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 21 and 22.

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 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.

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

		Fair values
Group 31 December 2014	Notional amount €’000	Assets €’000	Liabilities €’000	Net €’000
(a) Derivatives at fair value through profit or loss
Derivative financial instruments acquired from borrowers	149,118	39,123	-	39,123
Other derivative financial instruments	95,000	17,591	(23,630)	(6,039)
Foreign currency derivatives	2,991,116	1,527	(192,021)	(190,494)
(b) Derivative financial instruments designated in hedge relationships
Interest rate swaps	12,750,000	-	(379,877)	(379,877)
Total derivative assets / (liabilities)	15,985,234	58,241	(595,528)	(537,287)

		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	23,030,000	-	(466,517)	(444,945)
Total derivative assets / (liabilities)	31,530,880	160,369	(599,784)	(439,415)

Movement recognised in the income statement and other comprehensive income

The table below shows the net fair value position on derivatives at 31 December 2014 and 2013. 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 35.

		Fair values
Group	Note	2014 €’000	2013 €’000	Movement 2014 €’000
(a) Derivatives at fair value through profit or loss
Derivative financial instruments acquired from borrowers	8	39,123	107,301	(68,178)
Other derivative financial instruments	8	(6,039)	(15,771)	9,732
Foreign currency derivatives	11	(190,494)	(86,000)	(104,494)
(b) Derivative financial instruments designated in hedge relationships
Interest rate swaps	35	(379,877)	(444,945)	65,068
Net derivative fair value movement		(537,287)	(439,415)	(97,872)

(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 €39m (2013: €107m). The fair value movement recognised in the income statement on these derivatives in the year was a net loss of €1m (2013: €90m) (see Note 8), comprising a loss of €68m (2013: €215m) and an amount received of €67m (2013: €125m) in respect of termination fees on acquired borrower derivatives, which have been recognised as a fair value gain in the income statement.

The fair value movement recognised in the income statement in the year on other derivative financial instruments was a net loss of €150m (2013: net gain of €30m) (see Note 8). This relates to fair value movements on derivatives entered into by the Group to hedge derivative financial instruments acquired from borrowers that were not designated into hedge relationships and termination fees incurred on the early termination of interest rate swaps that were previously designated into hedge relationships.

Of the net loss of €150m (2013: net gain of €30m), €147m (2013: €nil) relates to termination fees paid on interest rate swaps in NAMA and NARL (in Voluntary Liquidation) previously designated into hedge relationships. The remaining amount comprises a fair value gain of €9.7m (2013: €122m) on other derivatives and termination fees paid of €12.5m (2013: €92m) on borrower derivative hedges.

NAMA uses currency derivatives to hedge the foreign exchange exposure which arose on the transfer of foreign currency loans from Participating Institutions with Euro denominated NAMA Securities. The foreign currency derivatives are used 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 €12.8bn (2013: €23bn) of interest rate swaps to hedge its exposure to interest rate risk arising from Euribor floating rates.

At the reporting date, NAMA has in issue debt securities of €13.6bn (2013: €34.6bn) with a floating rate coupon based on 6 month Euribor (see Note 29). 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 floating cash flows for fixed 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 mature 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.

The Agency held no derivatives at the reporting date.

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

Group 31 December 2014	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	15,438	9,167	23,849	-	48,454
b) Expected to accrue	11,179	7,180	19,825	-	38,184

Group 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	27,138	388,864	44,632	482,230
b) Expected to accrue	25,306	29,959	355,993	30,767	442,025

There is no cash flow hedging applied in the Agency.