Due to the large fair-value movements, marginal ineffectiveness has resulted in ineffectiveness recorded in the profit or loss accounts of EUR 1.3 million.

Net investment hedge

Triodos Bank enters into GBP foreign currency forward contracts to hedge the currency risk of the UK subsidiary equity participation of Triodos Bank. Triodos Bank hedges up to a maximum of 100% of the UK subsidiary to maintain effectiveness. The GBP foreign currency contracts are designated in net investment hedge relationship to hedge the net asset value of the UK subsidiary.

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