36 – Derivatives


Derivative Financial Instruments and Hedging Activities

Derivative contracts used by the Group include swaps, futures, forwards, options and other similar types of contracts. In the normal course of business, the Group enters into a variety of derivative transactions for both trading and risk management purposes. The Group’s objectives in using derivative instruments are to meet customers’ risk management needs and to manage the Group’s exposure to risks.

In accordance with the Group’s accounting policy relating to derivatives and hedge accounting as described in Note 01 “Significant Accounting Policies”, all derivatives are carried at fair value in the balance sheet regardless of whether they are held for trading or nontrading purposes.

Derivatives held for Trading Purposes

Sales and Trading

The majority of the Group’s derivatives transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading includes market-making, positioning and arbitrage activities. Market-making involves quoting bid and offer prices to other market participants, enabling revenue to be generated based on spreads and volume. Positioning means managing risk positions in the expectation of benefiting from favorable movements in prices, rates or indices. Arbitrage involves identifying and profiting from price differentials between markets and products.

Risk Management

The Group uses derivatives in order to reduce its exposure to market risks as part of its asset and liability management. This is achieved by entering into derivatives that hedge specific portfolios of fixed rate financial instruments and forecast transactions as well as strategic hedging against overall balance sheet exposures. The Group actively manages interest rate risk through, among other things, the use of derivative contracts. Utilization of derivative financial instruments is modified from time to time within prescribed limits in response to changing market conditions, as well as to changes in the characteristics and mix of the related assets and liabilities.

Derivatives qualifying for Hedge Accounting

The Group applies hedge accounting if derivatives meet the specific criteria described in Note 01 “Significant Accounting Policies”.

Fair Value Hedge Accounting

The Group enters into fair value hedges, using primarily interest rate swaps and options, in order to protect itself against movements in the fair value of fixed-rate financial instruments due to movements in market interest rates.

in € m.

Assets
2012

Liabilities
2012

Assets
2011

Liabilities
2011

Derivatives held as fair value hedges

7,990

2,455

7,485

2,741

For the years ended December 31, 2012, 2011 and 2010, a loss of € 0.1 billion, a gain of € 2.2 billion and a gain of € 0.7 billion, respectively, were recognized on the hedging instruments. For the same periods, the results on the hedged items, which were attributable to the hedged risk, were losses of € 0.4 billion, € 1.5 billion and € 0.6 billion, respectively.

Cash Flow Hedge Accounting

The Group enters into cash flow hedges, using interest rate swaps, equity index swaps and foreign exchange forwards, in order to protect itself against exposure to variability in interest rates, equities and exchange rates.

in € m.

Assets
2012

Liabilities
2012

Assets
2011

Liabilities
2011

Derivatives held as cash flow hedges

137

430

436

Periods when hedged cash flows are expected to occur and when they are expected to affect the income statement

in € m.

Within 1 year

1–3 years

3–5 years

Over 5 years

As of December 31, 2012

 

 

 

 

Cash inflows from assets

80

133

89

262

Cash outflows from liabilities

(26)

(44)

(33)

(51)

Net cash flows 2012

54

89

56

211

As of December 31, 2011

 

 

 

 

Cash inflows from assets

46

83

75

302

Cash outflows from liabilities

(4)

(4)

Net cash flows 2011

42

79

75

302

Of these expected future cash flows, most will arise in relation to the Group’s largest cash flow hedging program, Maher Terminals LLC.

Cash Flow Hedge Balances

in € m.

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

1

Reported in equity refers to accumulated other comprehensive income as presented in the Consolidated Statement of Comprehensive Income.

Reported in Equity1

(341)

(427)

(289)

of which relates to terminated programs

(17)

(26)

(44)

Gains (losses) posted to equity for the year ended

42

(141)

(78)

Gains (losses) removed from equity for the year ended

(45)

(3)

(4)

Ineffectiveness recorded within P&L

1

(3)

As of December 31, 2012 the longest term cash flow hedge matures in 2027.

Net Investment Hedge Accounting

Using foreign exchange forwards and swaps, the Group enters into hedges of translation adjustments resulting from translating the financial statements of net investments in foreign operations into the reporting currency of the parent at period end spot rates.

in € m.

Assets
2012

Liabilities
2012

Assets
2011

Liabilities
2011

Derivatives held as net investment hedges

244

790

76

1,610

For the years ended December 31, 2012, 2011 and 2010, losses of € 357 million, € 218 million and € 197 million, respectively, were recognized due to hedge ineffectiveness which includes the forward points element of the hedging instruments.