43
of 100 bps across all yield curves, the value of the FRR s portfolio would now decrease by just 1.65%, i.e. around EUR 0.59 billion. This level of modified duration takes into account the FRR s reduced exposure to interest rate risk on invest- ment grade credit through the introduction of tactical hedging.
Symmetrically, a 100 bp rise in interest rates would reduce the FRR s balance sheet liabilities by 3.81% through a fall in the value of fixed
income commitments. Modified duration had been 4.26 at the end of 2015, and will continue to drop as the number of payments due to the CADES falls.
The portfolio s credit risk
The table below shows a breakdown by rating of the FRR s fixed income assets at the end of 2015 and 2016. The bulk of these assets are invested in investment grade securities.
AAA AA A BBB The overall quality of the FRR s credit portfolio in
2016 was slightly lower than in 2015, as 87% of
it was invested in investment grade securities,
as opposed to 91% in 2015. This change on 2015
was due to:
the lower weighting of short-term OATs in the
FRR s assets. Rated AA, they have been
replaced with debt securities issued by
national and international banks, generally
rated A;
the search for more yield through an increase
in less well rated investments (within new
investment grade credit mandates, which
allow for marginal diversification outside of
this category) or unrated investments in new
private debt funds used to finance the
economy.
Counterparty risk
Counterparty risk is the risk linked to trading by
investment managers in over-the-counter for-
ward financial instruments with bank counter-
parties (swaps and currency forwards). It has
been sharply reduced through the introduction
of various measures: minimum rating of author-
ised counterparties, margin calls, use of CLS2
Bank s clearing services for foreign exchange,
limits per counterparty. At the end of 2016, the
FRR s overall exposure to counterparty risk was
EUR 46 million, with changes dependent on var-
iations in the EUR/USD exchange rate.
2 Continuous Linked Settlement: clearing and settlement
system that reduces counterparty risk.
Issuer risk diversification ratios
The regulations applicable to the FRR lay down
specific risk diversification ratios with regard to
issuers of equities and debt securities. In addi-
tion to these ratios, the FRR has applied, since
2011, a maximum internal exposure limit for a
single issuer or OTC counterparty corresponding
to 3.5% of the FRR s net assets, excluding sover-
eign issuers for which specific limits have been
set depending on the issuer s rating. Since a rul-
ing on 24 May 2016, the application of regula-
tory limits on issuer or counterparty
concentration also take into account positions
held indirectly through undertakings for collec-
tive investment.
Currency risk
The FRR s portfolio is partly invested in foreign
currencies. In the strategic allocation, perfor-
mance assets currency risk is theoretically 90%
hedged, excluding assets denominated in
emerging currencies, for which the exchange
rate is an intrinsic performance factor. Never-
theless, the FRR has some flexibility in its level
of hedging, provided that its total currency risk
exposure remains below 20% of its total assets
(regulatory limit). In 2016, hedging of exposure
to developed market currencies excluding the
euro (chiefly the USD) increased relative to 2015,
and returned to the usual 90% level after being
substantially lower from April 2014. The cur-
rency risk of hedging assets has been fully
hedged since 2011.