Financial and
ESG report 2020

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 2020, the Group hold derivatives and repurchase transactions and 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 Total
0% 2% 4% 10% 20% 50% 75% 100% 150%
1 Central governments or central banks
2 Regional governments or local authorities
3 Public sector entities
4 Multilateral development banks
5 International organizations
6 Institutions 47 419 70 694 118 113
7 Corporates 106 547 7 043 113 591
8 Retail 160 160
9 Claims on institutions and corporates with a short-term credit assessment
10 Other exposures
11 Total 47 419 70 694 160 106 547 7 043 231 864

Qualitative information related to CCR is 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 Portfolio RWA 31.12.2020 Own funds requirements 31.12.2020
Derivatives Institution 116 422 9 314
Derivatives Corporates 113 591 9 087
Derivatives Retail 160 13
Repos Institution 1 691 135
Total 231 864 18 549

Internal capital (Article 439.a)

In respect to the approaches used to assign internal capital to counterparty credit risk exposures, a modified Credit Risk+4 approach is used, taking into account counterparty risk parameters: PD, LGD & EAD.

4Statistical credit risk model, developed by Credit Suisse First Boston Bank

PCZ_2335 PCZ_2335

Credit limits

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 internal Instruction for setting and controlling exposure limits to foreign and domestic banks. With respect to foreign exchange transactions, fx swaps, currency options, deposit transactions, FRAs, interest rate swaps and currency-interest rate swaps (“fx and money market transactions”) – sub-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-requisite5 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 requested treasury limit 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.

5It is possible to conclude transaction under cash deposit, in case of lack of treasury transaction limit

Collateral (Article 439.b)

As part of the policies for securing collateral, Credit Support Annexes to ISDA (International Swaps and Derivatives Association) agreements (CSAs) are broadly used – or their Polish equivalents (binding in relations with domestic banks).

The Bank concludes derivative transactions with those counterparties on the inter-bank market, with whom it has signed ISDA (International Swaps and Derivatives Association) master agreements. According to current market practice and regulations, CSAs are signed along with ISDA agreements to cover matters related to the collateralization of exposures under concluded transactions. CSAs are signed bilaterally and establish mutual rights to receive a security deposit from a counterparty for whom the valuation of active derivative transactions is negative on a given day. All active CSAs in place between the Bank and its counterparties fulfil currently binding on the Bank requirements (including the ones related to Variation Margin) established by 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.

Wrong way risk exposures (Article 439.c)

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

The impact of the amount of collateral the Bank would have to provide given a downgrade in its credit rating (Article 439.d)

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

As on 31/12/2020 the loan amounted to EUR 41,7 m.

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).

In First Demand Guarantee agreements Bank Millennium long term rating granted by Fitch is at level BBB - and by Moody’s at Baa2. The Bank is obliged to inform EIB about any change in its rating and deliver to EIB any other information on its financial position likely to have a detrimental effect on its ability to perform the obligations resulted from those agreements.

Articles 439.e. 439.f. 439.g. 439.h. 439.i CRR

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 500 141 0 611 062 231 864

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 373 669 59 790
EU4 based on the original exposure method
5 Total subject to the CVA capital charge 373 669 59 790

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

1 Exposures to QCCPs (total) 43 366
2 Exposures for trades at QCCPs (excluding initial margin and default fund contributions); of ehich 248 883 43 366
3 (i) OTC derivatives 248 883 43 366
4 (ii) Exchange-traded derivatives
5 (iii) SFTs
6 (iv) Netting sets where cross-product nettinh has been approved
7 Segregated initial margin 3 305
8 Non-segregated initial margin
9 Prefunded default fund contributions 5 617 70 209
10 Alternative calculation of own funds requirements for exposures 43 366
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

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

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

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
Fair value of collateral received Fair value of posted collateral
Segregated Unsegregated Segregated Unsegregated
40 396 3 305 496 351 116 869
Total 40 396 3 305 496 351 116 869

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.

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