State Street Bank GmbH Disclosure Report · State Street Bank GmbH Disclosure Report ... and...

State Street Bank GmbH

Disclosure Report As of December 31, 2014

According to § 26a KWG i.c.w. Part 8 CRR

DISCLOSURE REPORT STATE STREET BANK GMBH 2014

Table of Contents

1 Scope ................................................................................................................... 4

1.1 Organizational structure .......................................................................................... 5

1.1.1 Group background ................................................................................................... 5

1.1.2 Structure and Business Model ................................................................................ 5

1.2 Consolidation ............................................................................................................ 7

1.2.1 Consolidation requirements from a regulatory and balance sheet point of view ... 7

1.2.2 Restrictions and other significant limits concerning the transfer of funds or

own funds within the group...................................................................................... 7

2 Own funds ............................................................................................................ 8

2.1 Structure of Own Funds............................................................................................ 8

2.2 ICAAP and Risk Bearing Capacity Concept ............................................................ 13

2.2.1 Own funds requirements for Credit Risks under the Standardized Approach

(“CRSA”) ................................................................................................................. 17

2.2.2 Own funds requirements for Market and Settlement Risk positions under the

Standardized Approach .......................................................................................... 18

2.2.3 Own funds requirements for Operational Risks under the Standardized

Approach ................................................................................................................ 18

2.2.4 Own funds requirements for Credit Valuation Adjustment Risks under the

Standardized Approach .......................................................................................... 18

2.2.5 Overview of the Total Own Funds requirements.................................................... 19

3 Risk Management .............................................................................................. 20

3.1 Structure and Organization of risk management................................................... 20

3.2 Fundamental strategies and organizational guidelines......................................... 22

3.3 Relevant risk types ................................................................................................. 23

3.3.1 Credit Risks ............................................................................................................ 24

3.3.1.1 Credit Risks - on-balance sheet ............................................................................ 24

3.3.1.2 Credit Risks - off-balance sheet / derivatives ....................................................... 26

3.3.1.3 Credit Risk Mitigation Techniques ........................................................................ 27

3.3.1.4 Further information on the Credit Risk Standardized Approach .......................... 28

3.3.1.5 Funding obligations ............................................................................................... 33

3.3.1.6 Definition – “Past due”, “Impaired” and “Default” ................................................ 33


3.3.1.7 Credit risk adjustments ......................................................................................... 34

3.3.2 Market Risks .......................................................................................................... 35

3.3.3 Operational Risk ..................................................................................................... 39

3.3.4 Investment Risks.................................................................................................... 42

3.3.5 Business Risks ....................................................................................................... 43

3.3.6 Liquidity Risks ........................................................................................................ 44

3.3.7 Concentration Risks (resulting from Risk Concentrations identified in each

risk category) ......................................................................................................... 45

3.3.8 Reputational risks (resulting from reputation risks in each risk category) ......... 46

3.4 Risk Reporting ........................................................................................................ 47

4 Securitizations ................................................................................................... 48

5 Encumbered and unencumbered assets ............................................................ 51

6 Remuneration Disclosure for the Financial Year 2014 according to § 16

InstitutsVergV .................................................................................................... 54

6.1 Compensation structure......................................................................................... 54

6.2 Quantitative information ......................................................................................... 61

7 Non-applicable disclosure requirements .......................................................... 63

8 Glossary ............................................................................................................. 64


List of Tables and Illustrations

Illustration 1: Pillars of Basel II......................................................................................................................... 4

Illustration 2: Geographical distribution of investments, branch offices and branches ................................ 6

Illustration 3: ICAAP structure ........................................................................................................................ 14

Illustration 4: ICAAP worst-case utilization as of December 31, 2014 ......................................................... 16

Illustration 5: Structure of risk management and committees .................................................................... 21

Table 1: Own funds according to Art. 437 (1) d) and e) CRR before and after ratification of the

financial statement ........................................................................................................................... 8

Table 2: Main features of capital instruments according to Art. 437 (1) b) and c) CRR ............................... 10

Table 3: Reconciliation of own funds items to audited financial statements according to Art. 437 (1)

a) CRR .............................................................................................................................................. 12

Table 4: Own funds requirements for Credit Risks according to Art. 438 c) CRR ........................................ 17

Table 5: Own funds requirements for Market and Settlement Risks according to Art. 438 e) und 445

CRR .................................................................................................................................................. 18

Table 6: Own funds requirements for Operational Risks according to CRR ................................................ 18

Table 7: Own funds requirements for Credit Valuation Adjustment Risks according to CRR ..................... 18

Table 8: Total Own Funds requirements according to CRR........................................................................... 19

Table 9: Operational Responsibilities for Risk Management broken down by risk types ............................ 22

Table 10: Counterparty credit risk exposure according to 439 e) CRR ......................................................... 26

Table 11: Rating agencies broken down by exposure classes according to Art. 444 a) and b) CRR ........... 28

Table 12: Gross exposure and average gross exposure broken down to relevant exposure class

according to Art. 442 c) CRR ........................................................................................................... 29

Table 13: Total amount of receivables broken down by significant geographic regions according to

Art. 442 d) CRR ................................................................................................................................ 30

Table 14: Total amount of receivables broken down by industry sector according to Art. 442 e) CRR ...... 31

Table 15: Total amount of receivables broken down by remaining time to maturity according to Art.

442 f) CRR ........................................................................................................................................ 32

Table 16: Total amount of receivables before and after credit risk mitigation according to Art. 444 e)

CRR .................................................................................................................................................. 32

Table 17: Total amount of collateralized receivables according to Art. 453 f) and g) CRR .......................... 33

Table 18: Own funds requirements for Market and Settlement Risk positions ........................................... 37

Table 19: Impact of interest rate shocks on the Total Own Funds ................................................................ 38

Table 20: Securitization positions according to Art. 449 CRR ....................................................................... 50

Table 21: Assets of the institution according to Art. 443 CRR ....................................................................... 52

Table 22: Collateral received by the institution according to Art. 443 CRR .................................................. 53

Table 23: Encumbered assets, collateral received and associated liabilities according to Art. 443

CRR .................................................................................................................................................. 53

Table 24: Total remuneration 2014 broken down by business areas according to Art. 450 (1) (g) CRR ..... 61

Table 25: Aggregated Breakdown by Risk Takers and Senior Management according to Art. 450 (1)

(h) CRR ............................................................................................................................................. 62

Table 26: Non-applicable disclosure requirements ...................................................................................... 63

4


1 Scope

The regulatory framework concerning capital adequacy of internationally active banks (“Basel II”)

published by the Basel Committee on Banking Supervision in 2004 outlines three mutually supporting

pillars to ensure stability of the national and international banking systems.

Illustration 1: Pillars of Basel II

Legal requirements on disclosure have been enhanced with the European implementation of Basel III,

more specifically the Directive 2013/36/EU on access to the activity of credit institutions, the prudential

supervision of credit institutions and investment firms (“CRD IV”) as well as the Regulation EU No.

575/2013 on prudential requirements for credit institutions and investment firms (“CRR”), and became

effective on January 1, 2014. Part 8 of the CRR is dedicated to the disclosure requirements of banks and

requires State Street Bank GmbH (“SSB GmbH” or “the Bank”) to publish qualitative and quantitative

information in respect to own funds, the risks taken, the risk management processes applied including

the internal methodologies used in accordance with Art. 143 CRR, the methods used to mitigate credit

risk, encumbered and unencumbered assets, securitization transactions and information on

remuneration on a regular basis. The requirements of CRR have been further outlined in various

regulatory/implementing technical standards and guidelines of the European Banking Authority (“EBA”).

The Disclosure Report of SSB GmbH contains all information according to regulatory requirements

effective as of December 31, 2014.

This report of SSB GmbH, Munich, therefore meets the disclosure requirements of Basel II/III Pillar 3 as

well as the requirements according to Part 8 CRR and § 26a of the German Banking Act (“KWG”). The

aim of this report is to allow market participants to evaluate the Bank’s capital adequacy by means of

disclosure of information regarding risk positions and risk-assessment processes. This report refers to

all relevant and material risks which have an impact on the capital adequacy of the Bank. Furthermore,

this report is intended to fulfil the disclosure requirements resulting from § 16 Remuneration Ordinance

for Institutions (“InstitutsVergV”)1.

As of January 1, 2008, the Bank uses the Standardized Approach for Credit Risks (“CRSA”), the

Standardized Approach for Operational Risks and the Standardized Approach for Market Risks and

Settlement Risks to determine its regulatory capital requirements. SSB GmbH applies the Standardized

Approach for the following, newly defined, risk type, the risk of Credit Valuation Adjustment (“CVA risk”)

according to CRR.

1 InstitutsVergV in the version valid as of December 31, 2014.

Supervisory review

process

Enhanced

disclosure

Pillar 3Pillar 2Pillar 1

Minimum capital

requirements

Basel II

5


This Disclosure Report includes information of the audited Financial Statements, especially of the

Management Report.

Quantitative data presented in this report may show differences due to rounding. Additionally, in case of

any ambiguity in the descriptions contained in this report, the German version of this report is binding.

1.1 Organizational structure

1.1.1 Group background

Through a 100% ownership by State Street International Holdings (“SSIH”), headquartered in Boston,

USA, the Bank is an indirect subsidiary of State Street Corporation (“SSC”), Boston, USA, and State

Street Bank and Trust Company (“SSBT”), Boston, USA. SSIH holds the stake in State Street Holdings

Germany GmbH, Munich through State Street Bank Luxembourg S.A., Luxembourg, and State Street

International Holdings Switzerland GmbH, Steinhausen, Switzerland. State Street Holdings Germany

GmbH, holds a direct 100% stake in the Bank and is an indirect subsidiary of SSIH.

The Bank is subject to the supervision and rules of the German Federal Financial Supervisory Authority

(“BaFin”) and the Deutsche Bundesbank as well as to the supervision and rules in the jurisdictions,

where its branches are domiciled (please also see below). On the level of the EU-parent institution of

SSB GmbH, State Street Bank Luxembourg S.A., the Group falls under the supervision of the European

Central Bank (“ECB”).

SSC, SSBT and SSIH are subject to the supervision and rules of the Board of Governors of the U.S.

Federal Reserve System as well as other regulatory authorities in the U.S.. As a subsidiary of a U.S. bank

as well as of a Luxembourgian bank, the Bank has to comply not only with the rules of the national

supervisory authorities, but also with the U.S. rules and laws applicable to subsidiaries of U.S. banks and

with certain Luxembourgian rules and laws applicable to subsidiaries of Luxembourgian banks.

1.1.2 Structure and Business Model

SSB GmbH, Munich, Germany, was founded in 1970 as a provider of innovative solutions for the global

custody and management of securities. It has been a deposit bank since 1994 and, since 1996, it has

offered the full range of services expected of a custodian bank/depositary to the German and European

market. With its headquarters in Munich, SSB GmbH maintained a branch office in Frankfurt am Main,

one non-EU branch in Zurich, and EU branches in Amsterdam, Milan, Turin, London, Luxembourg,

Krakow and Vienna with an annual average of 2,666 employees in 2014.

6


Illustration 2: Geographical distribution of investments, branch offices and branches

SSB GmbH concentrates on the specific requirements of institutional customers over the entire

investment cycle. The core business consists primarily of custody-only business, the related custody

bank business/custodian activities including reporting services for asset managers and supporting

activities for the middle and back office of investment/investment management companies. Moreover, its

registered activities also include rendering securities services in the form of, among other things,

principal broking services and agent fund trading (“AFT”), principal broking and clearing services with

regard to exchange-traded futures performed at a number of international futures exchanges, either as

a direct member of the respective exchange or clearing organizations (at present, EUREX Clearing AG

and ICE Clear Europe Ltd.) or indirectly via brokers, proprietary trading in forward exchange

agreements, proprietary business in security repurchase agreements and contract broking services

related to the securities lending business, and managing the collateral provided in the course of

securities lending transactions. In connection with its core business, SSB GmbH offers lending business

and foreign exchange as well as money market transactions and invests in securities in the form of

proprietary business.

In the course of the fiscal year, SSB GmbH received an external rating of AA- by Standard & Poor’s

Financial Services LLC.

7


1.2 Consolidation

1.2.1 Consolidation requirements from a regulatory and balance sheet point of view

The Bank owns a 100% direct strategic ownership in State Street Fondsleitung AG, Zurich, Switzerland, a

direct strategic ownership in State Street Holdings Italy S.r.l. Milan, Italy (90% voting rights) and through

the latter an indirect majority ownership in State Street Bank S.p.A., Milan, Italy.

There is no consolidation of State Street Fondsleitung AG from a regulatory point of view due to an

exemption in accordance with Art. 19 (1) CRR. A consolidation with respect to German Commercial Law2

is likewise not necessary and is not conducted. With respect to State Street Holdings Italy S.r.l. and State

Street Bank S.p.A., a consolidation from a regulatory point of view as well as from a view comparable to

German Commercial Law is conducted on the level of the EU parent institution, State Street Bank

Luxembourg S.A. (EU parent institution as defined in Art. 18 CRR).

1.2.2 Restrictions and other significant limits concerning the transfer of funds or own funds within

the group

In principle, there are no restrictions or other significant barriers concerning the transfer of funds or

own funds within the group of entities, which are consolidated from a regulatory point of view at the level

of State Street Bank Luxembourg S.A. The Bank may furthermore obtain funds or own funds from its

parent companies or subsidiaries at any time, if necessary, or if the circumstances justify this, subject to

obtaining any applicable regulatory approvals.

Capability of the Bank and/or the capabilities of the parent companies and subsidiaries with regard to

such a transfer of funds can be restricted due to existing own funds requirements and other legal

obligations or regulations which have been imposed on the Bank, its parent companies or its

subsidiaries. As an example, capabilities of SSC and SSBT to invest in international groups such as SSIH

(which is the indirect parent company of the Bank) may be restricted; similarly, capability of SSIH to

transfer equity to its subsidiaries may also be subject to regulatory approval.

2 SSB GmbH consolidated its annual financial statements in accordance with the specifications of the German Commercial Code

(“HGB”).

8


2 Own funds

2.1 Structure of Own Funds

Own funds of the Bank according to § 10 KWG in connection with Art. 25ff CRR as of December 31, 2014

was composed as shown in the following table:

Table 1: Own funds according to Art. 437 (1) d) and e) CRR before and after ratification of the financial statement

Disclosure of Own funds

Amount as of

December 31, 2014

before ratification of

the financial statements

(in kEUR)

Amount as of

December 31, 2014

after ratification of the

financial statements

(in kEUR)

Regulation (EU)

No 575/2013

Article reference

Amounts subject to pre-

regulation (EU) No

575/2013 treatment or

prescribed residual

amount of regulation

(EU) No 575/2013

(in kEUR)

Capital instruments and the related

share premium accounts109,267 109,267

26 (1), 27, 28, 29,

EBA list 26 (3) 109,267

of which: subscribed capital 109,267 109,267 109,267

Accumulated other comprehensive

income (and other reserves, to include

unrealised gains and losses under the

applicable accounting standards)

1,143,615 1,143,615 26 (1) 1,143,615

Funds for general banking risk 34,000 46,000 26 (1) ( f ) 34,000

C o mmo n Equity T ier 1 (C ET 1)

capital befo re regulato ry

adjustments

1,286,882 1,298,882 1,286,882

Intangible assets (net o f related tax

liability) (negative amount)-6,037 -3,849 36 (1) (b), 37, 472 (4) -6,037

Capital charge for risk positions towards

a fully consolidated European subsidiary

that exceeds the Large Exposure Limit

resulting from the limited exercise of the

national discretion

-35,920 -34,147 400 (2) c) -35,920

C o mmo n Equity T ier 1 (C ET 1) capital: regulato ry adjustments

C o mmo n Equity T ier 1 capital: instruments and reserves

9


As shown in the table above Tier 1 capital contributes 95.10% to total capital calculated before

ratification of the financial statements and 95.16% after ratification, with tier 2 capital components

contributing the remaining 4.90% calculated before ratification of the financial statements and 4.84%

after ratification. CET 1 and total capital ratio of SSB GmbH as of December 31, 2014 are 25.15% and

26.45% respectively. It should be noted that as a result of the submission deadline, total capital before

ratification of the financial statements is applicable for supervisory reporting purposes.

T o tal regulato ry adjustments to

C o mmo n equity T ier 1 (C ET 1)-41,957 -37,996 -41,957

C o mmo n Equity T ier 1 (C ET 1)

capital1,244,925 1,260,886 1,244,925

T ier 1 capital (T 1 = C ET 1 + A T 1) 1,244,925 1,260,886 1,244,925

Capital instruments and the related

share premium accounts100,000 100,000 62, 63 100,000

T ier 2 (T 2) capital befo re

regulato ry adjustments100,000 100,000 100,000

Capital charge for risk positions towards

a fully consolidated European subsidiary

that exceeds the Large Exposure Limit

resulting from the limited exercise of the

national discretion

-35,920 -34,147 400 (2) c) -35,920

T o tal regulato ry adjustments to

T ier 2 (T 2) capital-35,920 -34,147 -35,920

T ier 2 (T 2) capital 64,080 65,853 64,080

T o tal capital (T C = T 1 + T 2) 1,309,005 1,326,740 1,309,005

T o tal risk weighted assets 4,949,373

C o mmo n Equity T ier 1

(as a percentage o f risk expo sure

amo unt)

25.15 92 (2) (a), 465

T ier 1


amo unt)

25.15 92 (2) (b), 465

T o tal capital


amo unt)

26.45 92 (2) (c)

C apital rat io s and buffers

T ier 2 (T 2) capital: instruments and pro visio ns

T ier 2 (T 2) capital: regulato ry adjustments

10


Main features of capital instruments are shown in Table 2:

Table 2: Main features of capital instruments according to Art. 437 (1) b) and c) CRR

Main features

Common Equity Tier 1 Capital

Instruments:

GmbH Share Capital

Tier 2 Capital

Instruments:

Subordinated Loan

Issuer State Street Bank GmbH State Street Bank GmbH

Unique identifier (e.g. CUSIP, ISIN or

Bloomberg identifier for private placement)

Governing law(s) of the instrument

Regulatory treatment

Transitional CRR rules Tier 1 capital Tier 2 capital

Post-transitional CRR rules Tier 1 capital Tier 2 capital

Eligible at solo/(sub-)consolidated/ solo &

(sub-)consolidated Solo Solo

Instrument type (types to be specified by each

jurisdiction)

GmbH Share Capital

as per Art. 28 CRR

Subordinated loan

as per Art. 63 CRR

Amount recognised in regulatory capital

(currency in million, as of most recent

reporting date)

Nominal amount of instrument

Issue price N/A 100

Redemption price

Accounting classification

Original date of issuance

Perpetual or dated open-ended with maturity date

Original maturity date N/A 28.08.2038

Issuer call subject to prior supervisory

approval No Yes

Optional call date, contingent call dates and

redemption amount N/A

The issuer may terminate the

subordinated loan on any interest

payment date by giving 30 calendar

days' notice (such interest payment

date is generally the 10th of

January of each year) following a

Tax Event or a Gross-Up Event.

Subsequent call dates, if applicable N/A N/A

N/A N/A

109 100

N/A 100

11


Tier 1 Capital

Regulatory Tier 1 capital of the Bank is composed of share capital, other reserves as well as reserves for

general banking risks in accordance with § 340g HGB. Deductions from Tier 1 capital, pursuant to Art. 36

(1) b) CRR, consist of intangible assets in their full amount. Additionally, half of the capital charge (35,920

kEUR before ratification, 34,147 kEUR after ratification of the financial statements) for risk positions

towards a fully consolidated European subsidiary that exceeds the Large Exposure Limit resulting from

the limited exercise of the national discretion according to Art. 400 (2) c) CRR has been deducted from

the Tier 1 capital.

All conditions in respect to Art. 28 CRR, capital instruments, have been met.

Tier 2 Capital

Regulatory Tier 2 capital pursuant to Art. 63 CRR consists of a subordinated loan issued by State Street

Bank Luxembourg S.A., a long-term subordinated obligation in the amount of nominal 100,000 kEUR and

payable at the rate of 7.75% p.a. and classified as lower Tier 2 capital. The contractual maturity is August

25, 2038. In addition to that, half of the capital charge (35,920 kEUR before ratification, 34,147 kEUR after

ratification of the financial statements) for risk positions towards a fully consolidated European

Coupons / dividends

Fixed or floating dividend/coupon

Coupon rate and any related index

Existence of a dividend stopper N/A No

Fully discretionary, partially discretionary or

mandatory (in terms of timing) N/A mandatory

Fully discretionary, partially discretionary or

mandatory (in terms of amount)

Existence of step up or other incentive to

redeem

Noncumulative or cumulative

Convertible or non-convertible

If convertible, conversion trigger(s)

If convertible, fully or partially

If convertible, conversion rate N/A N/A

If convertible, mandatory or optional

conversion N/A N/A

If convertible, specify instrument type

convertible into N/A N/A

If convertible, specify issuer of instrument it

converts into N/A N/A

Write-down features N/A No

If write-down, write-down trigger(s)

If write-down, full or partial

If write-down, permanent or temporary

If temporary write-down, description of write-

up mechanism

Position in subordination hierarchy in

liquidation (specify instrument type

immediately senior to instrument)

Non-compliant transitioned features

If yes, specify non-compliant features N/A N/A

N/A fixed

N/A mandatory

N/A N/A

N/A N/A

N/A N/A

N/A N/A

Subordinated

to Tier 2 Capital Instruments

Subordinated to

creditors of the insolvency

proceedings

12


subsidiary that exceeds the Large Exposure Limit resulting from the limited exercise of the national

discretion according to Art. 400 (2) c) CRR has been deducted from the Tier 2 capital.

Items not applicable to SSB GmbH have been marked “N/A” in accordance with Annex II of the

Commission Implementing Regulation (EU) No 1423/2013 with respect to the disclosure of own funds

requirements for institutions.

The following table presents the reconciliation of own funds items to the respective balance sheet

positions of the audited financial statements:

Table 3: Reconciliation of own funds items to audited financial statements according to Art. 437 (1) a) CRR

Capital Management

The Bank’s capital management is embedded in its overall control process (as described under Section

2.2), the strategies, the internal rules, and regulations, the monitoring processes and in the

organizational structures of the Bank.

in kEUR Balance sheet items in kEUR

Paid up capital instruments 109,267 Subscribed Capital 109,267

Other reserves 1,143,615 Capital reserves 1,039,287

Other revenue

reserves 104,328

Fund for general banking risk 46,000 46,000

Goodwill -1,387

Other intangible assets -2,462

Capital charge for risk positions towards a

fully consolidated European subsidiary that

exceeds the Large Exposure Limit resulting

from the limited exercise of the national

discretion according to Art. 400 (2) c) CRR.

-34,147

C o mmo n Equity T ier

1 C apital (C ET 1)T o tal 1,260,886

T ier 1 C apital (T 1) T o tal 1,260,886

Tier 2 CapitalPaid up capital instruments and

subordinated loans 100,000 Subordinated liabilities 107,858

of which interest 7,858

Items to be deducted from

Tier 2 Capital

Capital charge for risk positions towards a

fully consolidated European subsidiary that

exceeds the Large Exposure Limit resulting

from the limited exercise of the national

discretion according to Art. 400 (2) c) CRR.

-34,147

T ier 2 C apital (T 2) T o tal 65,853

T o tal C apital T o tal 1,326,740

3,849

Own funds for supervisory reporting purposes after ratification Relevant balance sheet items after ratification

Capital instruments

Common Equity Tier 1

Capital

Equity

Fund for general banking risk

Items to be deducted from


Capital

Intangible assets

13


2.2 ICAAP and Risk Bearing Capacity Concept

The aim of capital management is to ensure sufficient capitalization of the Bank at any time. In order to

provide for the Bank’s capital adequacy under various aspects, the key capital indicators and the capital

structure are considered from a regulatory as well as an economic point of view. Furthermore, by means

of capital management, financial flexibility for strategic business initiatives should be ensured.

The Bank is required to manage its own funds, to ensure that a sound capital basis is provided, thereby

allowing financial flexibility with respect to the capital requirements resulting from the core and annex

business segments. This financial flexibility includes the capability to finance organic and inorganic

company growth as well as to support clients by offering appropriate banking activities and financial

services. In the course of capital management, given its current and prospective risk profile, the Bank

strives for an optimal capital base. The optimal capital base should allow the Bank to achieve attractive

short- and long-term earnings, under the condition that the obligations towards clients are met and

regulatory requirements are fulfilled.

To ensure a sound capital base, the Bank developed and implemented an Internal Capital Adequacy

Assessment Process (ICAAP - also referred to as Risk Bearing Capacity Concept - pursuant to § 25a

KWG and Minimum Requirements for Risk Management – “MaRisk”). The ICAAP includes risk

identification, risk quantification and risk monitoring, and provides for capital adequacy from both a

regulatory and economic perspective. In the course of the regular ICAAP, capital requirements of the

Bank are determined and appropriateness of the risk management process to monitor all risks

associated with the business objectives is verified as part of the validation process on an annual basis.

The structure of the ICAAP is depicted in Illustration 3.

14


Illustration 3: ICAAP structure

On the one hand the ICAAP takes into account the Bank’s risks prescribed in Pillar 1 of Basel II/III

Framework and its corresponding regulations in the CRR, on the other hand, given the MaRisk and Pillar

2 of Basel II Framework, the ICAAP considers risks which are not or not fully considered under Pillar 1.

In 2011, the Bank’s ICAAP was amended to meet the requirements of the BaFin’s Guidelines on

Regulatory Assessment of Internal Risk-Bearing Capacity Concepts (“Aufsichtliche Beurteilung

bankinterner Risikotragfähigkeitskonzepte” published on December 7th, 2011). According to the

terminology of the Guidelines, the Bank uses the profit & loss/balance sheet oriented perspective to

determine its Risk-Taking Potential on the basis of the Going Concern Approach.

Pursuant to the aforementioned Guidelines, the Bank’s Risk-Taking Potential (“Available risk capital”)

includes only Regulatory Capital which is not assigned for Pillar 1 capital requirements and whereby the

Regulatory Capital elements resulting from subordinated debt, which were not assigned for Pillar 1

purposes, are eliminated. Given the Going Concern Approach, the conservatively forecasted Bank’s net

result for the current financial year is additionally accounted in the Risk-Taking Potential. The Risk-

Taking Potential determined in this manner is intended to cover the Bank’s whole risk capital needs.

15


The Bank’s risk capital needs result from the regulatory capital requirements (“Pillar 1”) and from the

aggregated capital needs for all other risk types identified by the Bank to be material, but not considered

within the regulatory capital requirements. The capital needed to cover such material risks is

determined by means of internal risk measurement methods. Due to the fact that the existing liquidity

risks affect the profit & loss position and the net asset position of the Bank only indirectly and to a low

extent, no capital is allocated to liquidity risks. There is likewise no separate capital allocation to

business risks as they remain to be considered in the ICAAP at the aggregated level, within calculation of

the free Risk-Taking Potential (please refer to section 3.3.5.)

In sum, the ICAAP considers both Pillar 1 risks according to CRR and all material risk types from an

economic perspective.

Each material risk type (with the exception of liquidity risks, business and reputational risks) is allocated

a part of the Risk-Taking Potential. The respective part of the Risk-Taking Potential is transformed into a

global limit for each material risk type. The global limit is further split into sub-limits, which are

implemented in the course of scenario considerations. The allocation is aimed at limiting concentrations

of risk and ensuring that a suitable capital buffer is available to cover immaterial risks, extreme

situations and future organic growth and growth from acquisitions.

Ongoing compliance with regulatory and economic capital requirements is provided by means of the

regular monitoring of actual developments, forecasting and stress tests for the planning period.

Utilization of capital by material risks (from the Pillar 1 and economic view in the worst case) accounted

for 49.20% as of December 31, 2014. Illustration 4 presents the free part of the capital (so-called free

Risk-Taking-Potential), which is left after the capital is allocated to all material risks.

16


Illustration 4: ICAAP worst-case utilization as of December 31, 2014

In order to adequately reflect creditor protection under the MaRisk, in fiscal year 2014 SSB GmbH

applied, in addition, a gone concern approach, also determining its available risk capital on the basis of

its income statement and balance sheet.

In accordance with the requirements for the composition of the available risk capital, it contains

regulatory capital (net of the appropriate deductions). On the basis of the gone concern approach, the

result as at the balance sheet date – adjusted for hidden charges and hidden reserves and any resulting

tax expense – is included in the available risk capital. The capital determined in this manner is available

to cover all the Bank’s risk capital needs.

Taking account the objective of the gone concern approach, the risk capital requirements, determined

using internal risk measurement methods and regularly verified using a global limit, are aggregated for

all key types of risk.

17


2.2.1 Own funds requirements for Credit Risks under the Standardized Approach (“CRSA”)

The following table presents the Bank’s own funds requirements for Credit Risks, broken down by asset

class in accordance with CRR as of December 31, 2014:

Table 4: Own funds requirements for Credit Risks according to Art. 438 c) CRR

Exposure Class/ Risk exposure in kEUR

Central governments or central banks -

Regional governments or local authorities -

Public sector entities -

Multilateral development banks -

International organisations -

Institutions 9,665

Corporates 173,457

Retail exposures -

Exposures secured by mortgages on immovable property -

Exposures in default -

Exposures associated with particularly high risk -

Covered bonds 6,804

Exposures to institutions and corporates with a short-term credit assesment -

Collective Investment Undertakings (CIUs) 298

Equity exposures 37,939

Other items 4,447

Securitisations 102,783

Contributions to the default fund of a Central Counterparty ("CCP") 664

Own funds requirements for Credit Risks 336,058

18


2.2.2 Own funds requirements for Market and Settlement Risk positions under the Standardized

Approach

To calculate own funds requirements, the Standardized Approach is applied for all Market and

Settlement Risks positions. The own funds requirements in accordance with CRR as of December 31,

2014, were composed as follows:

Table 5: Own funds requirements for Market and Settlement Risks according to Art. 438 e) und 445 CRR

2.2.3 Own funds requirements for Operational Risks under the Standardized Approach

To determine the own funds requirements for Operational Risks, the Standardized Approach is applied.

The own funds requirements as of December 31, 2014 were as follows:

Table 6: Own funds requirements for Operational Risks according to CRR

2.2.4 Own funds requirements for Credit Valuation Adjustment Risks under the Standardized

Approach

For the evaluation of the own funds requirements for Credit Valuation Adjustment Risks, the

Standardized Approach is applied. The following table presents the own funds requirements as of

December 31, 2014:

Table 7: Own funds requirements for Credit Valuation Adjustment Risks according to CRR

Risk position in kEUR

Position risk resulting from the trading-book 2,454

Traded debt instruments 2,454

Equity -

Specific interest rate risk of securitisation positions -

Large exposures exceeding the limits specified

in Art. 395 -401 CRR -

Foreign Exchange 4,862

Commodities 0

Own funds requirements for Market Risks 7,316

Own funds requirements for Settlement Risks -

Risk type in kEUR

Operational Risks 46,598

Own funds requirements for Operational Risks 46,598

Risk type in kEUR

Credit valuation adjustment risks (Standardised method) 5,978

Own funds requirements for credit valuation adjustment risks 5,978

19


2.2.5 Overview of the Total Own Funds requirements

The following table presents the Total Own Funds requirements for all risk types considered under CRR

as of December 31, 2014:

Table 8: Total Own Funds requirements according to CRR

Risk type in kEUR

Credit Risks (incl. Contributions to a Default Fund of a CCP) 336,058

Market Risks 7,316

Settlement Risks -

Credit Valuation Adjustment Risks 5,978

Operational Risks 46,598

Total Own Funds requirements 395,950

20


3 Risk Management

3.1 Structure and Organization of risk management

The Board of Managing Directors (“Board”) is the highest body with regard to authority and decision-

making for risk management and has implemented adequate risk processes, to ensure that the existing

risk management system has been established appropriately in respect to SSB GmbH’s risk profile and

strategy.

Within this scope, the Board of Managing Directors is responsible for setting the management goals;

particularly regarding the content of the business strategy and a consistent risk strategy. The Board is

also responsible for determining the risk standards and assessment methods as well as for the risk

management, including the economic capital allocation and limitation.

The selection and appointment of SSB GmbH’s members of the Board of Managing Directors follows a

rigorous and robust process. A pre-requisite for being considered as a suitable candidate is an

impeccable internal track record within the State Street group or with a comparable background. This

includes positive performance ratings, reflecting, amongst other things, on the execution against a

balanced set of objectives. Furthermore, the BaFin will be notified of the intention to appoint a member

to the Board of Managing Directors of SSB GmbH. To meet the professional qualification requirements of

the BaFin, members of the Board of Managing Directors must have “adequate theoretical and practical

knowledge of the business concerned, as well as managerial experience.” (Section 25c (1), Sent. 2 of the

KWG. For this purpose, the BaFin requires a set of various documents to be submitted so that the BaFin

can make use of its right to decline an appointment, if deemed necessary. The annual evaluation by the

Supervisory Board pursuant to Section 25d (11) Sent. 2, No. 3 and 4 KWG confirmed that SSB GmbH’s

Board of Managing Directors is suitable in terms of structure, size, composition and performance, as

well as of the knowledge, skill-set and experience of each member and of the Board of Managing

Directors as a whole. Currently, the members of the Board of Managing Directors have six directorships

with other companies. SSB GmbH also firmly believes that diverse teams take more balanced decisions

and achieve better results. In this context, the Bank is committed to increasing diversity throughout the

senior levels of the organization in a sustainable way. In accordance with German legislation, SSB GmbH

will define diversity targets for the Supervisory Board, Board of Managing Directors and Top

Management, and manage its succession, promotion, and hiring activities against these targets.

To realize the Risk Management goals the Bank has established a Risk Management (MaRisk)

Committee and an Asset-Liability Committee (ALCO) to ensure overall risk control. In 2014, the

respective committees met on a quarterly basis. Additionally a MaSan3 Committee was created and was

convened three times in the financial year 2014. The MaSan Committee is responsible for preparing,

implementing and revising the Recovery Plan4 of the Bank and its execution during a potential crisis

situation. Illustration 5 depicts the structure of risk management and relevant committees.

3MaSan stands for the Minimum Requirements for the Design of Recovery Plans. 4Information regarding the Recovery Plan of SSB GmbH can be obtained under the following link: http://www.statestreet.com/content/dam/statestreet/officelocations/Disclosure%20Presentation%20RRP%202015%20as%20of%20Dec%2031,%202014.pdf

http://www.statestreet.com/de/en/rp_at_ssb_gmbh_2013.pdf

http://www.statestreet.com/content/dam/statestreet/officelocations/Disclosure%20Presentation%20RRP%202015%20as%20of%20Dec%2031,%202014.pdf

21


Illustration 5: Structure of risk management and committees

While the Risk Controlling Function is responsible for the overall Risk Management arrangements, the

operational responsibility for risk management is distributed within the Bank, dependent on the risk

type, to different departments.

Credit Risks

Market Risks

Operational Risks

Liquidity Risks

Concentration Risks

Investment Risks

RISK MANAGEMENT

ICAAP / Risk Bearing Capacity Conceptintegrated capital and risk management

Managing Directorsset management objectives: strategies, guidelines, business plans and limits,

are responsible for the overall risk management

Committees

MaRisk

risk management,

internal audit, compliance,

lending & trading business

Business Risks

Reputational Risks

ALCO

balance sheet review ,

liquidity risk,

current situation & economic

outlook

MaSanrecovery & resiolution planning;

extended Risk Management

Pension obligation Risks

22


The precise operational responsibilities for the risk management of the individual risk types can be

found in the following table:

Table 9: Operational Responsibilities for Risk Management broken down by risk types

Risk Management at SSB GmbH involves internal control mechanisms with an internal control system

and Internal Audit function. Internal Audit is organizationally put under the control of the spokesperson

of the Board of Managing Directors and reports independently to the entire Board of Managing Directors.

The strict division of trading and back-office processing / control and risk controlling functions within the

internal control system required by MaRisk is taken into account at all structure levels within the whole

organization.

3.2 Fundamental strategies and organizational guidelines

In order to define and document the business activities and associated processes, the Bank has

established appropriate strategies and organizational guidelines.

The relevant strategies and organizational guidelines for risk management are especially:

Business & Trading Strategy (including Investment Portfolio Strategy)

Risk Strategy

Policy “Strategy Process pursuant to AT 4.2 Tz 4 of the MaRisk”

Competence structure

ICAAP Framework/ Risk Bearing Capacity Concept

All strategies and organizational guidelines are reviewed at least on an annual basis and, as applicable,

adjusted and reapproved.

Additionally, the Bank has defined and implemented essential risk management principles, which

appropriately represent the overall risk profile of the Bank. The risk profile is monitored regularly and

managed by suitable early warning indicators and ratios, whereas the base for the update of the overall

risk profile is the business model inclusive of any possible new products and services.

Risk type / Function Operational Responsibility

ICAAP Risk Management/ Finance

Credit Risks Risk Management

Market Risks Risk Management / Treasury

Operational Risks Risk Management / Compliance

Liquidity Risks Finance / Risk Management / Treasury

Concentration Risks Risk Management

Investment Risks Finance

Business Risks Finance / Risk Management

Reputational Risks Finance / Risk Management

23


Respective risk management goals and strategy including corresponding risk tolerances per risk

categories are highlighted further in section 3.3.

3.3 Relevant risk types

Risks for the Bank arise from the core and annex business segments of Investment Servicing. The

relevant risk types are:

Credit Risks

Market Risks

Operational Risks

Investment Risks

Business Risks

Liquidity Risks

Concentration Risks (resulting from Risk Concentrations identified in each risk category)

Pension Obligation Risks

Reputation Risks (resulting from reputation risks in each risk category)

Credit Risks, Market Risks, Operational Risks, Liquidity Risks, Concentration Risks, Investment Risks,

Business Risks and Reputational Risks are classified to be material for the Bank given its overall risk

profile and due to the specifications of the MaRisk. In the following the material risks are explained.

24


3.3.1 Credit Risks

Risk Definition

Credit Risks are defined as the risks of loss of current or future income or capital due to the inability of a

debtor to meet its contractual obligations. The risks definition includes also the risk of default by

counterparties from off-balance sheet transactions.

3.3.1.1 Credit Risks - on-balance sheet

Risk Strategy

The risk strategy provides for a passive issue of loans to customers, the utilization of internal credit lines

and holding overnight deposits on current account at other banks. Excess liquidity is placed as short-

term monetary investments at banks with high credit ratings or in the form of securities repurchase

agreements with SSBT. Mid to long-term investments are made by acquiring variable-yield or fixed-

income securities. SSB GmbH pursues a conservative lending policy.

Furthermore, the risk strategy of SSB GmbH provides for daily monitoring of on-balance sheet credit

risks using a comprehensive system of limits. Establishing of limits and monitoring of limit compliance

is a core component of the risk minimization process. All limits for on-balance sheet positions are for

internal use only and are not communicated to counterparties and customers.

Risk Situation

The Bank is exposed to on-balance-sheet credit risks from the following products:

Utilization or breaches of internal limits by customers within the course of depositary bank

services and custody services that has not been approved. There is no security beyond the right

to a pledge contained in the general terms of business (if at all possible) or by force of contract

Deposits on current accounts at other banks used primarily to settle customer transactions. The

items are not secured by collateral

Short-term investments of cash surpluses at third-party banks (including central banks) with

immaculate ratings. No collateral is provided for these transactions

Securities repurchase transactions with SSBT although here the risk of default relates to both

SSBT and the issuer of the securities purchased

Investments in euro-denominated securities (asset-backed securities, collateralized debt

obligations, residential mortgage backed securities and covered bonds)

Derivatives clearing transactions in which there is a delay between paying the margin

requirements to the respective exchange and debiting the customer’s account. In addition, an

appropriate contribution is made to the central counterparty’s default fund

Securities repurchase transactions with banks and customers resulting in amounts receivable

Intercompany loans

Principal broking services and agent fund trading

Variable-yield securities (shares in investment funds) related to employees converting salary

components into investments for their pension plan

25


To date, there has not been any need to recognize specific or general risk provisions within the context of

the lending business of SSB GmbH, including its investments in securities. Likewise, there has been no

need to date to write-down any loans and advances.

Risk Quantification

The internal rating system quantifies the risk of default by a counterparty basically using a 15-point

scale. This methodology corresponds to the internal ratings-based approach used at group level (IRBA-

Advanced). External ratings by Moody’s, Standard & Poors and Fitch are used for securities repurchase

transactions and the securities held in the portfolio and allocated to the internal ratings where

appropriate.

To measure the capital charges for credit risks, SSB GmbH applies the standardized approach and the

financial collateral comprehensive method (with regard to repurchase transactions and foreign

exchange transactions as well as with respect to the derivative trading and clearing solution business in

accordance with the CRR). In addition, a Pillar 2 capital requirement is set in the going concern approach

and the gone concern approach to cover the expected loss. The requirement is based on internal ratings,

stress tests and scenario calculations applied to these ratings.

Risk Management

The internal rating system is a central element of the management of on-balance sheet counterparty

credit risks. The initial rating of a counterparty is conducted prior to entering into a business

relationship. This ensures that possible counterparty credit risks can be made transparent beforehand.

The internal rating of a counterparty is considered in the decision on whether to accept business from a

new customer and it represents the basis for the internal limits, taking account of further customer-

specific information and the relevant regulatory requirements. The creditworthiness of counterparties

and customers is reviewed at least once annually. The resulting ratings are updated regularly.

Securities held in the own portfolio of the Bank and securities acquired under repurchase transactions

are subject to qualitative and quantitative limits which consider the respective ratings made by external

agencies.

In addition, they are monitored regularly by analysts and a scenario-based stress test for securities held

to own account is also conducted.

Provided that the criteria stipulated by the CRR are met, the securities acquired as collateral for

repurchase transactions, foreign exchange transactions and the derivative trading and clearing solution

business are included in the securities calculated using the comprehensive method. Under the ICAAP all

securities are deemed to be collateral from an economic risk perspective after considering an

appropriate haircut.

Two different limits are set for customers using the derivate trading and clearing solution service. The

initial margin limit sets the aggregate for the initial margins of all State Street Futures transactions of

any one customer with SSB GmbH. The unsecured exposure limit is an additional limit not granted to

external parties that, where necessary, allows the initial margin limit to be breached without the need

for additional collateral.

26


Gross positive fair

value of contracts

(in kEUR)

Netting benefits

(in kEUR)

Netted current credit

exposure

(in kEUR)

Collateral held

(in kEUR)

Net derivatives

credit exposure

(in kEUR)

335,374 137,101 1,169,270 402,961 766,309

3.3.1.2 Credit Risks - off-balance sheet / derivatives

Risk Strategy

Credit risks arising from off-balance sheet exposures are subject to regular centralized monitoring that

pursues the objective of minimizing the risks of significant transactions, for example, default by

borrowers.

Risk Situation

Off-balance sheet credit risks originate from forward exchange contracts initiated by customers from

derivatives clearing transactions, repurchase transactions as well as from guaranteeing the rental

agreements of companies within the Group. Additional risks have arisen from a guarantee in favor of

SSB S.p.A. for the possible overdrafts of certain customers and credit facilities granted in favor of two

customers. In addition, off-balance credit risks can arise as a result of undisbursed loans to issuers in

connection with securities repurchase transactions and securities purchased in derivative trading &

clearing solution business.

Risk Quantification

Risks are quantified using the same methods as those used for on-balance-sheet Credit Risks.

The details regarding own funds requirements for counterparty credit risk positions as of December 31,

2014 are displayed in Table 10.

Table 10: Counterparty credit risk exposure according to 439 e) CRR

Risk Management

Forward exchange contracts with customers and derivative clearing transactions are only entered into

once the trading limits have been granted. These are set on the basis of the individual ratings and the

customer’s volume of securities. Any deterioration in the ratings of the customer during the term of a

contract leads to more intensive monitoring of the customer’s circumstances and possible cancellation

of the deal.

The management of other off-balance sheet credit risks is conducted using the same methods as those

used for on-balance sheet credit risks.

27


3.3.1.3 Credit Risk Mitigation Techniques

Based on the business model and the resulting asset policy, the risk assets of the Bank are essentially

restricted to client overdrafts, the Bank’s own portfolio of securities, as well as unsecured and secured

money market transactions (repurchase agreements). Additionally, the Bank is exposed to Credit Risks

resulting from forward exchange transactions and derivatives clearing transactions.

Credit risk mitigation techniques are used in relation to both repurchase agreements – given their

original structure – and derivatives clearing transactions. In this context, received or pledged securities,

such as equities, government and corporate bonds, securitizations and cash deposits serve as collateral.

The Bank applies the comprehensive method for financial collateral according to Art. 223ff. CRR. From a

regulatory point of view, only financial collateral that are listed in Art. 197 und 198 CRR (for repurchase

agreements only) are considered in the process. These financial collaterals are measured at their

market value and afterwards regulatory haircuts are applied (maturity mismatch adjustment, market

value volatility adjustment, currency volatility adjustment). As part of the Risk Bearing Capacity Concept

collaterals are considered after taking the respective regulatory haircut into account.

The legal basis for these transactions is either the standardized Framework Agreement or the Covering

Agreement. Netting agreements are considered an important factor for credit risk mitigation and receive

special attention as part of such contracts.

Netting agreements according to Art. 295 b) CRR are currently in place for repurchase agreements and

for different service providers within Derivatives Trading and Clearing Solutions in regards to the off-

balance sheet exposure. As of December 31, 2014 the Bank has solely made use of netting agreements

within Derivatives Trading and Clearing Solutions, therefore the impact compared to the total business

volume is relatively small. SSB GmbH has implemented the procedures and maintained required

documentation by respective processes and defined responsibilities required by Art. 297 CRR and takes

the respective netting agreements into account when measuring the counterparty credit risk exposure

(see Table 10).

The strategy and associated processes with respect to the collateralization of these transactions are

documented in the Trading Policies & Guidelines and the corresponding organizational guidelines.

The purchased securities are evaluated dependent on the product category at least once a day, in most

of the cases several times a day. The valuation in this case is not based on an internal assessment

method, but on current market values obtained from an external, independent pricing source. This is a

responsibility of the Risk Management department. Risk concentrations related to credit and market

risks with respect to collaterals are limited by internal restrictions considering issuer, region, class of

investment and rating class. Compliance with these limits is monitored on a daily basis.

Related internal controls and procedures are reviewed on an annual basis, or more frequently as

appropriate and required.

Regular stress tests are carried out related to the market value of eligible collateral. An assessment of

the maturity of the repurchase transaction and the maturity of the financial collateral used for credit risk

mitigation is performed.

28


Risk positions related to repurchase agreements and derivatives clearing transactions as well as the

development of respective collaterals are reported on a regular basis to the Board of Managing

Directors.

3.3.1.4 Further information on the Credit Risk Standardized Approach

To determine the appropriate risk-weights for purposes of Credit Risk quantification under the

Standardized Approach, the Bank has nominated the following rating agencies:

Table 11: Rating agencies broken down by exposure classes according to Art. 444 a) and b) CRR

Market segment Rating agency Exposure Class

Governments- The McGraw-Hill Companies under the brand name

“Standard & Poor’s Ratings Services” (“S&P”)

Central governments

or central banks

- The McGraw-Hill Companies under the brand name

“Standard & Poor’s Ratings Services” (“S&P”)

- Fitch Ratings

- Moody’s Investors Service

SecuritizationsStructured finance

29


The following tables present the required quantitative disclosures regarding the Credit Risk

Standardized Approach and the information required when using Credit Risk Mitigation Techniques

(“CRMT”):

a) Total amount of receivables and the average amounts – without considering Credit Risk Mitigation

Techniques – broken down by relevant exposure classes as of December 31, 2014:

Table 12: Gross exposure and average gross exposure broken down to relevant exposure class according to Art. 442 c) CRR

Exposure class

Gross exposure

as of Dec. 31, 2014(in kEUR)

Average gross exposure based

on quarter-end exposures (in kEUR)

Central governments or central banks 183,238 417,042

Institutions 11,987,513 11,669,639

Corporates 2,689,266 2,868,341

Covered bonds 850,519 699,272

Collective Investment Undertakings (CIUs) 3,730 3,403

Equity exposures 474,243 492,993

Other items 55,593 57,556

Securitizations 4,438,411 4,538,389

Total (in kEUR) 20,682,512 20,746,636

30


b) Total amount of receivables broken down by significant geographic regions and relevant exposure

classes as of December 31, 2014:

Table 13: Total amount of receivables broken down by significant geographic regions according to Art. 442 d) CRR

Exposure class Africa Asia Australia Europe North AmericaTotal

(in kEUR)

Central governments or

central banks - - - 183,238 - 183,238

Institutions - 0 115,082 566,754 11,305,676 11,987,513

Corporates 12,892 614 42,075 2,451,817 181,869 2,689,266

Covered bonds - - - 850,519 - 850,519

Collective Investment

Undertakings (CIUs) - - - 3,730 - 3,730

Equity exposures - - - 474,243 - 474,243

Other items - - - 55,593 - 55,593

Securitizations - - 93,594 4,258,781 86,036 4,438,411

Total (in kEUR) 12,892 614 250,751 8,844,675 11,573,581 20,682,512

31


c) Total amount of receivables broken down by industry sector and relevant exposure classes as of

December 31, 2014:

Table 14: Total amount of receivables broken down by industry sector according to Art. 442 e) CRR

In the reporting period existed no exposures to Small and Middle Size Enterprises (“SME”).

Economic sector

Central

governments or

central banks

Institutions Corporates Covered bonds

Collective

Investment

Undertakings

(CIUs)

Equity

exposures

Other

items

Securiti-

sations

Total

(in kEUR)

Pension funds - - 117,495 - - - - - 117,495

Banks

(Deposit-taking corporations

except the central bank)

- 11,987,513 15 710,471 - - - - 12,697,999

Captive financial institutions

and money lenders - - 1 - - 464,010 - - 464,011

Investment funds

(Non-M M F funds) - - 920,176 - 3,730 - 55,593 - 979,498

Financial auxiliaries - - 980,852 - - - - - 980,852

Non-financial corporations - - 25,009 - - - - - 25,009

Non-profit institutions serving

households - - 4 - - - - - 4

Other financial intermediaries,

except insurance corporations

and pension funds

- - 520,564 140,048 - 10,233 0 4,438,411 5,109,255

Insurance corporations - - 125,151 - - - - - 125,151

Central banks 183,238 - - - - - - - 183,238

Total (in kEUR) 183,238 11,987,513 2,689,266 850,519 3,730 474,243 55,593 4,438,411 20,682,512

32


d) Total amount of receivables broken down by time remaining to maturity and relevant exposure

classes as of December 31, 2014:

Table 15: Total amount of receivables broken down by remaining time to maturity according to Art. 442 f) CRR

e) Total amount of receivables before and after credit risk mitigation broken down by risk weight as of

December 31, 2014:

Table 16: Total amount of receivables before and after credit risk mitigation according to Art. 444 e) CRR

Maturity < 1 yearyears

Total(in kEUR)

Central governments or

central banks 183,238 - - 183,238

Institutions 11,661,889 323,411 2,212 11,987,513

Corporates 1,814,274 137,992 737,000 2,689,266

Covered bonds 70,085 465,279 315,155 850,519

Collective Investment

Undertakings (CIUs) 3,730 - - 3,730

Equity exposures 474,243 - - 474,243

Other items 55,593 - - 55,593

Securitisations - 366,880 4,071,531 4,438,411

Total (in kEUR) 14,263,051 1,293,563 5,125,898 20,682,512

before CRMT after CRMT

0% 183,238 183,238

2% 238,176 238,174

10% 850,519 850,519

20% 16,115,970 4,921,707

50% 17,278 17,278

100% 3,248,669 2,827,505

150% - -

1250% 28,662 28,662

Total 20,682,512 9,067,083

Risk weight

Total of CRSA position values

before and after credit risk mitigation techniques ("CRMT")

under the standardized approach (in kEUR)

33


f) The amount of collateralized receivables as of December 31, 2014 broken down by asset class and

CRMT:

Table 17: Total amount of collateralized receivables according to Art. 453 f) and g) CRR

3.3.1.5 Funding obligations

The Bank did not enter into any contracts during the reporting period that would have required the

provision of collateral in case of a downgrade of its rating.

3.3.1.6 Definition – “Past due”, “Impaired” and “Default”

Past due

A loan is considered “past due” if outstanding contractual amounts regarding interest and capital, that

means amounts that according to contractual agreement have already exceeded the due date, have not

yet been settled by the debtor. This is valid as long as the loan is not classified as “impaired”.

Impaired

A loan is considered “impaired” or “overdue if the Bank expects that a debtor is sustainably not able to

fulfill its obligations according to the contractual agreement. This may be the case, if the debtor is either

unwilling or unable to settle the agreed payments or fulfill the credit agreements.

This may be related to any or all debt obligations of a respective credit agreement and counterparty.

Default

With regard to Art. 178 CRR, a “default” is considered to have occurred when either one or both of the

two following events has taken place with regard to a particular obligor:

The obligor is considered, by the institution and for material reasons, unlikely to pay its credit

obligations in full to the institution or any group enterprise belonging to the group of institutions

or financial holding group to which the institution belongs without recourse by the institution to

actions such as realizing security (if held);

Exposure Class Collateral

Risk exposure

after netting and volatility

adjustments(in kEUR)

Eligible financial collateral 11,208,423

Guarantees -

Credit derivatives -

Eligible financial collateral 419,269

Guarantees -

Credit derivatives -

Total 11,627,692

Banks

Corporates

34


The obligor is past due more than 90 successive calendar days on any material part of its overall

credit obligation to the institution or to a group enterprise belonging to the group of institutions

or financial holding group to which the institution belongs.

3.3.1.7 Credit risk adjustments

As part of the early warning process for risks implemented by the Bank, lending commitments are

reviewed using predefined indicators for any increase in risk content. Depending on the results, these

are assigned a suitable form of care – intensive care, restructuring or liquidation.

If they are assigned to restructuring or liquidation with an associated loss in value of the receivable, an

individual risk provision will be made. The amount of the respective individual provision is calculated per

lending commitment. If, in the case of a loss in value, it is determined that there is no expectation of a

recovery rate, the receivable would accordingly be written off, taking into account any individual

provision which has already been made.

There has been no need to record risk provisions in the past – neither individual nor general provisions –

or to write off either on-balance sheet or off-balance sheet positions. There are currently no

impairments recorded by the Bank. Provisions for credit risk adjustments in accordance with Art. 4 (95)

CRR were not recorded in the reporting period.

As of December 31, 2014, none of the Bank’s lending commitments were assigned to intensive care,

restructuring or liquidation. This is due to, in part, the specific business model of the Bank

(custodian / custodian bank).

Based on the above paragraphs, quantitative information in accordance with Art. 442 g), h), und i) CRR is

neither required nor provided.

35


3.3.2 Market Risks

Risk Definition

Market risks are defined as the risk of loss of current or future income or capital due to adverse

developments in the market prices of bonds, shares and commodities as well as exchange rate

fluctuations. Market risks can arise as a result of our role as a market maker or through the trading and

holding of securities, currencies, commodities or derivatives (relating securities, currencies and

commodities).

Given the business activities of the Bank, this risk category comprises foreign exchange risks, interest

rate risks, risks resulting from changes in the market prices of securities and credit valuation

adjustment (CVA) risks.

As a result of the analysis of materiality, risks arising in changes in market rates for securities are

classified as material, whereas interest rate risks and foreign exchange risks are considered to be

immaterial. This assessment means that market risks are deemed overall to be a material risk for the

Bank. In light of the specific definition in the CRR, CVA risk is quantified under a Pillar 1 approach.

Risk Strategy

The strategy for foreign exchange risks and risks from changes in the market prices of securities

consists of exactly determining any market risk before accepting the corresponding risk position

(selective approach) and also closely monitoring existing risks. Actively adopting risks from changes in

the market prices of securities is not a core element of the risk strategy of SSB GmbH, but to a limited

extent it is necessary for the efficient asset/liability management.

Interest rate risks are also accepted to a controllable extent to optimize asset/liability management.

Risk Situation

SSB GmbH may be exposed to market risks from foreign exchange fluctuations on items denominated in

foreign currency held for the account of SSB GmbH.

There are no foreign exchange exposures from foreign exchange transactions initiated by customers

because each foreign exchange transaction is immediately countered by an offsetting transaction with

the group entity, SSBT. Client funds denominated in foreign currency are invested in the same currency.

In addition, foreign exchange risks could arise from derivative trading that the Bank performs for its

customers.

The securities acquired and provided as collateral for securities repurchase transactions or derivatives

transactions are subject to market price fluctuations. As a result, the amount of secured funds for

investment can fluctuate.

The securities in the investment portfolio are also subject to daily market price fluctuations that can lead

to a fall in their market rate.

36


Derivatives clearing implies market risk solely in the case of a corresponding customer default.

However, this risk only remains until the securities provided as collateral can be liquidated.

Interest rate risks can arise from money market transactions, loans extended and received, client

deposits and the securities held in the Bank’s own portfolio. With the exception of the loans received/

granted and the Bank’s own portfolio, the majority of interest-bearing balance sheet items are payable

on demand or interest rates are adjusted regularly as defined by contractual terms and conditions of the

respective financial instrument. The longer terms of securities held in the Bank’s own portfolio have

little impact on the risk position as the investment focus is on securities with floating rates and short

intervals between interest rate adjustments.

In addition, market risks can arise from variable return instruments (shares in investment funds)

acquired within the framework of employees voluntarily converting salary components into savings for

their pension plans.

Risk Quantification

Open foreign currency positions are negligible in comparison to the transactions in foreign currencies

initiated by customers and are quantified for Pillar 1 purposes in accordance with the CRR. These

immaterial amounts are measured when the monthly balance sheets are prepared. Under the gone

concern approach applied in addition in fiscal year 2014, as Pillar 1 capital requirements were not taken

into account, foreign exchange risks were quantified separately using a model that was fed with

historical exchange rates.

Potential measurement risks from the portfolio of securities are calculated in accordance with the going

concern approach using a model for various scenarios. The input parameters for the model include

“unrealized loss,” “residual term” and “coverage ratios” for each individual security. The findings are

taken into account in the monthly ICAAP calculations. Under the gone concern approach, risks were

quantified using a separate model based on historical price trends.

Interest rate risks in the trading book are quantified using the methods defined in Part 3 Title IV Chapter

2 CRR. Moreover, interest rate risks inherent in the total balance sheet and in the banking book are

quantified at net present value on a monthly basis by means of the Asset-Liability-Management Model:

“Quantitative Risk Management” (“QRM”). This model, which is applied throughout the group by State

Street Corporation, simulates both the regulatory interest shock scenarios for the banking book

(required by BaFin) and the internal interest rate shock scenarios for the total balance sheet.

Due to its capability to model even complex instruments, QRM is a frequently used tool in the financial

services industry. QRM generates cash-flow forecasts based on actual balance sheet data for the

monthly (statistical balance sheet) analysis, which are then taken into consideration for the net present

value analysis. Cash flows for structured securities are modelled either by an external data provider or

within QRM.

SSB GmbH’s primary focus is on the determination of present value for interest rate risk, and continues

to enhance its models, including the implementation of additional key risk indicators supporting interest

rate risk, particularly from a P&L perspective.

37


The most significant contributor to interest rate risk are long-term intercompany loans with fixed

interest rates. The model takes final maturities into consideration as no early repayment or termination

options exist.

Based on the existing structure of SSB GmbH’s own portfolio, consisting predominantly of floating-rate

securities, the contribution of said portfolio to interest rate risk is relatively immaterial. Another area

representing very short interest rate adjustment intervals are client deposits of the Bank, as a result,

their contribution to interest rate risk is minor as well.

A breakdown of the own funds requirements of the Bank for Market and Settlement Risk positions in

accordance with the Standardized Approach as of December 31, 2014, can be found in the following

table:

Table 18: Own funds requirements for Market and Settlement Risk positions

Risk position in kEUR

Position risk resulting from the trading-book 2,454

Traded debt instruments 2,454

Equity -

Specific interest rate risk of securitisation positions -

Large exposures exceeding the limits specified in Art. 395 -401 CRR -

Foreign Exchange 4,862

Commodities 0

Own funds requirements for Market Risks 7,316

Own funds requirements for Settlement Risks -

38


Table 19 presents the quantitative impact of the regulatory interest rate shocks in the banking book on

the Bank’s Total Own Funds as of December 31, 2014 in accordance with the BaFin Circular 11 / 2011

(BA) (issued on November 9th, 2011). According to the circular, significant currencies have to be

additionally taken into consideration, for which a materiality threshold of 5% has been defined.

Table 19: Impact of interest rate shocks on the Total Own Funds

Risk Management

The foreign exchange transactions with customers and the respective offsetting deals with SSBT are

monitored daily to ensure completeness, matching cover and correct settlement.

The foreign exchange positions resulting from own-account trading are subject to a system of limits and

compliance with these limits is monitored daily. Any breaches of limits are clarified immediately with the

front office, which ensures that foreign exchange deals are offset with SSBT.

The application of a suitable haircut within securities repurchase transactions and derivatives clearing

transactions allows the Bank to cover market risks resulting from fluctuations in exchange rates or

market prices. In addition, the securities received as collateral are marked to market daily, using prices

from an independent source.

The own-account securities are allocated to fixed assets and are generally not sold until they mature.

Qualitative and quantitative limits are in place for these securities; the securities are analyzed in detail

and discussed at monthly meetings.

To date, there has not been any need to record write-downs of such securities.

The results of the simulation of the interest rate risks are communicated to the management each

month. Limits have been implemented for the individual scenarios and are monitored accordingly.

+200 BPs -200 BPs

in kEUR -191,993 131,588

thereof:

EUR-190,958 132,623

thereof:

other significant currencies: USD-1,035 -1,035

in % of the Total Own Funds -14.67 10.05

Present value change

Interest Rate Risks in the banking book

as of December 31, 2014

39


3.3.3 Operational Risk

Risk Definition

Operational risks are defined as the risk of loss resulting from inadequate or failed internal processes

and systems, human error, or from external events. This definition includes IT risks, outsourcing risks,

settlement risks, legal risks, compliance risks and model risks. For the purpose of measuring risks, the

definition does not extend to business risks and reputation risks, although these types of risks could be

effectively managed by sound management of operational risks.

Risks which result from outsourcing operations (outsourcing risks) are treated as a special kind of

operational risk. Functions are deemed to be outsourced when a third party is assigned to perform

activities and processes related to the execution of banking transactions, financial services or other

services typical for the Bank and that SSB GmbH would otherwise perform itself.

Risk Strategy

The risk strategy is based on the early recognition of operational risks and ensuring that the measures

taken to mitigate the risks are appropriate. This includes the effective management of operational risks

and compliance with the applicable requirements set by the financial regulators.

Compliance with relevant legal and regulatory requirements is a critical component of the risk strategy

pursued by SSB GmbH.

With regard to the management of compliance risks, the goal of the Bank is to comply with all legal and

regulatory requirements that it must observe when rendering banking services, financial services and

ancillary security-related services. The responsibility for complying with these requirements lies with

every single member of the staff wherever the related tasks and duties apply to the sphere of the

employee.

Risk Situation

Operational risks are ubiquitous: in the services and products which SSB GmbH provides and sells, in the

technology used and the processes applied and in employees who maintain daily operations. While the

use of information processing systems can minimize operational risks, dependence on these systems

and the applications running on them can in itself result in significant operational risks. Moreover,

significant operational risks arise from processes that require manual input. In addition, securities

transactions can entail settlement risks.

Outsourcing risks are inherent in the services and products provided by the service organization, the

technology used and the processes themselves. SSB GmbH is exposed to an outsourcing risk due to its

dependence on the timely and correct rendering of services by the external provider. Given the rising

number of outsourced operations, the overall potential outsourcing risk is also higher.

At SSB GmbH, legal risks exist in the form of the loss risk that might arise from not performing

contractually agreed obligations and in the form of potential litigation associated with the business

activities of SSB GmbH.

40


Compliance risks exist both from an external and an internal perspective. On the one hand, SSB GmbH

operates within a complex legal and regulatory environment that is evolving constantly. On the other

hand, it must also comply with internal standards and guidelines set by State Street Corporation.

Ongoing initiatives, new regulations (e.g., UCITS V), changes to existing business processes and

additional outsourcing by SSB GmbH or customers/other group companies or insourcing from

customers or other group companies can also increase operational risks.

Model risks are risks of financial or reputation loss arising as a result of inadequate decisions based on

the flawed development, implementation or use of internal models.

Risk Quantification

Risks are quantified by preparing a risk inventory that is based on operational risk workshops, the

results of which are augmented and verified by other data sources. Operating gains and losses that are

incurred are recorded in a structured fashion in a loss database and monitored closely. The results are

used to define specific measures to avoid the risk in future. At account/portfolio level, qualitative risk

ratings are prepared to assess operational and contractual risks, risks related to the performance of

trust activities and the risks of money laundering.

To measure the capital charges for operational risks, SSB GmbH applies the Capital Requirements

Regulation (CRR). Internal capital needs to cover operational risks are measured under the ICAAP

(Internal Capital Adequacy Assessment Process) and the risk-bearing capacity concept pursuant to the

MaRisk [“Mindestanforderungen an das Risikomanagement”: Minimum Requirements for Risk

Management] using estimates for the expected default and standard deviation based on the actual past

defaults. Operational risks are not only validated: they are quantified and an appropriate amount of

capital is allocated to them.

Risk Management

Extensive risk mitigation measures, ranging from measures inherent to the processes to process-

independent measures, are used to manage operational risks. The measures that are inherent to the

processes include identification of potential operational risks before the Bank is actually exposed to

them (taking a selective approach) and also analysis, management and monitoring of existing

operational risks. Controls that are independent of processes consist of the internal audit and a

comprehensive program of monitoring and auditing measures conducted by the compliance department.

All contractual documents are drafted by the central legal department based on worldwide standards.

There are corresponding escalation processes in place to authorize any deviation from these standards.

The Compliance Oversight Program offers a group-wide framework for an inventory of regulatory

requirements, communicating these requirements to the business units concerned, choosing the

appropriate measures to manage the risks and for addressing any compliance findings. It provides these

to the business units in the form of a summary of its regulatory requirements, risks, corresponding risk

controls, and suggested solutions for compliance issues. This framework constitutes a comprehensive

and consistent approach to the management of compliance risk.

41


The compliance department monitors and secures ongoing compliance with the relevant laws and

regulatory requirements as well as the group’s and specific local internal requirements. In this way it

creates a foundation for continuous compliance with all requirements. Compliance with the required

controls is monitored by a comprehensive program of running tests. The future evolution of the legal

environment and regulatory requirements is analyzed in a structured fashion at a global level, European

level and also at a local level for all those countries in which the Bank is based. The latter serves to

identify the need to implement any new regulations in the short to mid-term so as to ensure compliance

with the changing legal and regulatory requirements.

SSB GmbH has documented the framework for outsourcing work. The spokesman of the management is

explicitly responsible for outsourcing and is assisted by the outsourcing officer who is also the head of

risk management and acts as a central coordinator. The feasibility of any intended outsourcing is

reviewed with regard to the legal and regulatory requirements.

The risks associated with outsourcing are presented in a comprehensive risk assessment. This is then

used to determine the significance of the risk inherent in the outsourcing. The degree of detail for this

risk assessment is determined by the nature, scope and complexity of the outsourcing.

The outcome of this risk assessment for the corresponding scenario is used to define mitigating factors

for each individual risk scenario. The conclusions drawn from the risk assessment determine the length

of the review cycle. Significant outsourced operations are reviewed annually. Insignificant outsourced

functions are reviewed every three years. In addition, a reassessment is made whenever the risk profile

changes significantly.

SSB GmbH regularly monitors and measures the performance of the service organization as part of its

quality assurance processes. Regular service calls and reporting of the key performance indicators

(“KPIs”) are an essential component of risk management. The KPIs are based on the two main criteria:

“timeliness” and “accuracy.” KPIs are reported on a daily, monthly, or quarterly basis.

42


3.3.4 Investment Risks

Risk Definition

Investment risks relate to the danger of potential losses from equity investments arising from a loss of

dividend payments, impairments, loss on disposal, or a reduction in reserves.

Risk Strategy

The risk strategy is to accept these risks and to monitor and manage it by means of suitable qualitative

measures.

Risk Situation

SSB GmbH holds a direct stake in State Street Holdings Italy S.r.l., Milan, Italy, (90% of the voting rights)

and, via these, an indirect majority stake in SSB S.p.A. In addition, it holds a 100% stake in State Street

Fondsleitung AG, Zurich.

Risk Quantification

Risks are quantified depending on past impairments.

Risk Management

In order to manage investment risks, there is a monthly and quarterly scenario analysis of the business

activities and risk profile of significant investments discussed at governance meetings and, in connection

with this, the close monitoring of the internal rating.

Balance Sheet Value

Shares in affiliated companies (other participations, not listed on the stock exchange) are accounted at

acquisition cost or, in case of permanent impairment, to the lower value at the balance sheet date. If the

reasons for impairment in the previous fiscal years cease to exist, write-ups up to the fair value yet

maximal up to the acquisition cost will follow. In the reporting period 2014, the book value of the State

Street Holding Italy S.r.l. was written off by 25 mn EUR. Thus, as of December 31, 2014 following

investment values were reported: State Street Holding Italy S.r.l. 464,010 kEUR and State Street

Fondsleitung AG 10,233 kEUR. Due to the reasons of confidentiality the Bank abstains from disclosing

the fair value of its participations.

There were no cumulative, realized profits or losses from sales and liquidations in the period under

review. Unrealized or deferred revaluation profits or losses were not taken into account in the period

under review.

43


3.3.5 Business Risks

Risk Definition

Business risks comprise the risks arising from changes in the business and regulatory environment,

including the risk that business develops differently to the business plans and business strategy.

Business risks therefore comprise strategic risks, the risk of losing customers and the risk of missing

income and expense budgets.

Risk Strategy

The risk strategy is based on early recognition of potential business risks and ensuring appropriate risk

mitigation measures to the extent possible given the nature of the risk.

Risk Situation

Business activity involves taking business risks, regardless of the specific nature of the business. The

number of variables in daily business frustrates any form of planning certainty.

In particular, the business risks for SSB GmbH result from the high degree of dependence on changes in

the legal environment (e.g., the laws and regulations governing custody bank business or tax aspects).

Additional risks arise from concentrations of customers and industries as well as dependence on

existing infrastructure of the financial markets (e.g., settlement systems). Business risks can also arise

from changes in the global business model and a rising trend to outsource certain business activities of

SSB GmbH and of customers/other group companies, respectively.

Risk Quantification

Business risks display a great deal of interdependency on other risk categories. Consequently, the

opportunities for quantifying the risks within a single risk category are greatly restricted. In addition, it

should be remembered that if business risks eventuate, they would have a direct impact on the available

risk capital of the Bank. For this reason, business risks are considered in the capital adequacy concept

of the Bank, primarily at global level. The calculation of the available risk capital – both with regard to

the Bank’s current as well as its planned risk position – substantiates the capital available to cover

potential present or future business risks.

Risk Management

SSB GmbH regularly monitors changes in the legal and regulatory environment to ensure a prompt and

complete response to such changes. In order to further minimize the risk, the following controls will be

implemented:

Annual revision of the business strategy

Balanced scorecards prepared quarterly to review goal attainment

Regular recording of financial data

Monitoring the P&L at customer level

A fee-adjustment process

Adjustment processes in accordance with AT 8 MaRisk

44


3.3.6 Liquidity Risks

Risk Definition

Liquidity risk is the risk of loss of current or future income or capital due to the inability to meet payment

obligations on the due date. It comprises call, untimely payment, credit deterioration, refinancing and

realization risks.

Risk Strategy

For the Bank’s own portfolio, the risk strategy involves accepting a suitable maturity mismatch to attain

the best result from cash management. The risk strategy for assets not held in the Bank’s portfolio is to

avoid liquidity risks as much as possible by ensuring the highest possible match in maturities between

asset and liability positions.

Risk Situation

At SSB GmbH, liquidity risks can become relevant when there is a mismatch between asset and liability

positions if, for example, customers unexpectedly withdraw large sums of money (observing the relevant

contractual maturities) or there is a strong trend towards them shifting their monetary deposits into

securities.

Although the own portfolio led to the residual terms rising on the assets side, liquidity nevertheless

remained very high overall. Moreover, the majority of the items held for the own account of the Bank are

eligible under the European Central Bank criteria as collateral for borrowings from Deutsche

Bundesbank or Banque Central Luxembourg (emergency cash plan).

The Bank pursues a liabilities driven investment strategy. This means the daily liquidity, held by

customers at SSB GmbH, is invested in suitable investments under the banking book. As a result, the

Bank is not exposed to any material refinancing risks.

Risk Quantification

Liquidity ratios and early warning indicators are calculated daily in accordance with the Capital, Liquidity

and Interest Rate Risk Management Policy and the Liquidity Risk Management Guidelines. The liquidity

ratio in accordance with the LiqV [“Liquiditätsverordnung”: German Liquidity Ordinance] at the end of

2014 is presented in section 4.4. This allows the liquidity risk to be quantified for both a normal and a

stressed market environment during the monthly cash flow forecast and the stress tests conducted by

the Bank.

Risk Management

The measures taken to manage liquidity risks include monthly scenario testing, daily identification and

monitoring of liquidity ratios and early warning indicators as well as a monthly cash flow forecast and an

emergency plan.

45


3.3.7 Concentration Risks (resulting from Risk Concentrations identified in each risk category)

Risk Definition

Risk concentrations include

a) risk positions vis-à-vis single-name counterparties that represent a risk concentration simply due to

the size of the position,

b) risk concentrations that arise owing to a common underlying factor of the risk positions within a single

risk category (“intra-risk concentrations”),

c) risk concentrations that arise due to a positive correlation between different risk categories (as a

result of common risk factors or interaction between various risk factors of different risk categories –

“inter-risk concentrations”).

Risk Strategy

Generally, the risk strategy here is to avoid risk concentrations taking account of the business model of

SSB GmbH. Risk concentrations are initially identified and then mitigated as far as possible. Existing risk

concentrations undergo both qualitative and quantitative monitoring.

Risk Situation

Significant risk clusters can be found in all of the Bank’s main risk categories, i.e., counterparty credit

risks, market risks, operational risks, liquidity risks, investment risks and business risks.

Concentrations with regard to certain products, transaction types, customer categories and countries

represent the largest risk concentrations.

Risk Quantification

These risks are quantified using a bottom-up scenario approach. The financial impact of the stress tests

is considered when validating the capital adequacy and measuring the degree to which the Bank’s risk

appetite has been utilized. In order to ensure adequate capital coverage for any risk concentrations, a

risk buffer based on the quantification results of the remaining relevant risk categories is applied under

the ICAAP.

Risk Management

The process-related measures used to manage risk concentrations include an analysis of potential

concentrations of risk before these risk exposures are accepted (taking a selective approach) and also

analysis, management and monitoring of existing operational risk concentrations.

The exposures arising from own account transactions are subject to a system of limits at

country/counterparty and asset class level.

46


3.3.8 Reputational risks (resulting from reputation risks in each risk category)

Risk definition

Reputational risks are the risk of potential losses arising as a result of the Bank being perceived in a

negative light by customers, counterparties, shareholders, investors or supervisory authorities.

Risk strategy

The risk strategy is based on early recognition of potential reputational risks and ensuring appropriate

risk mitigation measures to the extent possible given the nature of the risk.

Risk situation

Reputational risks can be found in all of the Bank’s main risk categories, i.e., counterparty credit risks,

market risks, operational risks, liquidity risks, investment risks and business risks.

Risk quantification

Reputational risks display a great deal of interdependency to other risk categories. Consequently, the

opportunities for quantifying the risks within a single risk category are greatly restricted. In addition, it

should be remembered that if reputational risks eventuate, they would have a direct impact on the

available risk capital of the Bank. For this reason, reputational risks are considered in the capital

adequacy concept of the Bank, primarily at global level. The calculation of the available risk capital –

both with regard to the Bank’s current as well as its planned risk position – substantiates the capital

available to cover potential present or future business risks. Risks are also quantified using a bottom-up

scenario approach in stress tests which take into account the financial impact of reputational risks in

validating capital requirements and in gauging the utilization of risk appetite.

Risk management

Reputational risks are managed by way of a complaints management system, the regular

communication with customers at customer service meetings and the analysis and monitoring of

customer satisfaction and media perception.

47


3.4 Risk Reporting

The risk situation of the Bank is communicated via a comprehensive reporting system to the Managing

Directors as well as other divisions. Apart from the reports described in Section 3.1, the risk situation of

SSB GmbH is reported by the following means:

A monthly report prepared as a part of the Management Information System (“MIS”) of SSB

GmbH. The MIS contents, which are crucial to the overall bank management, are coordinated by

a central division.

Reporting for relevant risk types is scheduled several times a day, a daily report at close of

business as well as weekly, monthly, quarterly and yearly.

The information flow takes place within the scope of the above-mentioned reporting and, if applicable, as

ad-hoc reports according to individually defined processes.

48


4 Securitizations

Securitization activities of the Bank

In the reporting period, the Bank acted solely as an investor in securitizations. The Bank was neither an

originator nor a sponsor of securitizations and did not hold or purchase any re-securitizations. The goal

of the Bank’s securitization activities was revenue generation through longer term investment and risk

diversification.

Classification, book value and valuation of securitization positions

Upon acquisition, all securitizations were assigned to the banking book based on the trading book

definition according to Art. 102ff CRR. They are valued as fixed assets according to commercial law

specifications in § 253 (3) HGB. The securitization positions are to be held to the maturity.

Securitizations are valued according to the modified lower of cost or market principle. During the year

under review there were no write-downs resulting from permanent impairments according to

§ 253 (3) sent. 3 HGB.

Other than Credit or Market Risks within the Bank’s securitization activities

Liquidity Risk associated with the Bank’s investment activities results from the longer term allocation of

liquid means for the held-to-maturity securitization positions. Yet given the fact that the majority of the

held securitization positions are eligible under the European Central Bank criteria as collateral for

borrowings from the Deutsche Bundesbank or from the Banque Central du Luxembourg, the Bank

considers the Liquidity Risk of the securitization position not to be material. The expected maturities of

securitizations held in the portfolio are monitored on an ongoing basis.

Additionally the Bank identifies and monitors country and product concentrations within the

securitization positions.

Approach for determination of risk-weighted securitization positions

The Bank used the specifications of Art. 251 CRR, when calculating Credit Risk risk-weighted assets for

securitizations held in 2014. To obtain external ratings for securitization positions and further to be able

to determine risk weights related to the exposure class “Securitizations” the following rating agencies

were nominated by the Bank: the McGraw-Hill Companies (under the brand name “Standard & Poor’s

Rating Services” (“S&P”)), Fitch Ratings and Moody’s Investor Services. To determine the risk weighs

related to the securitization exposures, the Bank complied with the requirements of Art. 138 CRR.

Monitoring of Credit and Market Risks

Pre-trade checks and regular post-trade portfolio monitoring processes were established to oversee

changes within Credit and Market Risks of the securitization positions. The pre-trade check process

aims to ensure compliance of a new trade with the internal and supervisory requirements at the earliest

stage. A risk assessment of a new securitization position is conducted therein, which additionally serves

as documented evidence for conformity to Art. 405 and 406 CRR. The regular post-trade portfolio

monitoring processes include, together with a regular scenario-based stress test, the comprehensive

reporting and monthly Surveillance Group Meetings which consider the risks of the Bank’s entire

49


securities portfolio. Alongside this analysis, liquidity and investment topics of the Bank are presented on

a quarterly basis to the decision-making body (ALCO Committee). The risk situation of the securitizations

portfolio is also discussed in the quarterly MaRisk Committee meetings. The structure of the

aforementioned Committees can be found in Illustration 5. The post-trade portfolio monitoring process

fulfills the requirements of Art. 406 CRR.

Further to this, Credit and Market Risks of the securitization positions are monitored as part of the

monthly ICAAP and subsequently reported to the Managing Directors through the MIS reporting.

Hedging

The Bank has not implemented a hedging strategy with respect to its securitization positions.

Quantitative information

In 2014, the Bank acted solely as investor in securitizations; no re-securitizations as well as no off-

balance sheet (re-)securitization items were held. All purchased securitization positions were assigned

to the banking book. To that effect, the following quantitative information outlines the Bank’s investor

activities in the banking book.

In the period under review, the Bank decreased its stock of securitizations. The reduction resulted from

maturing investments as well as from the sale of securities. The size of the portfolio declined from

4,873,399 kEUR as of December 31, 2013 to 4,438,411 kEUR as of December 31, 2014. Receivables from

residential mortgages remained the dominant underlying asset class in the securitizations portfolio.

Distribution of the risk weights within the securitizations portfolio changed slightly in 2014. A downgrade

within the securitizations portfolio caused the respective risk weight of the position (0.6% of the total

CRSA-position value) to increase in comparison to the previous year. The majority of the securitization

positions were assigned the risk-weight according to the highest credit quality step for the CRSA

exposure class “Securitization positions” (97.86% of the total CRSA-position value).

The following table shows the securitization positions acquired by the Bank as investor, broken down by

type of underlying receivables and by CRSA risk weights for “Securitization positions” as of December

31, 2014 (all securitizations were assigned to the banking book):

50


Table 20: Securitization positions according to Art. 449 CRR

Securitized asset classExposure value

(in kEUR)Risk weight

Own funds

requirements(in kEUR)

2,539,739 20% 40,636

17,278 50% 691

49,221 100% 3,938

28,662 1250% 28,662

Leasing 492,649 20% 7,882

Loans to corporates or SMEs

(treated as corporates) 71,155 20% 1,138

Consumer loans 1,239,707 20% 19,835

Total 4,438,411 102,783

Residential mortgages

51


5 Encumbered and unencumbered assets

Art. 100 CRR prescribes that Institutions shall report to the competent authorities the level of their

repurchase agreements, securities lending and all forms of encumbrance of assets. These requirements

have been concretized in the Commission Implementing Regulation (EU) 2015/79.

In this context, an asset shall be treated as encumbered if it has been pledged or if it is subject to any

form of arrangement to secure, collateralize or credit enhance any transaction from which it cannot be

freely withdrawn.

CRR Institutions had to comply with the above mentioned requirement as of December 31, 2014 for the

first time and had to provide the supervisory authority an overview on their encumbered assets, maturity

and contingent encumbrance.

Disclosure requirements resulting from the EBA guidelines related to Disclosure of Encumbered Assets

will be fulfilled in the next sections.

Encumbrance of Assets at the Bank

SSB GmbH offers Derivatives Trading and Clearing Solutions to its clients. As a direct or indirect clearing

member, SSB GmbH provides collateral in the form of margins or otherwise as security for its

obligations or liabilities vis-à-vis the clearing house or direct clearing member to which it is connected.

Encumbrance of assets in this context takes place by (a) transfer of cash, (b) transfer of title to

securities, or (c) pledging securities held with a central securities depository or another credit institution

in favour of the respective clearing house or direct clearing member to which SSB GmbH is connected.

Typically, such collateral consists of cash or securities.

With regard to the further terms and conditions under which such asset encumbrance takes place,

generally, the general terms and conditions (clearing rules) set up by the relevant clearing houses apply.

With respect to ICE Clear Europe Ltd. and EUREX Clearing Aktiengesellschaft, the relevant clearing

rules are publicly available on the homepages of such entities.

SSB GmbH offers repurchase agreements to its clients by which it borrows securities on the market and

lends them to its clients.

In the context of borrowing the securities from other market participants (which may occur through

another SSBT acting as agent of respective market participants), SSB GmbH provides collateral to such

market participants; insofar, encumbrance of assets takes place. Collateralization takes place by (a)

transfer of cash, (b) transfer of title to securities, or (c) pledging securities in favour of the respective

market participant acting as lender vis-à-vis SSB GmbH.

Under the respective agreements which are generally governed by English law, marking to market of

collateral takes place, i.e., the market value of collateral to be delivered to the lender must equal the

sum of (a) the aggregate amount of the loaned securities and (b) a respective margin; such market value

is calculated on an intra-day basis.

52


Quantitative information

As of 31 December 2014, only transfer of cash and securities have been used by SSB GmbH as collateral.

The following tables provide an overview on assets, collateral received and associated liabilities of the

Bank broken down by encumbrance as of December 31, 2014:

Table 21: Assets of the institution according to Art. 443 CRR

61% (25,016 kEUR) of the unencumbered other assets (40,957 kEUR) have to be treated as

unencumbered also according to the definition of Art. 100 CRR, as these items are not pledged or not

subject to any form of arrangement for secure, collateralize or credit enhance of any balance sheet or

off-balance sheet position, but due to their nature are not available for encumbrance (e.g. tangible and

intangible assets, deferred items).

Template A - Assets

Carrying amount of

encumbered assets

(in kEUR)

Fair value of

encumbered assets

(in kEUR)

Carrying amount of

unencumbered

assets

(in kEUR)

Fair value of

unencumbered

assets

(in kEUR)

Assets of the reporting

institution175,428 18,823,314

Equity instruments 3,730 3,730 474,243

Debt securities - - 5,404,013 5,423,444

Other assets 131,616 40,957

53


Template B - Collateral received

Fair value of encumbered

collateral received or own

debt securities issued

(in kEUR)

Fair value of collateral received or

own debt securities issued

available for encumbrance

(in kEUR)

Collateral received by the reporting institution 1,210,874 13,870,821

Equity instruments 168,146 -

Debt securities 737,210 13,862,584

Other collateral received 285,955 -

Own debt securities issued other than own covered bonds or ABSs - -

Table 22: Collateral received by the institution according to Art. 443 CRR

Table 23: Encumbered assets, collateral received and associated liabilities according to Art. 443 CRR

Template C - Encumbered assets/collateral received and associated

liabilities

Matching liabilities,

contingent liabilities or

securities lent

(in kEUR)

Assets, collateral received and

own

debt securities issued other than

covered bonds and ABSs

encumbered

(in kEUR)

Carrying amount of selected financial liabilities 308,729 1,382,573

54


6 Remuneration Disclosure for the Financial Year 2014 according to § 16 InstitutsVergV

6.1 Compensation structure

External regulatory requirements and internal drivers for change continued to shape the compensation

structure of SSB GmbH following the new remuneration requirements under CRD IV. The remuneration

requirements of CRD IV were transposed into national law through the revised German Remuneration

Ordinance (Institutsvergütungsverordnung/InstitutsVergV) that came into effect on January 1, 2014. As a

fully licensed bank under the German Banking Act (“KWG”), SSB GmbH is subject to the German bank

remuneration regime, particularly defined in Section 25a (1) Sent. 3 No. 6 KWG and in Section 25a (5) and

(6) KWG in connection with the InstitutsVergV. Further, SSB GmbH has a Supervisory Board and

maintains a Remuneration Officer function that ensures an appropriate, permanent and effective control

of the remuneration systems and supports the Supervisory Board according to Section 24 InstitutsVergV.

The Executive Compensation Committee (“ECC”) of the SSC Board of Directors has oversight of the

compensation system at State Street. ECC members are senior professionals with strong

financial/business knowledge, who are independent members of the Board of State Street Corporation,

in accordance with the listing standards of the New York Stock Exchange. They are appointed by the

Board on the recommendation of the Nominating and Corporate Governance Committee of the Board.

The ECC oversees all of State Street’s compensation plans, policies, and programs in which senior

executives participate and incentive, retirement, welfare and equity plans in which certain other

employees of the group participate. It also oversees the alignment of the group’s incentive compensation

arrangements with the group’s financial safety and soundness consistent with applicable related

regulatory rules and guidance. The ECC approves the overall funding rate and amount of the corporate

incentive compensation pool (“IC pool”). The Chief Executive Officer (“CEO”) of State Street Corporation

allocates the IC pool to business units and corporate functions based upon a variety of factors, which

may include budget performance, achievement of key goals and other considerations. SSB GmbH then

reviews the total amount of the IC pool that is ultimately allocated to its staff against affordability.

Separately, the Bank’s members of the Board of Managing Directors review whether the individual

allocation process and the allocation are in line with the Bank’s Remuneration Policy. For the 2014

Performance Year, SSB GmbH has implemented two Remuneration Policies - one for each of the Bank’s

staff and Board of Managing Directors itself (enacted by the SSB GmbH Supervisory Board). Those

categories of staff whose professional activities have a material impact on the risk profile of the Bank

(so-called “Risk Takers”) are also covered under these policies. Both policies were primarily designed by

the Global Human Resources department and include input from SSB GmbH’s Compliance department,

Corporate Secretary Office and Legal department. The Remuneration Policy for the Bank’s staff was

approved and enacted by the SSB GmbH Board of Managing Directors and covers the remuneration of

the Bank’s staff. SSB GmbH’s members of the Board of Managing Directors are subject instead to the

separate SSB GmbH Managing Directors Remuneration Policy, which was approved and enacted by the

SSB GmbH Supervisory Board. The number of meetings held by the SSB GmbH Board of Managing

Directors met 11 times during the 2014 financial year (the SSB GmbH Supervisory Board met 2 times).

Both policies are designed to demonstrate compliance with Section 11 InstitutsVergV and are reviewed

at least on an annual basis. The policies apply to all business units of SSB GmbH and all of its domestic

and foreign branches as well as all banking subsidiaries, unless local Policies and Guidelines require

55


different or modified approaches as imposed by local laws and regulations. Both Remuneration Policies

are coordinated in close consultation with human resource employees in State Street’s global

total rewards function (“GTR”) to maintain a high degree of consistency of compensation strategy across

the State Street group of affiliated entities.

Compensation Strategy

State Street’s overall aim is to attract and retain high-performing employees via its compensation

strategy. We recognize that for the business to succeed, it must remain competitive and cultivate an

environment that encourages employees to learn and grow in their careers.

There are five key principles that define our compensation strategy:

1. An emphasis on total compensation.

2. A ”pay-for-performance” philosophy. Company, business unit and individual

performance drives overall compensation levels.

3. A competitive compensation package to attract and retain key talent.

4. An alignment with shareholder interests as reflected through the mix of cash, instruments and

equity compensation.

5. Compliance with applicable regulations and related guidance, including limiting

incentives to take excessive risks.

State Street operates a fully flexible, discretionary bonus program which is structured so as to achieve a

balance between fixed and variable remuneration components (see below). The IC pool is based on the

overall profits of the entire State Street group of companies. The primary component in the calculation of

the IC pool is operating-basis “Net Income Before Tax and Incentive Compensation” (NIBTIC). The ECC

reviews operating-basis NIBTIC calculations and identifies any applicable adjustments to reflect its

assessment as to elements of revenues and expenses that should or should not apply for IC purposes.

The ECC has flexibility to adjust the overall global IC pool and, in doing so, evaluates a number of factors,

including capital, risk, business and other considerations. Specific capital measurements taken into

consideration include, for example, the Tier 1 risk-based capital ratio; the tangible common equity ratio;

unrealized portfolio gains and losses; and the Tier 1 leverage ratio. Further, the allocation of the overall

global bonus pool of State Street group to each business unit is determined by the CEO/Chairman by

reference to business unit performance and considers many factors including those considered by the

ECC. The sub-allocation of the business unit bonus pool to an individual is then also further determined

by an individual’s business manager with reference to the individual’s performance measured on both

financial and non-financial criteria. Individual incentive awards are completely discretionary. In addition

to the formal ex-ante adjustment process described below, in making individual incentive awards,

State Street permits the use of discretionary adjustments to awards for both financial and non-financial

criteria, including (but not limited to) compliance and risk performance factors, such as noncompliance

with internal policies and procedures or significant audit findings, instances where there is a significant

downturn in the financial performance of, or a material risk management failure, in respect of

State Street or a material business unit.

56


State Street also has a performance planning and review process (“PPR”), which is State Street's

performance management process, for employee compensation that involves a collaborative planning

process in which employees and their managers establish performance goals that align individual with

corporate goals. Mid-year and year-end progress reviews are conducted and the employee’s

performance level is reviewed and rated on a five-point scale. This rating is a key factor used by

managers in determining incentive compensation and salary decisions during the annual compensation

planning process. Performance management employs consistent processes to cascade goals, create

"line of sight" and measure actual individual and organizational performance. Where applicable,

individual financial targets will be incorporated into the Performance Planning stage of the PPR process

and the level of achievement against these financial goals will form part of the year-end review process

and contribute to the performance rating along with qualitative assessment. In 2012, State Street

introduced the Talent and Reward Differentiation Tool (TRDT) to further assist managers in making

compensation decisions. The TRDT system guides managers in assessing employees, and making

compensation decisions, on the basis of factors, such as criticality of role and retention risk, that are in

line with State Street’s values and long-term interests. The TRDT allows managers to assign a relative

score (on a seven-point scale) to employees at the Vice President level and above based on five factors.

These include relative performance, potential, criticality of role, critical skills or expertise and retention

risk, and combined with the PPR rating, are used to help guide compensation decisions. Once the

individual performance has been determined, the performance level will be reflected in the individual

compensation that is composed of the following remuneration structure.

57


Remuneration Structure

The Bank’s key remuneration components are as follows:

Fixed Compensation

Base Salary and Benefits

Base Salary is one element of an employee’s compensation. Employees’ base salaries are determined by

role, and by a number of other factors such as individual performance, proficiency level, year-over-year

increase guidelines, budget and position to market. Employees are entitled to various benefits (such as

company cars in Germany) based on their position in the hierarchical structure and their location.

Role-Based Allowance

Role-Based Allowance is a new element of an employee’s fixed compensation introduced for a very

limited number of individuals for the 2014 performance year to ensure that State Street can continue to

deliver compensation that is reflective of the competitive market place, an individual’s role,

responsibility, experience and performance, in compliance with its regulatory obligations. The key

characteristics are:

Contractual cash payment

No fixed term, continuous

Paid in equal monthly installments

Not subject do deferral or performance conditions

Amount subject to change only if there is a change in role and responsibilities.

The following are summaries of the variable remuneration plans for Risk Takers:

Variable Remuneration (i.e. Incentive Compensation (IC))

State Street’s IC plan is an integral part of the State Street compensation strategy. The IC Plan is the

primary scheme for the provision of annual discretionary bonuses to State Street’s staff globally,

including SSB GmbH, and is intended to motivate staff at various levels within State Street’s operations

to perform as well as possible and produce superior results whilst not incentivizing inappropriate risk-

taking. Except as described below with respect to a small number of employees who participate in

business unit sales incentive plans, all State Street employees, including all Risk Takers, are eligible to

participate in the IC Plan.

A small number of employees in sales participate in sales incentive plans (“SIPs”), which aim to bring

the variable compensation granted to plan participants into line with the revenues they generate as well

as taking into account non-financial qualitative performance indicators. All such participants have fixed

compensation. Variable compensation is assigned on an individual basis by way of a review of both

quantitative and qualitative factors. All SIPs are reviewed annually by GTR and by a risk control

committee comprised of State Street’s control functions, including Risk and Compliance. An employee’s

eligibility to participate in a SIP, and all amounts paid under a SIP, are subject to management approval.

58


The Structure of the Scheme’s Awards for Risk Takers5

The IC award is delivered in two separate elements,

1. The immediate non-deferred award (delivered partly in cash and partly in equity) and

2. The deferred award (delivered partly in equity and partly in cash that notionally tracks a money

market instrument).

1. The Immediate Award

The immediate Award is the portion of the IC that is delivered immediately following the date of

communication of the award to the employee. This typically takes place during the first quarter following

the year to which the award relates. Any Immediate Equity is subject to a 6-month retention period

during which the recipient is prohibited from sale or other transfer of the Immediate Equity.

2. The Deferred Award

All Risk Takers receive a Deferred Award, which is delivered partly in equity instruments and partly in

deferred cash that notionally tracks a money market instrument.

All Deferred Equity is awarded in the form of Deferred Stock Awards (“DSAs”). DSAs are effectively a

contractual right to receive, on each vesting date, a set number of shares in the common stock of State

Street Corporation. The number of shares to be delivered on each vesting date is set at the award date,

but may be adjusted between the award date and each vesting date through the ex-post performance

adjustment measures described below. Upon vesting, all Deferred Equity is subject to a 6-month

retention period during which the recipient is prohibited from sale or other transfer of the Deferred

Equity. Risk Takers receive at least 50% of the Deferred Award as DSAs.

In order to reduce employee concentration in State Street stock that would result from using equity

instruments alone to deliver the entirety of the deferred award, in 2013 State Street introduced a new

non-equity deferral vehicle, called the Deferred Value Award (“DVA”). DVAs notionally track the value of

the SSGA Prime Money Market Fund and are delivered in cash on the vesting date. Similar to DSAs, DVAs

may be adjusted between the award date and each vesting date through the ex-post performance

adjustment measures described below.

Award Vehicle Distribution

Deferral Amounts

- At least 40% of IC delivered as Deferred Award

- At least 60% of IC delivered as Deferred Award for members of the Bank’s Board of

Managing Directors and for the Risk Takers directly reporting to them

5 It should be noted that Risk Takers receiving variable remuneration below the threshold of EUR 50,000 are exempted from this

regulatory deferral requirement (which for the time being, is deemed appropriate for the Banking industry by BaFin). Instead,

these Risk Takers receive their variable remuneration per State Street’s corporate IC design (see below for employees who are not

subject to Section 20 InstitutsVergV).

59


Deferral Period and Vesting Schedule

- DSAs vest on annual pro-rata basis over four years following the award date

- DVAs vest on quarterly pro-rata basis over four years following the award date

- 100% of DSAs and DVAs are subject to the below “ex-post” performance

adjustments

Cash/ Equity Split

- At least 50% of Immediate Award delivered as Immediate Equity

- At least 50% of Deferred Award delivered as DSAs (balance as DVAs)

Retention Periods

- All equity subject to 6-month retention period post-vest (i.e. Immediate Equity and DSAs)

The IC structure described above relates to Risk Takers. For individuals whose variable remuneration is

not subject to the requirements of Section 20 InstitutsVergV, State Street’s corporate IC design applies

and the awards are delivered as follows:

For employees at the Senior Vice President level and above:

- 10% as immediate cash

- 90% deferred over 4 years with vesting on quarterly pro-rata basis

For employees below Senior Vice President level and above Assistant Vice President level, the

higher the total amount of variable remuneration, the higher the percentage of the variable

remuneration which will be deferred. This could ultimately result in up to 90% of variable

remuneration being deferred over 4 years with vesting on quarterly pro-rata basis

For employees below the Vice President level, IC awards are delivered 100% in immediate cash.

Beginning with the 2014 compensation year, incentive compensation plan awards are restricted to

2x fixed compensation to ensure compliance with the maximum ratio permitted under CRD IV and

Section 6 InstitutsVergV. SSB GmbH has obtained the relevant shareholder approval to extend the

default maximum ratio from 1x fixed compensation to 2x fixed compensation for all employees and

members of the Board of Managing Directors and such has been notified to the BaFin and Deutsche

Bundesbank.

The Performance Measures

State Street applies both “ex-ante” and “ex-post” adjustments to its award process for Risk Takers:

1. Ex-Ante Performance Adjustment

Ex-ante adjustments are guided by the corporate multi-factor risk scorecard which is used to guide the

assessment of risk performance and serve as an input into the incentive compensation pool size and

allocation processes. This scorecard framework utilizes several different risk inputs and perspectives to

assess State Street’s top risks. Risk factors are evaluated using a five-point rating scale that ranges

from significantly above expectations to significantly below expectations for each of the following five

categories:

60


Actual performance vs. expectations for key risk areas such as operational losses,

fiduciary losses, liquidity risk, investment portfolio change,

Stress loss based on scenarios specified by the US Federal Reserve Board,

Capital/ dividend strength,

Economic capital, and

Regulatory and agency ratings.

Performance against the scorecard metrics is completed using data sourced from various systems in

State Street’s control functions, including Enterprise Risk Management, Finance and Treasury, among

others. To the extent any performance is significantly below expectations (i.e., a red flag is indicated on

any scorecard), judgment-based ex-ante adjustments to the responsible individual material Risk Taker’s

incentive compensation may be triggered upon review by the Chair of SSB GmbH’s Supervisory Board in

conjunction with the regional heads of the control functions.

2. Ex-Post Performance Adjustment

State Street includes a malus-based forfeiture provision in the deferred award agreements of all Risk

Takers. In addition, State Street has for several years included in its deferred award agreements for all

employees, a contractual provision requiring any unvested deferred awards to be forfeited in the case of

termination on account of gross misconduct. Gross misconduct is determined in State Street’s discretion

and includes conduct which places State Street at legal or financial risk. The malus-based forfeiture

provision includes a statement of intention to comply with and meet the requirements of applicable

banking regulations and guidance on incentive compensation and provides specifically that the ECC may

reduce or cancel any deferred award to the extent required to do so under any such applicable rules. In

this way, the forfeiture provision permits consideration of any criteria, to the extent required by

applicable law to be considered in an investigation and forfeiture decision. Malus-based forfeiture review

will be triggered by the occurrence of a material loss, the establishment of a reserve for a material loss,

or the investigation of facts or circumstances, which, if determined adversely to State Street or a

material business unit of State Street, could reasonably be expected to result in a material loss or

reserve. The individuals reviewing a potential malus-based forfeiture must be independent for the

purpose of the review and should be sufficiently knowledgeable about the area of business in which the

loss event occurred or the business whose employees are under investigation to be able to understand

and analyze the consequences of the employee’s risk-taking conduct.

61


6.2 Quantitative information

The following tables disclose the quantitative remuneration details according to Art. 450 CRR for the

financial year 2014. In order to safeguard confidentiality due to the low number of recipients, the number

of individuals being remunerated EUR 1 million or more will be disclosed collectively in the separate

disclosure report of State Street Bank Luxembourg S.A. which is SSB GmbH’s EU parent institution and

the information at the level of the Bank’s members of the Board of Managing Directors are included in

the ‘Senior Management’ section of Table 25. Aggregated information on the remuneration of

SSB GmbH’s Board of Managing Directors are also available in the Bank’s Annual Financial Statement

which is published separately in the German Federal Gazette.

Table 24: Total remuneration 2014 broken down by business areas according to Art. 450 (1) (g) CRR

Remuneration in kEUR

Global

Custody &

Depositary

Services

Insourcing

Services

Add-on

Services

Corporate

Functions

Operational

Support

Services

2014

Total

Total remuneration 30,494 4,300 12,308 14,811 32,620 94,533

of which fixed

remuneration27,162 3,817 9,879 12,474 30,493 83,826

of which variable

remuneration3,332 483 2,429 2,337 2,127 10,707

Number of employees that

received variable

remuneration

395 52 108 168 1,752 2,475

62


Table 25: Aggregated Breakdown by Risk Takers and Senior Management according to Art. 450 (1) (h) CRR

Remuneration in kEUR

Risk Taker thereof: Senior Management2014

Total

according to Art. 450 (1) (h) (i) & (ii) CRR

Total remuneration 11,899 7,482 19,382

of which fixed remuneration 7,287 4,214 11,501

of which variable remuneration 4,612 3,268 7,880

of which cash 1,255 960 2,215

of which shares 1,997 1,367 3,364

of which share linked instruments 1,360 941 2,301

of which other 0 0 0

Number of Beneficiaries 42 23 65

according to Art. 450 (1) (h) (iii) CRR

Outstanding deferred remuneration 10,706 8,067 18,773

of which vested 597 382 980

of which unvested 10,109 7,684 17,793

according to Art. 450 (1) (h) (iv) CRR

Deferred remuneration 5,579 4,383 9,962

of which awarded 943 677 1,620

of which paid out 4,636 3,706 8,342

of which reduced through

performance adjustments0 0 0

according to Art. 450 (1) (h) (v) & (vi) CRR

New sign-on payments 0 0 0

Number of Beneficiaries of new sign-on

payments0 0 0

Severance payments 0 0 0

Number of Beneficiaries of severance

payments0 0 0

Highest severance to a single person 0 0 0

63


7 Non-applicable disclosure requirements

As long as for the Bank non-applicable disclosure requirements are not evident from the report, they are

outlined in the following table:

Table 26: Non-applicable disclosure requirements

At the Bank, any disclosure requirements regarding Internal Model Approaches for Credit Risks, Market

Risks, Operational Risks and for CVA-Risks are also not applicable.

Disclosure requirement Legal basis according to CRR

Information on credit derivatives hedges Art. 439 g) CRR

Notional amount of credit derivatives transactions Art. 439 h) CRR

Capital buffers Art. 440 CRR

Indicators of global systemic importance Art. 441 CRR

A description of the process used to transfer issuer and

issue credit assesments onto items not included in the

trading book; Assignment of external rating

Art. 444 c) und d) CRR

The main types of guarantor and credit derivatove

counterparty and their creditworthinessArt. 453 d) CRR

64


8 Glossary

AFT Agent Fund Trading

AG Aktiengesellschaft

AGB Allgemeine Geschäftsbedingungen

ALCO SSB GmbH Asset & Liability Committee

AT 1

BaFin

Additional Tier 1 Capital

Bundesanstalt für Finanzdienstleistungsaufsicht (German Federal

Financial Supervisory Authority)

CEO

CET 1

CRD IV

CRMT

CRR

CRSA

CVA

DSA

DVA

EBA

ECB

ECC

EU

Chief Executive Officer


Capital Requirements Directive IV

Credit Risk Mitigation Techniques

Capital Requirements Regulation (Verordnung EU Nr. 575/2013)

Credit Risk Standardized Approach

Credit Valuation Adjustment

Deferred Stock Award

Deferred Value Award

European Banking Authority

European Central Bank

Executive Compensation Committee

European Union

GmbH Gesellschaft mit beschränkter Haftung

GS Global Services

GTR

HGB

IC

ICAAP

Global Total Rewards

Handelsgesetzbuch

Incentive Compensation

Internal Capital Adequacy Assessment Process

InstitutsVergV Institutsvergütungsverordnung

IRBA Internal Ratings Based Approach

KPI Key Performance Indicator

KWG Kreditwesengesetz (German Banking Act)

LiqV Liquiditätsverordnung (German Liquidity Ordinance)

MaRisk

MaSan

Minimum Requirements for Risk Management

Minimum Requirements for the Design of Recovery Plan

MIS Management Information System

NIBTIC

UCITS

PPR

Net Income Before Tax and Incentive Compensation

Undertakings for Collective Investments in Transferable Securities

Performance Plan and Review Process

QRM Quantitative Risk Management

S&P Standard & Poor’s

S.A.

S.p.A.

Aktiengesellschaft nach luxemburgischem Recht

Aktiengesellschaft nach italienischem Recht

S.r.l. Gesellschaft mit beschränkter Haftung nach italienischem Recht

SIP Sales Incentive Plan

65


SME

SSB GmbH

Small and Middle Size Entreprises

State Street Bank GmbH

SSBT State Street Bank & Trust Company

SSC State Street Corporation

SSGA State Street Global Advisors

SSIH State Street International Holdings

TCS

TRDT

Total Compensation Strategy

Talent and Reward Differentiation Tool


State Street State Street Corporation (NYSE: STT)

is one of the world's leading provider of financial

services to institutional investors including

investment servicing, investment management and

investment research and trading. With $28.19

trillion in assets under custody and administration

and $2.45 trillion* in assets under management as

of December 31, 2014, State Street operates in

more than 100 geographic markets worldwide,

including the US, Canada, Europe, the Middle East

and Asia. For more information, visit State Street’s

web site at www statestreet.com.

*Assets under management include the assets of the SPDR® Gold

ETF (approximately $27.3 billion as of December 31, 2014), for which

State Street Global Markets, LLC, an affiliate of SSgA, serves as the

distribution agent.

statestreet.com

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