40 – Unconsolidated Structured Entities

Unconsolidated structured entities

Nature, purpose and extent of the Group’s interests in unconsolidated structured entities

The Group engages in various business activities with structured entities which are designed to achieve a specific business purpose. A structured entity is one that has been set up so that any voting rights or similar rights are not the dominant factor in deciding who controls the entity. An example is when voting rights relate only to administrative tasks and the relevant activities are directed by contractual arrangements.

A structured entity often has some or all of the following features or attributes:

  • Restricted activities;
  • A narrow and well defined objective;
  • Insufficient equity to permit the structured entity to finance its activities without subordinated financial support;
  • Financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).

The principal uses of structured entities are to provide clients with access to specific portfolios of assets and to provide market liquidity for clients through securitizing financial assets. Structured entities may be established as corporations, trusts or partnerships. Structured entities generally finance the purchase of assets by issuing debt and equity securities that are collateralized by and/or indexed to the assets held by the structured entities. The debt and equity securities issued by structured entities may include tranches with varying levels of subordination.

Structured entities are consolidated when the substance of the relationship between the Group and the structured entities indicate that the structured entities are controlled by the Group, as discussed in Note 1 “Significant Accounting Policies and Critical Accounting Estimates”. The entities covered by this disclosure note are not consolidated because the Group does not control them through voting rights, contract, funding agreements, or other means. The extent of the Group’s interests to unconsolidated structured entities will vary depending on the type of structured entities.

Below is a description of the Group’s involvements in unconsolidated structured entities by type.

Repackaging and investment entities
Repackaging and investment entities are established to meet clients’ investment needs through the combination of securities and derivatives.

Third party funding entities
The Group provides funding to structured entities that hold a variety of assets. These entities may take the form of funding entities, trusts and private investment companies. The funding is collateralized by the asset in the structured entities. The group’s involvement involves predominantly both lending and loan commitments.

Securitization Vehicles
The Group establishes securitization vehicles which purchase diversified pools of assets, including fixed income securities, corporate loans, and asset-backed securities (predominantly commercial and residential mortgage-backed securities and credit card receivables). The vehicles fund these purchases by issuing multiple tranches of debt and equity securities, the repayment of which is linked to the performance of the assets in the vehicles.

The Group often transfers assets to these securitization vehicles and provide financial support to these entities in the form of liquidity facilities.

The Group also invests and provides liquidity facilities to third party sponsored securitization vehicles.

Funds
The Group establishes structured entities to accommodate client requirements to hold investments in specific assets. The Group also invests in funds that are sponsored by third parties. A group entity may act as fund manager, custodian or some other capacity and provide funding and liquidity facilities to both group sponsored and third party funds. The funding provided is collateralized by the underlying assets held by the fund.

Other
These are Deutsche Bank sponsored or third party structured entities that do not fall into any criteria above.

Income derived from involvement with structured entities
The Group earns management fees and, occasionally, performance-based fees for its investment management service in relation to funds. Interest income is recognized on the funding provided to structured entities. Any trading revenue as a result of derivatives with structured entities and from the movements in the value of notes held in these entities is recognized in ‘Net gains/losses on financial assets/liabilities held at fair value through profit and loss’.

Interests in unconsolidated structured entities
The Group’s interests in unconsolidated structured entities refer to contractual and noncontractual involvement that exposes the group to variability of returns from the performance of the structured entities. Examples of interests in unconsolidated structured entities include debt or equity investments, liquidity facilities, guarantees and certain derivative instruments in which the Group is absorbing variability of returns from the structured entities.

Interests in unconsolidated structured entities exclude instruments which introduce variability of returns into the structured entities. For example, when the group purchases credit protection from an unconsolidated structured entity whose purpose and design is to pass through credit risk to investors, the Group is providing the variability of returns to the entity rather than absorbing variability. The purchased credit protection is therefore not considered as an interest for the purpose of the table below.

Maximum Exposure to unconsolidated structured entities
The maximum exposure to loss is determined by considering the nature of the interest in the unconsolidated structured entity. The maximum exposure for loans and trading instruments is reflected by their carrying amounts in the consolidated balance sheet. The maximum exposure for derivatives and off balance sheet instruments such as guarantees, liquidity facilities and loan commitments under IFRS 12, as interpreted by the Group, is reflected by the notional amounts. Such amounts do not reflect the economic risks faced by the Group because they do not take into account the effects of collateral or hedges nor the probability of such losses being incurred. At December 31, 2013, the notional related to the positive and negative replacement values of derivatives and off balance sheet instruments were € 311 billion, € 529 billion and € 27.3 billion respectively.

Size of structured entities

The Group provides a different measure for size of structured entities depending on their type. The following measures have been considered as appropriate indicators for evaluating the size of structured entities:

  • Funds - Net asset value or asset under management where the Group holds fund units and notional of derivatives when the Group’s interest comprises of derivatives.
  • Securitizations – notional of notes in issue when the Group derives its interests through notes its holds and notional of derivatives when the Group’s interests is in the form of derivatives.
  • Third party funding entities –Total assets in entities
  • Repackaging and investment entities – Fair value of notes in issue

For Third party funding entities, size information is not publicly available, therefore the Group has disclosed the greater of the collateral Deutsche Bank has received/pledged or the notional of the exposure Deutsche Bank has to the entity.

The following table shows, by type of structured entity, the carrying amounts of the Group’s interests recognized in the consolidated statement of financial position as well as the maximum exposure to loss resulting from these interests. It also provides an indication of the size of the structured entities. The carrying amounts presented below do not reflect the true variability of returns faced by the Group because they do not take into account the effects of collateral or hedges.

Carrying amounts and size relating to Deutsche Bank’s interests

 

Dec 31, 2013

in € m.

Repackaging and Investment Entities

Third Party Funding Entities

Securitizations

Funds

Total

Assets

 

 

 

 

 

Interest-earning deposits with banks

0

0

0

303

303

Central bank funds sold and securities purchased under resale agreements

0

0

0

1,797

1,797

Securities Borrowed

0

0

0

6,819

6,819

Total financial assets at fair value through profit or loss

1,830

3,097

26,180

89,365

120,472

Trading assets

1,216

2,586

26,002

12,949

42,753

Positive market values (derivative financial instruments)

600

175

169

7,640

8,584

Financial assets designated at fair value through profit or loss

15

336

9

68,776

69,136

Financial assets available for sale

3

414

2,279

867

3,564

Loans

101

27,978

13,406

6,153

47,639

Other assets

0

47

546

37,280

37,872

Total assets

1,935

31,536

42,412

142,584

218,467

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Total financial liabilities at fair value through profit or loss

471

85

223

8,836

9,615

Negative market values (derivative financial instruments)

471

85

223

8,836

9,615

Total liabilities

471

85

223

8,836

9,615

Off-balance sheet exposure

0

2,135

1,104

24,064

27,304

Total

1,464

33,586

43,293

157,812

236,156

 

 

 

 

 

 

Size of structured entity

20,771

74,278

1,665,626

4,488,622

 

Trading assets – Total trading assets of € 42.8 billion are comprised primarily of € 26 billion and € 12.9 billion in investments in Securitizations and Funds structured entities respectively. The Group’s interests in securitizations are collateralized by the assets contained in these entities. Where the Group holds Fund units these are typically in regards to market making in funds or otherwise serve as hedges for notes issued to clients. Moreover the credit risk arising from loans made to Third party funding structured entities is mitigated by the collateral received.

Financial assets designated at fair value through profit or loss – Reverse repurchase agreements to Funds comprise the majority of the interests in this category and are collateralized by the underlying securities.

Loans – Loans of € 47.6 billion consists of investment in securitization tranches and financing to Third Party Funding Entities. The Group’s financing to Third Party funding entities is collateralized by the assets in those structured entities.

Other assets – Other assets of € 37.9 billion consist primarily of short term receivables from funds for unsettled sales of securities. These receivables are collateralized by the securities being delivered to the structured entity.

Financial Support

Deutsche Bank did not provide noncontractual support during the year to unconsolidated structured entities.

Sponsored Unconsolidated Structured Entities where Deutsche Bank has no interest at December 31, 2013

As a sponsor, Deutsche Bank is involved in the legal set up and marketing of the entity and supports the entity in different ways, namely:

  • transferring assets to the entities
  • providing seed capital to the entities
  • providing operational support to ensure the entity’s continued operation
  • providing guarantees of performance to the structured entities.

Deutsche Bank is also deemed a sponsor for a structured entity if market participants would reasonably associate the entity with the Group. Additionally, the use of the Deutsche Bank name for the structured entity indicates that Deutsche Bank has acted as a sponsor.

The gross revenues from sponsored entities where the Group did not hold an interest as at December 31, 2013 was € 527 million. Instances where the Group does not hold an interest in an unconsolidated sponsored structured entity include cases where any seed capital or funding to the structured entity has already been repaid in full to the Group during the year. This amount does not take into account the impacts of hedges and is recognized in Net gains/losses on financial assets/liabilities at fair value through profit and loss. The carrying amounts of assets transferred to sponsored unconsolidated structured entities were € 3.2 billion and € 3.7 billion to securitization and repackaging and investment entities respectively.


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