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2018 Pillar 3 Disclosures
Annex
classifications: countries, ratings, sectors, economic
groups, etc.
For the management of concentration risk, prudent
criteria are applied so as to be able to manage the
limits available with sufficient leeway with regard to the
legal concentration limits established.
As for the level of sector concentration, this is the
consequence of Cecabank’s specialisation in the
execution of all manner of activities, operations and
services inherent in the banking business in general, or
directly or indirectly associated with this. As a result,
financial sector risks account for around 56.3% of overall
exposure, although in the assessment of this degree of
sector concentration it must be borne in mind that the
exposure is maintained within a highly regulated and
supervised sector.
Contractual netting and financial guarantee
contracts or “collateral”
The general policy regarding trading of financial
derivatives, and repo, sell/buy-back and securities
lending operations is to sign netting agreements
prepared by national or international associations.
In the event of a breach by the counterparty, these
contracts allow for the foreclosure of the operations
covered by them and offsetting, which means that the
parties will only be able to demand the net balance of
the product of the settlement of such operations.
For financial derivatives, ISDA Master Agreements are
formalised, subject to UK law or that of the State of New
York, or otherwise the CMOF Master Agreement, subject to
Spanish law, depending on the counterparty. Meanwhile,
for hedging derivative financial instruments beyond a
certain risk level, financial guarantee agreements are
formalised, namely the Credit Support Annex for the ISDA
Master Agreements and Annex III for CMOF.
In the case of repo and sell/buy-back operations, the
Global Master Repurchase Agreements (GMRA) are
signed, while for securities lending, the European
Master Agreement (EMA) or the Global Master Securities
Lending Agreements (GMSLA) are formalised. In this
type of contractual netting agreement, the clauses
incorporate the regulation of the financial guarantees or
“margins” for the operations.
At present, most collateral (to be handed over or
received) in derivatives takes the form of cash, although
market practices are demonstrating that non-cash
collateral usage is increasing, a trend which Cecabank
is taking into consideration in its active collateral
management.
Credit risk exposure in accordance with
the credit ratings
At 31 December 2018, some 81.3% of exposure
(without taking into consideration investments in
the public sector, nor central counterparties (CCP)
with direct or indirect access) has been given a
rating granted by one of the credit rating agencies
recognised by the Bank of Spain.
The distribution by rating level of the rated exposure
is as follows:
Level
Rating
Percentage
1
AAA-AA
9.8%
2
A
24.3%
3
BBB
55%
4
BB
10.4%
5
B
0.5%
6
CCC and lower
0.0%
Total
100%
2. Risks associated with
the trading book
The General Risk Management Framework approved by
the Board, implementing the Risk Tolerance Framework,
contains the policies regarding the assumption and
management of market risk.
Market risk management objectives, policies
and processes
Market risk is defined as the risk affecting results
or capital and resulting from adverse movements
in the prices of bonds, securities, commodities and
exchange rates in operations registered in the trading
book. This risk arises from market-making activities,
trading, adoption of positions in bonds, securities,
currencies, commodities and derivatives (based on
bonds, securities, currencies and commodities). This
risk includes foreign currency risk, defined as the
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