RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS

Transcription

1 RISK MNGEMENT ND DERIVTIVE FINNCIL INSTRUMENTS Management of financial and energy price risks s a mobility, transport and logistics group with international operations, DB Group is exposed to financial risks in the form of changes in rates and exchange rates. In addition, there are also energy price risks on the procurement side as a result of fluctuations in the prices of diesel fuel and electricity. One of the aspects of corporate policy is to actively manage and thus limit these risks by means of the use of derivative financial instruments. DB G with its central Group Treasury is responsible for all financing and hedging transactions of DB Group. It cooperates with the subsidiaries to identify, evaluate and control financial and energy price risks. t regular intervals, the Management Board is informed of major finan - cial risks and receives a schedule of all financial instruments as well as information on the impact on results and the balance sheet. Speculation is not permitted. Ongoing market and risk assessment takes place as part of risk management. The Management Board of DB G has defined principles for risk management. The guidelines for Group financing and for the internal control system contain binding rules for the use of derivative financial instruments for managing rate and foreign exchange risks and the risks of energy price changes, as well as the procedure for dealing with related counterparty default risks. In the structure and procedure organization, there is a clear functional and organizational segregation between scheduling and trading on the one hand (front office) as well as settlement and monitoring on the other (back office). Group Treasury operates on the global financial markets using the minimum requirements applicable for risk management (Mindestanforderungen an das Risikomanagement; MaRisk) of the banks prepared by the Federal Financial Supervisory uthority (Bundesanstalt für Finanzdienstleistungsaufsicht; BaFin), and is subject to regular internal and external control. Derivative financial instruments are used exclusively for hedging, currency and energy price risks. ll individual transactions correspond to on-balance-sheet or anticipated underlyings (for instance bonds, purchases of diesel fuel and electricity). The aim is to achieve qualification as an effective hedge in accordance with IS 39. Interest rate risks In line with the length of time that assets are tied up, the financial requirement is covered mainly by issuing long-term and fixed- bonds. Interest rate management comprises a comparatively low amount of for optimizing costs. Interest rate derivatives such as rate swaps, caps, floors and collars may be used for managing the fixed-floating ratio. In accordance with IFRS 7, existing rates are detailed by means of a sensitivity analysis which investigates the effects of theoretical changes in market rates on results and shareholders equity. The sensitivity analysis which has been carried out has taken ac - count of the following financial instruments: Derivatives designated in cash flow hedges ( hedges and cross-currency hedges) have an impact on the hedge reserve in equity and are therefore taken into consideration in the sensitivity calculations relating to equity. Financial instruments with a return have an impact on net income. This is applicable to -income cross-currency swaps as well as -rate loans/finance leases. Cash at banks and current borrowings/deposits with banks have an impact on net income. If the level of market rates for the exposure had been 100 basis points higher (lower) as of the balance sheet date, the result would have been affected as follows: Changes in market level of rates BP 1) 100 BP 1) +100 BP 1) 100 BP 1) Impact on comprehensive income thereof recognized in the income statement thereof covered directly in equity ) Basis points. Foreign currency risks The foreign currency risks are attributable to financing measures and operating activities. In order to avoid rate and foreign currency risks, the foreign currency bonds issued within the framework of Group financing are converted into euro liabilities by means of cross-currency swaps. However, it is not necessary for such bonds to be converted in individual cases if there is a guarantee that the bond can be serviced out of inflows of foreign currency payments. Group Treasury extends loans to foreign subsidiaries in their functional currency. These positions are normally hedged with the aid of derivative financial instruments. We have international operations with our activities and are thus exposed to operational exchange rate risks. In order to minimize these risks, the subsidiaries take out internal foreign exchange transactions with Group Treasury and hedge all major foreign currency positions in

2 their functional currency. Group Treasury in turn hedges its open foreign currency positions by way of opposite transactions on the financial markets. In exceptional cases and to a limited extent, subsidiaries are permitted to hedge foreign currency positions with banks themselves. In order to present foreign currency risks, IFRS 7 requires a sensitivity analysis which investigates the effects of theoretical changes in foreign currency relations on result and shareholders equity. The currency sensitivity analysis is based on the following assump tions: The cross-currency swaps which are concluded and the current currency transactions are always allocated to original underlyings. ll major foreign currency positions arising from operating activities are always 100 % hedged. If exchange rate changes are 100 % hedged, they do not have any impact on results or capital. Foreign currency risks can only occur if a 100 % hedge does not exist in justified exceptional cases; for instance if a conservative estimate is made for hedge volumes for anticipated foreign currency cash flows in order to avoid overhedging. On-balance-sheet foreign currency risks may result from energy price hedging which is not denominated in the respective functional currency. If the following foreign currencies for currency hedges had weakened (or strengthened) by 10 % as of the balance sheet date, the result would have been affected as follows: ppreciation of foreign currency by % 10% +10% 10% GBP CHF CNY HKD SGD TRY DB Group has numerous equity investments in foreign subsidiaries, whose net assets are exposed to a translation risk. This translation risk is not perceived to be a foreign currency risk for the purposes of IFRS 7, and is not hedged. Energy price risks DB Group is the largest consumer of electricity in Germany. In addition, the Group also requires considerable volumes of diesel fuel. The high energy procurement volume and the volatility of electricity and mineral oil markets result in substantial earnings risks, which are continuously monitored. The Energy Price Risk Management Committee (ERMC) is responsible for managing and minimizing these risks; this committee is re - spon sible for ensuring the implementation of the risk policy of DB Group specifically with regard to energy price risks. The ERMC takes decisions with regard to specific hedging strategies and measures in which financial and energy derivatives are used. Swaps relating to the commodities underlying the price formulae (coal and heating oil) are used as hedges for the risks of price changes for sourcing electricity. Diesel price risks are for instance limited by taking out diesel swaps (hybrid hedges of diesel price and currency risks and individual hedges of currency risks are possible in exceptional cases). Energy price risks are quantified by means of sensitivity analyses in accordance with IFRS 7. These provide information concerning the effects of theoretical energy price changes on result and equity (in relation to the balance sheet exposure on the balance sheet date). The following assumptions have been made for performing the sensitivity analyses: In the case of energy price swaps, the effective part is recognized in equity, and the ineffective part is recognized in the income statement. If options are used (collars), the intrinsic value constitutes the effective part of the hedge, so that the intrinsic value is shown in shareholders equity. On the other hand, the fair value is not part of the hedge, and is shown in the income statement. If the energy prices at the end of the year had been 10 % lower (or higher), the result would have been affected as follows: Changes in market prices % 10% +10% 10% Impact on comprehensive income thereof recognized in the income statement Diesel Hard coal HSL thereof covered directly in equity Diesel Hard coal HSL

3 Counterparty default risk of, currency and energy derivatives Counterparty default risk is defined as possible losses due to the default of counterparties ( worst-case scenario ). It represents the replacement costs (at market values) of the derivative financial instruments for which DB Group has claims against contract partners. The counterparty default risk is monitored and actively managed by way of strict requirements relating to the creditworthiness of the counterparty at the point at which the transactions are concluded and also throughout the entire life of the transactions, and also by way of defining risk limits. In order to minimize the credit risk of long-term derivative transactions, DB Group has concluded credit support agreements (CS) with its core banks. In the CS, it was agreed that both parties would mutually provide cash securities for and cross-currency swaps as well as energy derivatives. The daily exchange of securities with all relevant banks has been taking place since the end of March Related amounts which are not netted in the balance sheet: Financial assets / liabilities shown in the balance sheet Financial instruments ppreciation of foreign currency by Cash securities received /provided Net amounts DEC 31, 2013 Derivative financial instruments assets Derivative financial instruments liabilities DEC 31, 2012 Derivative financial instruments assets Derivative financial instruments liabilities The decline in the counterparty default risks compared with the previous year is mainly attributable to the development in value of the cross-currency swaps and the energy price derivatives. The maximum individual risk default risk in relation to individual contract partners is 47 million, and exists in relation to a bank with a Moody s rating of 3. For transactions with terms of more than one year, all banks which are exposed to a counterparty default risk have at least a Moody s rating of Baa2. Liquidity risk Liquidity management involves maintaining adequate liquid assets, constantly checking the commercial paper market for ensuring adequate market liquidity and depth and the constant availability of financial resources via guaranteed credit facilities of banks (see note (28) [ page 245 ff.]). The following table shows the contractually agreed undiscounted payments and redemption payments relating to the original financial liabilities as well as the derivative financial instruments with a positive and negative fair value of DB Group:

4 Maturity analysis of financial liabilities and later Maturity analysis of financial liabilities as of Dec 31, 2013 NON-DERIVTIVE FINNCIL LIBILITIES Interest-free loans Bonds ,284 5, , ,083 Commercial paper Bank borrowings EUROFIM loans Finance lease liabilities Other financial liabilities 10 2 Trade liabilities 4, Other/miscellaneous liabilities 3, DERIVTIVE FINNCIL LIBILITIES (NET/GROSS SETTLED) with cash flow hedges , , Interest derivatives connected with cash flow hedges Currency derivatives connected with cash flow hedges 788 with cash flow hedges Energy price derivatives DERIVTIVE FINNCIL SSETS (GROSS SETTLED) with cash flow hedges Currency derivatives connected with cash flow hedges with cash flow hedges VOLUNTRY INFORMTION BOUT DERIVTIVES DERIVTIVE FINNCIL SSETS (NET SETTLED) with cash flow hedges Currency derivatives connected with cash flow hedges with cash flow hedges 0 0 Energy price derivatives INFLOW OF FUNDS FROM DERIVTIVE FINNCIL INSTRUMENTS (GROSS SETTLED) with cash flow hedges , , Currency derivatives connected with cash flow hedges 1,099 0 with cash flow hedges FINNCIL WRRNTIES Financial warranties 50

5 and later Maturity analysis of financial liabilities as of Dec 31, 2012 Redemp- tion NON-DERIVTIVE FINNCIL LIBILITIES Interest-free loans Bonds ,250 4, , ,746 Commercial paper Bank borrowings EUROFIM loans Finance lease liabilities Other financial liabilities 10 Trade liabilities 4, Other/miscellaneous liabilities 2, DERIVTIVE FINNCIL LIBILITIES (NET/GROSS SETTLED) with cash flow hedges Interest derivatives connected with cash flow hedges Currency derivatives connected with cash flow hedges 248 with cash flow hedges 322 Energy price derivatives DERIVTIVE FINNCIL SSETS (GROSS SETTLED) with cash flow hedges Currency derivatives connected with cash flow hedges with cash flow hedges VOLUNTRY INFORMTION BOUT DERIVTIVES DERIVTIVE FINNCIL SSETS (NET SETTLED) with cash flow hedges Currency derivatives connected with cash flow hedges with cash flow hedges Energy price derivatives INFLOW OF FUNDS FROM DERIVTIVE FINNCIL INSTRUMENTS (GROSS SETTLED) with cash flow hedges , , Currency derivatives connected with cash flow hedges with cash flow hedges FINNCIL WRRNTIES Financial warranties 136

6 This includes all instruments which were held at the end of 2013 and for which payments had already been agreed. Foreign currency amounts have been translated using the spot rate applicable as of the balance sheet date. The payments attributable to the financial instruments have been calculated on the basis of the rates applicable on December 31, 2013 (previous year on December 31, 2012). Financial liabilities which can be repaid at any time are allocated to the earliest possible time segment. The financial liabilities are opposed by cash and cash equivalents of 2,861 million, consisting of positive account balances (50 %) and current fixed-term deposits (50%).