Annual Financial Statements 2011 of Bank Austria

Notes to the Financial Statements of UniCredit Bank Austria AG
4.31. Derivatives business
Derivatives shown in the following tables are classified
as financial derivatives and credit derivatives,
according to the underlying financial instrument. In
these categories, a distinction is made between trading
book and banking book and between different
counterparties. UniCredit Bank Austria AG’s business
volume in derivatives focuses on interest rate
contracts.
Over-the-counter transactions are individual
agreements concerning volume, maturities and
underlying instrument. In large-volume interbank
trading, these agreements reflect international practice,
while in customer business they are usually adjusted to
specific needs. Exchange-traded contracts are always
standardised in respect of volume and maturity date.
Derivatives are mainly used by the bank itself for
hedging market risk and credit spread risk arising from
new issue activities. In customer business, market
participants include banks, securities houses, mutual
funds, pension funds and corporate customers.
Trading in derivatives at Bank Austria is primarily
related to the hedging of positions entered into vis-àvis
customers.
For the purposes of portfolio and risk management,
contracts are valued at current prices using recognised
and tested models. Market values show the contract
values as at the balance sheet date, positive market
values indicate the potential default risk arising from
the relevant activity.
For the purposes of portfolio management and risk
limitation in the derivatives business with banks and
customers, UniCredit Bank Austria AG uses a Monte
Carlo path simulation to estimate the potential future
exposure at portfolio level for each counterparty. The
calculations are based on market volatility, correlations
between specific risk factors, future cash flows and
stress considerations. Netting agreements and
collateral agreements are also taken into account for
simulation purposes.
The simulation calculations are performed for all major
types of transactions, e.g. forward foreign exchange
transactions, commodity futures transactions, interest
rate instruments, securities lending transactions and
repurchase agreements, equity-related, commodityrelated
or inflation-related instruments and credit
derivatives. Other (exotic) products are taken into
account with an add-on factor (depending on volatility
and maturity). The bank applies a confidence interval
of 97.5%.
In addition to determining the potential future exposure
for the purpose of internal risk management, the path
simulation also enables the bank to calculate the mean
exposure and the Basel 2-modified mean exposure as
well as the effective term of the exposure for each
counterparty. In this way, counterparty risk can be
taken into account in a Basel 2-compliant internal
model for the calculation of capital requirements. In
2009, the bank obtained approval from the Austrian
regulatory authorities for the use of the relevant model.
Line utilisation for derivatives business is available
online in WSS (“Wallstreet”), the central treasury
system, on a largely Group-wide basis. For smaller
units not connected to the central system, separate
lines are allocated and monitored. Group-wide
compliance with lines approved in the credit process is
thus ensured at any time.
UniCredit Bank Austria AG additionally limits the credit
risk arising from its derivatives business through strict
use of master agreements, through collateral
agreements and break clauses. In combination with
the very good average credit rating of our business
partners in the derivatives business, management
takes proper account of default risk.
Details of derivatives transactions and of the uniform
Group-wide method of recording them for risk
measurement and risk management purposes are
given in the following tables.
Information pursuant to Section 64 (1) 3 of the Austrian
Banking Act may also be derived from the statistical
data for derivatives.
Bank Austria – Annual Financial Statements 2011 226