NON-TRADING TRANSACTIONS TRADING TRANSACTIONS

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2.12.1 NON-TRADING TRANSACTIONS

Derivatives may be used to hedge interest rate, exchange rate or other price exposures that are inherent in the assets and liabilities of DBS Bank. The criteria required for a derivative instrument to be classified as a designated hedge are: i the derivative instrument must be reasonably expected to match or eliminate a significant proportion of the risk inherent in the assets, liabilities, other positions or cash flows being hedged; and ii there is adequate evidence of the intention to hedge. Linkage with the underlying risk inherent in the assets, liabilities, other positions or cash flows being hedged, must be established at the outset of the transaction. Profits and losses on derivatives entered into for specifically designated hedging purposes against assets, liabilities, other positions or cash flows measured on an accrual accounting basis are included in the related category of income or expense in the profit and loss account on the same basis as that arising from the underlying hedging transactions. Hedging transactions, which have been superseded, or ceased to be effective prior to the end of the life of the assets, liabilities, other positions or cash flows being hedged, are measured at fair value. Any profit or loss arising from the fair value measurement or on termination of hedging transaction is deferred and amortised as interest income or expense in the profit and loss account over the remaining life of the items previously being hedged. When the underlying assets, liabilities, other positions or cash flows are terminated prior to the hedging transactions, or anticipated transactions are no longer likely to occur, the hedging transactions are measured at fair value prior to being transferred to the trading portfolio. The profit or loss arising from the fair value measurement prior to the transfer to the trading portfolio is included in the category of income and expense in the profit and loss account relating to the previously hedged transactions.

2.12.2 TRADING TRANSACTIONS

Transactions undertaken for trading purposes are stated at fair value. Quoted market prices, when available, are used to determine the fair values of derivatives held for trading. Where mid prices are used, a bid-offer spread adjustment will be made to ensure that all long positions are marked to bid prices and short positions to offer prices. Liquidity reserve is taken when a market price may not be achievable as a result of certain material positions held DBS Bank. Methodology deficiency reserves address approximation uncertainties from modeling methods and numerical methods. When parameters are unobservable or stem from illiquid markets, uncertainty in their true market implied value arises and a parameter deficiency reserve is taken for the potential impact on mark to market valuations. Resultant gains and losses from changes in fair value of trading transactions are recognised as “Other income” in the profit and loss account. Unrealised valuation gains or losses are included in “Other assets” or “Other liabilities” respectively. 11

2.13 OFFSETTING FINANCIAL INSTRUMENTS