State Street Europe Holdings Germany S.à r.l. & Co. KG Consolidated Disclosure Report. According to 26a KWG i.c.w. Part 8 CRR as of December 31, 2016

Transcription

1 State Street Europe Holdings Germany S.à r.l. & Co. KG Consolidated Disclosure Report According to 26a KWG i.c.w. Part 8 CRR as of December 31, 2016

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3 DISCLOSURE REPORT STATE STREET EUROPE HOLDINGS GERMANY S.À R. L. & CO. KG GROUP 2016 Table of Contents 1 Scope General Information Group background (Art. 436 CRR) Consolidation Consolidation requirements from a regulatory and balance sheet point of view (Art. 436 b) CRR) Participations assigned to the banking book (Art. 447 CRR) Restrictions and other significant limits concerning the transfer of own funds within the group (Art. 436 c) CRR) Structure and Business Model Risk Management Structure and Organization of Risk Management (Art. 435 CRR) Material risk types Credit Risks Market Price Risks Operational risks Business Risks Liquidity risks Risk Concentration (risk concentrations in each risk category) Reputational Risks (reputation risks in each risk category) Immaterial Risks Risk Reporting (Art. 435 (2) e) CRR) Declaration on the adequacy of risk management arrangements (Art. 435 (1) e) CRR) Concise Risk statement (Art. 435 (1) f) CRR) Governance arrangements (Art. 435 (2) a), b), c) CRR) Own funds and own funds requirements Structure of Own Funds of SSEHG Group and SSB Intl GmbH (Art. 437 CRR) Own funds requirements for SSEHG Group and SSB Intl GmbH (Art. 438 CRR) Countercyclical Capital Buffer (Art. 440 CRR) Information to Credit Risks... 38

4 DISCLOSURE REPORT STATE STREET EUROPE HOLDINGS GERMANY S.À R. L. & CO. KG GROUP Amount and structure of Credit Risks (Art. 442 CRR) Use of External Credit Rating Assessments (Art. 444 CRR) Credit Risk Mitigation Techniques (Art. 453 CRR) Credit risk adjustments (Art. 442 CRR) Funding obligations (Art. 439 b) CRR) Unencumbered assets (Art. 443 CRR) Leverage Ratio (Art. 451 CRR) Securitizations (Art. 449 CRR) Remuneration (Art. 450 CRR) Governance Remuneration Structure Quantitative Information Non-applicable disclosure requirements Glossary... 63

5 DISCLOSURE REPORT STATE STREET EUROPE HOLDINGS GERMANY S.À R. L. & CO. KG GROUP 2016 List of Tables and Illustrations Illustration 1: Geographical distribution of investments, branches and representative offices... 8 Illustration 2: Structure of Risk Management and Committees Illustration 3: ICAAP Structure Table 1: Operational responsibilities for Risk Management broken down by risk types Table 2: Own funds requirements for Market and Settlement Risk positions according to Art. 445 CRR Table 3: Impact of interest rate shocks on the Total Own Funds of SSB Intl GmbH according to Art. 448 CRR Table 4: Limit utilization of material risks and free risk-bearing capacity potential of SSEHG Group Table 5: Limit utilization of material risks and free risk-bearing capacity potential of SSB Intl GmbH Table 6: Target values for the ratio of female employees in leadership positions Table 7: Number of management and directorships held by the EMB of SSB Intl GmbH at the reporting date according to Art. 435 (2) a) CRR Table 8: Number of management and directorships held by the Supervisory Board of SSB Intl GmbH during reporting period according to Art. 435 (2) a) CRR Table 9: Own funds of SSEHG Group and SSB Intl GmbH according to Art. 437 (1) d) and e) CRR Table 10: Main features of capital instruments of SSEHG Group and SSB Intl GmbH according to Art. 437 (1) b) CRR Table 11: Additional Terms and Conditions of the subordinated loan of the SSB Intl GmbH according to Art. 437 (1) c) CRR Table 12: Reconciliation of own funds to audited financial statement of SSEHG Group according to Art. 437 (1) a) CRR Table 13: Reconciliation of own funds to audited financial statement of SSB Intl GmbH according to Art. 437 (1) a) CRR Table 14: Own funds requirements according to Art. 438 c) and e) 445 CRR Table 15: Geographical distribution of exposures relevant for the calculation of countercyclical capital buffer of SSEHG Group according to Art. 440 CRR Table 16: Amount of institution-specific countercyclical capital buffer of SSEHG Group according to Art. 440 CRR Table 17: Geographical distribution of exposures relevant for the calculation of countercyclical capital buffer of SSB Intl GmbH according to Art. 440 CRR Table 18: Amount of institution-specific countercyclical capital buffer of SSB Intl GmbH according to Art. 440 CRR Table 19: Gross exposure and average gross exposure of SSEHG Group and SSB Intl GmbH broken down to relevant exposure classes according to Art. 442 c) CRR Table 20: Total amount of relevant receivables of SSEHG Group broken down by geographic regions according to Art. 442 d) CRR Table 21: Total amount of relevant receivables of SSB Intl GmbH broken down by geographic regions according to Art. 442 d) CRR Table 22: Total amount of relevant receivables of SSEHG Group broken down by industry sector according to Art. 442 e) CRR... 39

6 DISCLOSURE REPORT STATE STREET EUROPE HOLDINGS GERMANY S.À R. L. & CO. KG GROUP 2016 Table 23: Total amount of relevant receivables of SSB Intl GmbH broken down by industry sector according to Art. 442 e) CRR Table 24: Total amount of relevant receivables of SSEHG Group broken down by remaining time to maturity according to Art. 442 f) CRR Table 25: Total amount of relevant receivables of SSB Intl GmbH broken down by remaining time to maturity according to Art. 442 f) CRR Table 26: Rating agencies broken down by exposure classes according to Art. 444 a) and b) CRR Table 27: Total amount of exposures of SSEHG Group and SSB Intl GmbH before and after credit risk mitigation according to Art. 444 e) CRR Table 28: Total amount of collateralized exposures of SSEHG Group and SSB Intl GmbH according to Art. 453 f) and g) CRR Table 29: Counterparty credit risk exposure of SSEHG Group and SSB Intl GmbH according to Art. 439 e) CRR Table 30: Development of credit risk adjustments at SSEHG Group according to Art. 442 i) CRR Table 31: Development of credit risk adjustments at SSB Intl GmbH according to Art. 442 i) CRR Table 32: Assets of SSEHG Group according to Art. 443 CRR Table 33: Collateral received by the SSEHG Group according to Art. 443 CRR Table 34: Encumbered assets, collateral received and associated liabilities of SSEHG Group according to Art. 443 CRR Table 35: Leverage ratio of the SSEHG Group and SSB Intl GmbH as of December 31, Table 36: Securitization positions according to Art. 449 CRR Table 37: Total remuneration for 2016, broken down by business areas according to Art. 450 (1) (g) CRR Table 38: Aggregate quantitative information on remuneration according to Art. 450 (1) (h) & (2) (h) CRR Table 39: Number of individuals being remunerated EUR 1m or more according to Art. 450 (1) (i) CRR Table 40: Non-applicable disclosure requirements... 62

7 1 Scope Legal requirements on disclosure of credit institutions and investment firms have been enhanced with the European implementation of Basel III, more specifically the Directive 2013/36/EU (Access to the activity of credit institutions, the prudential supervision of credit institutions and investment firms, henceforth CRD IV ) as well as the Regulation EU No. 575/2013 (Prudential requirements for credit institutions and investment firms, henceforth CRR ), and became effective on January 1, Part 8 of the CRR requires institutions to at least annually 1 disclose a set of qualitative and quantitative statutory information among others with respect to own funds and own funds requirements, risks incurred, applied risk management processes, credit risk mitigation techniques, encumbered and unencumbered assets, securitization transactions, and information on remuneration. The State Street Europe Holdings Germany S.à r.l. & Co. KG Group (henceforth SSEHG Group or Group ) was newly established on May 04, 2015 by merging several European business entities of the former State Street Bank Luxembourg S.A. Group. State Street Europe Holdings Germany S.à r.l. & Co. KG (henceforth SSEHG KG ) is a financial holding company in accordance with Art. 4 (1) No. 20 CRR and at the same time the EU parent financial holding company in accordance with Art. 4 (1) No. 31 CRR. State Street Bank International GmbH (henceforth SSB Intl GmbH or Bank ) 2, being the superordinate bank in accordance with Art. 11 (2) Sent. 2 CRR, prepares this consolidated Disclosure Report for the Group and thus fulfills the disclosure requirements on an individual basis as a significant subsidiary of SSEHG KG pursuant to Art. 13 (2) CRR. This Disclosure Report of SSEHG Group aims to fulfill the prudential transparency rules to enable market participants to evaluate the Group s capital adequacy and risk profile. Additional disclosure requirements regarding the country-by-country reporting as well as the public disclosure of return on assets of SSB Intl GmbH according to 26a (1) Sent. 2 German Banking Act (henceforth KWG ) are included in the individual financial statements of SSB Intl GmbH as of December 31, 2016 which is disclosed in the Federal Gazette 3 as separate appendix to the consolidated notes. Figures shown in this Disclosure Report are based on the regulatory scope of consolidation and on the German accounting standards according to the German Commercial Code (henceforth HGB ). The Disclosure Report is mostly based on the audited annual financial statements and on the respective Management Report of SSEHG Group and SSB Intl GmbH as of December 31, Quantitative data presented in this report may show differences due to rounding. Additionally, in case of any ambiguity in the descriptions contained in this report, the German version of this report is binding. 2 General Information 2.1 Group background (Art. 436 CRR) One of the main objectives of establishing the SSEHG Group in May 2015 was to enhance operational, capital and governance efficiency and optimize the use of capital. 1 Furthermore institutions are obliged to assess the necessity of disclosing specific information on a higher frequency than annually. Therefore, SSEHG Group has published its first semi-annual Disclosure Report as of June 30, A quarterly report is assessed and is not regarded as deemed necessary. Disclosure Reports are available at the country specific homepage via 2 State Street Bank GmbH has been renamed to State Street Bank International GmbH on April 5, under Homepage, Search area Accounting/financial Reports, Search term State Street Europe Holdings 5

8 The SSEHG Group consists of the following entities as of December 31, 2016: State Street Europe Holdings Germany S.à r.l. & Co. KG, Munich, Germany State Street Europe Holdings Luxembourg S.à r.l., Luxembourg, Luxembourg State Street Holdings Germany GmbH, Munich, Germany State Street Bank International GmbH, Munich, Germany State Street Finanz GmbH, Zurich, Switzerland As of December 31, 2016 (henceforth reporting date ) SSB Intl GmbH has a strategic participation in directly holding 99,9%, and indirectly holding 0,1% of the shares of State Street Finanz GmbH, Zurich, Switzerland. SSB Intl GmbH SSB Intl GmbH Indirect shareholders of the Group are State Street Corporation (henceforth SSC ), Boston, USA, State Street Bank and Trust Company (henceforth SSBT ), Boston, USA, State Street International Holdings (henceforth SSIH ), Boston, USA, State Street International Holdings Switzerland GmbH, Steinhausen, Switzerland and State Street International Holdings UK Limited, London, Great Britain. Shares of the Group are directly held by State Street Europe Holdings Switzerland GmbH, Steinhausen, Switzerland. As of the reporting date, the SSEHG Group is subject to the direct supervision of the European Central Bank (henceforth ECB ) and subsequently also on local level supervised by the German Federal Financial Supervisory Authority (henceforth BaFin ) and the Deutsche Bundesbank. In addition to that, national laws and regulations apply to SSB Intl GmbH in those European countries, where its branches and representatives are located. As an indirect subsidiary of an U.S. bank the SSB Intl GmbH and SSEHG Group have to comply, beside the European and national supervisory requirements, to the U.S. rules and laws, which are applicable to subsidiaries of U.S. banks and bank holding companies. SSC, SSBT and SSIH are subject to the supervision and rules of the U.S. Federal Reserve System as well as other regulatory authorities in the U.S Consolidation Consolidation requirements from a regulatory and balance sheet point of view (Art. 436 b) CRR) A consolidation from a regulatory point of view (according to Art. 18 CRR) as well as from a view comparable to HGB is conducted on the level of SSEHG KG. The scope of consolidation with the parent company of SSEHG KG includes all of the above mentioned participations of SSEHG KG, except for State Street Finanz GmbH. There is no consolidation of State Street Finanz GmbH from a regulatory point of view due to an exemption in accordance with Art. 19 (1) CRR i. c. w. 31 (3) Sent. 1 and 2 KWG. A consolidation of State Street Finanz GmbH with respect to HGB 4 requirements is likewise not conducted due to materiality reasons Participations assigned to the banking book (Art. 447 CRR) As of the reporting date, SSB Intl GmbH has a strategic participation in holding the shares of State Street Finanz GmbH, Zürich, Switzerland. Shares in affiliated companies (other participations, not listed on the stock exchange) are accounted at acquisition cost or, in case of permanent impairment, to the lower value on the balance sheet date. If the reasons for impairment in the previous fiscal years cease to exist, attributions up to the fair value but maximal up to the acquisition cost will follow. 4 SSB Intl GmbH consolidated its annual financial statements in accordance with the specifications of HGB. 6

9 In the reporting period 2016, the book value of the State Street Finanz GmbH was written up by 1.0mn EUR. Thus, as of December 31, 2016 both book and fair value of the participation amounted to 11.0mn EUR. Further cumulative values, realized profits or losses arising from sales and liquidations in the reporting period were not relevant. Unrealized or deferred revaluation profits or losses have not been taken into account in the reporting period Restrictions and other significant limits concerning the transfer of own funds within the group (Art. 436 c) CRR) It is generally possible to transfer funds within the Group, but such transfers can be restricted due to existing minimum own funds requirements and other legal obligations or regulations which have been imposed on the Group, its parent companies or any group companies and subsidiaries. Subject to receiving any applicable regulatory approvals and / or providing any necessary regulatory notices, there are no other restrictions or significant barriers concerning the transfer of funds or own funds within the group of entities, which are consolidated from a regulatory point of view at the level of SSEHG Group. Furthermore, if necessary, capital or own funds may be obtained within the Group at any time. 2.3 Structure and Business Model Since 4 May 2015 SSEHG KG, has been the parent company of the European subgroup (the Group ) of SSC, Boston, USA. On this date, SSEHG KG replaced State Street Bank Luxembourg S.A., Luxembourg, as the parent company. SSB Intl GmbH 5, Munich is the legal entity that constitutes the Group s operating company. SSB Intl GmbH, Munich, was founded in 1970 as a provider of innovative solutions for the global custody and management of securities. It has been a deposit bank since 1994 and, since 1996, it has offered the full range of services expected of a depositary bank to the German and European market. In 2016 SSB Intl GmbH, with its headquarters in Munich, maintained a domestic branch in Frankfurt am Main, a non-eu branch office in Zürich, and EU branch offices in Amsterdam, Milan (with another office in Turin), London, Vienna, Luxembourg and Krakow (with an additional office in Gdansk) with a total of 4,511 employees measured as an annual average. In addition, there is an representative office in Copenhagen. SSB Intl GmbH concentrates on the specific requirements of institutional customers over the entire investment cycle. The core business consists primarily of custody-only business, the related custody bank business including reporting services for asset managers and supporting activities for the middle and back office of investment companies. Moreover, its registered activities also include: rendering securities services in the form of, for example, futures commission merchant business and agent fund trading (henceforth AFT ), proprietary trading in forward exchange transactions, proprietary trading in the enhanced custody business, as an agent for securities lending, and managing the collateral provided in the course of securities lending transactions. Principal broking services and clearing services related to listed futures on a number of international futures exchanges, either as a direct member of the respective exchange or clearing organization (EUREX and ICE Clear Europe) or indirectly via interposed brokers, were discontinued effective 30 September In connection with its core business, SSB Intl GmbH offers lending business and foreign exchange as well as money market transactions and invests in securities in the form of proprietary business. The external rating of AA- issued to SSB Intl GmbH was confirmed in the course of the fiscal year by Standard & Poor s Financial Services LLC, New York, USA. 5 Effective 5 April 2016 the Company was renamed State Street Bank International GmbH, Munich, (formerly: State Street Bank GmbH, Munich). 7

10 Illustration 1: Geographical distribution of investments, branches and representative offices London since 2007 Amsterdam since 2013 Copenhagen since 2015 Gdansk (unregulated) since 2016 Legend: Luxemburg Frankfurt since 2003 Investment German branch office EU branch office since 2009 Krakow (unregulated) Non-EU branch office Representative office since 2013 Zurich State Street Finanz GmbH Vienna since 2003 since 2008 Munich Zurich Milan and Turin since 1970 since 2007 since Risk Management 3.1 Structure and Organization of Risk Management (Art. 435 CRR) According to the Partnership Agreement, SSEHG KG is managed by the Managing Limited Partner (henceforth MLP ). Decisions at the level of SSB Intl GmbH or SSEHG Group are approved by the respective appropriate decision making body or person, this means. by the Executive Management Board of the SSB Intl GmbH (henceforth EMB ) and / or the MLP of SSEHG KG. To ensure a properly implemented business organization (including risk management) also on the level of SSEHG KG, a Service Level Agreement (henceforth SLA ) is in place between SSEHG KG, SSB Intl GmbH and all other entities belonging to the Group. The EMB is the highest competency with regard to authority and decision-making for risk management and responsible for the implementation of adequate risk management processes. The EMB of SSB Intl GmbH and the MLP of SSEHG KG ensure that the existing risk management system has been established appropriately in respect to the Bank s / Group s risk profile and business strategy. Within this scope, the EMB is responsible for setting management goals; determining the risk standards, assessment methods and risk tolerance as well as for the risk management including the economic capital allocation and limit setting. Requirements defined by the EMB are incorporated in the business strategy and in the consistent risk strategy. The risk controlling function required by AT No. 2 of Minimum Requirements for Risk Management ( Mindestanforderungen an das Risikomanagement, henceforth MaRisk ) is performed by the Risk Management department of the SSB Intl GmbH whereby the Head of Risk Controlling can also revert to the resources of other departments of the SSB Intl GmbH in order to fully complete the assigned tasks. While the Risk Controlling Function is responsible for the overall risk management arrangements, the 8

11 operational responsibility for risk management is distributed within the Bank, dependent on the risk type, to different departments. The Risk Management department is the central department responsible for the development and definition of the risk management process and covers all relevant risk categories. In particular, the department is responsible for the definition of methods to identify, monitor, control and report on risks. The Risk Management department, being embedded in the group-wide risk management process and in the risk management organization of State Street Corporation, and therefore serves as an interface and coordinator for the risk management function at State Street Corporation. Day-to-day risk management, means, the business-related identification, assessment and monitoring of risks, is performed decentralized by the individual departments of the SSB Intl GmbH. The Risk Management department acts in this regard in a central supporting role and ensures that the individual departments perform this function in accordance with the existing risk and risk monitoring culture and the corresponding group guidelines of State Street Corporation as well as the concepts and methods developed by the Risk Management department in harmony with the regulatory requirements. The Credit Risk unit which is part of to the Risk Management department, monitors default risks in all lending portfolios and approves the internal ratings of customers and counterparties. The Treasury and Risk Management departments are responsible for steering, monitoring and reporting of Interest Rate Risks. Liquidity Risks and the associated stress tests are measured, monitored and reported regularly by the Finance, Treasury and Risk Management departments. The multi-stage internal capital adequacy concept assures the risk-bearing capacity (Internal Capital Adequacy Assessment Process henceforth ICAAP ) in terms of ongoing risk identification, (risk) capital allocation, preparing the multi-year risk and capital forecast, quantifying the risks, conducting stress tests, consolidating the individual risks at the level of SSB Intl GmbH and of the SSEHG Group for monitoring capital adequacy from the perspective of risks and returns. This is being conducted by the Risk Management department. To realize the Risk Management goals and to ensure overall risk control a Risk Management Committee and an Asset-Liability Committee (henceforth ALCO ) have been established. In 2016, the respective committees basically met on a monthly basis (Note: Risk Management Committee until September 2016 quarterly; ALCO met eleven times). As sub-committees of the Risk Management Committee, a Credit Risk Committee (monthly; five meetings in 2016) and an OpRisk Committee (quarterly; two meetings in 2016) have been established in the course of Additionally, a Recovery and Resolution Planning RRP (formerly MaSan 6 ) Committee was established and was convened four times in the financial year The RRP Committee is responsible for preparing, implementing and revising the Recovery Plan of the Group and its execution during a potential crisis situation. The following illustration depicts the structure of risk management and relevant committees. 6 MaSan means Minimum Requirements for the design of Recovery Plans. 9

12 Illustration 2: Structure of Risk Management and Committees RISK MANAGEMENT Managing Directors set management objectives: strategies, guidelines, business plans and limits, are responsible for the overall risk management Committees Risk Management risk management, internal audit, compliance, lending & trading business ALCO balance sheet review, liquidity risk, current situation & economic outlook ICAAP / Risk Bearing Capacity Concept integrated capital and risk management Credit Risks Market Risks Operational Risks Liquidity Risks Concentration Risks Business Risks Reputational Risks Recovery & Resolution Planning (RRP) recovery & resolution planning; extended Risk Management The precise operational responsibilities for the risk management of the individual risk types can be found in the following table: Table 1: Operational responsibilities for Risk Management broken down by risk types Risk type / Function ICAAP / Risk-Bearing Capacity Credit Risks Market Risks Operational Risks Liquidity Risks Concentration Risks Business Risks Reputational Risks Operational Responsibility Risk Management Risk Management Risk Management Risk Management / Compliance Risk Management / Treasury Risk Management/ Treasury Risk Management Risk Management Risk Management of the SSB Intl GmbH and SSEHG Group involves also internal control mechanisms based on the internal control system and internal controls by the Internal Audit function. Internal Audit is organizationally assigned to the Speaker of the EMB and reports independently to the entire EMB. The strict division of trading and back-office processing / control and risk controlling functions within the 10

13 internal control system required by MaRisk is taken into account at all structure levels within the whole organization. In order to define and document the business activities and associated processes appropriately, the Bank as well as the Group have established strategies and organizational guidelines. The relevant strategies and organizational guidelines for risk management are as follows: Business Strategy (including Global Treasury Strategy, IT Strategy and Outsourcing Strategy) Risk Strategy Risk Appetite Framework Policy for the Strategy Process pursuant to AT 4.2 No. 4 of the MaRisk ICAAP Framework/ Risk-Bearing Capacity Concept ILAAP 7 Framework Recovery Plan All strategies, policies and organizational guidelines are reviewed on a regular basis, as applicable, are adjusted and reapproved by the competent functions. Additionally, essential risk management principles have been defined and implemented both on the Bank and Group level, which appropriately represent the overall risk profile. The risk profile is monitored regularly and managed by suitable early warning indicators and ratios, whereas the base for the update of the overall risk profile is the business model inclusive of any possible new products and services. Respective risk management goals and strategy including corresponding risk tolerances per relevant risk type are highlighted separately and in more detail in section Material risk types In general, risks for the Bank and for the Group arise from the core and complementary business segments of Investment Servicing. The relevant risk types both for the Bank and the Group are: Credit Risks Market Price Risks Operational Risks Business Risks Liquidity Risks Concentration Risks (risk concentrations in each risk category) Pension Obligation Risks Reputation Risks (reputation risks in each risk category) Credit risks, Market Price risks, Operational Risks, Liquidity Risks, Concentration Risks, Business Risks, and Reputational Risks are classified within the regular risk identification process to be material for the Bank as well as for the Group given their overall risk profile respectively due to specific MaRisk requirements. Overall, there are no significant differences resulting from the materiality assessment regarding individual risk types between SSB Intl GmbH and SSEHG Group, due to the fact that risks almost exclusively arise at the level of SSB Intl GmbH, the only operative entity of the Group. Material risks and related risk management processes and strategies are explained in the following sections. 7 Internal Liquidity Adequacy Assessment Process 11

14 3.2.1 Credit Risks Risk Definition Credit Risk is defined as the risk of loss of current or future income or capital due to the inability of a debtor to meet its contractual obligations. Starting from the delay of a payment, the following definitions are in place at the Group: Past due A loan is considered past due or overdue if outstanding contractual amounts regarding interest and principal, that means amounts that according to contractual agreement have already exceeded the due date, have not yet been settled by the debtor. Impaired A loan is considered as impaired if it is expected that a debtor is sustainably not able to fulfill its obligations according to the contractual agreement. This may be the case, if the debtor is either unwilling or unable to settle the agreed payments or fulfill the credit agreements. This may be related to any or all debt obligations of a respective credit agreement and counterparty. Default With regard to Art. 178 CRR, a default is considered to have occurred when at least one of the two following events has taken place with regard to a particular obligor: The obligor is considered, by the creditor and for material reasons, unlikely to pay its credit obligations in full to the SSB Intl GmbH or any other company belonging to the SSEHG Group to which the creditor belongs without recourse by the creditor to actions such as realizing security (if held); The obligor is past due more than 90 successive calendar days on any material part of its overall credit obligation to the SSB Intl GmbH or to another company belonging to the SSEHG Group Risk Strategy The risk strategy provides for a passive issue of loans to customers, the utilization of internal credit lines and holding overnight deposits on current account at other banks. Excess liquidity is placed as shortterm monetary investments at central banks or in the form of securities repurchase agreements with SSBT. Mid to long-term investments are made by acquiring variable-yield or fixed-income securities. The Group pursues a conservative lending policy. Furthermore, the risk strategy of SSB Intl GmbH provides for daily monitoring of credit Risks using a comprehensive system of limits. Establishing of limits and monitoring of limit compliance is a core component of the risk minimization process. Limits for on-balance sheet and off-balance sheet positions are for internal use only and are generally not communicated to counterparties and customers. Risk Situation The Group is exposed to Credit Risks from the following products: Utilization or breaches of internal limits by customers within the course of depositary bank services and custody services that has not been approved. There is no security beyond the right to a pledge contained in the general terms of business (if at all possible) or by force of contract Utilization of limits by certain customers to whom the limits have been communicated but can be canceled at any time Deposits on current accounts at banks used primarily to settle customer transactions. The items are not secured by collateral 12

15 Short-term investments of cash surpluses at third-party banks (including central banks) with immaculate ratings. No collateral is provided for these transactions Securities repurchase transactions with SSBT although here the risk of default relates to both SSBT and the issuer of the securities purchased Investments in securities denominated in Euro and US dollar (asset-backed securities, collateralized debt obligations, residential mortgage-backed securities, and covered bonds and corporate bonds) Securities repurchase transactions with banks and customers resulting in amounts receivable Cash receivables from customers arising from the enhanced custody business Principal broking services and agent fund trading Variable-yield securities (shares in investment funds) related to employees voluntary converting salary components into investments for their pension plan Customer-initiated forward exchange contracts Credit lines promised to some customers in isolated cases Credit Risks arising from loans that have not yet been credited to the issuer of securities purchased within the framework of repo transactions Commencing in the second quarter of 2017, SSB Intl GmbH intends to invest in large liquid European Leveraged Loans. This addition to the product portfolio will have an impact on the risk profile of SSB Intl GmbH, particularly with regard to Credit Risk, whereby the additional risks will only be taken on within the parameters of the Bank s risk appetite. Higher Credit Risks and the associated increase in the expected loss will be considered in the capital adequacy concept and the stress tests. In addition, sector risks and other risk clusters will be monitored constantly. To date, there has not been any need to recognize specific or general risk provisions within the context of the lending business of SSB Intl GmbH, including its investments in securities. Likewise, there has been no need to date to write-down any loans and advances. Risk Quantification The internal rating system quantifies the risk of default by a counterparty basically using a 15-point scale. This methodology corresponds to the internal ratings-based approach used at group level ( IRBA - Advanced). External ratings by Moody s, Standard & Poor s, Fitch, and DBRS are used for securities repurchase transactions and for securities held in the portfolio and allocated to the internal ratings where appropriate. To measure the capital charges for Credit Risks in Pillar 1, the Group applies the Credit Risk standardized approach and the financial collateral comprehensive method (with regard to repurchase transactions and foreign exchange transactions according to CRR). The risks are quantified in Pillar 2 on the basis of an internal model that is based on the economic capital requirements and uses internal ratings and scenario calculations using stressed risk parameters. Risk Management The internal rating system is a central element of the management of Credit Risks. The initial rating of a counterparty is conducted prior to entering into a business relationship. This ensures that possible Credit Risks can be made transparent beforehand. The internal rating of a counterparty is considered in the decision on whether to accept business from a new customer and it represents the basis for the internal limits, taking account of further customer-specific information, and the relevant supervisory requirements. The creditworthiness of counterparties and customers is reviewed at least once a year. The resulting ratings are updated regularly. Securities held in the own portfolio of the Bank and securities acquired under repurchase transactions are subject to qualitative and quantitative limits which consider the respective ratings made by external agencies. 13

16 In addition, they are monitored regularly by means of analyses and a scenario-based stress test for securities held in the own portfolio is also conducted. As criteria given by CRR are met, the securities received as collateral for repurchase transactions and FX Business are considered using the comprehensive method. Under the ICAAP all securities are deemed to be collateral from an economic risk perspective after in general considering an appropriate haircut. Forward exchange contracts with customers are only entered into once the trading limits have been granted. These are set on the basis of the individual ratings and the customer s volume of securities. Any deterioration in the ratings of the customer during the term of a contract leads to more intensive monitoring of the customer s circumstances and possibly cancellation of the deal Market Price Risks Risk Definition Market Price Risks are the risk of loss of current or future income or capital due to adverse developments in the market prices of bonds, shares and commodities as well as exchange rate fluctuations. Market Risks can arise as a result of our role as a market maker or through the trading and holding of securities, currencies, commodities or derivatives (relating securities, currencies or commodities).given the business activities of the Bank, this risk category comprises Foreign Exchange Risks, Interest Rate Risks as well as risks resulting from market price fluctuations in the investment portfolio. Risk Strategy The risk strategy approach for Market Price Risks consists of determining any Market Price Risk before becoming exposed to the corresponding risk position (selective approach) and also closely monitoring existing risks. Adopting risks from changes in the market prices especially for securities is necessary to a limited extent for efficient asset/liability management. Risk Situation Market Price Risks can arise at the Group to varying degrees in the forms already mentioned. While there are marginal risks related to foreign exchange exposures carried on the own accounts of SSB Intl GmbH, there are no currency risks from customer-initiated forex trades as each foreign exchange transaction is immediately hedged in a counter-transaction with the group company, SSBT. Client funds denominated in foreign currency are invested in the same currency. The securities acquired within the framework of repo transactions or used as collateral are subject to fluctuations in market prices, whereby there may be a lack of collateral to cover the funds being invested. The securities in the investment portfolio are also subject to daily market price fluctuations that can lead to a change in the corresponding market rate. Such fluctuations can arise from the credit spread risk of the market participants. Interest Rate Risks can arise from money market transactions and the securities held in the Bank s own portfolio. With the exception of loans received and the proprietary portfolio, most of the interest bearing positions are payable on demand or have short repricing intervals. Along with the continued expansion of the investment portfolio, a greater volume will be invested in securities with fixed interest rates, whereby the longer terms in the own portfolio will have a growing influence on the risk situation. The focus of investment will lie on instruments with a variable rate and short repricing intervals whereby the Interest Risk will remain within a reasonable scope. In addition, Market Price Risks can arise from variable return instruments (shares in investment funds) acquired within the framework of employees voluntarily converting salary components into savings for their pension plans. 14

17 Risk Quantification Open foreign currency positions at SSB Intl GmbH are negligible in terms of amount in comparison to the transactions in foreign currencies initiated by customers and are quantified for Pillar 1 purposes in accordance with the CRR. These immaterial amounts are measured when the monthly balance sheets are prepared. The own-account securities are allocated to fixed assets and are generally not sold until they mature. Correspondingly, short-term market volatility will not have any impact on the capital adequacy of the Bank. The Credit Risk spread associated with the portfolio of securities will only be considered in the capital adequacy assessment using the Gone-Concern-Approach on SSB Intl GmbH level based on an internal model. Interest Rate Risks in the trading book are quantified using the methods required by the CRR. Moreover, general Interest Rate Risks inherent in the balance sheet and in the banking book are calculated at net present value on a monthly basis by means of the Quantitative Risk Management (henceforth QRM ) model. This model, which is applied throughout the Group, simulates both the supervisory interest shock scenarios for the banking book (required by BaFin) and the internal interest rate shock scenarios for the balance sheet. These calculations are used in the capital adequacy assessment of the Bank under Pillar 2 of the calculation of the Banks risk-bear capacity. A breakdown of the own funds requirements for market and Settlement Risk positions in accordance with the standardized approach as of December 31, 2016, can be found in the following table: Table 2: Own funds requirements for Market and Settlement Risk positions according to Art. 445 CRR Exposure Class / Risk exposure SSEHG Group SSB Intl GmbH Position risks in traded debt instruments 5 5 of which general risks 5 5 of which specific risks - - of which for non-securitization debt instruments - - of which for securitization debt instruments - - Equity risks - - Foreign Exchange Risks - - Commodities Risks - - Large exposures exceeding the limits specified in Art CRR - - Own funds requirements for Market Risks 5 5 Own funds requirements for Settlement Risks - - The following table presents the quantitative impact of the regulatory interest rate shocks in the banking book on the Bank s Total Own Funds as of December 31, 2016 based on the requirements of the BaFin Circular 11 / 2011 (BA). According to the circular, significant currencies have to be additionally taken into consideration, for which a materiality threshold of 5% has been defined. The requirements of this circular are generally not applicable for Groups. However, the quantification, monitoring and reporting is performed additionally to the SSB Intl GmbH individual level also on the SSEHG Group level. 15

18 Table 3: Impact of interest rate shocks on the Total Own Funds of SSB Intl GmbH according to Art. 448 CRR Present value change Interest Rate Risks in the banking book as of December 31, 2016 Interest rate shock parallel shift of the yield curve: +200 BPs -200 BPs in keur -173,825 4,699 thereof: EUR thereof: other significant currencies: USD thereof: other significant currencies: GBP -169,734 8,790-3,863-3, in % of the Total Own Funds -8.07% 0.22% Risk Management Generally, the Bank uses a three lines of defense model to manage Market Price Risks. In the first line of defense, Global Treasury and Global Markets monitor the risk position of the Bank in relation to Market Price Risks. In the second line of defense, Enterprise Risk Management (henceforth ERM ) is responsible for setting up risk management processes and monitoring and reviewing the risk profile of the Group. The Internal Audit guarantees in the third line of defense an independent and objective assessment of the structure and operational effectiveness of the internal control system of the Bank and therefore ensures a holistic approach to managing Market Price Risk. The following points should be considered with regard to the various sub-categories of Market Price Risk. The foreign exchange transactions with customers and the respective offsetting deals with SSBT are monitored daily to ensure completeness, matching cover and correct settlement. The foreign exchange positions resulting from own-account trading are subject to a system of limits and compliance with these limits are monitored daily. Any breaches of limits are clarified immediately with the front office, which ensures that foreign exchange deals are offset with SSBT. The application of a suitable haircut within securities repurchase transactions allows the Bank to reduce Market Price Risks resulting from fluctuations in exchange rates or market prices. In addition, the securities received as collateral are marked to market daily using prices from an independent source. The own-account securities are allocated to fixed assets and are generally not sold until they mature. Qualitative and quantitative limits are in place for these securities; the securities are analyzed in detail and discussed at monthly meetings. Credit spread risk is calculated by ERM each month on the basis of an internal model with the results forwarded to management. To date, there has not been any need to record write-downs of such securities. The results of the simulation of general interest risks are also modeled by ERM using the QRM system of the Group and communicated to the management monthly. Limits have been implemented for the individual scenarios and are subject to regular monitoring. 16

19 3.2.3 Operational risks Risk Definition Operational Risks are defined as the risk of loss resulting from inadequate or failed internal processes and systems, human error, or from external events. This definition includes IT Risks, Outsourcing Risks, Settlement Risks, Legal Risks, Compliance Risks, Model Risks, and Behavioral Risks. For the purpose of measuring risks, the definition does not extend to Business Risks and Reputation Risks, although these types of risks could be effectively managed by sound management of Operational Risks. Risks which result from outsourcing operations (Outsourcing Risks) are treated as a special kind of Operational Risk. Functions are deemed to be outsourced when a third party is assigned to perform activities and processes related to the execution of banking transactions, financial services or other services typical for the Group and that the Group would otherwise perform itself. Risk Strategy The risk strategy is based on the early recognition of Operational Risks and ensuring that the measures taken to mitigate the risks are appropriate. This includes the effective management of Operational Risks and compliance with the applicable regulatory requirements. Compliance with relevant legal and supervisory requirements is a critical component of the business activity of SSB Intl GmbH, the operating unit of the Group. With regard to the management of Compliance Risks, the goal of the Bank is to comply with all legal and supervisory requirements that it must observe when rendering banking services, financial services and ancillary security-related services. The responsibility for complying with these requirements lies with every single member of the staff wherever the related tasks and duties apply to the sphere of the employee. Risk Situation Operational Risks are ubiquitous: in the services and products which SSB Intl GmbH provides and sells, in the technology used and the processes applied and in employees who maintain daily operations. While the use of information processing systems can minimize Operational Risks, dependence on these systems and the applications running on them can in itself result in new significant Operational Risks. Moreover, significant Operational Risks arise from processes that require manual input. In addition, securities transactions can entail Settlement Risks. Outsourcing risks are inherent in the services and products provided by the service organization, the technology used and the processes themselves. The Group is exposed to Outsourcing Risk due to its dependence on the timely and correct rendering of services by the external provider. Given the rising number of outsourced operations, the overall potential Outsourcing Risk is also higher. Legal Risks at the Group exist in the form of the loss risk that might arise from not performing contractually agreed obligations and in the form of potential litigation associated with the business activities of SSB Intl GmbH. Compliance Risks exist both from an external and an internal perspective. On the one hand, the Group operates within a complex legal and supervisory environment that is evolving constantly. On the other hand, it must also comply with internal standards and guidelines set by State Street Corporation. Ongoing initiatives, new regulations (e.g., UCITS V ), changes to existing business processes and additional outsourcing by the Group or customers/other group companies or insourcing from customers or other group companies can also increase Operational Risks. Model Risks are risks of financial or reputation loss arising as a result of inadequate decisions based on the flawed development, implementation or use of internal models. 17

20 Behavioral Risks relate to the potential loss that would arise if the Bank offered inappropriate or unlicensed financial services. Risk Quantification Risks are quantified by preparing a risk inventory that is based on risk control self-assessment workshops, the results of which are augmented and verified by other data sources. Operating gains and losses that are incurred are recorded in a structured fashion in a loss database and monitored closely. The results are used to define specific measures to avoid the risk in future. At account/portfolio level, qualitative risk ratings are prepared to assess Operational and Contractual Risks, risks related to the performance of trust activities and the risks of money laundering. To measure the capital charges for Operational Risks in Pillar 1, the Group applies the CRR. The Bank uses a future-oriented scenario-based approach that complements the internal and external loss histories to measure its capital requirements using ICAAP and the capital adequacy concept pursuant to MaRisk (ability of the Bank to bear risk). Estimated losses and probabilities are worked out to various confidence levels for the range of scenarios at workshops and then run through a Monte-Carlo simulation. The results are then used to quantify Operational Risks under Pillar 2. Risk Management Extensive risk mitigation measures, ranging from measures inherent to the processes to processindependent measures, are used to manage Operational Risks. The measures that are inherent to the processes include identification of potential Operational Risks before the Bank is actually exposed to them (taking a selective approach) and also analysis, management and monitoring of existing Operational Risks. Controls that are independent of processes consist of the internal audit and a comprehensive program of monitoring and auditing measures conducted by the Compliance department. The Compliance Oversight Program offers a group-wide framework for an inventory of supervisory requirements, communicating these requirements to the business units concerned, choosing the appropriate measures to manage the risks and for addressing any compliance findings. It provides these to the business units in the form of a summary of its supervisory requirements, risks, corresponding risk controls, and suggested solutions for compliance issues. This framework constitutes a comprehensive and consistent approach to the management of Compliance Risk. The Compliance department monitors and secures ongoing compliance with the relevant laws and supervisory requirements as well as the group s and specific local internal requirements. In this way it creates a foundation for continuous compliance with all requirements. Compliance with the required controls is monitored by a comprehensive program of running tests. The future evolution of the legal environment and supervisory requirements is analyzed in a structured fashion at a global level, European level and also at a local level for all those countries in which the Group has an operation. The latter serves to identify the need to implement any new regulations in the short to mid-term so as to ensure compliance with the changing legal and supervisory requirements. All contractual documents are drafted by the central Legal department based on worldwide standards. There are corresponding escalation processes in place to authorize any deviation from these standards. The Group has documented the framework for outsourcing work. The spokesman of the management is explicitly responsible for outsourcing and is assisted by the Outsourcing Officer who is also the Chief Risk Officer and acts as a central coordinator. The feasibility of any intended outsourcing is reviewed with regard to the legal and supervisory requirements. The risks associated with outsourcing are presented in a comprehensive risk assessment. The risk profile for outsourced operations is then calculated on this basis. The degree of detail for this risk assessment is determined by the nature, scope and complexity of the outsourcing. The Group regularly monitors and measures the performance of the service organization as part of its quality assurance processes. Regular service calls and reporting of the key performance indicators 18

21 (henceforth KPIs ) are an essential component of the day-to-day risk management. The KPIs are based on the two main criteria: timeliness and accuracy. KPIs are reported on a daily, monthly, or quarterly basis Business Risks Risk Definition Business Risks comprise the risks arising from changes in the business and supervisory environment, including the risk that business develops differently to the business plans and business strategy. Risk Strategy The risk strategy is based on early recognition of potential Business Risks and ensuring appropriate risk mitigation measures to the extent possible given the nature of the risk. Risk Situation Business activity involves taking business risks, regardless of the specific nature of the business. The number of variables in daily business frustrates any form of planning certainty. In particular, the business risks for the Group result from the high degree of dependence on changes in the legal environment (e.g., the laws and regulations governing custody bank business or tax aspects). Additional risks arise from concentrations of customers and industries as well as dependence on existing infrastructure of the financial markets (e.g., settlement systems). Business Risks can also arise from changes in the global business model and a rising trend to outsource certain business activities of the Group and of customers / other group companies, respectively. Risk Quantification Business Risks display a great deal of interdependency on other risk categories. Consequently, the opportunities for separately quantifying the risks within a single risk category are restricted. Currently, Business Risks are not internally modeled separately. Rather, capital adequacy is currently managed by ensuring that adequate risk capital is available to cover any potential Business Risks. It is planned to quantify Business Risks directly in the course of fiscal year Risk Management The Group regularly monitors changes in the legal and supervisory environment to ensure a prompt and complete response to such changes. In order to further minimize the risk arising from such changes in the environment, the following controls will be implemented: Annual revision of the business strategy Balanced scorecards prepared quarterly to review goal attainment Regular recording of financial data Monitoring the income statement at customer level A fee-adjustment process Adjustment processes in accordance with AT 8 MaRisk Liquidity risks Risk Definition Liquidity Risks refer to the risk that payment obligations cannot be met as they fall due. This comprises the risk of refinancing, market liquidity, risks from a deterioration in Ratings and Intraday Risks. 19

22 Risk Strategy The Group pursues a conservative strategy towards Liquidity Risks, which ensures a high maturity match between asset and liability profiles. The liabilities of the Bank mainly consist of stable deposits that are invested as short-term financial instruments or as highly-liquid instruments. Risk Situation The liabilities of the Group mainly consist of deposits from customers that are coupled with the services rendered by the Bank. Consequently, the Group does not have to rely on external funding from the capital markets. The highly liquid funds provided by customer deposits are primarily invested in highly liquid assets taking account of the corresponding diversification requirements. These assets mainly consist of short-term receivables from internal repo transactions with SSBT and unsecured money market transactions with central banks. The other funds are primarily invested in highly liquid assets that are eligible for lending in accordance with the criteria set by the ECB. Risk Quantification The Group calculates and monitors the Liquidity Risk of the Bank on a daily / monthly basis using a range of liquidity ratios and early warning indicators. These include the liquidity ratios set by the Liquidity Regulation (henceforth LiqV, at the level of SSB Intl GmbH), the Liquidity Coverage Ratio (henceforth LCR ) and the Net Stable Funding Ratio (henceforth NSFR ) as well as additional internal liquidity ratios. In addition, the Liquidity Risk is quantified in a monthly stress test that simulates a restricted market. In the framework of calculating risk-bearing capacity, the Liquidity Risk is covered by that part of the riskbearing capacity potential that is not defined for covering material risk types. SSB Intl GmbH defines Liquidity Risks as material which are considered qualitative within the ICAAP. In order to valuate, early detect and monitor the Liquidity risks, SSB Intl GmbH implemented qualitative based processes and instruments. Further, monthly liquidity stress testing based on internal and external scenarios are conducted. Additionally, the EMB receives regular a MIS-Reporting containing results of the stress testing and the instruments. Beside this, SSB Intl GmbH disposed of a liquidity risk-bearing capacity process (henceforth ILAAP ), which takes place once a year or on an ad-hoc basis. Risk Management As with other risk categories, the management of Liquidity Risks is built upon Three Lines of Defense. In the First Line of Defense, Global Treasury Liquidity Risk Management monitor the liquidity position of the Bank. In the Second Line of Defense, Enterprise Risk Management is responsible for setting up risk management processes and monitoring and reviewing the risk profile of the Group. The Internal Audit guarantees in the Third Line of Defense an independent and objective assessment of the structure and operational effectiveness of the internal control system of the Bank and therefore ensures a holistic approach to managing Market Price Risk Risk Concentration (risk concentrations in each risk category) Risk Definition Risk concentrations include a) risk positions vis-à-vis single-name counterparties that represent a risk concentration due to the size of the position, b) risk concentrations that arise owing to a common underlying factor of the risk positions within a single risk category ( intra-risk concentrations ), c) risk concentrations that arise due to a positive correlation between different risk categories (as a result of common risk factors or interaction between various risk factors of different risk categories inter-risk concentrations ). 20

23 Risk Strategy Generally, the risk strategy here is to avoid risk concentrations taking account of the business model of SSB Intl GmbH. Risk concentrations are initially identified and then mitigated as far as possible. Existing risk concentrations undergo both qualitative and quantitative monitoring. Risk Situation Material risk concentrations can be found in all of the Group s main risk categories, i.e. Credit Risks, Market Price Risks, Operational Risks, Liquidity Risks, Investment Risks and Business Risks. Concentrations with regard to certain products, transaction types, customer categories and countries represent the largest risk concentrations. Risk Quantification These risks are quantified using a bottom-up scenario approach. The financial impact of the stress tests is considered when validating the capital adequacy and measuring the degree to which the Bank s risk appetite has been utilized. In order to ensure adequate capital coverage for any risk concentrations, a risk buffer based on the quantification results of the remaining relevant risk categories is applied under the ICAAP. Risk Management The process inherent measures used to manage risk concentrations include an analysis of potential concentrations of risk before these risk exposures are accepted (taking a selective approach) and also analysis, management and monitoring of existing Operational Risk concentrations. The exposures arising from own account transactions are subject to a system of limits at country / counterparty and asset class level Reputational Risks (reputation risks in each risk category) Risk definition Reputation Risks are the risk of potential losses arising as a result of the Bank being perceived in a negative light by customers, counterparties, shareholders, investors or supervisory authorities. Risk strategy The risk strategy is based on early recognition of potential Business Risks and ensuring appropriate risk mitigation measures to the extent possible given the nature of the risk. Risk situation Reputation Risks can be found in all of the Group s main risk categories, i.e. Credit Risks, Market Price Risks, Operational Risks, Liquidity Risks, Investment Risks and Business Risks. Risk quantification Reputational Risks display a great deal of interdependency on other risk categories. Consequently, the opportunities for separately quantifying the risks within a single risk category are restricted. Currently, Reputation Risks are not internally modeled separately. Rather, capital adequacy is currently managed by ensuring that adequate risk capital is available to cover any potential Reputation Risks. Risks are also quantified using a bottom-up scenario approach in stress tests which take into account the financial impact of Reputation Risks in validating capital requirements and in gauging the utilization of risk appetite. 21

24 Risk management The measures used to manage Reputation Risks include a complaints management system, regular communication with customers at customer service meetings and the analysis and monitoring of customer satisfaction and media perception. 3.3 Immaterial Risks In addition to the material risk categories discussed above, the risk management of the Group also covers Pension Obligation Risks, which, however, are deemed to be immaterial in terms of their scope. The risks from assuming Pension obligations are based on a contractual commitment or other obligation undertaken within the framework of a pension plan. For the Group, these risks arise from pension plans under which minimum commitments are made. These risks could become relevant if there are not enough plan assets to cover the obligation to pay a pension when it falls due. The risk strategy pursued in this regard is to accept any risks from assuming pension obligations under existing pension plans that are not secured by the pension guarantee association. Insignificant risks are presented in Pillar 2 as a risk-add-on. 3.4 Risk Reporting (Art. 435 (2) e) CRR) The regular risk reporting regarding the risk situation of the Group / Bank is communicated via a comprehensive reporting system to the EMB of SSB Intl GmbH and to the MLP of SSEHG KG as well as to other relevant committees and functions. Apart from the reporting structure within the committees described in Section 3.1, the risk situation is reported to the EMB of SSB Intl GmbH and to the MLP of SSEHG KG by the following means: by a monthly report prepared as a part of the Management Information System (henceforth MIS ) of SSEHG Group / SSB Intl GmbH regarding material risk types a reporting is scheduled several times a day, a daily report at close of business as well as weekly, monthly, quarterly and yearly by ad-hoc reports in case of material changes of the risk situation. 3.5 Risk-bearing capacity concept pursuant to MaRisk Permanently guarantee the risk-bearing capacity is one of the major components of the risk management system of the Group / Bank. Therefore continuous appropriate capital resources on the basis of the control of the risk-bearing capacity is ensured. The Group has installed an ICAAP pursuant to Sec. 25a KWG and MaRisk. Within the framework of this process, which is divided in seven process steps, all risks which are deemed to be significant are regularly and ad hoc based identified, assessed and monitored using the models described. Additionally, the resulting figures are compared to the available risk capital, composed primarily of the own funds of the Bank. Any diversification effects between the types of risks are not considered. Rather, the individual risks are aggregated in full based on a conservative assumption that there may be a positive correlation. The primary steering indicator is a Going-Concern-Approach which derives the available risk capital from the income statement and balance sheet. In addition, capital adequacy is also calculated from a liquidation perspective and monitored accordingly. The structure of the ICAAP is depicted in Illustration 3. 22

25 Illustration 3: ICAAP Structure With regard to adequate risk monitoring and steering, all significant risks are assigned a risk capital limit in both the Going-Concern-Approach and the Gone-Concern-Approach. This allocation of risk capital serves to limit the individual risks and to steer any risk concentrations. Other than this, the allocation of risk capital ensures that there is always a suitable capital buffer for extreme situations and to fund future organic and non-organic growth. No capital is allocated to liquidity risks due to the fact that the existing liquidity risks only affect the net asset position of the Bank indirectly and also to a small extent. Day-to-day compliance with the supervisory requirements and economic capital requirements is ensured for a planning period of five years by the regular monitoring of current developments and a mid-term projection of risks and capital, supplemented by stress tests. In the reporting period 2016, the Bank s ability to bear risk was ensured at all times. The utilization of available risk capital by the significant risks modeled in Pillar 2 - worst case came to 23.21% as of 31 December In order to adequately reflect creditor protection SSB Intl GmbH additionally applied beside the Going- Concern-Approach, a Gone-Concern-Approach., Analogue to the Going-Concern-Approach, in the Gone-Concern-Approach, an aggregation of the risk capital requirement to all material risk types, are verified by using a separate global limit. 23

26 To ensure a capital adequacy on an ongoing basis, relevant capital ratios are connected to a limit system. The aim of SSB Intl GmbH and SSEHG Group regarding capital management is to ensure sufficient capitalization allowing financial flexibility with respect to the capital requirements resulting from the core and side business segments. This includes the capability to finance organic and non-organic company growth as well as supporting clients by offering appropriate banking activities and financial services. In the course of capital management, the Group / Bank strives for an optimal capital basis allowing to achieve attractive short- and long-term earnings, under the condition that the obligations towards clients are met and regulatory requirements are fulfilled. 3.6 Declaration on the adequacy of risk management arrangements (Art. 435 (1) e) CRR) Risk measurement methods applied at SSEHG Group level and at the single-entity level of SSB Intl GmbH with regard to the methodological standards of the banking industry. Methods and processes are based on the respective business and risk strategy specified directly by the EMB and are defined in accordance with the current and medium-term risk profile. These approaches and techniques allow a permanent and adequate monitoring and management of risks, with the scope of entering risks only up to an acceptable level, not exceeding the risk tolerance determined by the EMB. Risk management processes are appropriate to ensure a continuous and sustainable risk-bearing capacity in the Going- Concern-Approach. Hence, the implemented risk management processes are deemed to be effective and appropriate by the EMB. 3.7 Concise Risk statement (Art. 435 (1) f) CRR) General remarks SSB Intl GmbH, being an international operating custodian bank and financial service provider, offers a wide range of financial services to its institutional clients. The core business primarily consists of depositary bank services, custody-only business, including reporting services for asset managers and supporting activities for the middle and back office of investment management companies. The executive management of SSB Intl GmbH as well as the MLP of SSEHG Group are aware of the risks resulting from the business model of the bank and of its potential impact on the realization of strategic goals, considering its responsibilities to stakeholders, including shareholders, clients, employees, regulators, the communities and markets in which it operates. Therefore, SSB Intl GmbH and SSEHG Group have implemented a comprehensive risk management framework in alignment with the business strategy and resulting risk profile. This framework ensures that sustainable growth of the institution is balanced with an acceptable level of risk. According to the definition to the business strategy and the corresponding objectives, the risk management system and the business strategy defines a consistent risk strategy in case of handling risks. The risk strategy includes subordinate principals using the risk within SSB Intl GmbH and SSEHG Group. The risk strategy includes the primary principles of the risk management of both SSB Intl GmbH and SSEHG Group. It contains specific risk indicators including relevant thresholds corresponding to the executive management s risk tolerance. These indicators and thresholds are further defined in the risk appetite framework and risk policy documents, covering all identified material risk types and including qualitative and quantitative aspects. Key ratios include all as material risks defined quantitative and qualitative requirements. The risk limitation is implemented at different controlling levels, specifically key ratios are both defined at an 24

27 operational unit level for risk types and at an overall bank level such as ICAAP. In addition to the ratios based on binding supervisory requirements, the economic perspective is being considered, whereby thresholds are being applied depending on certain characteristics at institutional, group portfolio and product level. Ratios and thresholds are monitored regularly regarding compliance. Additionally, these ratios are integrated in the ongoing management reporting and in the related escalation processes with related management actions. The functionality and the adequacy of the risk management system is monitored on an ongoing basis. If necessary the system will be adjusted to changed circumstances promptly. Risk profile in the Reporting period In the course of the annual risk inventory process the following risk types have been identified as material at the levels of the SSEHG Group and SSB Intl GmbH: Credit risks, Market Price Risks, Operational Risks, Business Risks, Reputational Risks, Concentration Risks, Liquidity Risks. To assure a continuously adequate risk-bearing capacity, risk capital is allocated to all material risk types, which means that part of the risk taking potential is allocated to each material risk type in the form of a risk limit. Based on the risk tolerance defined by the EMB of SSB Intl GmbH and the MLP of SSEHG Group, not the complete risk-bearing capacity potential is allocated to these material risks, an additional buffer is being retained. This buffer currently amounts to 10% of the available risk-bearing capacity potential. The following table shows the limit utilization of material risks as well as the free risk-bearing capacity potential as of December 31, 2016 under the Going-Concern-Approach, which is the primary management related approach. Table 4: Limit utilization of material risks and free risk-bearing capacity potential of SSEHG Group SSEHG Group as of December 31, 2016 Risk taking potential: 1,395,801 Material risk types Allocated limit Utilization amount (Pillar 2) Utilization in % Credit risksk 160,000 18, % Operational risks 150,000 70, % Interest rate risk (Banking and trading book) 370, , % Market risks resulting from market price changes of the securities of the Investment Portfolio Concentration risk buffer - 109,026 - Total 680, ,763 - Free risk taking potential - 996,037-25

28 Table 5: Limit utilization of material risks and free risk-bearing capacity potential of SSB Intl GmbH SSB Intl GmbH as of December 31, 2016 Risk taking potential: 1,400,291 Material risk types Allocated limit Utilization amount (Pillar 2) Utilization in % Credit risks 160,000 18, % Operational risks 150,000 70, % Interest rate risk (Banking and trading book) 380, , % Market risks resulting from market price changes of the securities of the Investment Portfolio Concentration risk buffer - 98,468 - Total 690, ,049 - Free risk taking potential - 1,039,242 - The EMB and the senior management including the Risk Management Committee are informed about the risk situation on a monthly basis and the Supervisory Board on a quarterly basis. The information includes essential indicator amounts and limit utilizations as well as the evaluation of current risk situation. Besides the regular reporting procedures, reporting processes for circulating substantial information on an ad-hoc basis are implemented. During the complete reporting period the risk-bearing capacity on SSB Intl GmbH and SSEHG Group level were continuously adequate. 3.8 Governance arrangements (Art. 435 (2) a), b), c) CRR) The selection and appointment of the members of the management bodies of all SSEHG Group entities follows a predefined process. A prerequisite for being considered as a suitable candidate is an impeccable reputation and verifiable successful internal track record within the State Street Group or with a comparable institution. This includes positive performance ratings, which reflects, among other things, the performance measured by a balanced set of objectives. The Supervisory Board assisted by the Nominations Committee of SSB Intl GmbH selects suitable candidates. The intention to appoint a member to the EMB of SSB Intl GmbH is mandatory reportable to the BaFin and Deutsche Bundesbank. To meet the professional qualification requirements of the BaFin (according to Section 2d (1) and Section 25c (1) Sent. 1 and 2 KWG), members of the Board of Managing Directors must have adequate theoretical and practical knowledge of the business concerned, as well as managerial experience. For this purpose, the regulatory authorities require the submission of a set of various verification documents The annual evaluation by the Supervisory Board pursuant to Section 25d (11) Sent. 2, No. 3 and 4 KWG confirmed for the reporting year that SSB Intl GmbH s EMB is suitable in terms of structure, size, composition and performance. Moreover the suitability with regard to knowledge, skill set and experience of each member and subsequently of the whole EMB was confirmed. SSB Intl GmbH firmly believes that diversified teams make more balanced decisions and achieve better results. In this context, the Bank is committed to increasing diversity throughout the senior levels of the organization in a sustainable manner. 26

29 In accordance with a new German legislation ( Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern in Führungspositionen in der Privatwirtschaft und im öffentlichen Dienst ), the Supervisory Board and the EMB have determined specific target values for the ratio of female employees in leading positions. The company has put significant focus on supporting female colleagues in their progression. This includes aiming for diverse candidate and interview slates for external hires as well as targeting balanced promotion slates. An EMEA wide Diversity Council is orchestrating a range of activities and initiatives. Two EMB members are representing SSB Intl GmbH on this group-wide committee. We have made progress towards our diversity goals but based on the end of 2016 figures it has to be acknowledged that it will be very difficult to achieve them on all levels by middle of We are looking at this as a longterm initiative so regardless of the formal status middle of 2017, the Executive Management Board will define new goals which will be communicated in the second half of 2017 and ensure that we keep focus on this topic. Table 6: Target values for the ratio of female employees in leadership positions Management level Target value Status as per December 31, 2016 Supervisory Board 30% 50% Executive Management Board 13% 0% Vice President (and higher Corporate Title) 31% 27% Assistant Vice President 40% 39% The following tables provide an overview on the number of additional directorships held by the EMB and Supervisory Board members of SSB Intl GmbH according to Art. 435 (2) a) CRR. Table 7: Number of management and directorships held by the EMB of SSB Intl GmbH at the reporting date according to Art. 435 (2) a) CRR Executive Management Board Number of Leader- and Directorships Number of the Directorships after consideration of excemptions Stefan Gmür 6 0 Jörg Ambrosius 4 0 Frank Eggloff (until April 30, 2016) 6 1 Andreas Niklaus 4 0 Christian Vogels 2 0 Kris Wulteputte (since November 1, 2016)

30 Table 8: Number of management and directorships held by the Supervisory Board of SSB Intl GmbH during reporting period according to Art. 435 (2) a) CRR Supervisory Board Number of the Leaderand Directorships Number of the Directorships after consideration of excemptions Jeff D. Conway 2 2 Mark Keating (until April 12, 2016) 9 0 Marlena Ludian 0 0 Hartmut Popp 0 0 Ritu Shirgaokar 0 0 Elizabeth Nolan 1 1 David Suetens (since April 13, 2016) 3 2 The following management changes occurred during reporting period: Mr. Frank Eggloff retired from his position as a member of EMB of the Bank on April 30, Mr. Kris Wulteputte was appointed as a member of EMB of the Bank as of November 1, Mr. Mark Keating retired from his position as member of Supervisory Board on April 12, Mr. David Suetens was appointed as member of the Supervisory Board on April 13, Own funds and own funds requirements 4.1 Structure of Own Funds of SSEHG Group and SSB Intl GmbH (Art. 437 CRR) Structure of own funds of SSEHG Group Own funds of the Group completely consist of Common Equity Tier 1 (henceforth CET 1 ) items. The CET 1 as well as the Total capital ratio of the Group amount to % as of December 31, CET 1 capital of the Group is composed of share capital, other reserves as well as reserves for general banking risks in accordance with 340g HGB. The decrease of CET 1 capital compared to the last disclosure as of June 30, 2016 was driven by a capital distribution amounting to 50mn EUR paid from the reserves. The funds for general banking risks have increased by 12mn EUR since the yearly financial statement of 2016 was ratified. The increased net loss of the year is fully compensated by the reduced deductible items from goodwill in the case of the ratification of the financial statement. Deductible items consist of: Prudential deductions acc. to Art. 34 (so called prudential filters ) i.c.w. 105 CRR concern 0.01% of the financial assets measured at fair value of the Group according to the simplified approach of the delegated ordinance (EU) 2016/101. Deductions from CET 1 capital, pursuant to Art. 36 (1) a) and b) CRR, consist of the loss of the financial year as well as intangible assets, including the goodwill of the entities subject to the restructuring of several European entities in the course of the establishment of the Group. There are no further items in terms of deductions and corrections to be disclosed according to Art. 437 (1) d) CRR. Structure of the Own funds of SSB Intl GmbH As shown in the table below, CET 1 capital contributes 95% to the total capital (calculated before and after ratification of the financial statements) and Tier 2 capital components contribute the remaining 5% 28

31 (calculated before and after ratification of the financial statements). CET 1 and Total Capital Ratio of SSB Intl GmbH as of reporting date are 49.55% and 51.97% respectively. Tier 1 Capital CET 1 capital of the Bank is composed of subscribed capital, other reserves as well as the funds for general banking risks in accordance with Section 340g HGB. Since the last disclosure of the own funds at SSB Intl GmbH level as of June 30, 2016, CET 1 capital in the course of the ratification of annual accounts has changed as follows: Deductions from goodwill have decreased by 33mn EUR and 12mn EUR have been transferred to the funds for general banking risks during With respect to the separate disclosure of information according to Art. 437 (1) d) CRR we refer to the above mentioned explanations of SSEHG Group which generally apply for SSB Intl GmbH as well. Deductions from CET 1 capital, pursuant to Art. 36 (1) b) CRR, consist of intangible assets, including the goodwill recorded in the books of the former SSB S.p.A., which has been transferred to SSB Intl GmbH in the course of the merger of SSB S.p.A. into SSB Intl GmbH. The deductions according to Art. 34 and 105 CRR concern 0.01% of the financial assets measured at fair value of non-significant shares of pension funds as well as shares of an affiliated company. Capital instruments both at SSEHG Group and SSB Intl GmbH level fulfil the conditions described in Art. 28 CRR in respect to the eligibility of CET 1 capital instrument. Tier 2 Capital The Bank has issued Tier 2 capital pursuant to Art. 63 CRR in the form of long-term subordinated obligations. These obligations result from a sub-ordinated loan in the amount of nominal 100,000 keur charged with an interest rate of 7.75% p.a. initially granted by State Street Bank Luxembourg S.A. In the course of the change of the group structure in 2015, the sub-ordinated loan has been transferred to State Street Europe Holdings Luxembourg S.à r.l. The contractual term of the sub-ordinated loan ends on April 25, 2038.The conditions regarding the eligibility as Tier 2 capital instrument according to Art. 63 CRR are fulfilled at SSB Intl GmbH level. Due to the supervisory submission deadline in February of the following year the total capital before ratification of the financial statement has to be merely reported on both Group and SSB Intl GmbH level. The following table presents the Own funds of the Group and Bank according to Part 2, Title I to III CRR as of December 31, 2016: 29

32 Table 9: Own funds of SSEHG Group and SSB Intl GmbH according to Art. 437 (1) d) and e) CRR No 1 Disclosure of Own funds Capital instruments and the related share premium accounts Regulation (EU) No 575/2013 Article ref. Common Equity Tier 1 capital: instruments and reserves 26 (1), 27, 28, 29, before ratification of the financial statements after ratification of the financial statements Amount as of December 31, 2016 SSEHG Group SSB Intl GmbH SSEHG Group SSB Intl GmbH before ratification of the financial statements Amounts subject to pre-regulation (EU) No after ratification of the 575/2013 treatment or prescribed residual financial statements amount of regulation (EU) No 575/2013 EBA list 26 (3) 1,000 1, , , of which: subscribed capital 1,000 1, , , Accumulated other comprehensive income (and other reserves, to include unrealised gains and losses under the applicable accounting standards) 26 (1) 3,697, ,697,630 2,044,615 2,044, a Funds for general banking risk 26 (1) (f ) 58,000 70,000 58,000 70, Common Equity Tier 1 (CET1) capital before regulatory adjustments Common Equity Tier 1 (CET1) capital: regulatory adjustments 7 Additional value adjustments (negative amount) 3,756,630 3,768,630 2,211,882 2,223, , Intangible assets (net of related tax liability) (negative amount) 36 (1) (b), 37, 472 (4) -1,325,004-1,143, , , a 28 Losses for the current financial year (negative amount) T o tal regulato ry adjustments to C o mmo n equity T ier 1 (C ET 1) 36 (1) (a), 427 (3) -388, , ,713,845-1,531, , , Common Equity Tier 1 (CET1) capital 2,042,785 2,236,635 2,053,624 2,100, Additional Tier 1 (AT1) capital Tier 1 capital (T1 = CET1 + AT1) 2,042,785 2,236,635 2,053,624 2,100, Tier 2 (T2) capital: instruments and provisions Capital instruments and the related share premium accounts Tier 2 (T2) capital before regulatory adjustments Tier 2 (T2) capital: regulatory adjustments 62, , , , , T o tal regulato ry adjustments to T ier 2 (T 2) capital T ier 2 (T 2) capital , , T o tal capital (T C = T 1 + T 2) 2,042,785 2,236,635 2,153,624 2,200, T o tal risk weighted assets 4,092,809-4,144, Capital ratios and buffers C o mmo n Equity T ier 1 61 (as a percentage of risk exposure amount) 62 T ier 1 (as a percentage of risk exposure amount) 92 (2) (a), (2) (b), T o tal capital (as a percentage of risk exposure amount) 92 (2) (c) Institution specific buffer requirement (CET1 requirement in accordance with article 92 (1)(a) plus capital conservation and 64 countercyclical buffer requirements, plus systemic risk buffer, plus CRD 128, 129, the systemically important institution buffer (G-SII or O-SII buffer), expressed as a percentage of risk exposure amount) 65 of which: capital conservation buffer requirement of which: countercyclical buffer requirement of which: systemic risk buffer requirement of which: Global Systemically Important Institution (G-SII) or Other 67a CRD Systemically Important Instituion (O-SII) buffer 68 Common Equity Tier 1 available to meet buffers (as a percentage CRD of risk exposure amount) Amounts below the thresholds for deduction (before risk weighting) 72 Direct and indirect holdings by the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions) 36 (1) (h), 45, 46, 472 (10), 56 (c), 59, 60, 475 (4), 66 (c), 69, 70, 477 (4) 4,446-4, Direct and indirect holdings by the institution of the CET 1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions) 36 (1) (i), 45, 48, 470, 472 (11) 10,994-10, Main features of capital instruments of the SSEHG Group and SSB Intl GmbH are shown in the following table (items, which are not applicable for disclosure are marked with N/A in accordance with Annex II of the Commission Implementing Regulation (EU) No 1423/2013 with respect to the disclosure of own funds requirements for institutions): 30

33 Table 10: Main features of capital instruments of SSEHG Group and SSB Intl GmbH according to Art. 437 (1) b) CRR No. Main features SSEHG Group Common Equity Tier 1 Capital Instruments: Subscribed Capital Common Equity Tier 1 Capital Instruments: Subscribed Capital Tier 2 Capital Instruments: Subordinated Loan 1 Issuer State Street Europe Holdings Germany S.à r.l. & Co. KG State Street Bank International GmbH State Street Bank International GmbH 2 Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) N/A N/A N/A 3 Governing law (s) of the instrument German law German law German law Regulatory treatment 4 Transitional CRR rules N/A Common Equity Tier 1 Tier 2 5 Post-transitional CRR rules Common Equity Tier 1 Common Equity Tier 1 Tier 2 6 Eligible at solo/(sub-)consolidated/ solo & (sub-) consolidated Consolidated Solo and consolidated Solo 7 Instrument type (types to be specified by each Limited partners' share in paid-up capital GmbH Share Capital Subordinated loan jurisdiction) of a limited partnership as per Art. 28 CRR as per Art. 28 CRR as per Art. 63 CRR 8 Amount recognised in regulatory capital (currency in million, as of most recent reporting date) Nominal amount of instrument a Issue price N/A N/A 100 9b Redemption price N/A N/A Accounting classification Limited partners' share in paid-up capital Share Capital Subordinated debts 11 Original date of issuance October 18, 2013 September 25, 1970 Foundation of the GmbH August 25, Perpetual or dated perpetual perpetual dated 13 Original maturity date N/A N/A August 25, Issuer call subject to prior supervisory approval No No Yes 15 Optional call date, contingent call dates and redemption amount N/A N/A The issuer may terminate the subordinated loan on any interest payment date by giving 30 calendar days' notice (such interest payment date is generally the 10th of January of each year) follow ing a Tax Event or a Gross-Up Event. 16 Subsequent call dates, if applicable N/A N/A N/A Coupons / dividends 17 Fixed or floating dividend/coupon N/A N/A fixed 18 Coupon rate and any related index N/A N/A 7.75% p.a. 19 Existence of a dividend stopper N/A N/A No 20a Fully discretionary, partially discretionary or mandatory (in terms of timing) N/A N/A Mandatory 20b Fully discretionary, partially discretionary or mandatory (in terms of amount) N/A N/A Mandatory 21 Existence of step up or other incentive to redeem No No No 22 Noncumulative or cumulative N/A N/A N/A 23 Convertible or non-convertible Non-convertible Non-convertible Non-convertible 24 If convertible, conversion trigger(s) N/A N/A N/A 25 If convertible, fully or partially N/A N/A N/A 26 If convertible, conversion rate N/A N/A N/A 27 If convertible, mandatory or optional conversion N/A N/A N/A 28 If convertible, specify instrument type convertible into N/A N/A N/A 29 If convertible, specify issuer of instrument it converts into N/A N/A N/A 30 Write-dow n features N/A N/A No 31 If w rite-dow n, w rite-dow n trigger(s) N/A N/A N/A 32 If write-down, full or partial N/A N/A N/A 33 If w rite-dow n, permanent or temporary N/A N/A N/A If temporary w rite-dow n, description of w rite-up mechanism Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) N/A N/A N/A Subordinated to creditors of the insolvency proceedings Subordinated to Tier 2 Capital Instruments SSB Intl GmbH Subordinated to creditors of the insolvency proceedings 36 Non-compliant transitioned features No No No 37 If yes, specify non-compliant features N/A N/A N/A The following information on the terms of the sub-ordinated Loan issued by SSB Intl GmbH are excerpts from the Loan Agreement which has been originated in English language. 31

34 Table 11: Additional Terms and Conditions of the subordinated loan of the SSB Intl GmbH according to Art. 437 (1) c) CRR Terms of the Contract Interest Payment Date Day Count Convention Interest Payments Arrear of Interest Payments Subordination Termination of the Loan Agreement by Lender Regulatory Notice Transfer Rights Taxation Details of the respective term "Interest Payment Date" means with respect to each Interest Period 10 January of the year following such Interest Period, with the first Interest Payment Date being 10 January If the audited unsconsolidated annual financial statements of the Bank for the financial year immediately preceding such 10 January are, however, not available on such date, the Interest Payment Date shall be the third Business Day following the day on which the audited unconsolidated financial statements of the Bank regarding the financial year immediately preceding such 10 January are approved by the shareholders meeting. If, however, any Interest Payment Date is not a Business Day, the Interest Payment Date will instead be the next Business Day in that calendar month (if there is one) or the preceeding Business Day (if there is not). "Business Day" means any day on which banks are open for general business in Germany.(Clause 2.1) Act/360 Interest accrued during an Interest Period shall be payable on the related Interest Payment Date in accordance with Clause 2.1 only to the extent that the annual result, not taking into account the impact of any profit and loss transfer agreement in place, plus interest expenses on the loan documented by the Agreement which have been charged to the profit and loss statement, result in a positive amount. The Bank must pay outstanding Arrear if Interst (in whole or in case of (i) below in whole or in part ), on the earlier of: (i) the next Interest Payment Date on which and to the extent the Unconsolidated Financial Statements for the year immediately preceding such Interest Payment Date show an annual profit that exceeds the amount of Interest payable on such Interest Payment Date (ii) the Early Repayment Date, and (iii) the Maturity Date. The Lender irrevocably subordinates all its claims under this Agreement, including (without limitation) for repayment of principal and payment of Interest, (hereinafter, the "Claims" and each a "Claim") to the claims of all other present and future unsubordinated creditors and the claims of all other present and future subordinated creditors of the Bank. The Claims shall rank prior to any claims or rights of the shareholders of the Bank for liquidation proceeds or repayment of share capital. In the event of the dissolution, liquidation, insolvency or any proceeding for the avoidance of insolvency of the Bank, no amounts shall be payable under this Agreement until the claims against the Bank arising from the unsubordinated obligations and other subordinated obligations shall first have been satisfied in full. Any Claim shall only become payable if and to the extent the payment of such Claim would not result in an insolvency of the Bank. The Lender may not set off any claim arising under the Loan against any claims that the Bank may have against the Lender and may not exercise any retention right in respect thereof. The rights of the Lender are not secured by any form of security provided by the Bank or third person, and such security will not be provided at any time during the term of this Agreement. This Agreement shall not constitute a profit participation right of the Lender in respect of the Bank or a silent partnership of the Lender in the Bank or a profit participating loan between the Lender and the Bank. Termination of this Loan Agreement by the Lender shall be excluded. Following the conclusion of this Agreement (i) the subordination described above cannot be subsequently restricted and (ii) the term or notice periods cannot be subsequently shortened. The amount of an early repayment, if any, is to be repaid to the Bank - notwithstanding any agreement to the contrary - unless the relevant capital has been replaced by contribution of other at least equivalent liable capital within the meaning of the KWG, or the BaFin has given its consent to the early repayment. Any assignment or other disposal (e.g. by way of a pledge) of claims of the Lender under this Loan Agreement requiures the prior written consent of the Bank. The assignment or other disposal must not result in the Lender incurring additional charges such as investment income tax or other withholding taxes, any estate tax, trade tax or other income tax. All payments due under this Agreement will be made without deduction or withholding for or on account of current of future taxes, duties or charges levied or collected by or on behalf of the Federal Republic of Germany, or by or on behalf of any political subdivision or authority therein or thereof having the power to tax, unless such deduction or withholding is required by law. The following tables show the reconciliation of own funds at the level of the SSEHG Group and SSB Intl GmbH to the respective balance sheet positions of the respective audited financial statements as of December 31, 2016: 32

35 Table 12: Reconciliation of own funds to audited financial statement of SSEHG Group according to Art. 437 (1) a) CRR SSEHG Group Own funds for supervisory reporting purposes after Relevant balance sheet items after ratification ratification Capital instruments in keur Balance sheet items in keur Common Equity Tier 1 Capital Items to be deducted from Common Equity Tier 1 Capital Common Equity Tier 1 Capital (CET 1) Fund for general banking risk 70,000 Fund for general banking risk 70,000 Paid up capital instruments 1,000 Other reserves 3,697,630 Loss attributable to owners of the parent Losses for the current financial year -206, ,511 Limited partners' capital (Capital account I) Limited partners' capital (Capital account II) Limited partners' capital (Clearing account) Difference in the group result in comparison to the parent company 1,000 3,697,630 49, ,544 Goodwill -994,424 Goodwill 994,424 Other intangible assets -219,604 Deferred tax liabilities (Goodwill) Deferred tax liabilities (Other intangible assets) ,948 Prudent Valuation -4 Total 2,236,635 Tier 1 Capital (T1) Total 2,236,635 Total Capital Total 2,236,635 Equity Intangible assets Purchased franchises, industrial rights and similar rights and assets as well as licenses in such rights and assets 219,604 Deferred tax liabilities 70,874 33

36 Table 13: Reconciliation of own funds to audited financial statement of SSB Intl GmbH according to Art. 437 (1) a) CRR Own funds for supervisory reporting purposes after ratification Capital instruments Common Equity Tier 1 Capital Items to be deducted from Common Equity Tier 1 Capital Common Equity Tier 1 Capital Tier 1 Capital (T1) Tier 2 Capital Paid up capital instruments Fund for general banking risk in keur Other reserves 2,044,615 in keur 109,267 Subscribed Capital 109,267 Capital reserves 1,940,358 Other revenue reserves 104,256 70,000 Fund for general banking risk 70,000 Goodwill -113,089 Goodwill 113,089 Other intangible assets Total 2,100,946 Total 2,100,946 Paid up capital instruments and subordinated loans -9,846 SSB Intl GmbH Relevant balance sheet items after ratification Balance sheet items Equity Intangible assets Purchased franchises, industrial rights and similar rights and assets as well as licenses in such rights and assets 9, ,000 Subordinated liabilities 100,000 of which interest 15,737 Tier 2 Capital (T2) Total 100,000 Total Capital Total 2,200, Own funds requirements for SSEHG Group and SSB Intl GmbH (Art. 438 CRR) For the determination of the regulatory capital requirements at both SSEHG Group and SSB Intl GmbH level, the Bank applies the respective standardized approaches since January 1, 2008, i.e. the CRSA, the standardized approach for Market Price and Settlement Risks, the standardized approach for Operational Risks as well as the standardized approach for CVA risk according to CRR. The following table presents the Group s and the Bank s own funds requirements for all the risk types mentioned above as of December 31, Own funds requirements for Credit Risks are broken down by exposure classes in accordance with Art. 112 CRR 8 : 8 Due to the different acquisition date of the securities at the consolidated and standalone level, own funds requirements for securitization positions under the standardized approach are partly divergent 34

37 Table 14: Own funds requirements according to Art. 438 c) and e) 445 CRR SSB Intl SSEHG Group Exposure Class / Risk exposure GmbH Central governments or central banks - - Regional governments or local authorities - - Public sector entities - - Multilateral development banks - - International organisations - - Institutions 27,750 27,688 Corporates 117, ,022 Retail exposures - - Exposures secured by mortgages on immovable property - - Exposures in default - - Exposures associated with particularly high risk - - Covered bonds 8,329 8,312 Exposures to institutions and corporates with a short-term credit assessment - - Collective Investment Undertakings (CIUs) Equity exposures 2,201 2,201 Other items 12,950 13,141 Securitisations 68,671 68,513 Contributions to the default fund of a Central Counterparty ("CCP") - - Own funds requirements for Credit Risks 238, ,230 Own funds requirements for Market Risks 5 5 Own funds requirements for Settlement Risks - - Own funds requirements for Operational Risks 88,317 88,317 Own funds requirements for credit valuation adjustment risks Own funds requirements 327, , Countercyclical Capital Buffer (Art. 440 CRR) The countercyclical capital buffer according to Art. 130, 135 to 140 CRD IV as well as Art. 10 d KWG and 64r KWG, is intended to prevent a disproportional credit growth in comparison to economic growth. Therefore, the bank has to expand the existing capital buffer in order to increase the loss absorption capacity of the Bank. This buffer may be used up for any losses which might occur in times of crisis. Additionally, a credit crunch will be prevented. The implementation of the countercyclical capital buffer will be implemented in three steps with the first one having started in When all steps will be fully implemented in 2019 the buffer is limited to a ratio of up to 2.5% according to Art. 136 (4) CRD IV, Section 10 (3) KWG. For the calculation of the individual institution s countercyclical capital buffer, indicators such as the relation between granted loans and GDP, the Credit risk situation acc. Art. 36 SolvV, and the country specific ratios will be used. BaFin set the country specific ratio for Germany at 0% in

38 Exposure value for SA in keur Exposure value for SA in keur of which: General credit exposures of which: Securitisation exposures Total Own funds requirements weights Countercyclical capital buffer rate in % DISCLOSURE REPORT STATE STREET EUROPE HOLDINGS GERMANY S.À R.L. & CO. KG GROUP 2016 Table 15: Geographical distribution of exposures relevant for the calculation of countercyclical capital buffer of SSEHG Group according to Art. 440 CRR Geographical distribution of credit exposures relevant for the calculation of the countercyclical capital buffer General Securitisation Credit Own funds requirements exposures exposures in keur Australia - 114,872-1,838 1, Canada 10, Federal Republic of Germany 440, ,567 35,217 13,337 48, French Republic 404, ,489 9,774 3,384 13, Grand Duchy of Luxembourg 145,163 14,000 11, , Great Britain and Northern Ireland 95, ,959 4,344 9,535 13, Guernsey 6, Hong Kong Ireland 18,249 24,008 1, , Isle of Man Japan Kingdom of Belgium 145, ,021 1,614 1,840 3, Kingdom of Netherlands 146,690 1,205, ,280 23, Kingdom of Norway 208,677 23,954 1, , Kingdom of Spain - 251,549-4,025 4, Kingdom of Sweden 88,413-1,538-1, Korea, Republic of New Zealand 36,057-2,885-2, Nigeria Other 43,708-3,497-3, Republic of San Marino 181, ,152 14,521 10,737 25, Portuguese Republic - 19,451-1,556 1, Principality of Liechtenstein Republic of Austria 11,047 17, , Republic of Estonia Republic of Finland 157,472 31,397 1, , Republic of Indonesia Republic of Kazakhstan Republic of Malta 2, Republic of Poland Republic of San Marino Republic of the Phillipines Swiss Confederation 14,764-2,500-2, Taiwan, Province of China United States of America 537,956 85,071 43,036 1,361 44, Sum 2,695,629 4,131, ,005 68, , Table 16: Amount of institution-specific countercyclical capital buffer of SSEHG Group according to Art. 440 CRR Amount of institution-specific countercyclical capital buffer Total risk exposure amount in keur 4,092,809 Institution specific countercyclical capital buffer rate in % 0.03 Institution specific countercyclical capital buffer requirement in keur 1,048 36

39 Exposure value for SA in keur Exposure value for SA in keur of which: General credit exposures of which: Securitisation exposures Total Own funds requirements weights Countercyclical capital buffer rate in % DISCLOSURE REPORT STATE STREET EUROPE HOLDINGS GERMANY S.À R.L. & CO. KG GROUP 2016 Table 17: Geographical distribution of exposures relevant for the calculation of countercyclical capital buffer of SSB Intl GmbH according to Art. 440 CRR Geographical distribution of credit exposures relevant for the calculation of the countercyclical capital buffer General Credit exposures Securitisation exposures Own funds requirements in keur Australia - 114,885-1,838 1, Canada 10, Federal Republic of Germany 440, ,387 35,220 13,334 48, French Republic 404, ,426 9,772 3,383 13, Grand Duchy of Luxembourg 197,163 14,000 15, , Great Britain and Northern Ireland 94, ,984 4,339 9,536 13, Guernsey 6, Hong Kong Ireland 18,249 24,008 1, , Isle of Man Japan Kingdom of Belgium 146, ,021 1,618 1,840 3, Kingdom of Netherlands 146,271 1,201,433 4,501 19,223 23, Kingdom of Norway 208,498 23,948 1, , Kingdom of Spain - 251,549-4,025 4, Kingdom of Sweden 87,725-1,532-1, Korea, Republic of New Zealand 36,057-2,885-2, Nigeria Other 42,194-3,376-3, Republic of San Marino 181, ,460 14,521 10,655 25, Portuguese Republic - 19,257-1,541 1, Principality of Liechtenstein Republic of Austria 11,047 17, , Republic of Estonia Republic of Finland 157,056 31,397 1, , Republic of Indonesia Republic of Kazakhstan Republic of Malta 2, Republic of Poland Republic of San Marino Republic of the Phillipines Swiss Confederation 14,764-2,500-2, Taiwan, Province of China United States of America 537,956 85,071 43,036 1,361 44, Sum 2,743,983 4,124, ,030 68, , Table 18: Amount of institution-specific countercyclical capital buffer of SSB Intl GmbH according to Art. 440 CRR Amount of institution-specific countercyclical capital buffer Total risk exposure amount in keur 4,144,269 Institution specific countercyclical capital buffer rate in % 0.03 Institution specific countercyclical capital buffer requirement in keur 1,038 37

40 5 Information to Credit Risks 5.1 Amount and structure of Credit Risks (Art. 442 CRR) The following tables present the distribution of risk positions to exposure classes, geographical regions, industry sectors and remaining maturity under the CRSA at SSEHG Group as well as SSB Intl GmbH level as of December 31, 2016: Table 19: Gross exposure and average gross exposure of SSEHG Group and SSB Intl GmbH broken down to relevant exposure classes according to Art. 442 c) CRR Exposure class Gross exposure as of December 31, 2016 Average gross exposure based on quarter-end exposures SSEHG Group SSB Intl GmbH SSEHG Group SSB Intl GmbH Central governments or central banks 14,347,295 14,347,295 15,812,169 15,812,169 Public sector entities , ,321 Institutions 16,458,219 16,454,339 15,494,457 15,493,058 Corporates 3,402,659 3,454,696 3,749,694 3,762,703 Covered bonds 1,041,173 1,039,004 1,077,294 1,074,309 Collective Investment Undertakings (CIUs) 4,416 4,416 4,193 4,193 Equity exposures 11,024 11,024 10,976 10,976 Other items 161, , , ,291 Securitizations 4,131,234 4,124,548 5,186,476 5,178,111 Total 39,557,893 39,599,584 41,667,883 41,666,130 Table 20: Total amount of relevant receivables of SSEHG Group broken down by geographic regions according to Art. 442 d) CRR Exposure class Africa Asia Australia Europe North America South America Central governments or central banks Total - 3,580-14,343, ,347,295 Institutions - 5, , ,429 15,521, ,458,219 Corporates ,057 2,781, ,948-3,402,659 Covered bonds ,041, ,041,173 Collective Investment Undertakings (CIUs) , ,416 Equity exposures , ,024 Other items , ,873 Securitizations ,872 3,931,290 85,071-4,131,234 Total 230 9, ,436 22,967,000 16,191, ,557,893 38

41 Table 21: Total amount of relevant receivables of SSB Intl GmbH broken down by geographic regions according to Art. 442 d) CRR Exposure class Africa Asia Australia Europe North America South America Central governments or central banks Total - 3,580-14,343, ,347,295 Institutions - 5, , ,115 15,521, ,454,339 Corporates ,057 2,833, ,948-3,454,696 Covered bonds ,039, ,039,004 Collective Investment Undertakings (CIUs) , ,416 Equity exposures , ,024 Other items , ,263 Securitizations ,885 3,924,591 85,071-4,124,548 Total 230 9, ,178 23,009,245 16,191, ,599,584 Table 22: Total amount of relevant receivables of SSEHG Group broken down by industry sector according to Art. 442 e) CRR Economic sector Central governments or central Institutions banks Corporates Covered bonds Collective Investment Undertakings (CIUs) Equity exposures Other items Securitisations Pension funds , ,452 Banks (Deposit-taking corporations except the central bank) - 1,6457, ,041, ,251-17,568,811 Captive financial institutions and money lenders , , ,865 Regional authorities 601, ,887 Money market funds , ,722 Investment funds (Non-MMF funds) ,947,315-2,122-92,619 80,002 2,122,464 Financial auxiliaries ,756-2, ,080 Non-financial corporations , ,932 Non-profit institutions serving households Other financial intermediaries, except insurance corporations and pension funds , ,051,232 4,074,961 Compulsory social security activities Total Insurance corporations , ,039 Central banks 13,745, ,745,428 Total 14,347,295 16,458,219 3,402,659 1,041,173 4,416 11, ,873 4,131,234 39,557,893 39

42 Table 23: Total amount of relevant receivables of SSB Intl GmbH broken down by industry sector according to Art. 442 e) CRR Economic sector Central governments or central banks Institutions Corporates Covered bonds Collective Investment Undertakings (CIUs) Equity exposures Other items Securitisations Total Pension funds , ,452 Banks (Deposit-taking corporations - 16,453, ,039, ,251-17,562,762 except the central bank) Captive financial institutions and money lenders , , ,865 Regional authorities 601, ,887 Money market funds , ,722 Investment funds (Non-MMF funds) ,947,351-2,122-95,009 80,002 2,124,891 Financial auxiliaries ,756-2, ,080 Non-financial corporations , ,932 Non-profit institutions serving households Other financial intermediaries, except insurance corporations , ,044,546 4,068,275 and pension funds Compulsory social security activities Insurance corporations , ,039 Central banks 13,745, ,3745,428 Total 14,347,295 16,454,339 3,454,696 1,039,004 4,416 11, ,263 4,124,548 39,599,584 Exposures to small and medium sized enterprises (henceforth SME ) have not existed during the reporting period. Table 24: Total amount of relevant receivables of SSEHG Group broken down by remaining time to maturity according to Art. 442 f) CRR Maturity Central governments or central banks < 1 year 1 year and < 5 years 5 years Total 13,752, , ,816 14,347,295 Institutions 15,917, , ,407 16,458,219 Corporates 2,637, , ,148 3,402,659 Covered bonds 324, ,285-1,041,173 Collective Investment Undertakings (CIUs) 4, ,416 Equity exposures 11, ,024 Other items 161, ,873 Securitisations - 229,460 3,901,774 4,131,234 Total 32,809,552 1,708,195 5,040,145 39,557,893 40

43 Table 25: Total amount of relevant receivables of SSB Intl GmbH broken down by remaining time to maturity according to Art. 442 f) CRR Maturity Central governments or central banks < 1 year 1 year and < 5 years 5 years Total 13,752, , ,816 14,347,295 Institutions 15,913, , ,407 16,454,339 Corporates 2,689, , ,148 3,454,696 Covered bonds 324, ,728-1,039,004 Collective Investment Undertakings (CIUs) 4, ,416 Equity exposures 11, ,024 Other items 164, ,263 Securitisations - 229,393 3,895,154 4,124,548 Total 32,860,053 1,706,005 5,033,526 39,599, Use of External Credit Rating Assessments (Art. 444 CRR) To determine the appropriate own funds requirements for purposes of Credit risk quantification under the CRSA, the following rating agencies have been nominated: Table 26: Rating agencies broken down by exposure classes according to Art. 444 a) and b) CRR Market segment Rating agency Exposure Class Governments - The McGraw-Hill Companies under the brand name Standard & Poor s Ratings Services ( S&P ) Central governments or central banks Structured finance - The McGraw-Hill Companies under the brand name Standard & Poor s Ratings Services ( S&P ) - Fitch Ratings - Moody s Investors Service Securitizations 5.3 Credit Risk Mitigation Techniques (Art. 453 CRR) Based on the business model and the resulting asset policy, the risk positions of the Group and the Bank are essentially limited to client overdrafts of not externally communicated and internally set credit exposure limits resulting from the custody business, the Bank s own portfolio of securities, as well as unsecured and secured money market transactions (repurchase agreements). Additionally, the Group and the Bank are exposed to Credit risks resulting from foreign exchange transactions. CRMT are used in relation to both repurchase agreements and derivatives clearing transactions. 41

44 In this context, received or pledged securities, such as equities, government and corporate bonds, securitizations, and cash deposits serve as collateral. The Group and the Bank apply the Financial Collateral Comprehensive Method according to Art. 223ff. CRR. From a regulatory point of view, only financial collaterals that are listed in Art. 197 and Art. 198 CRR are considered in the process. These financial collaterals are measured at their market value less regulatory haircuts (maturity mismatch adjustment, market value volatility adjustment, currency volatility adjustment). In the course of the economic risk perspective, as part of the quantification of the risk-bearing capacity, collaterals are also considered after taking the respective regulatory haircut into account. The legal basis for these transactions are standardized contracts. Netting agreements are considered an important factor for credit risk mitigation and therefore receives special attention as part of such contracts. Netting agreements and foreign exchange transaction according to Art. 295 b) CRR are currently in place for repurchase agreements as of December 31, 2016 the Bank made use of netting agreements within repurchase agreements. The impact compared to the total business volume remains relatively small 38.47% of the total derivative exposures were mitigated due to the consideration of netting agreements. Due to an overcollateralization, netting agreements had no impact on the exposures resulting from reverse repurchase agreements. SSB Intl GmbH has implemented procedures regarding the assurance of legal validity and enforceability of the contracts and maintains documentation as required by Art. 297 CRR. Hence, it takes the respective netting agreements into account when measuring the counterparty credit risk exposure. The underlying strategy and associated processes with respect to the collateralization of relevant transactions are documented in the Trading Policies & Guidelines and the corresponding organizational guidelines. The purchased securities are at least evaluated once a day, but dependent on the product category more often several times a day. The valuation is based on current market values obtained from an external, independent pricing source. This is the responsibility of the Risk Management department. Risk concentrations related to Credit and Market price risks of collaterals are limited by internal restrictions considering issuer, region, class of investment and rating class. Compliance with these limits is monitored on a daily basis. Regular stress tests are carried out related to the market value of eligible collateral. Further an assessment of the maturity of the repurchase transaction and the maturity of the financial collateral used for credit risk mitigation is performed. Risk positions related to repurchase agreements and derivatives transactions as well as the development of respective collaterals are reported on a regular basis to the EMB. All the related internal controls and procedures are reviewed at ad-hoc but at least on an annual basis. Quantitative disclosure regarding CRMT The following tables show the total amount of exposures before and after CRMT as of December 31,

45 Table 27: Total amount of exposures of SSEHG Group and SSB Intl GmbH before and after credit risk mitigation according to Art. 444 e) CRR Risk weight Total of CRSA position values before and after CRMT before CRMT after CRMT SSEHG Group SSB Intl GmbH SSEHG Group SSB Intl GmbH 0% 14,347,295 14,347,295 14,347,295 14,347,295 10% 1,041,173 1,039,004 1,041,173 1,039,004 20% 20,505,565 20,495,796 5,807,862 5,798,093 50% 43,712 43,712 7,023 7, % 3,609,153 3,662,783 3,609,153 3,662, % 10,994 10,994 10,994 10,994 Total 39,557,893 39,599,584 24,823,500 24,865,191 Table 28: Total amount of collateralized exposures of SSEHG Group and SSB Intl GmbH according to Art. 453 f) and g) CRR Exposure Class Central governments or central banks Banks Corporates Collateral Risk exposure after netting and volatility adjustments SSEHG Group SSB Intl GmbH Eligible financial collateral - - Guarantees - - Credit derivatives - - Eligible financial collateral 14,734,393 14,734,393 Guarantees - - Credit derivatives - - Eligible financial collateral - - Guarantees - - Credit derivatives - - Total 14,734,393 14,734,393 Table 29: Counterparty credit risk exposure of SSEHG Group and SSB Intl GmbH according to Art. 439 e) CRR Gross positive fair value of contracts Netting benefits Netted current credit exposure Collateral held Net derivatives credit exposure 76,944 73, ,077 36,689 80,388 43

46 5.4 Credit risk adjustments (Art. 442 CRR) As part of the early warning process for risks implemented by the Bank, lending commitments are reviewed for any increase in risk content using pre-defined indicators. Depending on the results, these are assigned in a suitable form of care intensive care, restructuring or liquidation. If they are assigned to restructuring or liquidation with an associated loss in value of the receivable, an individual risk provision will be calculated. If a recovery rate on an associated loss in value is determined as unlikely the receivable is written off having regard to the individual provision which has already been made. As of December 31, 2016, none of the Bank s lending commitments were assigned to intensive care, restructuring or liquidation. As of December 31, 2016 credit risk adjustments on SSEHG Group and SSB Intl GmbH level did not exist. The following table shows the existing credit risk adjustments at level of SSEHG Group and SSB Intl GmbH. Table 30: Development of credit risk adjustments at SSEHG Group according to Art. 442 i) CRR Specific credit risk adjustments General credit risk adjustments Opening balance Allocation Withdrawal Usage Closing balance Provisions Table 31: Development of credit risk adjustments at SSB Intl GmbH according to Art. 442 i) CRR Specific credit risk adjustments General credit risk adjustments Opening balance Allocation Withdrawal Usage Closing balance Provisions During reporting period solely specific credit risk adjustments exists. 5.5 Funding obligations (Art. 439 b) CRR) During the reporting period no contracts existed that would have required a group entity to provide collateral in case of a downgrade of its rating. 44

47 6 Unencumbered assets (Art. 443 CRR) Art. 100 CRR prescribes that institutions shall report the level of their repurchase agreements, securities lending, and all forms of encumbered assets to the banking authority. These requirements have been concretized in the Commission Implementing Regulation (EU) 2015/79. In this context, an asset shall be treated as encumbered if it has been pledged or if it is subject to any form of arrangement to secure, collateralize or credit enhance any transaction from which it cannot be freely withdrawn. CRR Institutions have to comply with the above mentioned requirement both at the consolidated and single entity-level since December 31, 2014 and have to provide the supervisory authority an overview on the encumbered assets, maturity and contingent encumbrance. In the following sections, the disclosure requirements pursuant to Art. 443 CRR are outlined in more detail. These requirements are further specified by the respective EBA Guidelines on disclosure of encumbered and unencumbered assets as of June 27, According to Art. 13 CRR, this disclosure obligation is only relevant for the SSEHG Group. Encumbrance of assets within the SSEHG Group All encumbered assets of the Group are held by SSB Intl GmbH. SSB Intl GmbH offers securities lending to its clients for which it borrows securities on the market and lends them to its clients. In the context of borrowing the securities from other market participants (which may occur through SSBT acting as agent), SSB Intl GmbH provides collateral to such market participants; insofar, encumbrance of assets takes place in this case. Collateralization takes place via (a) transfer of cash, (b) transfer of title to securities, or (c) pledging securities. Under the respective agreements which are generally governed by English law, marking to market of collateral takes place, i.e., the market value of collateral to be delivered to the lender must equal the sum of (a) the aggregated amount of the borrowed securities and (b) a respective surcharge (margin); such market value is calculated on an intra-day basis. Quantitative information In the reporting period only transfer of cash and securities have been used by SSB Intl GmbH as collateral. The following tables provide an overview on assets, collateral received and associated liabilities of the Group broken down by encumbrance in the reporting period. The median values are based on the quarterly data for Table 32: Assets of SSEHG Group according to Art. 443 CRR Assets Carrying amount of encumbered assets Fair value of encumbered assets Carrying amount of unencumbered assets Assets of the reporting institution 1,241,256 38,159,024 Fair value of unencumbered assets Equity instruments 4,218 4,218 10,960 10,960 Debt securities 462, ,846 7,131,053 7,142,802 Other assets 271,401 1,424,510 45

48 93% (Q4/2016: 1,281,234 keur, Median: 1,320,102 keur) of the unencumbered other assets (Q4/2016: 1,384,013 keur, Median: 1,424,510 keur) have to be treated as unencumbered also according to the definition of Art. 100 CRR, as these items are not pledged or not subject to any form of arrangement for securitization, collateralization or credit enhancement of any on- or off- balance sheet position, but due to their nature are not available for encumbrance (e.g. tangible and intangible assets, deferred items). Table 33: Collateral received by the SSEHG Group according to Art. 443 CRR Collateral received Fair value of encumbered collateral received or own debt securities issued Fair value of collateral received or own debt securities issued available for encumbrance Collateral received by the reporting institution 1,345,862 14,148,007 Equity instruments 548,919 - Debt securities 441,983 14,056,963 Other collateral received 304,031 - Own debt securities issued other than own covered bonds or ABSs - - Table 34: Encumbered assets, collateral received and associated liabilities of SSEHG Group according to Art. 443 CRR Encumbered assets/collateral received and associated liabilities Matching liabilities, contingent liabilities or securities lent Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered Carrying amount of selected financial liabilities 427,300 1,712,591 7 Leverage Ratio (Art. 451 CRR) The Leverage Ratio is defined as the "capital measure" (the numerator ) divided by the "exposure measure" (the denominator ) and is expressed as a percentage. The capital measure is currently defined as Tier 1 capital. In the current transitional and monitoring period, the Basel Committee on Banking Supervision (henceforth BCBS ) set the minimum Leverage ratio at 3% which is neither a binding requirement at European nor at the national level. The calculation of the Leverage Ratio is based on the Commission Delegated Regulation (EU) 2015/62 as of October 10, 2014, which amends the CRR with regard to the Leverage Ratio (Art. 429 CRR). At the reporting date, the ratio has been calculated based on the requirements both at SSEHG Group consolidated and SSB Intl GmbH individual level. The following disclosure of the Leverage Ratio as of December 31, 2016 at the SSEHG Group and SSB Intl GmbH level is published in accordance with the regulation and the templates of the Commission Implementing Regulation (EU) 2016/200. For operational management purposes, the Leverage Ratios of SSEHG Group and SSB Intl GmbH are reported monthly to the ALCO and developments and trends are respectively analyzed in case of relevant changes. Based on such analysis, the ALCO discusses potential management actions on consolidated or individual entity level and presents it to the EMB for approval. 46

49 Development of the Leverage Ratio The Leverage Ratio disclosed at the SSEHG Group level as of June 30, 2016 amounted to 5.0%. As of reporting date, the ratio increased to 5.56 % at the SSEHG Group level, respectively to 5.42 % at SSB Intl GmbH level. The increase of the ratio on both levels is driven by a lower overall risk position. On the consolidated level the capital base slightly dropped because of the capital distribution, while the capital base of the single institution remained stable. 47

50 Table 35: Leverage ratio of the SSEHG Group and SSB Intl GmbH as of December 31, 2016 Reference date Entity name SSEHG Group SSB Intl GmbH Level of application Consolidated Solo 1 Total assets as per published financial statements 38,603,825 37,559,999 2 Adjustment for entities w hich are consolidated for accounting purposes but are outside the scope of regulatory consolidation (Adjustment for fiduciary assets recognised on the balance sheet pursuant to the applicable accounting framew ork but excluded from the leverage ratio exposure measure in accordance w ith Article 429(13) of Regulation (EU) No 575/2013) Adjustments for derivative financial instruments 117, ,077 5 Adjustments for securities financing transactions (SFTs) 15,386 15,386 6 Adjustment for off-balance sheet items (ie conversion to credit equivalent amounts of off-balance sheet exposures) 277, ,739 EU-6a EU-6b (Adjustment for intragroup exposures excluded from the leverage ratio total exposure measure in accordance w ith Article 429(7) of Regulation (EU) No 575/2013) (Adjustment for exposures excluded from the leverage ratio total exposure measure in accordance w ith Article 429(14) of Regulation (EU) No 575/2013) Other adjustments -2,299,973-47,704 8 Leverage ratio total exposure measure 36,714,054 37,922,497 Table LRCom: Leverage ratio common disclosure CRR Leverage Ratio Table LRSum: Summary reconciliation of accounting assets and leverage ratio exposures 31-Dec-16 CRR leverage ratio exposures On-balance sheet exposures (excluding derivatives and SFTs) 1 On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral) 22,645,433 22,687,125 2 (Asset amounts deducted in determining Tier 1 capital) -1,325, ,253 3 Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets) (sum of lines 1 and 2) 21,320,429 22,528,872 Derivative exposures 4 Replacement cost associated w ith all derivatives transactions (ie net of eligible cash variation margin) 40,593 40,593 5 Add-on amounts for PFE associated w ith all derivatives transactions (mark-to-market method) 76,485 76,485 EU-5a Exposure determined under Original Exposure Method Gross-up for derivatives collateral provided w here deducted from the balance sheet assets pursuant to the applicable accounting framew ork (Deductions of receivables assets for cash variation margin provided in derivatives transactions) (Exempted CCP leg of client-cleared trade exposures) Adjusted effective notional amount of w ritten credit derivatives (Adjusted effective notional offsets and add-on deductions for w ritten credit derivatives) Total derivative exposures (sum of lines 4 to 10) 117, ,077 SFT exposures 12 Gross SFT assets (w ith no recognition of netting), after adjusting for sales accounting transactions 14,983,423 14,983, (Netted amounts of cash payables and cash receivables of gross SFT assets) Counterparty credit risk exposure for SFT assets 15,386 15,386 EU-14a Derogation for SFTs: Counterparty credit risk exposure in accordance w ith Article 429b (4) and 222 of Regulation (EU) No 575/ Agent transaction exposures - - EU-15a (Exempted CCP leg of client-cleared SFT exposure) Total securities financing transaction exposures (sum of lines 12 to 15a) 14,998,809 14,998,809 Other off-balance sheet exposures 17 Off-balance sheet exposures at gross notional amount 2,033,248 2,033, (Adjustments for conversion to credit equivalent amounts) -1,755,509-1,755, Other off-balance sheet exposures (sum of lines 17 to 18) 277, ,739 Exempted exposures in accordance with Article 429 (7) and (14) of Regulation (EU) No 575/2013 (on and off balance sheet) EU-19a (Intragroup exposures (solo basis) exempted in accordance w ith Article 429(7) of Regulation (EU) No 575/2013 (on and off balance sheet)) - - EU-19b (Exposures exempted in accordance w ith Article 429 (14) of Regulation (EU) No 575/2013 (on and off balance sheet)) - - Capital and total exposures 20 Tier 1 capital 2,042,785 2,053, Leverage ratio total exposures (sum of lines 3, 11, 16, 19, EU-19a and EU-19b) 36,714,054 37,922,497 Leverage Ratio 22 Leverage ratio 5.56% 5.42% Choice on transitional arrangements and amount of derecognised fiduciary items Applicable Amounts EU-23 Choice on transitional arrangements for the definition of the capital measure - - EU-24 Amount of derecognised fiduciary items in accordance w ith Article 429(11) of Regulation (EU) NO 575/

51 Table LRSpl: Split-up of on-balance sheet exposures (excluding derivatives, SFTs and exempted exposures) CRR leverage ratio exposures EU-1 Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures), of which: 22,645,433 22,687,125 EU-2 Trading book exposures - - EU-3 Banking book exposures, of which: 22,645,433 22,687,125 EU-4 Covered Bonds 1,041,173 1,039,004 EU-5 Exposures treated as sovereigns 14,345,755 14,345,755 EU-6 Exposures to regional governments, MDB, international organisations and PSE not treated as sovereigns - - EU-7 Institutions 1,649,289 1,645,409 EU-8 Secured by mortgages of immovable properties - - EU-9 Retail exposures - - EU-10 Corporate 1,300,670 1,352,706 EU-11 Exposures in default - - EU-12 Other exposures (e.g. equity, securitisations, and other non-credit obligations assets) 4,308,546 4,304,251 8 Securitizations (Art. 449 CRR) In accordance with Art. 13 CRR, disclosure requirements for exposures to securitization positions have to be disclosed only on the level of SSEHG Group. Securitization activities As of December 31, 2016 all securitization positions of the Group are held by SSB Intl GmbH. In the reporting period, the Bank and the Group have acted solely as an investor in securitizations. The Group and the Bank neither have been originator nor a sponsor of securitizations nor have any resecuritizations been held or purchased. The goals of the securitization activities are revenue generation through longer term investment and risk diversification. Classification, book value and valuation of securitization positions Upon acquisition, all securitizations are assigned to the banking book based on the trading book definition according to Art. 102ff CRR. They are valued as fixed assets according to commercial law specifications in Section 253 (3) HGB. The securitization positions are intended to be held to maturity from an accounting point of view. Securitizations are valued according to the modified lower of cost or market principle. During the reporting period there have not been any write-downs resulting from permanent impairments according to Section 253 (3) Sent. 3 HGB. Other risks resulting from securitization activities Liquidity risk associated with the Group s investment activities results from the longer term allocation of liquid means for the held-to-maturity securitization positions. Yet given the fact that the majority of the held securitization positions are eligible under the ECB criteria as collateral with the Deutsche Bundesbank or with the Banque Central du Luxembourg, the Group considers the liquidity risk of the securitization position not to be material. The expected maturities of securitizations held in the portfolio are monitored on an ongoing basis. Additionally, the Group identifies and monitors country and product concentrations within the securitization positions. Approach for determination of risk-weighted securitization positions The Group / Bank used the specifications of Art. 251 CRR, in calculating Credit Risk risk-weighted assets for securitizations held in the reporting year To obtain external ratings for securitization positions and further to be able to determine risk weights related to the exposure class Securitizations the following rating agencies were nominated by the Bank: the McGraw-Hill Companies (under the brand name S&P), Fitch Ratings and Moody s Investor Services. To determine the risk weights related to the securitization exposures, the Bank complied with the requirements of Art. 138 CRR. 49

52 Monitoring of credit and market price risks Pre-trade checks and regular post-trade portfolio monitoring processes have been established to oversee changes within Credit and Market Price Risks of the securitization positions. The pre-trade check process aims to ensure compliance of a new trade with the internal and supervisory requirements at the earliest stage. A risk assessment of a new securitization position is conducted therein, which additionally serves as documented evidence for conformity to Art. 405 and Art. 406 CRR. The regular post-trade portfolio monitoring processes include, together with a regular scenario-based stress test, the comprehensive reporting and monthly Surveillance Group Meetings which consider the risks of the Bank s entire securities portfolio. Alongside this analysis, liquidity and investment topics of the Group / Bank are presented on a monthly basis to the decision-making body (ALCO Committee). The risk situation of the securitizations portfolio is also discussed in the monthly Risk Management Committee meetings (formerly MaRisk Committee that had been held quarterly before September 2016). The structure of the aforementioned Committees can be found in Illustration 2. The post-trade portfolio monitoring process fulfills the requirements of Art. 406 CRR. Further to this, Credit and Market price risks of the securitization positions are monitored as part of the monthly risk-bearing capacity calculation and subsequently reported to the EMB through the MIS reporting. Hedging The Group has not implemented a hedging strategy with respect to its securitization positions. Quantitative information Compared to the last reporting as of June 30, 2016, the Group has decreased its stock of securitizations. The size of the consolidated portfolio declined from 5,459,772 keur as of June 30, 2016 to 4,131,234 keur as of December 31, Receivables from residential mortgages remained the dominant underlying asset class in the securitizations portfolio. Distribution of the risk weights within the securitizations portfolio has changed slightly in The majority of the securitization positions (99,03% of the total risk position) have been assigned the riskweight according to the highest credit quality step for the CRSA exposure class Securitization positions. The following table shows the securitization positions acquired by the Group as investor, broken down by type of underlying receivables and by CRSA risk weights for securitization exposures as of December 31, 2016: 50

53 Table 36: Securitization positions according to Art. 449 CRR Securitized asset class Exposure value Risk weight Own funds requirements Residential mortgages 2,458,651 20% 39,338 40, % 3,214 Leasing 274,174 20% 4,387 Loans to corporates or SMEs (treated as corporates) 1,574 20% 25 Consumer loans 1,271,588 20% 20,345 Other assets 85,071 20% 1,361 Total 4,131,234 68,671 9 Remuneration (Art. 450 CRR) As SSB Intl GmbH is the only credit institution in the consolidated SSEHG Group and the only legal entity in the SSEHG Group that has employees, the below remuneration disclosure refers to the Bank only. 9.1 Governance As a fully licensed German bank under KWG, the Bank is primarily subject to the statutory remuneration requirements of both the German Banking Act and the German Remuneration Ordinance for Institutions (the Ordinance ) 9 which implemented the remuneration requirements of the EU s Capital Requirements Directive IV 10 into German law, while direct supervisory oversight of the Bank is performed by the ECB. This remuneration disclosure is, therefore, subject to Section 16 (1) of the Ordinance in conjunction with Article 450 CRR. Given the direct supervision by the ECB within the meaning of Section 17 (2) No. 1 of the Ordinance the Bank is subject to the most extensive requirements of the Ordinance. At the same time, SSC, SSBT and SSIH are subject to the supervision and rules of the Board of Governors of the U.S. Federal Reserve System as well as other regulatory authorities in the U.S. As a subsidiary of a U.S. bank, SSB Intl GmbH has to comply not only with local laws and the rules of the national supervisory authorities, but also with U.S. rules and laws applicable to subsidiaries of U.S. banks. As such, the Bank is fully integrated into the remuneration governance structure of SSC and therefore, the Bank significantly benefits from State Street s global and EMEA remuneration governance: At the global State Street group level, the corporate Executive Compensation Committee (henceforth ECC ) of SSC has ultimate oversight of the overall compensation system at State Street. ECC members are senior professionals with strong financial / business knowledge, who are independent members of the Board of Directors of SSC, in accordance with the listing standards of the New York Stock Exchange. They are appointed by the Board on the recommendation of the Nominating and Corporate Governance Committee of the Board. At December 31, 2016, there were five (5) members of the ECC. During 2016, the ECC held nine (9) meetings. The ECC operates under a charter which was approved by the Board of Directors and the charter is publicly available at State Street s website. Under this charter, the ECC 9 Institutsvergütungsverordnung in its version effective January 1, Directive 2013/36/EU 51

54 oversees all of State Street s compensation plans, policies, and programs in which senior executives participate and incentive, retirement, welfare and equity plans in which certain other employees of SSC participate. It also oversees the alignment of the incentive compensation arrangements with State Street s financial safety and soundness consistent with applicable related regulatory rules and guidance. The Chair of State Street s corporate Risk Committee (henceforth RC ) is also a member of the ECC, providing continuity between the committees. It should be noted that the RC is responsible for reviewing and discussing with management State Street s assessment and management of risk. In addition, other independent directors who are not members of the ECC attend the ECC meetings from time to time. The ECC has sole authority to retain and terminate any compensation consultants and other advisors used by the ECC to assist in the evaluation of compensation for SSC s Chief Executive Officer (henceforth CEO ) and/or other executive officers, and approve these consultants and advisors fees and other retention terms. In this context, the ECC engages Meridian Compensation Partners, an executive compensation consulting firm, to provide compensation consulting as part of the ECC s review of executive compensation. In its annual process, the ECC receives regular updates, including from its independent compensation consultant and outside legal counsel, on regulatory and governmental actions and initiatives concerning compensation and related risk and governance considerations, particularly with respect to the financial services industry. These updates include rulemaking by the Board of Governors of the United States Federal Reserve System and other banking agencies regarding incentive compensation arrangements; rulemaking under the Dodd-Frank Act; proposed and final guidance and regulations from banking regulators across Europe (including the European Central Bank) and Asia concerning compensation and risk principles; and specific actions and inquiries undertaken by state and federal and the EU s national and supranational authorities concerning compensation practices. The ECC also receives updates on compensation actions, including publicly reported new design elements, taken by other major financial services firms in addition to general remuneration trends in the marketplace. These updates focus on developments in the alignment of incentive compensation with risk principles, and they inform the decisions of the ECC in making its incentive compensation decisions for State Street has also established the corporate Incentive Compensation Control Committee (henceforth ICCC ), a committee on a global level (reporting to State Street s corporate Compliance and Ethics Committee, with annual reporting to the ECC) of senior representatives of the ERM, Compliance, Internal Audit, Finance, Legal and Global Human Resources (henceforth GHR ) departments to serve as a forum for the risk management and internal control functions to formally review and provide their assessment of incentive compensation arrangements throughout the State Street Group. This review and assessment is intended to promote the consistency of the incentive compensation arrangements with the safety and soundness of State Street and its subsidiaries and the alignment of these arrangements with applicable regulatory guidance and regulations. The ICCC is supported by a working group comprised of GHR, Legal and other subject matter experts, which provides analytical and operational support to the ICCC. The ICCC meets on a regular monthly schedule and otherwise as needed. In addition to the integrated, systemic role that control functions have in incentive compensation practices through the ICCC, State Street's risk identification and assessment processes are managed by ERM. The corporate-multi-factor risk scorecard is also prepared by ERM and is subject to review and approval by the RC before the ECC may use it to determine the appropriate level of IC pool funding for any compensation year. The RC evaluates annually the material risks applicable to State Street, as well as management actions during the year designed to mitigate those risks. The RC then makes recommendations to the ECC as to positive or negative factors to be considered in compensation decisions. These recommendations are presented to the ECC by the Chair of the RC, who is also a member of the ECC. In addition, State Street group s Audit function completes an annual audit of GHR IC practices and compliance with regulatory guidance. From the 2015 performance year, the discretionary business unit allocation process was enhanced through the use of a new business unitlevel risk scorecard which will be described in more detail below. In addition, State Street has identified those employees throughout the global organization who individually or as a group are responsible for activities that may expose State Street including SSB Intl 52

55 GmbH to material amounts of risk (i.e. EU Identified Staff (henceforth EUIS ) and FRB MRTs 11 ). State Street annually reviews the variable pay arrangements used to compensate these employees in light of identified risks relevant to their respective responsibilities and also annually reviews the design and governance of the incentive compensation plans applicable to all employees for alignment with applicable regulatory guidance. In light of the global nature of State Street s organization, State Street s remuneration plans and programs are generally established at the level of SSC and specified locally/regionally to the extent required to comply with the applicable local legal and regulatory requirements. Therefore, the remuneration policy of SSB Intl GmbH reflects the nature of SSC s global remuneration approach while complying with local/regional regulatory remuneration requirements that are applicable for the Bank. SSB Intl GmbH only makes use of remuneration-related plans and programs that also exist at the corporate State Street level. As described above, the Bank, therefore, also benefits from State Street s global and EMEA remuneration governance (including but not limited to the reviews of the ICCC). At the level of SSB Intl GmbH, and in accordance with German company law, the Bank has a two-tier board structure that includes the EMB and the SB as an independent control and supervisory body. The EMB held twelve (12) meetings and also approved the updated remuneration policy for the Bank s employees, which also covers EUIS, while the remuneration policy for the EMB was approved by the Bank s SB, which held four meetings during Both policies were primarily designed by the Human Resources department and also include input from the Bank s Remuneration Officer, Compliance department and Legal department. The Remuneration Officer and the Deputy Remuneration Officer were appointed by SSB Intl GmbH in line with the requirements of Section 23 et seq. of the Ordinance. The EMB enables the Remuneration Officers to be involved in the processes for the employee remuneration systems to ensure an appropriate, permanent and effective control of the employee remuneration systems. At the beginning of September 2016, the Bank s SB has established a dedicated Remuneration Committee ( Vergütungskontrollausschuss ) which held one meeting in The membership and duties/mandate are defined in this Remuneration Committee s Rules of Procedure that were approved by the SB and which are in line with the requirements of Section 25d (12) of the German Banking Act and Section 15 of the Ordinance. As a sub-committee to the Bank s SB, the Remuneration Committee consists of three members which are The Chair of the Bank s SB who is the Chair of the Remuneration Committee; and The Chair of the Bank s Risk Committee; and One employee representative who is also a member of the Supervisory Board. The Remuneration Officers also participate in the meetings of SSB Intl GmbH s Remuneration Committee. State Street s and the Bank s overall aim is to attract and retain high-performing employees via its compensation strategy. State Street recognizes that for the business to succeed, it must remain competitive and cultivate an environment that encourages employees to learn and grow in their careers. There are six key remuneration principles that align State Street s remuneration system with the business strategy: 1. We emphasize total rewards 2. We target the aggregate annual value of our Total Rewards Program to be competitive with our business peers 11 i.e., individuals who have been identified as material risk takers pursuant to the guidance of the Board of Governors of the United States Federal Reserve System (FRB) 53

56 3. Funding for our Total Rewards Program is subject to affordability and is designed to be flexible based on corporate performance 4. We differentiate pay based on performance 5. We align employees interests with shareholders interests 6. Our compensation plans are designed to comply with applicable regulations and related guidance, including prohibiting incentives to take excessive risks State Street operates a fully flexible, discretionary bonus policy (i.e. the amount of individual variable pay may fluctuate significantly from one year to the next, depending on performance and the other factors described below, and even could be reduced to zero for any given year). The discretionary bonus policy is structured so as to achieve a balance between fixed and variable components. The corporate Incentive Compensation (henceforth IC ) pool is based on the overall profits of the entire State Street group of companies. The primary quantitative component in the calculation of the IC pool is operating-basis Net Income Before Tax and Incentive Compensation (henceforth NIBTIC ), i.e. the IC pool is funded as a percentage of State Street s group-wide NIBTIC, which percentage is determined by the ECC at the beginning of each performance year. The ECC reviews operating-basis NIBTIC calculations and identifies any applicable adjustments to reflect its assessment as to elements of revenues and expenses that should or should not apply for IC purposes. The ECC has flexibility to adjust the overall global IC pool and, in doing so, evaluates a number of factors, including capital, risk, business and other considerations. The ECC approves the funding of the corporate IC pool. The CEO allocates IC pools to business units and corporate functions based upon a variety of factors, which may include budget performance, achievement of key goals and other considerations. From the 2015 performance year, the discretionary business unit allocation process was enhanced through the use of a new business unit-level risk scorecard, which captures qualitative and quantitative data across Risk, Audit, Compliance, Legal and Regulatory areas for every business unit and corporate function. The CEO/Chairman of SSC uses the results of the business unit-level risk scorecard as an input into the pool allocation process as well as the Management Committee sub-allocation process. Details on State Street s Compensation Assessment Framework and Corporate Performance can be referenced in State Street s 2016 Proxy Statement filed with the US Securities Exchange Commission and available publicly on the its website. The sub-allocation of the business unit bonus pool to an individual is then also further determined by an individual s business manager with reference to the individual s performance measured on both financial and non-financial criteria. At the level of the Bank, each EMB member formally signs off on all individual variable pay and salary proposals for employees working in all SSB Intl GmbH entities, including all branches and subsidiaries within their remit. In the same context, the Bank s Finance Supervisory Reporting Team (with input from the Bank s Risk, Treasury and Accounting departments) analyzes the total amount of variable pay from an affordability perspective in line with the requirements of Section 7 of the Ordinance and the results are reviewed and approved by the EMB prior to pay-out of variable remuneration. Individual incentive awards are completely discretionary. In addition to the formal two-pronged risk adjustment process (ex-ante and ex-post compensation adjustments) described in the Performance Measures section below, in making individual incentive awards, State Street (incl. SSB Intl GmbH) permits the use of discretionary adjustments to awards for both financial and non-financial criteria, including (but not limited to) compliance and risk performance factors, such as non-compliance with internal policies and procedures or significant audit findings, instances where there is a significant downturn in the financial performance of, or a material risk management failure in, State Street or a material business unit or subsidiary. State Street also has a performance planning and review process (henceforth PPR ) for employee compensation (which also exists at the level of the Bank) that involves a collaborative planning process in which employees and their managers establish performance goals that align individual with company goals (in the following categories which are described below: Drive Our Strategy, Deliver Highly Valued Services and Solutions to Our Clients, Strengthening our Foundation, Engage our People). Mid-year and year-end progress reviews are conducted and the employee s performance level is reviewed and rated 54

57 on a five-point scale. This rating is a key factor used by managers in determining incentive compensation and salary decisions during the annual compensation planning process. Performance management employs consistent processes to cascade goals, create "line of sight" and measure actual individual and organizational performance. From the 2015 year-end review, an additional performance rating metric (the Risk Excellence rating) was introduced to the PPR process to measure employees risk and conduct performance. The Risk Excellence rating is intended to inform the overall performance evaluation as well as compensation decisions. Where applicable, individual financial targets will be incorporated into the Performance Planning stage of the PPR process and the level of achievement against these financial goals will form part of the year-end review process and contribute to the performance rating along with qualitative assessment. In addition to the PPR process, State Street s global Talent and Reward Differentiation Tool enhances the overall PPR process by assisting managers in making relative to peer compensation decisions. This tool allows managers to assign a relative score (on a seven-point scale) to employees at the Vice President level and above based on five factors. These include relative to peer performance, potential, criticality of role, critical skills or expertise and retention risk, and combined with the PPR rating, are used to help guide compensation decisions. Once the individual performance has been determined, the performance level will be reflected in the individual remuneration structure as described below. 9.2 Remuneration Structure The Bank s key remuneration components are as follows: Fixed Pay Base Salary and Benefits Base Salary is one element of an employee s compensation. Employees base salaries are determined by role, bank title and by a number of other factors such as individual performance, proficiency level, year-over-year increase guidelines, statutory requirements, budget and position to market. Employees are also entitled to various benefits (such as the company car scheme in Germany) based on their bank title/position in the hierarchical structure and their location. Role Based Allowance Role Based Allowances are an element of fixed remuneration introduced for the first time in the 2014 performance year for a very limited number of individuals to permit that State Street (incl. SSB Intl GmbH) can continue to deliver compensation that is reflective of the competitive market place, an individual s role, responsibility, experience and in compliance with its regulatory obligations. The key characteristics are: Contractual cash payment, i.e. non-discretionary No fixed term, i.e. continuous Paid in equal monthly installments Not subject to deferral or performance conditions Amount or receipt of an Role-Based Allowance subject to change only if there is a material change in role and responsibilities Not subject to malus / clawback Variable Pay The IC plan is an integral part of the compensation strategy as set out above. The IC Plan is the primary scheme for the provision of annual discretionary bonuses and is intended to motivate staff to perform as well as possible and produce superior results whilst not incentivizing inappropriate risk-taking. Beginning with the 2014 compensation year, variable pay is restricted to 2x fixed compensation to ensure compliance with the maximum ratio permitted under the German Remuneration Ordinance. The Bank has obtained the relevant shareholder approval to extend the default maximum ratio from 1x fixed 55

58 compensation to 2x fixed compensation for all employees and EMB members and such has been notified to the BaFin and Deutsche Bundesbank. Except as described below with respect to a small number of employees who participate in business unit structured incentive plans (henceforth SIPs ), all employees other than the most junior job titles (Associates), including all EUIS, are eligible to participate in the IC Plan. Employees participate in either the IC Plan or a SIP, but do not participate in both for variable pay purposes. Individuals in Associate roles participate in the Associates Bonus Plan (subject to limited exceptions), which is designed to link total compensation opportunities to organizational and individual performance, motivate and reward eligible employees as the business unit and State Street attain profit growth, and provide participants with a variable pay opportunity. Payments under the Associates Bonus Plan are made using a percent-based approach to base compensation and performance ratings, and may be adjusted at manager discretion based on performance ratings or other relative assessments. A small number of employees in sales roles participate in SIPs, which aim to bring the variable compensation granted to plan participants in line with the financial results they generate. These SIPs also take into account non-financial qualitative performance indicators. In addition, all SIP participants receive sufficiently high fixed compensation, which aims to eliminate incentives for excessive risk taking. Variable compensation is allocated on an individual basis by way of a review of both quantitative and qualitative factors. All SIPs are reviewed annually by the ICCC. An employee s eligibility to participate in a SIP, and all amounts paid under a SIP, are subject to management approval. The EMEA Sector Solutions SIP is a pool-based sales incentive plan (i.e. a pool which is separate from the pool of the IC plan) with two components: a quantitative (based on achievement against revenue) and a qualitative component. The target pool for each component is calculated by aggregating individual quantitative and qualitative targets for all plan participants. Quantitative Component sales incentives are paid in cash. Qualitative Component awards are made in the form of deferred equity granted in the first quarter of the following year. All awards are paid/granted provided the participant is employed by State Street in good standing on the award date. For those whose SIP awards are subject to CRD III, both the quantitative and qualitative components are restructured to ensure the regulatory requirements for the delivery of the award is met. All Executive Vice Presidents have an IC target structure to provide additional structure for determining IC. Annual and long-term targets were developed based upon an assessment of the executive s role and responsibilities at State Street and relevant competitive and market factors. Annual Incentive: The annual incentive is designed to reflect the executive s specific performance for the year. Therefore, the actual annual incentive can be expected to vary from the relevant target compensation level with the company s and the executive s performance from year to year. Long-Term Incentive: The long-term incentive is designed to reflect State Street s long-term performance trend, as well as the core responsibilities associated with the executive s role over time. Therefore, the actual long-term incentive awarded can generally be expected to remain more consistent from year to year compared to the annual incentive, absent a change in (1) State Street s long-term performance trend, (2) the executive s responsibilities or (3) market practices. For 2014, State Street introduced the potential for variation of the long-term incentive under ordinary circumstances. The actual amount within the range is based on an assessment of leadership behaviors State Street believes to have a long-term effect, such as commitment to cross-organization initiatives, serving as an ethical role model, enhancing a culture of compliance and prudent risk-taking and championing diversity and citizenship. 56

59 State Street (incl. SSB Intl GmbH) applies a globally consistent policy on guaranteed bonuses and buyout awards. For guarantees, where a strong business case can be made to justify such an award, this rationale will be reviewed along with the individual facts and circumstances of the award. Any such awards that are proposed must meet the following criteria: Awards must be only made to new hires Awards must not last longer than 12 months Awards may only be made in exceptional circumstances At the time of payment, sufficient equity, liquidity and capital resources are available The Bank may, from time to time, buy out existing awards for new hires. Where this is the case, the Bank will, as far as possible match, but not exceed, the quantum of existing awards and structure (including vesting schedule) of existing awards. Buy-outs are subject to the deferral requirements of the relevant regulations and appropriate evidence is sought of existing awards prior to the award of a buy-out. Incentive Compensation ( IC ) For the 2016 performance year (paid in the first quarter of 2017), IC awards consisted of deferred awards and immediate cash payments. The allocation of deferred compensation is formulaically-driven based on total value of an individual s 2016 IC. In general, the more senior an employee is, the greater the percentage of IC that was paid as deferred awards. For individuals whose variable remuneration is not subject to the EUIS deferral requirements under the Ordinance, IC awards were delivered as follows based on corporate grade level: For employees at the Senior Vice President level and above: Up to 10% as immediate cash and at least 90% deferred in Deferred Stock Awards (henceforth DSAs ) and Deferred Value Awards (henceforth DVAs ) 12 over 4 years with vesting on a quarterly pro-rata basis For employees below Senior Vice President level and above Assistant Vice President level, the higher the total amount of variable remuneration, the higher the percentage of the variable remuneration which will be deferred. This could ultimately result in up to 90% of variable remuneration being deferred in DSAs and DVAs over 4 years with vesting on a quarterly pro-rata basis For employees below the Vice President level, IC awards are delivered 100% in immediate cash. 12 DSAs and DVAs will be described in more detail on the next page 57

60 Structure of IC awards for EUIS 13 For EU Identified Staff, the IC award is delivered in two separate elements, the immediate non-deferred award (an Immediate Cash award delivered in cash and an Immediate Equity award delivered in equity) and the deferred award (delivered partly in equity and partly in cash that notionally tracks a money market instrument). More significant deferral and instrument thresholds are in place for more senior staff, i.e. the higher the total amount of variable remuneration, the higher the percentage of the variable remuneration which will be deferred. 1. Immediate Award (Immediate Cash and Immediate Equity) This is the portion of the IC that is delivered immediately following the date of communication of the award to the employee. This typically takes place during the first quarter following the performance year to which the award relates. An Immediate Equity award immediately vests in full upon grant but can only be sold or transferred after the retention period mentioned below under Retention Period. 2. Deferred Award (DSA and DVA) All EUIS receive a Deferred Award, which is delivered partly in deferred equity instruments and partly in deferred cash that notionally tracks a money market instrument. All Deferred Equity is awarded in the form of DSAs. DSAs are effectively a contractual right to receive, on each vesting date, a set number of shares in the common stock of State Street Corporation, subject to applicable recovery terms, which may include malus, clawback, forfeiture, restrictive covenants and other conditions. The number of shares to be delivered on each vesting date is set at the award date, but may be adjusted between the award date and each vesting date through the ex-post performance adjustment measures described below. In order to reduce employee concentration in State Street stock that would result from using equity instruments alone to deliver the entirety of the Deferred Award, in 2013 State Street introduced a new non-equity deferral vehicle, called the DVA. DVAs notionally track the value of the SSGA Prime Money Market Fund and are delivered in cash on the vesting date. The earnings credited to the DVAs vary based on the actual performance of the SSGA Prime Money Market Fund; however, there is no ownership interest in the fund or any other actual investment. Earnings generally result in the credit of additional notional units as the money market fund is managed to a $1.00 USD unit share price. Similar to DSAs, DVAs may be adjusted between the award date and each vesting date through the ex-post performance adjustment measures described below. Deferred Award Distribution for EUIS Deferral Amounts At least 40% of IC delivered as Deferred Award For EMB members and EUIS directly reporting to them, at least 60% of IC delivered as Deferred Award Deferral Period and Vesting Schedule DSAs vest on annual pro-rata basis over four years following the award date DVAs vest on quarterly pro-rata basis over four years following the award date Cash/ Equity Split At least 50% of Immediate Award delivered as Immediate Equity (balance as Immediate Cash) 13 EUIS receiving variable pay below the threshold of 50,000 EUR are exempted from this regulatory deferral requirement (which for the time being, is deemed appropriate for the banking industry by BaFin). Instead, these EUIS receive their variable pay per State Street s corporate design based on grade level. 58

61 At least 50% of Deferred Award delivered as DSAs (balance as DVAs) Retention Periods All equity subject to 6-month retention period post-vest during which the recipient is prohibited from sale or other transfer of the equity The Performance Measures State Street (incl. the Bank) applies both ex-ante and ex-post adjustments to its award process for EUIS: Ex-ante adjustments are guided by the corporate multi-factor risk scorecard, developed by State Street s global risk function, ERM, that is used to measure firm-wide risk performance. The scorecard is overseen by the Management Risk and Capital Committee and the RC and serves as an input into State Street s corporate incentive compensation pool size and allocation processes. The scorecard framework utilizes several different risk inputs and perspectives to assess State Street s top risks. Risk factors are evaluated using a five-point rating scale that ranges from significantly above expectations to significantly below expectations for each of the following five categories: Actual performance vs. expectations for financial and non-financial risks, such as operational, legal / fiduciary, credit, liquidity, and market risk, Capital strength, Business Unit risk performance, State Street s regulatory posture, and A Management overlay to account for factors not explicitly captured in the risk scorecard. Performance against the scorecard metrics is completed using data sourced from various systems in State Street s control functions, including ERM, Finance and Treasury, among others. To the extent any performance is significantly below expectations (i.e. a red flag is indicated on any scorecard), judgment-based ex-ante adjustments to the responsible individual EUIS incentive compensation may be triggered upon review of the actions of EUIS related to the significantly below expectations rating to evaluate whether an action or omission exposed State Street to inappropriate risks resulting in the rating. The corporate risk scorecard creates a mechanism that, in the first instance, adjusts the overall pool of incentive compensation to reflect the inventory of risks taken during the year, and in the second instance, can affect allocations based on appropriate risk-taking behavior by unit or by individual. Moreover, any red flags will automatically trigger a review of the appropriateness of an ex-ante adjustment to the associated individual EUIS. Therefore, the ex-ante adjustments would allow adjustments for the pool at group level and (based on the determination of the remuneration body that is responsible for the oversight of the remuneration of such EUIS) can also reduce variable pay at the individual level. To provide for ex-post adjustments (after grant of award), a malus-based forfeiture provision has been additionally incorporated into the deferred IC awards for all material risk takers, including EUIS. The provision provides for the reduction or cancellation of the amount remaining to be paid under the relevant award in the event the remuneration body responsible for the oversight of the remuneration of such EUIS determined that the actions of the material risk taker or EUIS exposed State Street to inappropriate risk and that exposure has resulted or could reasonably be expected to result in a material loss or losses that are or would be substantial in relation to the revenue, capital and overall risk tolerance of SSC or a particular business of SSC. This forfeiture provision permits the application, as appropriate; of a risk adjustment to the compensation of the responsible material risk-taker (incl. EUIS) after the compensation is awarded. In addition, the Deferred Award agreements for all employees (incl. non-euis) include a contractual provision requiring any unvested deferred awards to be forfeited in the case of termination on account of gross misconduct. Gross misconduct could include conduct that gives rise to a significant risk management failure in respect of State Street or a material business unit, which would place State Street at legal or financial risk. 59

62 The terms and conditions applicable to incentive compensation awards, including the forfeiture provisions described above, are contained in the applicable plan documents and individual award agreements. By accepting an award on the website of the third-party administrator, the recipients of such award acknowledge and agree that they understand and accept those forfeiture terms and the other terms and conditions applicable to the award. 9.3 Quantitative Information The following tables disclose the quantitative remuneration details according to Article 450 CRR for the performance year Table 37: Total remuneration for 2016, broken down by business areas according to Art. 450 (1) (g) CRR Remuneration in keur Global Custody & Depositary Services Insourcing Services Add-on Services Corporate Functions Operational Support Services 2016 Total Total remuneration 34,373 11,350 20,362 40,829 80, ,705 of which fixed remuneration 31,900 10,561 16,847 33,338 75, ,717 of which variable remuneration 2, ,515 7,491 5,719 19,988 Number of beneficiaries ,774 5,103 Table 38: Aggregate quantitative information on remuneration according to Art. 450 (1) (h) & (2) (h) CRR Remuneration in keur according to Art. 450 (1) (h) (i) & (ii) and (2) CRR Total remuneration 15,715 8,652 31,633 of which fixed remuneration 9,715 5,035 18,969 of which variable remuneration 6,000 3,617 12,664 of which cash ,268 of which shares 3,125 2,019 6,613 of which share linked instruments** 2,325 1,445 4,783 of which other n/a n/a n/a Number of Beneficiaries according to Art. 450 (1) (h) (iii) and (2) CRR Outstanding deferred remuneration of which vested of which unvested 10,317 6,612 23,243 according to Art. 450 (1) (h) (iv) and (2) CRR Deferred remuneration of which awarded 5,443 3,182 12,911 of which paid out 4,487 2,630 10,601 of which reduced through performance adjustments according to Art. 450 (1) (h) (v) & (vi) and (2) CRR Senior Management Management Body* Total EU Identified Staff New sign-on payments Number of Beneficiaries of new sign-on payments Severance payments Number of Beneficiaries of severance payments Highest severance to a single person * including 6 members of the Supervisory Board and 7 Branch Heads ** consists of Deferred Value Awards (DVAs) as DVAs are not considered as "shares" or "other" 60

63 Table 39: Number of individuals being remunerated EUR 1m or more according to Art. 450 (1) (i) CRR 61