US Bank 2014 Annual Report Download - page 61

Additionally, the Company uses forward commitments
to sell TBAs and other commitments to sell residential
mortgage loans at specified prices to economically hedge the
interest rate risk in its residential mortgage loan production
activities. At December 31, 2014, the Company had
$7.2 billion of forward commitments to sell, hedging
$3.9 billion of mortgage loans held for sale and $4.3 billion of
unfunded mortgage loan commitments. The forward
commitments to sell and the unfunded mortgage loan
commitments on loans intended to be sold are considered
derivatives under the accounting guidance related to
accounting for derivative instruments and hedging activities.
The Company has elected the fair value option for the
mortgage loans held for sale.
Derivatives are subject to credit risk associated with
counterparties to the contracts. Credit risk associated with
derivatives is measured by the Company based on the
probability of counterparty default. The Company manages
the credit risk of its derivative positions by diversifying its
positions among various counterparties, by entering into
master netting arrangements, and, where possible by
requiring collateral arrangements. The Company may also
transfer counterparty credit risk related to interest rate
swaps to third parties through the use of risk participation
agreements. In addition, certain interest rate swaps and
forwards and credit contracts are required to be centrally
cleared through clearing houses to further mitigate
counterparty credit risk.
For additional information on derivatives and hedging
activities, refer to Notes 20 and 21 in the Notes to
Consolidated Financial Statements.
Market Risk Management In addition to interest rate risk,
the Company is exposed to other forms of market risk,
principally related to trading activities which support
customers’ strategies to manage their own foreign currency,
interest rate risk and funding activities. For purposes of its
internal capital adequacy assessment process, the Company
considers risk arising from its trading activities employing
methodologies consistent with the requirements of
regulatory rules for market risk. The Company’s Market Risk
Committee (“MRC”), within the framework of the ALCO,
oversees market risk management. The MRC monitors and
reviews the Company’s trading positions and establishes
policies for market risk management, including exposure
limitsforeachportfolio.TheCompanyusesaValueatRisk
(“VaR”) approach to measure general market risk.
Theoretically, VaR represents the statistical risk of loss the
Company has to adverse market movements over a one-day
time horizon. The Company uses the Historical Simulation
method to calculate VaR for its trading businesses measured
at the ninety-ninth percentile using a one-year look-back
period for distributions derived from past market data. The
market factors used in the calculations include those
pertinent to market risks inherent in the underlying trading
portfolios, principally those that affect its corporate bond
trading business, foreign currency transaction business,
client derivatives business, loan trading business and
municipal securities business. On average, the Company
expects the one-day VaR to be exceeded by actual losses two
to three times per year for its trading businesses. The
Company monitors the effectiveness of its risk programs by
back-testing the performance of its VaR models, regularly
updating the historical data used by the VaR models and
stress testing. If the Company were to experience market
losses in excess of the estimated VaR more often than
expected, the VaR models and associated assumptions would
be analyzed and adjusted.
The average, high, low and period-end VaR amounts for the
Company’stradingpositionswereasfollows:
Year Ended December 31
(Dollars in Millions) 2014 2013
Average ........................................... $1 $1
High .............................................. 23
Low ............................................... 11
Period-end ....................................... 11
The Company did not experience any actual trading
losses for its combined trading businesses that exceeded
VaR by more than a negligible amount during 2014 and 2013.
The Company stress tests its market risk measurements to
provide management with perspectives on market events
that may not be captured by its VaR models, including worst
case historical market movement combinations that have not
necessarily occurred on the same date.
The Company calculates Stressed VaR using the same
underlying methodology and model as VaR, except that a
historical continuous one-year look-back period is utilized
that reflects a period of significant financial stress
appropriate to the Company’s trading portfolio. The period
selected by the Company includes the significant market
volatility of the last four months of 2008.
The average, high, low and period-end Stressed VaR
amounts for the Company’s trading positions were as
follows:
Year Ended December 31
(Dollars in Millions) 2014 2013
Average ......................................... $4 $4
High ............................................ 88
Low ............................................. 22
Period-end ...................................... 53
U.S. BANCORP The power of potential
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