Investor Presentaiton
NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
35
DERIVATIVES (CONTINUED)
A. Derivatives held for risk management (continued)
Derivative Product Types
Forwards are contractual agreements to either buy or sell a specified currency, commodity or financial
instrument at a specific price and date in the future. Forwards are customised contracts transacted in the
over-the-counter market.
Swaps are contractual agreements between two parties to exchange interest or foreign currency
differentials based on a specific notional amount. For interest rate swaps, counterparties generally
exchange fixed and floating rate interest payments based on a notional value in a single currency. For
currency swaps, the underlying amounts are exchanged in different currencies.
Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a
specific amount of a commodity or financial instrument at a fixed price, either at a fixed future date or at
any time within a specified period.
Derivative Related Credit Risk
Credit risk in respect of derivative financial instruments arises from the potential for a counterparty
to default on its contractual obligations and is limited to the positive fair value of instruments that are
favourable to the Group and potential future fluctuations. The majority of the fair value of favourable
contracts (and therefore credit risk) is exposure to financial institutions. All credit exposure is managed
under approved facilities, and in many cases are collateralised under Credit Support Annex (CSA). The
Group takes a Credit Value Adjustment (CVA) on outstanding derivative transactions. The methodology for
CVA calculation relies on three components: the probability of default of the counterparty, the expected
positive exposure and the recovery rate. CVA is computed on all asset classes including Foreign Exchange,
Interest Rates and Commodities.
Derivatives Held or Issued for Trading Purposes
Most of the Group's derivative trading activities relate to sales and position coverage. Sales activities involve
offering products to customers at competitive prices in order to enable them to transfer, modify or reduce
current and expected risks.
Interest rate derivatives trading is conducted under Board approved limits.
Derivatives Held or Issued for Hedging Purposes
As part of its asset and liability management, the Group uses derivatives for hedging purposes in order
to reduce its exposure to currency and interest rate risks. This is achieved by hedging specific financial
instruments and forecasted transactions as well as strategic hedging against overall balance sheet exposures.
The Group designates its derivatives held or issued for hedging purposes as:
Fair value hedges: Hedges of the fair value of recognised assets or liabilities or firm commitments;
Cash flow hedges: Hedges of highly probable future cash flows attributable to a recognised asset or
liability, or a highly probable forecast transaction; and
Net investment hedges: Hedges of net investments in foreign operations.
NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
35
DERIVATIVES (CONTINUED)
A. Derivatives held for risk management (continued)
Further, in terms of the hedging transactions carried out by the Group, the Group documents:
At the inception of the transaction, the relationship between hedging instruments and hedged items,
the risk being hedged and the Group's risk management objective and strategy for undertaking a
hedge transaction.
The manner in which effectiveness will be measured throughout the life of the hedge relationship.
The Group's assessment, both at hedge inception and on an ongoing basis, of whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items.
Hedge effectiveness is measured by the Group on a prospective basis at inception, as well as retrospectively
(where applicable) and prospectively over the term of the hedge relationship. Sources of ineffectiveness
in hedge accounting include the impact of derivative related credit risk on the valuation of the hedging
derivative and hedged item. To mitigate this credit risk, the Group executes hedging derivatives with high
quality counterparties and the majority of the Group's hedging derivatives are collateralised.
Fair Value Hedges:
The Group uses interest rate swaps to hedge against changes in value of investment securities due to
interest rate movements. These are designated by the Group as fair value hedges and, therefore the
fair value hedge accounting is applied to hedge movements in the value of fixed interest rate assets and
liabilities subject to interest rate risk, as well as assets and liabilities subject to foreign exchange risk.
Subsequent to initial designation, changes in the fair value of derivatives designated as fair value hedges
are accounted for in the 'other operating income', along with any changes in the fair value of the hedged
asset or liability attributable to the hedged risk.
Cash Flow Hedges:
The Group uses interest rate swaps and forward rate agreements to hedge against the cash flow risks
arising on certain floating rate customer deposits and medium-term borrowings. Interest rate swaps
are also used to hedge against the cash flow risks arising on certain floating rate loans and receivables.
These are designated by the Group as cash flow hedges, and, as such, the Group applies cash flow hedge
accounting to hedge the variability in highly probable forecast future cash flows attributable to interest rate
risk on variable rate assets and liabilities, and assets and liabilities subject to foreign exchange risk.
The effective portion of changes in the fair value of derivatives designated as cash flow hedges are
recognised in the fair value reserve within equity. Any gain or loss relating to the ineffective portion is
recognised immediately in the Group consolidated income statement.
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EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021
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