Derivative financial instruments for hedging purposes

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative financial instruments for hedging purposes

21. Derivative financial instruments for hedging purposes

As of December 31, 2012 and 2011, quantitative information on derivative financial instruments held for hedging purposes is as follows:

	2012						2011
	Nominal		Fair Value (1)				Nominal		Fair Value (1)
(In thousands of US$)	Amount		Asset		Liability		Amount		Asset		Liability
Fair value hedges:
Interest rate swaps		480,000		8,319		6,600		125,000		16		10,317
Cross-currency interest rate swaps		236,866		3,525		4,665		215,107		56		40,574
Cash flow hedges:
Interest rate swaps		-		-		-		20,000		-		512
Cross-currency interest rate swaps		42,001		7,333		23		42,336		3,549		-
Forward foreign exchange		75,733		62		411		53,264		249		2,339
Net investment hedges:
Forward foreign exchange		6,196		-		48		6,036		289		-
Total		840,796		19,239		11,747		461,743		4,159		53,742
Net gain on the ineffective portion of hedging activities (2)		71						2,849

⁽¹⁾ The fair value of assets and liabilities is reported within the derivative financial instruments used for hedging - receivable and payable lines in the consolidated balance sheets, respectively.

⁽²⁾ Gains and losses resulting from ineffectiveness and credit risk in hedging activities are reported within the derivative financial instruments and hedging line in the consolidated statements of income.

The gains and losses resulting from activities of derivative financial instruments and hedging recognized in the consolidated statements of income are presented below:

2012
(In thousands of US$)	Gain (loss) recognized in OCI (effective portion)	Classification of  gain (loss)	Gain (loss) reclassified from accumulated OCI to the statements of income (effective portion)	Gain (loss) recognized on derivatives (ineffective portion)
Derivatives – cash flow hedge
Interest rate swaps	217
Cross-currency interest rate swaps	3,740	Gain (loss) on foreign currency exchange	2,481	-
		Interest income – loans	(564)	-
Forward foreign exchange	1,742	Interest expense - borrowings	(169)	-
	-	Gain (loss) on foreign currency exchange	3,679	-
Total	5,699		5,427	-
Derivatives – net investment hedge
Forward foreign exchange	109	Gain (loss) on foreign currency exchange	-	-
Total	109		-	-

2011
(In thousands of US$)	Gain (loss) recognized in OCI (effective portion)			Classification of gain (loss)	Gain (loss) reclassified from accumulated OCI to the statements of income (effective portion)			Gain (loss) recognized on derivatives (ineffective portion)
Derivatives – cash flow hedge
Interest rate swaps		987
Cross-currency interest rate swaps		2,270		Gain (loss) on foreign currency exchange		1,958			-
Forward foreign exchange		(2,160	)	Interest income – loans		(124)			-
				Interest expense - borrowings		172			-
		-		Gain (loss) on foreign currency exchange		(2,966	)		-
Total		1,097				(960	)		-
Derivatives – net investment hedge
Forward foreign exchange		289		Gain (loss) on foreign currency exchange		-			-
Total		289				-			-

2010
(In thousands of US$)	Gain (loss) recognized in OCI (effective portion)			Classification of gain (loss)	Gain (loss) reclassified from accumulated OCI to the statements of income (effective portion)			Gain (loss) recognized on derivatives (ineffective portion)
Derivatives – cash flow hedge
Interest rate swaps		460
Cross-currency interest rate swaps		1,690		Gain (loss) on foreign currency exchange		1,171			-
Forward foreign exchange		(759	)	Interest income - loans		(477	)		-
		-		Gain (loss) on foreign currency exchange		478			-
Total		1,391				1,172			-

The Bank recognized in earnings the gain (loss) on derivative financial instruments and the gain (loss) of the hedged asset or liability related to qualifying fair value hedges, as follows:

2012
(In thousands of US$)	Classification in statements of income	Gain (loss) on derivatives			Gain (loss) on hedged item			Net gain (loss)
Derivatives -  fair value hedge
Interest rate swaps	Interest income – available-for-sale		(2,982	)		4,776			1,794
	Interest expense – borrowings and debt		1,564			(12,022	)		(10,458	)
	Derivative financial instruments and hedging (ineffectiveness)		59			-			59
Cross-currency interest rate swaps	Interest  income – loans		(239	)		522			283
	Interest expense – borrowings and debt		8,024			(11,187	)		(3,163	)
	Derivative financial instruments and hedging (ineffectiveness)		12			-			12
	Gain (loss) on foreign currency exchange		5,873			(6,469	)		(596	)
			12,311			(24,380	)		(12,069	)

2011
(In thousands of US$)	Classification in statements of income	Gain (loss) on derivatives			Gain (loss) on hedged item			Net gain (loss)
Derivatives -  fair value hedge
Interest rate swaps	Interest income – available-for-sale		(6,857	)		10,266			3,409
	Derivative financial instruments and hedging		74			-			74
Cross-currency interest rate swaps	Derivative financial instruments and hedging (ineffectiveness)		2,849			-			2,849
	Interest  income – loans		(33	)		55			22
	Interest expense – borrowings		4,352			(7,874	)		(3,522	)
	Gain (loss) on foreign currency exchange		(17,427	)		17,475			48
			(17,042	)		19,922			2,880

2010
(In thousands of US$)	Classification in statements of income	Gain (loss) on derivatives			Gain (loss) on hedged item			Net gain (loss)
Derivatives - fair value hedge
Interest rate swaps	Interest income – available-for-sale		(14,760	)		22,000			7,240
	Derivative financial instruments and hedging		419			-			419
Cross-currency interest rate swaps	Derivative financial instruments and hedging (ineffectiveness)		(1,865	)		-			(1,865	)
	Interest  income – loans		(45	)		89			44
	Interest expense – borrowings		3,812			(7,046	)		(3,234	)
	Gain (loss) on foreign currency exchange		7,922			(7,994	)		(72	)
			(4,517	)		7,049			2,532

For control purposes, derivative instruments are recorded at their nominal amount (“notional amount”) in memorandum accounts. Interest rate swaps are made either in a single currency or cross currency for a prescribed period to exchange a series of interest rate flows, which involve fixed for floating interest payments. The Bank also engages in certain foreign exchange trades to serve customers’ transaction needs and to manage the foreign currency risk. All such positions are hedged with an offsetting contract for the same currency. The Bank manages and controls the risks on these foreign exchange trades by establishing counterparty credit limits by customer and by adopting policies that do not allow for open positions in the credit and investment portfolio. The Bank also uses foreign currency exchange contracts to hedge the foreign exchange risk associated with the Bank’s equity investment in a non-U.S. dollar functional currency foreign subsidiary. Derivative and foreign exchange instruments negotiated by the Bank are executed mainly over-the-counter (OTC). These contracts are executed between two counterparties that negotiate specific agreement terms, including notional amount, exercise price and maturity.

The maximum length of time over which the Bank has hedged its exposure to the variability in future cash flows on forecasted transactions is 1.89 years.

The Bank estimates that approximately $42 thousand of gains reported in OCI as of December 31, 2012 related to forward foreign exchange contracts are expected to be reclassified into interest expense as an adjustment to yield of hedged liabilities during the twelve-month period ending December 31, 2013.

The Bank estimates that approximately $82 thousand of losses reported in OCI as of December 31, 2012 related to forward foreign exchange contracts are expected to be reclassified into interest income as an adjustment to yield of hedged loans during the twelve-month period ending December 31, 2013.

Types of Derivatives and Foreign Exchange Instruments

Interest rate swaps are contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. The Bank has designated a portion of these derivative instruments as fair value hedges and a portion as cash flow hedges. Cross currency swaps are contracts that generally involve the exchange of both interest and principal amounts in two different currencies. The Bank has designated a portion of these derivative instruments as fair value hedges and a portion as cash flow hedges. Forward foreign exchange contracts represent an agreement to purchase or sell foreign currency at a future date at agreed-upon terms. The Bank has designated these derivative instruments as cash flow hedges and net investment hedges.

In addition to hedging derivative financial instruments, the Bank has derivative financial instruments held for trading purposes that have been disclosed in Note 5.