Wells Fargo 2013 Annual Report Download - page 215

Credit Derivatives
We use credit derivatives primarily to assist customers with their
risk management objectives. We may also use credit derivatives
in structured product transactions or liquidity agreements
written to special purpose vehicles. The maximum exposure of
sold credit derivatives is managed through posted collateral,
purchased credit derivatives and similar products in order to
achieve our desired credit risk profile. This credit risk
management provides an ability to recover a significant portion
of any amounts that would be paid under the sold credit
derivatives. We would be required to perform under the noted
credit derivatives in the event of default by the referenced
obligors. Events of default include events such as bankruptcy,
capital restructuring or lack of principal and/or interest
payment. In certain cases, other triggers may exist, such as the
credit downgrade of the referenced obligors or the inability of
the special purpose vehicle for which we have provided liquidity
to obtain funding.
The following table provides details of sold and purchased
credit derivatives.
-
$
$
$
$
Notional amount
(in millions)
Fair value
liability
Protection
sold (A)
Protection
sold -
non-
investment
grade
Protection
purchased
with
identical
underlyings (B)
Net
protection
sold
(A) - (B)
Other
protection
purchased
Range of
maturities
December 31, 2013
Credit default swaps on:
Corporate bonds 48 10,947 5,237 6,493 4,454 5,557 2014-2021
Structured products 1,091 1,553 1,245 894 659 389 2016-2052
Credit protection on:
Default swap index 3,270 388 2,471 799 898 2014-2018
Commercial mortgage-
backed securities index 344 1,106 1,106 535 571 535 2049-2052
Asset-backed securities index 48 55 55 1 54 87 2045-2046
Other 1 2,570 2,570 3 2,567 5,451 2014-2025
Total credit derivatives 1,532 19,501 10,601 10,397 9,104 12,917
December 31, 2012
Credit default swaps on:
Corporate bonds 240 15,845 8,448 9,636 6,209 7,701 2013-2021
Structured products 1,787 2,433 2,039 948 1,485 393 2016-2056
Credit protection on:
Default swap index 4 3,520 348 3,444 76 616 2013-2017
Commercial mortgage-backed securities index 531 1,249 861 790 459 524 2049-2052
Asset-backed securities index 57 64 64 6 58 92 2037-2046
Other 4 3,344 3,344 106 3,238 4,655 2013-2056
Total credit derivatives 2,623 26,455 15,104 14,930 11,525 13,981
Protection sold represents the estimated maximum exposure
to loss that would be incurred under an assumed hypothetical
circumstance, where the value of our interests and any
associated collateral declines to zero, without any consideration
of recovery or offset from any economic hedges. We believe this
hypothetical circumstance to be an extremely remote possibility
and accordingly, this required disclosure is not an indication of
expected loss. The amounts under non-investment grade
represent the notional amounts of those credit derivatives on
which we have a higher risk of being required to perform under
the terms of the credit derivative and are a function of the
underlying assets.
We consider the risk of performance to be high if the
underlying assets under the credit derivative have an external
rating that is below investment grade or an internal credit
default grade that is equivalent thereto. We believe the net
protection sold, which is representative of the net notional
amount of protection sold and purchased with identical
underlyings, in combination with other protection purchased, is
more representative of our exposure to loss than either non-
investment grade or protection sold. Other protection purchased
represents additional protection, which may offset the exposure
to loss for protection sold, that was not purchased with an
identical underlying of the protection sold.
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