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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING | 12 Months Ended
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Dec. 31, 2018
Derivative Financial Instruments And Hedge Accounting |
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING | NOTE 08 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING
| a) | As of December 31, 2018 and 2017 the Bank holds the following portfolio of derivative instruments:
| As of December 31, 2018
| Notional amount |  | Fair value
| Up to 3 Months | More than 3 months to 1 year | More than 1 year | Total |  | Assets | Liabilities
| MCh$ | MCh$ | MCh$ | MCh$ |  | MCh$ | MCh$
Fair value hedge derivatives |  |  |  |  |  |  |
Interest rate swaps | 80,000 | 491,600 | 1,191,012 | 1,762,612 |  | 14,789 | 9,188
Cross currency swaps | - | 1,276,909 | 6,706,197 | 7,983,106 |  | 96,357 | 36,708
Subtotal | 80,000 | 1,768,509 | 7,897,209 | 9,745,718 |  | 111,146 | 45,896
Cash flow hedge derivatives |  |  |  |  |  |  |
Currency forwards | 205,750 | 168,151 | - | 373,901 |  | - | 8,013
Cross currency swaps | 1,920,900 | 1,970,412 | 9,191,209 | 13,082,521 |  | 79,859 | 32,712
Subtotal | 2,126,650 | 2,138,563 | 9,191,209 | 13,456,422 |  | 79,859 | 40,725
Trading derivatives |  |  |  |  |  |  |
Currency forwards | 15,301,943 | 13,080,875 | 6,062,183 | 34,445,001 |  | 613,063 | 466,741
Interest rate swaps | 12,024,095 | 22,064,681 | 69,453,618 | 103,542,394 |  | 723,870 | 577,835
Cross currency swaps | 2,173,111 | 8,853,306 | 68,976,339 | 80,002,756 |  | 1,568,365 | 1,385,314
Call currency options | 26,731 | 60,235 | 57,579 | 144,545 |  | 4,332 | 854
Call interest rate options | - | - | - | - |  | - | -
Put currency options | 23,411 | 50,445 | 56,392 | 130,248 |  | - | 363
Other derivatives | - | - | - | - |  | - | -
Subtotal | 29,549,291 | 44,109,542 | 144,606,111 | 218,264,944 |  | 2.909.630 | 2.431.107
Total | 31,755,941 | 48,016,614 | 161,694,529 | 241,467,084 |  | 3,100,635 | 2,517,728
| As of December 31, 2017
| Notional amount |  | Fair value
| Up to 3 months | More than 3 months to 1 year | More than 1 year | Total |  | Assets | Liabilities
| MCh$ | MCh$ | MCh$ | MCh$ |  | MCh$ | MCh$
Fair value hedge derivatives |  |  |  |  |  |  |
Interest rate swaps | - | 162,985 | 1,554,171 | 1,717,156 |  | 23,003 | 1,424
Cross currency swaps | - | 715,701 | 5,362,772 | 6,078,473 |  | 15,085 | 65,724
Subtotal | - | 878,686 | 6,916,943 | 7,795,629 |  | 38,088 | 67,148
Cash flow hedge derivatives |  |  |  |  |  |  |
Currency forwards | 801,093 | 218,982 | - | 1,020,075 |  | 39,233 | 59
Cross currency swaps | 421,428 | 1,637,604 | 6,672,566 | 8,731,598 |  | 36,403 | 128,355
Subtotal | 1,222,521 | 1,856,586 | 6,672,566 | 9,751,673 |  | 75,636 | 128,414
Trading derivatives |  |  |  |  |  |  |
Currency forwards | 17,976,683 | 10,679,327 | 3,091,393 | 31,747,403 |  | 412,994 | 502,555
Interest rate swaps | 9,069,964 | 14,389,389 | 46,342,779 | 69,802,132 |  | 467,188 | 392,366
Cross currency swaps | 2,963,641 | 7,503,144 | 47,111,371 | 57,578,156 |  | 1,241,632 | 1,042,120
Call currency options | 190,386 | 37,099 | 49,853 | 277,338 |  | 1,322 | 1,950
Call interest rate options | - | - | - | - |  | - | -
Put currency options | 192,722 | 28,616 | 50,470 | 271,808 |  | 1,787 | 4,935
Other derivatives | - | - | - | - |  | - | -
Subtotal | 30,393,396 | 32,637,575 | 96,645,866 | 159,676,837 |  | 2,124,923 | 1,943,926
Total | 31,615,917 | 35,372,847 | 110,235,375 | 177,224,139 |  | 2,238,647 | 2,139,488
| b) | Hedge accounting
Fair value hedge: The Bank uses cross-currency swaps and interest rate swaps to hedge its exposure to changes in fair value of hedged items attributable to interest rates. The aforementioned hedging instruments change the effective cost of long-term issuances from a fixed interest rate to a variable interest rate. Below is a detail of the hedged elements and hedge instruments under fair value hedges as of December 31, 2018 and 2017, classified by term to maturity:
| As of December 31, 2018
| Within 1 year | Between 1 and 3 years | Between 3 and 6 years | Over 6 years | Total
| MCh$ | MCh$ | MCh$ | MCh$ | MCh$
Hedged item |  |  |  |  |
Loans and accounts receivable at amortised cost |  |  |  |  |
Endorsable mortgage mutual loans | 653,872 | 1,272,382 | 276,590 | 603,818 | 2,806,662
Debt instruments at FVOCI |  |  |  |  |
Yankee bonds | - | - | - | 172,072 | 172,072
Mortgage financing bonds | - | - | 3,779 | - | 3,779
Treasury bonds (BTP) | - | - | - | 174,440 | 174,440
Chilean Treasury bonds | - | 304,818 | - | 220,041 | 524,859
Chilean Central Bank bonds | - | 449,730 | - | - | 449,730
Time deposits and other time liabilities |  |  |  |  |
Time deposits | 321,600 | - | - | 164,413 | 486,013
Issued debt instruments |  |  |  |  |
Senior bonds | 708,624 | 1,117,779 | 1,298,470 | 2,003,289 | 5,128,162
Total | 1,684,096 | 3,144,709 | 1,578,839 | 3,338,073 | 9,745,717
Hedging instrument |  |  |  |  |
Cross currency swaps | 1,112,496 | 2,794,709 | 1,228,839 | 2,847,061 | 7,983,105
Interest rate swaps | 571,600 | 350,000 | 350,000 | 491,012 | 1,762,612
Total | 1,684,096 | 3,144,709 | 1,578,839 | 3,338,073 | 9,745,717
| As of December 31, 2017
| Within 1 year | Between 1 and 3 years | Between 3 and 6 years | Over 6 years | Total
| MCh$ | MCh$ | MCh$ | MCh$ | MCh$
Hedged item |  |  |  |  |
Loans and accounts receivable from customers |  |  |  |  |
Endorsable mortgage mutual loans | 587,412 | 801,230 | 106,910 | - | 1,495,552
Available for sale investments |  |  |  |  |
Yankee bonds | - | - | 6,169 | 64,769 | 70,938
Mortgage financing bonds | - | - | 4,738 | - | 4,738
Treasury bonds (BTP) | - | - | - | 129,539 | 129,539
Chilean Treasury bonds | - | 21,377 | 762,727 | - | 784,104
Chilean Central Bank bonds (BCP) | 128,289 | 218,640 | 443,357 | - | 790,286
Time deposits and other time liabilities |  |  |  |  |
Time deposits | 137,985 | - | - | - | 137,985
Issued debt instruments |  |  |  |  |
Senior bonds | 25,000 | 1,399,686 | 670,488 | 2,287,313 | 4,382,487
Total | 878,686 | 2,440,933 | 1,994,389 | 2,481,621 | 7,795,629
Hedging instrument |  |  |  |  |
Cross currency swaps | 715,701 | 1,512,238 | 1,813,221 | 2,037,313 | 6,078,473
Interest rate swaps | 162,985 | 928,695 | 181,168 | 444,308 | 1,717,156
Total | 878,686 | 2,440,933 | 1,994,389 | 2,481,621 | 7,795,629
Cash flow hedges The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates of bonds and interbank loans at a variable rate. To cover the inflation risk in some items, both forwards as well as currency swaps are used. Below is the notional amount of the hedged items as of December 31, 2018 and 2017, and the period when the cash flows will be generated:
| As of December 31, 2018
| Within 1 year | Between 1 and 3 years | Between 3 and 6 years | Over 6 years | Total
| MCh$ | MCh$ | MCh$ | MCh$ | MCh$
Hedged item |  |  |  |  |
Loans and accounts receivable at amortised cost |  |  |  |  |
Mortgage loans | 1,890,696 | 3,026,824 | 1,459,389 | 2,467,090 | 8,843,999
Commercial loans | 39,809 | 69,776 | - | - | 109,585
Debt instruments at FVOCI |  |  |  |  |
Yankee bond | - | - | - | - | -
Chilean Central Bank bonds | - | - | 246,306 |  | 246,306
Time deposits | - | - | 166,628 | - | 166,628
Time deposits and other time liabilities |  |  |  |  |
Time deposits | - | - | - | - | -
Issued debt instruments |  |  |  |  |
Senior bonds (variable rate) | - | 666,823 | - | - | 666,823
Senior bonds (fixed rate) | 456,478 | 203,594 | 450,835 | 503,721 | 1,614,628
Interbank borrowings |  |  |  |  |
Interbank loans | 1,764,348 | - | - | - | 1,764,348
Total | 4,151,331 | 3,967,017 | 2,323,158 | 2,970,811 | 13,412,317
Hedging instrument |  |  |  |  |
Cross currency swaps | 3,891,311 | 3,853,136 | 2,323,158 | 2,970,811 | 13,038,416
Currency forwards | 260,020 | 113,881 | - | - | 373,901
Total | 4,151,331 | 3,967,017 | 2,323,158 | 2,970,811 | 13,412,317
| As of December 31, 2017
| Within 1 year | Between 1 and 3 years | Between 3 and 6 years | Over 6 years | Total
| MCh$ | MCh$ | MCh$ | MCh$ | MCh$
Hedged item |  |  |  |  |
Loans and accounts receivables from customers |  |  |  |  |
Mortgage loans | 1,153,348 | 583,061 | 1,335,141 | 2,353,871 | 5,425,421
Commercial loans | 644,608 | - | - | - | 644,608
Available for sale investments |  |  |  |  |
Yankee bond | - | - | 25,290 | 132,572 | 157,862
Chilean Central Bank bonds | - | - | 242,819 | - | 242,819
Time deposits | - | - | - | - | -
Time deposits and other time liabilities |  |  |  |  |
Time deposits | - | - | - | - | -
Issued debt instruments |  |  |  |  |
Senior bonds (variable rate) | 120,520 | 647,550 | 302,454 | - | 1,070,524
Senior bonds (fixed rate) | 241,183 | 121,619 | 224,401 | 300,874 | 888,077
Interbank borrowings |  |  |  |  |
Interbank loans | 919,448 | 402,914 | - | - | 1,322,362
Total | 3,079,107 | 1,755,144 | 2,130,105 | 2,787,317 | 9,751,673
Hedging instrument |  |  |  |  |
Cross currency swaps | 2,059,032 | 1,755,144 | 2,130,105 | 2,787,317 | 8,731,598
Currency forwards | 1,020,075 | - | - | - | 1,020,075
Total | 3,079,107 | 1,755,144 | 2,130,105 | 2,787,317 | 9,751,673
Below is an estimate of the periods in which cash flows are expected to be produced: b.1 Forecasted cash flows for interest rate risk:
| As of December 31, 2018
| Within 1 year | Between 1 and 3 years | Between 3 and 6 years | Over 6 years | Total
| MCh$ | MCh$ | MCh$ | MCh$ | MCh$
Hedged item |  |  |  |  |
Inflows | 76,736 | 35,994 | 3,062 | 2,401 | 118,193
Outflows | (125,747) | (46,372) | (13,311) | (4,701) | (190,131)
Net flows | (49,011) | (10,378) | (10,249) | (2,300) | (71,938)
Hedging instrument |  |  |  |  |
Inflows | 125,747 | 46,372 | 13,311 | 4,701 | 190,131
Outflows (*) | (76,736) | (35,994) | (3,062) | (2,401) | (118,193)
Net flows | 49,011 | 10,378 | 10,249 | 2,300 | 71,938
(*)Only includes cash flow forecast portion of the hedge instruments used to cover interest rate risk.
| As of December 31, 2017
| Within 1 year | Between 1 and 3 years | etween 3 and 6 years | Over 6 years | Total
| MCh$ | MCh$ | MCh$ | MCh$ | MCh$
Hedged item |  |  |  |  |
Inflows | 308,737 | 60,515 | 13,780 | 2,594 | 385,626
Outflows | (60,733) | (43,507) | (7,757) | (878) | (112,875)
Net flows | 248,004 | 17,008 | 6,023 | 1,716 | 272,751
Hedging instrument |  |  |  |  |
Inflows | 60,733 | 43,507 | 7,757 | 878 | 112,875
Outflows (*) | (308,737) | (60,515) | (13,780) | (2,594) | (385,626)
Net flows | (248,004) | (17,008) | (6,023) | (1,716) | (272,751)
(*)Only includes cash flow forecast portion of the hedge instruments used to cover interest rate risk. b.2 Forecasted cash flows for inflation risk:
| As of December 31, 2018
| Within 1 year | Between 1 and 3 years | Between 3 and 6 years | Over 6 years | Total
| MCh$ | MCh$ | MCh$ | MCh$ | MCh$
Hedged item |  |  |  |  |
Inflows | 37,086 | 73,576 | 166,516 | 310,293 | 587,471
Outflows | (14,036) | - | - | - | (14,036)
Net flows | 23,050 | 73,576 | 166,516 | 310,293 | 573,435
Hedging instrument |  |  |  |  |
Inflows | 14,036 | - | - | - | 14,036
Outflows | (37,086) | (73,576) | (166,516) | (310,293) | (587,471)
Net flows | (23,050) | (73,576) | (166,516) | (310,293) | (573,435)
| As of December 31, 2017
| Within 1 year | Between 1 and 3 years | Between 3 and 6 years | Over 6 years | Total
| MCh$ | MCh$ | MCh$ | MCh$ | MCh$
Hedged item |  |  |  |  |
Inflows | 20,300 | 29,008 | 103,544 | 286,471 | 439,323
Outflows | (1,645) | - | - | - | (1,645)
Net flows | 18,655 | 29,008 | 103,544 | 286,471 | 437,678
Hedging instrument |  |  |  |  |
Inflows | 1,645 | - | - | - | 1,645
Outflows | (20,300) | (29,008) | (103,544) | (286,471) | (439,323)
Net flows | (18,655) | (29,008) | (103,544) | (286,471) | (437,678)
b.3 Forecasted cash flows for exchange rate risk: As of December 31, 2018 and 2017 the Bank has no forecasted cash flows for exchange rate risk.
| c) | The accumulated effect of the mark to market adjustment of cash flow hedges produced by hedge instruments used in hedged cash flow was recorded in the Consolidated Statements of Changes in Equity, specifically within Other comprehensive income, as of December 31, 2018 and 2017, is as follows:
|  | As of December 31,
Hedged item |  | 2018 |  | 2017
|  | MCh$ |  | MCh$
Interbank loans |  | 309 |  | (4,779)
Time deposits and other time liabilities |  | - |  | -
Issued debt instruments |  | (10,893) |  | (8,683)
Available for sale investments |  | - |  | (364)
Loans and accounts receivable from customers |  | - |  | 10,264
Debt instruments at FVOCI |  | (1,392) |  | -
Loans and accounts receivable at amortised cost |  | 21,779 |  | -
Net flows |  | 9,803 |  | (3,562)
Since the inflows and outflows for both the hedged element and the hedging instrument mirror each other, the hedges are nearly 100% effective, which means that the fluctuations of fair value attributable to risk components are almost completely offset. As of December 31, 2018 and 2017 the Bank recorded ineffectiveness for an amount of Ch$2,912 million and Ch$1,187 million, respectively During the year, the Bank did not enter into any cash flow hedges relating to forecasted transactions.
| d) | Below is a presentation of income generated by cash flow hedges amount that were reclassified from other comprehensive income to income for the year:
| For the years ended December 31,
| 2018 |  | 2017 |  | 2016
| MCh$ |  | MCh$ |  | MCh$
Bond hedging derivatives | - |  | - |  | (77)
Interbank loans hedging derivatives | (683) |  | - |  | -
Cash flow hedge net gain (loss) | (683) |  | - |  | (77)
See Note 25 - Equity, letter e) |  |  |  |  |
| e) | Net investment hedges in foreign operations:
As of December 31, 2018 and 2017, the Bank does not have any foreign net investment hedges in its hedge accounting portfolio.

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