ING Direct 2009 Annual Report Download - page 152

2.1 Consolidated annual accounts
ING Group Annual Report 2009
150
Additional information to the consolidated balance sheet of ING Group (continued)
24 DERIVATIVES AND HEDGE ACCOUNTING
Use of derivatives and hedge accounting
As described in the ‘Risk management’ section, ING Group uses derivatives (principally interest rate swaps and cross currency interest rate
swaps) for economic hedging purposes in the management of its asset and liability portfolios and structural positions. The objective of
economic hedging is to enter into positions with an opposite risk profile to an identified exposure to reduce that exposure. The impact of
ING Group’s hedging activities is to optimise the overall cost to the Group of accessing debt capital markets and to mitigate the market risk
which would otherwise arise from structural imbalances in the duration and other profiles of its assets and liabilities. In addition, hedging
activities are undertaken to hedge against the interest rate risk in the mortgage offer period in relation to retail mortgages and to lock-in
the interest margin in relation to interest bearing assets and the related funding.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifies
under the IFRS-EU hedge accounting rules. Derivatives that qualify for hedge accounting under IFRS-EU are classified and accounted for
according to the nature of the instrument hedged and the type of IFRS-EU hedge model that is applicable. The three models applicable
under IFRS-EU are: fair value hedge accounting, cash flow hedge accounting and net investment hedge accounting. These are described
under the relevant headings below. The company’s detailed accounting policies for these three hedge models are set out in section
‘Principles of valuation and determination of results’.
To qualify for hedge accounting under IFRS-EU, strict criteria must be met. Certain hedges that are economically effective from a risk
management perspective do not qualify for hedge accounting under IFRS-EU. The fair value changes of derivatives relating to such non
qualifying hedges are taken to the profit and loss account. However, in certain cases, the Group mitigates the resultant profit and loss
account volatility by designating hedged assets and liabilities at fair value through profit and loss. If hedge accounting is applied under
IFRS-EU, it is possible that during the hedge a hedge relationship no longer qualifies for hedge accounting and hedge accounting cannot
be continued, even if the hedge remains economically effective. As a result, the volatility arising from undertaking economic hedging in
the profit and loss account may be higher than would be expected from an economic point of view.
With respect to exchange rate and interest rate derivative contracts, the notional or contractual amounts of these instruments is indicative
of the nominal value of transactions outstanding at the balance sheet date; however they do not represent amounts at risk. ING Group
uses credit derivatives to manage its exposure to credit risk, including total return swaps and credit default swaps, to sell or buy protection
for credit risk exposures in the loan, investment and trading portfolios. Hedge accounting is not applied in relation to credit derivatives.
Fair value hedge accounting
ING Group’s fair value hedges principally consist of interest rate swaps and cross-currency interest rate swaps that are used to protect
against changes in the fair value of fixed-rate instruments due to movements in market interest rates.
Gains and losses on derivatives designated under fair value hedge accounting are recognised in the profit and loss account. The effective
portion of the fair value change on the hedged item is also recognised in the profit and loss account. As a result, only the net accounting
ineffectiveness has an impact on the net result.
For the year ended 31 December 2009, ING Group recognised EUR –1,130 million (2008: EUR –5,492 million) of fair value changes on
derivatives designated under fair value hedge accounting in the profit and loss account. This amount was partly offset by EUR 975 million
(2008: EUR 5,697 million) fair value changes recognised on hedged items. This resulted in EUR –155 million (2008: EUR 205 million) net
accounting ineffectiveness recognised in the profit and loss account. As at 31 December 2009, the fair values of outstanding derivatives
designated under fair value hedge accounting was EUR –6,139 million (2008: EUR –5,050 million), presented in the balance sheet as EUR
2,727 million (2008: EUR 3,862 million) positive fair values under assets and EUR 8,866 million (2008: EUR 8,912 million) negative fair
values under liabilities.
ING Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of
IFRS-EU. The EU ‘carve-out’ macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly
designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core
deposits and under-hedging strategies. Under the IFRS-EU ‘carve-out’, hedge accounting may be applied to core deposits and
ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated
amount of that bucket. ING Group applies the IFRS-EU ‘carve-out’ to its retail operations in which the net exposure of retail funding
(savings and current accounts) and retail lending (mortgages) is hedged. The hedging activities are designated under a portfolio fair value
hedge on the mortgages, using the IFRS-EU provisions.