Prospectus - Notowania
Prospectus - Notowania Prospectus - Notowania
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from a pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If a published price quotation in an active market does not exist for a financial instrument in its entirety, but active markets exist for its component parts, fair value is determined on the basis of the relevant market prices for the component parts. If market prices are not available, the Group adopts mark to model valuation using generally accepted methods. These models include techniques based on discounting future cash flow and calculations of volatility and are revised both during development and regularly thereafter to ensure full and continuing consistency. The methods adopted use inputs based on prices formed in recent transactions involving the instrument to be valued or the prices of instruments with similar characteristics in terms of risk profile. These prices are important for the purposes of determining significant parameters for credit risk, liquidity risk and price risk of the instrument under valuation. Reference to these market parameters limits the discretionality of the valuation and at the same time ensures that the resulting fair value can be verified. If for one or more risk factors it is not possible to refer to market data, the valuation models adopted use calculations based on historical data. As a further guarantee of the objectivity of the valuations provided by the valuation modelsthe Group carries out: - Independent Price Verification (IPV) and - Fair Value Adjustment – FVA. Independent Price Verification is performed monthly by Risk Management units that are independent of the units that have assumed the exposure. IPV consists of comparison with and adjustment of the price of the day to valuations obtained from market participants. For unlisted instruments IPV takes infoprovider prices as its reference, giving greater weight to the prices that are considered more representative of the instruments being valued. IPV includes: the ‘executability’ of the transaction at the observed price, if any; the number of contributors, the degree of similarity of the financial instruments, consistency between prices obtained from different sources and the process followed by the infoprovider when obtaining the price. In addition to Independent Price Verification, Fair Value Adjustment (the calculation of further write-downs of reporting amounts, recognized in the accounts in order to provide for risk relating to illiquid positions and valuation model risk) is also performed. The above-described valuation model review processes and the related parameters, value adjustments for model risk and the use of prudent valuation models ensure that the amount taken to the income statement does not result from the use of nonobservable parameters. Independent Price Verification and Fair Value Adjustments were thus applied also to structured credit products classified as financial assets held for trading, measured at fair value and available for sale. CONSOLIDATED INTERIM REPORT AS AT SEPTEMBER 30, 2009 190
191 >> Condensed Consolidated Financial Statements Part E) – Information on risks and related risk management policies Fair value adjustments estimate, attributing different weights, part of the effects of a one notch downgrade of the instruments considering the price quality observed through the mentioned IPV process. Valuations of these products were uncontroversial before the onset of the sub-prime crisis in H2 2007, because secondary market liquidity gave executable prices for most of the existing securities, thus creating a level 1 valuation according to the fair value hierarchy established by the IFRS 7 - Financial Instruments: Disclosure. Market conditions following the sub-prime mortgage crisis, which was marked by growing illiquidity in these instruments, the market players referred where possible to prices obtained from consensus pricing providers 2 , which, though observable, do not necessarily qualify as active market prices. This meant that the valuation was level 2 under IFRS 7. Where prices were not available from consensus price providers either in terms of price or market input, fair value was calculated using internal models thus arriving at a level 3 valuation under IFRS 7. 65.76% of the portfolio is priced using level 2 methods and the remaining 34.24% according to level 3 methods. The following table gives the distribution of the types of exposure as a percentage of fair value at September 30, 2009 Structured credit product exposures: fair value hierarchy Exposure type Level 2 Level 3 RMBS Prime 87.91% 12.09% RMBS Non conforming 79.42% 20.58% CMBS 56.62% 43.38% CDO of ABS/CDO squared 2.39% 97.61% CDO - Balance Sheet 13.30% 86.70% CDO - Preferred Stock 0.00% 100.00% CDO - Synthetic Arbitrage 0.00% 100.00% CDO Other 0.00% 100.00% CLO SME 93.53% 6.47% CLO Arbitrage/balance sheet 66.31% 33.69% CLO/CBO others 93.49% 6.51% Consumer loans 0.00% 100.00% Credit cards 0.00% 100.00% Leasing 100.00% 0.00% Others 0.47% 99.53% Total 65.76% 34.24% 1.5 Group Exposure to Monoline Insurers The Group has limited exposure to monoline insurers. It is not the usual practice of the Group to manage credit risk arising from ABS exposures through credit derivatives, or other guarantees with monoliners. The Group has direct exposure to certain baskets of names which include monoliners. 2 E.g., MarkIt, which aggregates, validates and distributes composite end-of-day bond prices on the basis of prices obtained from over thirty large dealers worldwide. Only contributors’ prices that pass an automatic valuation process are inserted in the composite, so that the pricing is neutral and impartial.
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191<br />
>> Condensed Consolidated Financial Statements<br />
Part E) – Information on risks and related risk management policies<br />
Fair value adjustments estimate, attributing different weights, part of the effects of a one notch downgrade of the instruments<br />
considering the price quality observed through the mentioned IPV process.<br />
Valuations of these products were uncontroversial before the onset of the sub-prime crisis in H2 2007, because secondary<br />
market liquidity gave executable prices for most of the existing securities, thus creating a level 1 valuation according to the<br />
fair value hierarchy established by the IFRS 7 - Financial Instruments: Disclosure.<br />
Market conditions following the sub-prime mortgage crisis, which was marked by growing illiquidity in these instruments, the<br />
market players referred where possible to prices obtained from consensus pricing providers 2 , which, though observable, do<br />
not necessarily qualify as active market prices. This meant that the valuation was level 2 under IFRS 7.<br />
Where prices were not available from consensus price providers either in terms of price or market input, fair value was<br />
calculated using internal models thus arriving at a level 3 valuation under IFRS 7.<br />
65.76% of the portfolio is priced using level 2 methods and the remaining 34.24% according to level 3 methods.<br />
The following table gives the distribution of the types of exposure as a percentage of fair value at September 30, 2009<br />
Structured credit product exposures: fair value hierarchy<br />
Exposure type Level 2 Level 3<br />
RMBS Prime 87.91% 12.09%<br />
RMBS Non conforming 79.42% 20.58%<br />
CMBS 56.62% 43.38%<br />
CDO of ABS/CDO squared 2.39% 97.61%<br />
CDO - Balance Sheet 13.30% 86.70%<br />
CDO - Preferred Stock 0.00% 100.00%<br />
CDO - Synthetic Arbitrage 0.00% 100.00%<br />
CDO Other 0.00% 100.00%<br />
CLO SME 93.53% 6.47%<br />
CLO Arbitrage/balance sheet 66.31% 33.69%<br />
CLO/CBO others 93.49% 6.51%<br />
Consumer loans 0.00% 100.00%<br />
Credit cards 0.00% 100.00%<br />
Leasing 100.00% 0.00%<br />
Others 0.47% 99.53%<br />
Total 65.76% 34.24%<br />
1.5 Group Exposure to Monoline Insurers<br />
The Group has limited exposure to monoline insurers.<br />
It is not the usual practice of the Group to manage credit risk arising from ABS exposures through credit derivatives, or other<br />
guarantees with monoliners.<br />
The Group has direct exposure to certain baskets of names which include monoliners.<br />
2 E.g., MarkIt, which aggregates, validates and distributes composite end-of-day bond prices on the basis of prices obtained from over thirty<br />
large dealers worldwide. Only contributors’ prices that pass an automatic valuation process are inserted in the composite, so that the pricing is<br />
neutral and impartial.
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