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Rothschild & Co | Annual Report 2017
Note 2 – Derivatives
A derivative is a financial instrument, the value of which is derived from another financial instrument, an index or some other variable (“the underlying”).
Typically the underlying is an interest rate, a currency exchange rate or the price of a debt or equity security. Derivatives require little or no net investment or
a lower investment than a non-derivative financial instrument to obtain the same sensitivity to changes in the underlying.
Derivative instruments are carried at fair value, shown in the balance sheet as separate totals of positive fair values (assets) and negative fair values
(liabilities). Positive fair values represent the cost to the Group of replacing all transactions with a fair value in the Group’s favour if the counterparties
default. Negative fair values represent the cost to the Group’s counterparties of replacing all their transactions with the Group with a fair value in the
counterparties’ favour if the Group were to default. Positive and negative fair values on different transactions are only netted if there is legal right of set-off,
the transactions are with the same counterparty and the cash flows will be settled on a net basis. Changes in fair values of derivative instruments are
recognised in trading income unless they qualify as cash flow hedges for accounting purposes.
Derivatives may be transacted for trading or hedging purposes. The accounting treatment of hedge transactions depends on the nature of the hedging
relationship and whether the hedge qualifies as such for accounting purposes. Most of the Group’s transactions that do not qualify as hedges for
accounting purposes are nonetheless for the purpose of reducing market risk, by hedging exposures in the trading or non-trading books.
Trading derivatives
In thousands of euro
31/12/2017
31/03/2017
Notional
principal
Of which:
asset
Of which:
liability
Notional
principal
Of which:
asset
Of which:
liability
Firm interest rate contracts
141,972
958
308
143,424
2,998
169
Conditional interest rate contracts
19,150
178
175
15,090
305
34
Firm foreign exchange contracts
5,293,305
15,435
23,725
6,517,560
17,253
32,690
Conditional foreign exchange contracts
240,971
501
482
193,494
485
234
Commodity options
–
–
–
54,039
135
65
Equity-related options
69,893
307
133
103,518
348
137
TOTAL
5,765,291
17,379
24,823
7,027,125
21,524
33,329
Hedging derivatives
In thousands of euro
31/12/2017
31/03/2017
Notional
principal
Of which:
asset
Of which:
liability
Notional
principal
Of which:
asset
Of which:
liability
Firm interest rate contracts
137,000
–
6,543
136,000
–
8,626
TOTAL
137,000
–
6,543
136,000
–
8,626
The Group’s hedging derivatives consist of fair value hedges only. These are interest rate swaps that are used to protect against changes in the fair value
of fixed rate lending. There is no charge or credit in the income statement due to ineffectiveness of these hedges.
Offsetting financial assets and financial liabilities
The following table shows the impact on the consolidated balance sheet of offsetting assets and liabilities with the same counterparties. The hypothetical
financial impact of netting instruments subject to an enforceable master netting arrangement, or similar agreements, with available cash and financial
instrument collateral would not be material.
In thousands of euro
31/12/2017
Gross
assets
Amounts
set off
Net amounts
as per balance
sheet
Trading derivative assets
24,389
(7,010)
17,379
Loans and receivables with banks
1,735,630
(5,477)
1,730,153
Other assets not subject to netting
10,368,207
– 10,368,207
Total assets
12,128,226
(12,487)
12,115,739
Due to banks
637,003
(626)
636,377
Trading derivative liabilities
36,684
(11,861)
24,823
Other liabilities not subject to netting
9,002,610
– 9,002,610
Total liabilities
9,676,297
(12,487)
9,663,810
Notes to the consolidated financial statements