As part of the process of acquisition of loans from Participating Institutions, the Group acquired a number of derivatives that were related to underlying loans.

In addition the Group enters into derivative contracts to hedge its exposure to interest rate and foreign exchange risk.

The Group has established policies to manage the risks that arise in connection with derivatives, including hedging policies, which are explained in Notes 22 and 23.

The notional amounts of certain types of financial instruments do not necessarily represent the amounts of future cash flows involved or the current fair value of the instruments and, therefore, are not a good indication of the Group's exposure to credit or market risks. Derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market interest rates or foreign exchange rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable, and thus the aggregate fair value of derivative financial assets and liabilities, can fluctuate significantly over time.

Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or interest rates (for example, fixed rate for floating rate) or a combination of all these (e.g. cross-currency interest rate swaps). The Group's credit risk represents the potential cost of replacing the swap contracts if a counterparty fails to fulfil its obligations under the contract. This risk is monitored on an ongoing basis with reference to the current fair value.

Interest rate options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a specific amount of a financial instrument at a predetermined price. The seller receives a premium from the purchaser in consideration for the assumption of interest rate risk. The Group is exposed to credit risk on options acquired from Participating Institutions only, and only to the extent that they have a carrying amount.

The fair values, and notional amounts thereon, of derivative financial instruments held are set out below.

		Fair values
Group 31 December 2013	Notional amount €'000	Assets €'000	Liabilities €'000	Net €'000
(a) Derivatives at fair value through profit or loss
Derivative financial instruments acquired from borrowers	2,408,710	107,301	-	107,301
Other derivative financial instruments	454,843	13,334	(29,105)	(15,771)
Foreign currency derivatives	5,637,327	18,162	(104,162)	(86,000)
(b) Derivative financial instruments designated in hedge relationships
Interest rate swaps – NAMA	21,130,000	21,572	(458,314)	(436,742)
Interest rate swaps – NARL	1,900,000	-	(8,203)	(8,203)
Total derivative assets/(liabilities)	31,530,880	160,369	(599,784)	(439,415)

		Fair values
Group 31 December 2012	Notional amount €'000	Assets €'000	Liabilities €'000	Net €'000
(a) Derivatives at fair value through profit or loss
Derivative financial instruments acquired from borrowers	4,031,893	321,842	-	321,842
Other derivative financial instruments	1,264,005	17,114	(154,985)	(137,871)
Foreign currency derivatives	6,247,180	11,750	(305,956)	(294,206)
(b) Derivative financial instruments designated in hedge relationships
Interest rate swaps – NAMA	18,100,000	-	(707,747)	(707,747)
Total derivative assets/(liabilities)	29,643,078	350,706	(1,168,688)	(817,982)

Movement recognised in the income statement and other comprehensive income

The table below shows the net fair value position on derivatives at 31 December 2013 and 2012. The movement is recognised either in the income statement on derivatives where hedge accounting is not applied, Note 8, in unrealised foreign exchange losses on derivative financial instruments, Note 11, or in other comprehensive income where hedge accounting is applied, Note 36.

		Fair values
Group	Note	2013 €'000	2012 €'000	Movement €'000
(a) Derivatives at fair value through profit or loss
Derivative financial instruments acquired from borrowers	8	107,301	321,842	(214,541)
Other derivative financial instruments	8	(15,771)	(137,871)	122,100
Foreign currency derivatives	11	(86,000)	(294,206)	208,206
(b) Derivative financial instruments designated in hedge relationships	36
Interest rate swaps – NAMA		(436,742)	(707,747)	271,005
Interest rate swaps – NARL		(8,203)	-	(8,203)
Net derivative fair value movement		(439,415)	(817,982)	378,567

(a) Derivative financial instruments at fair value through profit or loss

The fair value of derivatives acquired from borrowers (that were associated with loans acquired) at year end was €107m (2012: €322m). The fair value movement recognised in the income statement on these derivatives in the year was a net loss of €90m (2012: €54m) (see Note 8), comprising a loss of €215m and an amount received of €125m in respect of the termination fee on an acquired borrower derivative, which has been recognised as a fair value gain in the income statement.

Other derivative financial instruments relate to the fair value of derivatives entered into by the Group to hedge derivative financial instruments acquired from borrowers. These derivatives have not been designated into hedge relationships. The fair value movement recognised in the income statement on these derivatives in the year was a net gain of €30m (2012: €9m)(see Note 8), comprising a gain of €122m less an amount paid of €92m in respect of a termination fee on a borrower derivative hedge, which has been recognised as a fair value loss in the income statement.

Following the transfer of assets from Participating Institutions and given that NAMA pays for these loans with Euro denominated bonds, NAMA entered into foreign currency derivatives to reduce its exposure to exchange rate fluctuation arising on foreign denominated loans and receivables acquired.

(b) Derivative financial instruments designated in hedge relationships

At the reporting date, NAMA had entered into €23bn (2012: €18.1bn) of interest rate swaps to hedge its exposure to interest rate risk arising from Euribor floating rates.

At the reporting date, NAMA has issued debt securities of €34.6bn with a floating rate coupon based on Euribor. Financial instruments priced at floating rate, are sensitive to interest rate fluctuations in Euribor rates, which in turn impacts on the amount of interest expense payable on debt securities in issue. These swaps allow NAMA to exchange fixed cash flows for floating cash flows, i.e. it pays fixed interest to the swap counterparties and receives floating interest, which in turn NAMA uses to pay floating interest to the holders of its debt securities in issue.

As market interest rates fluctuate up or down, this impacts on the value of the interest rate swaps. For example if Euribor rates decrease, and the swap is paying fixed cash flows at a rate higher than Euribor, then the value of that derivative declines because it is cheaper to borrow in the open market.

The value of the derivatives will fluctuate over the life of the derivative but these fluctuations are unrealised gains and losses and will ultimately terminate with a nil value. The derivatives are entered into for risk management purposes and under IFRS are allowed to be designated into hedge relationships. Any gains or losses on derivatives in hedge relationships are not immediately recognised through profit or loss as the intention is to reduce volatility in the income statement. Therefore the gains and losses are recognised in other comprehensive income.

These interest rate swaps were formally designated into hedge relationships during 2010, when the fair value of these derivatives was (negative) €30.4m. This amount was recognised as a fair value loss on other derivative financial instruments in the income statement in 2010. This fair value loss has been fully amortised as hedge ineffectiveness over the remaining life of the derivatives.

The Agency held no derivatives at the reporting date.

The table represents a) the periods in which the actual cash flows are expected to occur and b) the period in which the hedged cash flows are expected to impact the income statement, excluding any hedge accounting adjustments that may be applied.

NAMA Group (excluding NARL) 31 December 2013	0-6 months €'000	6 months - 1 year €'000	1-5 years €'000	More than 5 years €'000	2013 Total €'000
a) Expected to occur	21,596	23,584	336,432	44,632	426,244
b) Expected to accrue	22,753	25,961	306,558	30,767	386,039

NAMA Group (excluding NARL) 31 December 2012	0-6 months €'000	6 months - 1 year €'000	1-5 years €'000	More than 5 years €'000	2012 Total €'000
a) Expected to occur	38,464	22,060	213,982	-	274,506
b) Expected to accrue	27,472	20,758	201,298	-	249,528

NARL 31 December 2013	0-6 months €'000	6 months - 1 year €'000	1-5 years €'000	More than 5 years €'000	2013 Total €'000
a) Expected to occur	-	3,554	52,432	-	55,986
b) Expected to accrue	2,553	3,998	49,435	-	55,986

The cash flows in a) differ from b) by the amount of interest already accrued and not yet paid in the year.

There is no cash flow hedging applied in the Agency.