Counterparty credit risk

Risk appetite

Counterparty credit risk in the treasury portfolio stems from short-term investments, interest-bearing securities and derivative instruments. FMO aims to balance between keeping the losses within the level of risk tolerance and supporting FMO's business strategy, thereby minimizing credit risk and concentration risk in the Treasury portfolio, derivative portfolio and the several bank accounts. 

Risk governance

The treasury risks are reviewed on a monthly basis by the ALCO. The credit quality of the exposures from treasury activities is monitored on a daily basis by the Risk Management department. In cases where the creditworthiness of securities deteriorates to levels below the standard eligibility criteria for new exposures, the Risk Management department is responsible to provide the ALCO with recommended actions.

The Risk Management department approves each obligor to which FMO is exposed through its treasury activities and sets a maximum limit to the credit exposure of that obligor. Depending on the obligor’s short and long-term rating, limits are set for the total and long-term exposure. For derivatives, a separate limit is set for the weighted nominal value of the contract, the weight being dependent on the type of contract (as market volatility differs among the products).

Overview interest-bearing securities

At December 31

2017

2016

AAA

208,693

423,981

AA- to AA+

154,223

151,136

Total

362,916

575,117

Geographical distribution interest-bearing securities

At December 31

2017 (%)

2016 (%)

Belgium

-

4

Finland

17

14

France

6

10

Germany

40

17

Netherlands

25

40

Sweden

8

-

Supra-nationals

4

15

Total

100

100

Supra-nationals are international organizations or unions in which member states transcend national boundaries pertaining to the wider grouping. As per year-end 2017, our largest exposure in this category is to the European Investment Bank (EIB).

Overview short-term deposits

At December 31

Rating (short-term)

2017

2016

Dutch central bank

 

690,401

86,108

Financial institutions

A-1

653,140

890,087

 

A-2

5,890

20,990

 

A-3

-

38,734

 

Unrated

-

50,039

Money market funds

AAA

174,687

76,640

Municipality

 

20,000

80,006

Total

 

1,544,118

1,242,604

The short term ratings of the counterparties are in line with our liquidity and investment policy.

In order to reduce credit risk originating from derivative contracts, FMO has entered into Credit Support Annexes (CSA) with all derivative counterparties. A CSA is a legal document which regulates credit support (collateral) between derivative counterparties. In case of FMO, the accepted collateral is cash (US dollar or Euro). Additionally, FMO is also clearing EUR and USD interest rate swap through a central counterparty, as required by the European Market Infrastructure Regulations (EMIR).

Derivative financial instruments distributed by rating

  

2017

 

2016

 

Net exposure

CSA (%)

Net exposure

CSA (%)

AA- to AA+

36,243

100

1,517

100

A to A+

105,272

100

11,959

100

BBB

-

100

9,403

100

Central cleared

2,311

-

4,631

-

     

Total

143,826

100

27,510

100

The exposure of derivative financial instruments is presented for all derivatives with positive market value, if possible, netted with derivatives with a negative market value if it concerns the same counterparty. For this reason the total amount under derivative financial instruments does not equal the exposure presented in the other tables.

A sensitivity analysis of the equity portfolio is given in the section fair value of financial assets and liabilities.