Bonds are primarily measured using prices that can be realized in the market. If no quotations are available, the securities are measured using the discounted cash flow model. The measurement parameters used here are the yield curve and an adequate credit spread. The credit spread is calculated using comparable financial instruments which are available on the market. For a small part of the portfolio, a conservative approach was selected and credit default spreads were used for measurement. External measurements by third parties are also taken into account, all of which are indicative in nature. Items are assigned to levels at the end of the reporting period.
At Group standard, well-known valuation techniques are used to measure OTC derivatives. For example, interest rate swaps, cross currency swaps or forward rate agreements are measured using the customary discounted cash flow model for these products. OTC options, such as foreign exchange options or caps and floors, are based on valuation models which are in line with market standards. For the products mentioned as examples, these would include the Garman-Kohlhagen model, Black-Scholes 1972 and Black 1976. Complex options are measured using binomial tree models and Monte-Carlo simulations.
To determine the fair value a credit value adjustment (CVA) is also necessary to reflect the counterparty risk associated with OTC derivative transactions, especially of those contractual partners with whom hedging via credit support annexes has not yet been conducted. This amount represents the respective estimated market value of a security which could be used to hedge against the credit risk of the counterparties to the Group's OTC derivative portfolios.
For OTC derivatives, credit value adjustments (CVA) and debit value adjustments (DVA) are used to cover expected losses from lending business. The CVA will depend on the expected future exposure (expected positive exposure) and the probability of default of the contractual partner. The DVA is determined based on the expected negative exposure and on RBI's credit quality. The expected positive exposure is calculated by simulating a large number of scenarios for future points in time, taking into ac- count all available risk factors (e.g. currency and yield curves). OTC derivatives are measured at market values taking into account these scenarios at the respective future points in time and are aggregated at counterparty level in order to then ascertain the expected positive exposure for all points in time. Counterparties with CSA contracts (credit support annex contracts) are included in the calculation for the first time from 31 December 2014. Here, the expected exposures are not calculated directly from simu- lated market values, but from a future expected change in market values based on a "margin period of risk" of 10 days.
A further element of the CVA involves determining a probability of default for each counterparty. Where direct credit default swap (CDS) quotations are available, the Group calculates the market-based probability of default and, implicitly, the loss-given-default (LGD) for the respective counterparty. The probability of default for counterparties which are not actively traded on the market is calculated by assigning a counterparty's internal rating to a sector and rating-specific CDS curve. The valuation result due to changed credit risk of the counterparty is disclosed under Notes (5) Net trading income, interest-based transactions.
The DVA is determined by the expected negative exposure and by RBI's credit quality and represents the value adjustment for own probability of default. The method of calculation is similar to that for the CVA, but the expected negative market value is used instead of the expected positive market value. Instead of the expected positive exposures, expected negative exposures are calculated from the simulated future aggregated counterparty market values; these represent the expected debt which we have to the counterparty at the respective future points in time. Values implied by the market are also used to calculate the own probability of default. Direct CDS quotations are used where available. If no CDS quotation is available, the own probability of default is calculated by assigning the own rating to a sector and rating-specific CDS curve. The net valuation due to the changed credit risk of the counterparty is shown in note (5) net trading income, interest-based transactions.
In the following tables, the financial instruments reported at fair value in the statement of financial position are grouped according to items in the statement of financial position and classified according to measurement category. A distinction is made as to whether the measurement is based on quoted market prices (Level I), or whether the valuation models are based on observable market data (Level II) or on parameters which are not observable on the market (Level III). Items are assigned to levels at the end of the reporting period.
2014 2013
in € thousand Level I Level II Level III Level I Level II Level III
Trading assets 3,133,374 5,246,792 114,517 4,072,475 3,718,663 164,884
Positive fair values of derivatives1 158,754 4,822,166 72,603 71,664 3,445,601 88,009
Shares and other variable-yield securities 345,500 2,086 237 402,759 4,460 306
Bonds, notes and other fixed-interest securities 2,629,120 422,540 41,677 3,598,052 268,603 76,569
Call/time deposits from trading purposes 0 0 0 0 0 0
Loans held for trading 0 0 0 0 0 0
Financial assets at fair value through profit or loss 6,711,618 332,688 86,279 5,150,021 3,645,436 22,131
Shares and other variable-yield securities 240,425 0 3,720 323,424 108,836 4,889
Bonds, notes and other fixed-interest securities 6,471,193 332,688 82,559 4,826,597 3,536,600 17,242 Financial assets available-for-sale 1,881,248 583,237 332,243 1,423,039 5,591 263,206
Other interests 3,477 0 0 4,435 0 0
Bonds, notes and other fixed-interest securities 1,877,164 583,237 82,242 1,418,604 5,591 11,627
Shares and other variable-yield securities 607 0 250,001 0 0 251,580
Derivatives (hedging) 0 941,575 187 0 549,903 23,101
Positive fair values of derivatives from hedge accounting 0 941,575 187 0 549,903 23,101
1 Including other derivatives.
2 Includes only securities traded on the stock exchange. Level I Quoted market prices.
Level II Valuation techniques based on market data. Level III Valuation techniques not based on market data.
2014 2013
in € thousand Level I Level II Level III Level I Level II Level III
Trading liabilities 555,458 6,795,374 27,342 632,591 4,735,202 23,894
Negative fair values of derivative financial instruments1 128,449 6,039,341 19,446 130,831 4,082,610 16,640
Call/time deposits from trading purposes 0 0 0 0 0 0
Short-selling of trading assets 427,010 71,062 0 501,760 49,699 0
Certificates issued 0 684,972 7,896 0 602,893 7,254
Liabilities at fair value through profit and loss 0 2,595,682 0 0 2,612,277 0
Debt securities issued 0 2,130,029 0 0 2,121,500 0
Subordinated capital 0 465,653 0 0 490,777 0
Derivatives (hedging) 0 200,549 0 0 132,536 0
Negative fair values of derivatives from hedge accountin 0 200,549 0 0 132,536 0
1 Including other derivatives. Level I Quoted market prices.
Level II Valuation techniques based on market data. Level III Valuation techniques not based on market data.
Movements between Level I and Level II
For each financial instrument, a check is made whether quoted market prices are available on an active market (Level I). For finan- cial instruments where there are no quoted market prices, observable market data such as yield curves are used to calculate fair value (Level II). Reclassification takes place if this estimate changes.
If instruments are reclassified from Level I to Level II, this means that market quotations were previously available for these instru- ments but are no longer so. These securities are now measured using the discounted cash flow model, using the respective valid yield curve and the appropriate credit spread.
If instruments are reclassified from Level II to Level I, this means that the measurement results were previously calculated using the discounted cash flow model but that market quotations are now available and can be used for measurement.
In 2014, mainly bonds and other fixed-income securities in the amount of € 11,057 thousand were transferred from Level II to Level I driven by higher market liquidity of individual products.
Movements in Level III of financial instruments at fair value
If at least one significant measurement parameter is not observable on the market, this instrument is assigned to Level III of the fair value hierarchy. The following tables show the changes in the fair value of financial instruments whose valuation models are based on unobservable parameters. in € thousand As at 1/1/2014 Change in consolidated group Exchange differences Purchases Sales, repayment Trading assets 164,884 0 (2,816) 28,107 (89,523)
Financial assets at fair value through profit or loss 23,710 0 (1,692) 52,013 (38,883)
Financial assets available-for-sale 261,627 0 (324) 25,257 (179)
Derivatives (hedging) 23,101 0 146 187 (25,170) in € thousand Gains/loss in P/L Gains/loss in other comprehensive income Transfer to level III Transfer from level III
As at 31/12/2014
Trading assets 15,418 0 43 (1,595) 114,517
Financial assets at fair value through profit or loss 2,953 0 48,179 (1) 86,279
Financial assets available-for-sale (8,904) (4) 54,770 0 332,243
Derivatives (hedging) (118) 2,041 0 0 187 in € thousand As at 1/1/2014 Change in consolidated group Exchange differences Purchases Sales, repayment Trading liabilities 23,894 0 0 6,027 0 in € thousand Gains/loss in P/L Gains/loss in other comprehensive income Transfer to level III Transfer from level III
As at 31/12/2014
Trading liabilities (2,579) 0 0 0 27,342
In 2014, gains and losses resulting from financial instruments of the level III fair value hierarchy amounted to minus € 6,770 thou- sand (2013: € 8,971 thousand).