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2018 Financial and Social Report

Counterparty credit risk

Counterparty credit risk means the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows.

The exposure to counterparty credit risk pertains to exposures arising from derivatives. repurchase transactions. securities or commodities lending or borrowing transactions. long settlement transactions and margin lending transactions.

At the end of 2018, the Group hold derivatives and repurchase transactionsand there were no transactions regarding securities or commodities lending or borrowing transactions, long settlement transactions or margin lending transactions.

The Group presents its exposure to counterparty credit risk primarily under hedging derivatives and derivatives under contracts concluded with customers and repurchase transactions

Amounts of exposures to counterparty credit risk are presented in the below table.

Exposure classes Risk weight Others Of which unrated
0% 2% 4% 10% 20% 50% 75% 100% 150% Inne
1 Central governments or central banks
2 Regional governments or local authorities
3 Public sector entities 2 2
4 Multilateral development banks
5 International organizations
6 Institutions 9 668 93 715 103 383
7 Corporates 56 081 56 081
8 Retail
9 Claims on institutions and corporates with a short-term credit assessment
10 Other exposures
11 Total 9 670 93 715 56 081 159 466

Table    EU CCRA – Qualitative disclosure requirements related to CCR

Qualitative information related to CCRis disclosed in the current chapter, in line with requirements of the Table EU CCRA – Qualitative disclosure requirements related to CCR(EBA/GL/2016/11).

The below table presents risk-weighted assets and own funds requirements amounts regarding counterparty credit risk.

Exposure type Portfel RWA 31.12.2018 Own funds requirements 31.12.2018
Derivatives Institution 102 548 8 204
Derivatives Corporates 43 805 3 504
Derivatives Public sector entities 2 0
Repos Institution 835 67
Repos Corporates 12 276 982
Total 159 466 12 757

In respect to the approaches used to assign internal capital to counterparty credit risk exposures, a modified Credit Risk+*approach is used, taking into account counterparty risk parameters: PD, LGD & EAD.

* Statistical credit risk model, developed by Credit Suisse First Boston Bank

Credit limits applicable to counterparty credit risk exposures are set within the exposure limits for banks and non-bank customers, which are parties to transactions.

For banks, overall exposure limits are set in accordance with the Instructions for setting and controlling exposure limits to foreign and domestic banks. With respect to foreign exchange transactions, currency swaps, currency options, deposit transactions, FRAs, interest rate swaps and principal-interest rate swaps (“fx and money market transactions”) – sub-limits limits are set, which mark the Bank’s maximum exposure to outstanding currency purchase/sale transactions (spot and forward), active (outstanding) term deposits in a foreign or Polish bank (without due interest) and other outstanding transactions mentioned above. Irrespective of the sub-limits, settlement limits have been set, which are linked to the concentration of the counterparty’s obligations towards the Bank for the settlement date agreed on when they were concluded (“value date”).

The Group also concludes derivatives contracts upon orders from its customers. With respect to treasury transaction limits (including derivatives) concluded with non-bank customers, granting such limits to a customer is a pre-requisite* for the Bank to perform a derivative transaction for the customer. The Bank requires a customer applying for a treasury limit to have credit capacity for its current exposure and additionally for the amount equal to a specific portion of the requested treasury limit, to have a risk rating and natural exposure, that is cash flows under sales and purchases in a convertible currency other than PLN.

* It is possible to conclude transaction under cash deposit, in case of lack of treasury transaction limit

As part of the policies for securing collateral, Credit Support Annexes to ISDA (International Swaps and Derivatives Association) agreements (CSAs) are broadly used.

The Bank concludes derivative transactions with those counterparties on the inter-bank market, with which it has signed ISDA agreements (International Swaps and Derivatives Agreements). According to the current market practices and regulations, CSAs are signed along with ISDA agreements to cover matters related to the collateralization of exposures under concluded derivative transactions. CSAs are bilateral agreements and establish mutual rights for a party whose valuation of derivatives is negative on a given day to request a security deposit. All active CSAs in place between the Bank and its counterparties reflect requirements (including the ones related to Variation Margin) established by relevant EMIR regulations.

The position concluded under derivative transactions with customers other than banks is immediately referred for management by inter-bank market dealers and is hedged by an inter-bank market transaction.

The rules for establishing credit impairment for credit risk are presented in the section entitled “Financial risk management – Credit risk” of the Yearly Financial Report.

The Group does not identify its wrong-way risk exposures as material.

The Bank is the Guarantor of the loan agreement signed between Millennium Leasing and European Investment Bank („Finance Contract”) on December 15, 2017. The loan amounts to EUR 100 m and was drawn in four tranches in 2018.

The loan is secured in two ways. By Millennium Leasing in the form of assignment of rights from lease agreements (the value of assigned rights makes not less than 120 % of the granted loan) and by Bank Millennium in the form of the First Demand Guarantee up to amount of the already drawn loan plus accompanied interests, taxes, fiscal charges, duties etc.

According to the provisions of the Finance Contract in case the credit rating:

  • by Fitch is B+ or below;
  • by Moody is B1 or below;

it will be necessary to establish additional security for the Guarantee in the form of guarantee on terms acceptable for EIB (cash collateral, financial collateral, or other security).

The provisions of First Demand Guarantee warranty to EIB that in the time of execution of FDG by EIB,  Bank Millennium long term rating granted by Fitch is BBB-, by Moody’s is Baa2. Bank Millennium is obliged to inform EIB about  any change in its rating.

To determine the amount of its credit exposure under derivative instruments, the Group applies the Mark-to-market method laid down in Article 274 of CRR.

Amounts of counterparty credit risk by approach is presented in the below table.

Notional Replacement cost/current market value Potential future credit exposure EEPE (Effective Expected Exposure Profile) Multiplier EAD post CRM (EAD post Credit Risk Mitigation) RWAs
Mark to market 587 506 0 578 000 159 467

Amounts of risk of credit valuation adjustment are showed in the below table.

Exposure value RWAs
1 Total portfolios subject to the advanced method
2 (i) VaR component (including the 3x multiplier)
3 (ii) SVaR component (including the 3x multiplier)
4 All portfolios subject to the standardized method 289 518 43 686
EU4 based on the original exposure method
5 Total subject to the CVA capital charge 289 518 43 686

Exposures to derivatives with Central Counterparties are presented in the below table.

EAD po CRM RWA
1 Exposures to QCCPs (total) 7 087
2 Exposures for trades at QCCPs (excluding initial margin and default fund contributions); of ehich 35 436 7 087
3 (i) OTC derivatives 35 436 7 087
4 (ii) Exchange-traded derivatives
5 (iii) SFTs
6 (iv) Netting sets where cross-product nettinh has been approved
7 Segregated initial margin 2 112
8 Non-segregated initial margin
9 Prefunded default fund contributions 2 540 31 756
10 Alternative calculation of own funds requirements for exposures 7 087
11 Exposures to non-QCCP (total)
12 Exposures for trades at non-QCCPs (excluding initial margin and default fund contributions); of ehich
13 (i) OTC derivatives
14 (ii) Exchange-traded derivatives
15 (iii) SFTs
16 (iv) Netting sets where cross-product nettinh has been approved
17 Segregated initial margin
18 Non-segregated initial margin
19 Prefunded default fund contributions
20 Unfunded default fund contributions

Table [EU CCR4] – IRB approach – CCR exposures by portfolio and PD scale

Considering that Bank does not calculate CCR own requirements using IRB approach, Table EU CCR4 (EBA/GL/2016/11) is not presented.

 

Table [EU CCR7] – RWA flow statements of CCR exposures under the IMM

Considering that the Bank does not use IMM, Table EU CCR7 (EBA/GL/2016/11) is not presented.

 

Table [EU CCR5-A] – Impact of netting and collateral held on exposure values

Considering that the Bank does not use netting for CCR exposures, Table EU CCR5-A (EBA/GL/2016/11) is not presented.

Collateral used in derivative transactions Collateral used in SFTs
Fair value of collateral received Fair value of posted collateral Fair value of collateral received Fair value of posted collateral
Segregated Unsegregated Segregated Unsegregated
86 630 2 112 262 872 233 796
Total 86 630 2 112 262 872 233 796

Table [EU CCR6] – Credit derivatives exposures

Considering that the Bank does not hold credit derivatives exposures, Table EU CCR6 (EBA/GL/2016/11) is not presented.

 

Fair values of respective derivatives contracts. notional amounts of instruments by maturities and valuation of derivative instruments are presented in notes to the Yearly Financial Report (Note 23).

Data on security margins and netting of receivables and liabilities under master agreements are presented in Additional Information to the Yearly Financial Report.