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DISCLOSURE REPORT 2013

Disclosure Report

State Street Bank GmbH

According to § 26a KWG and § 7 (2) InstitutsVergV

As of December 31, 2013

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Table of Contents

TABLE OF CONTENTS .................................................................................................................................. 1

LIST OF TABLES AND ILLUSTRATIONS .......................................................................................................... 3

1 SCOPE............................................................................................................................................ 4

1.1 ORGANIZATIONAL STRUCTURE ................................................................................................. 5

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

Structure and Business Model .............................................................................................. 6 1.1.2

1.2 CONSOLIDATION .......................................................................................................................... 7

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

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

liable equity within the group ................................................................................................ 7

2 EQUITY ........................................................................................................................................... 9

2.1 EQUITY STRUCTURE ................................................................................................................... 9

2.2 CAPITAL ADEQUACY .................................................................................................................. 10

Regulatory capital requirements for Credit Risks under the Credit Risk 2.2.1

Standardized Approach (“CRSA”) ...................................................................................... 14

Regulatory capital requirements for Market Risks positions under the Standardized 2.2.2

Approach ............................................................................................................................. 14

Regulatory capital requirements for Operational Risks under the Standardized 2.2.3

Approach ............................................................................................................................. 15

Overview of the regulatory capital requirements ................................................................ 15 2.2.4

Overview of the Tier 1 and total capital ratio ...................................................................... 15 2.2.5

3 RISK MANAGEMENT .................................................................................................................. 17

3.1 STRUCTURE AND ORGANIZATION OF RISK MANAGEMENT ................................................ 17

3.2 FUNDAMENTAL STRATEGIES AND ORGANIZATIONAL GUIDELINES .................................. 19

3.3 RELEVANT RISK TYPES ............................................................................................................. 20

Credit Risks ......................................................................................................................... 21 3.3.1

3.3.1.1 Credit Risks - on-balance sheet ........................................................................... 21

3.3.1.2 Credit Risks - off-balance sheet / derivatives ....................................................... 23

3.3.1.3 Credit Risk Mitigation Techniques ........................................................................ 25

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3.3.1.4 Further information on the Credit Risk Standardized Approach........................... 26

3.3.1.5 Definition – “Past due”, “Overdue” and “Default” .................................................. 31

3.3.1.6 Risk Provisioning .................................................................................................. 32

Market Risks ....................................................................................................................... 33 3.3.2

Operational Risks ................................................................................................................ 37 3.3.3

Investment Risks ................................................................................................................. 40 3.3.4

Business Risks .................................................................................................................... 41 3.3.5

Liquidity Risks ..................................................................................................................... 42 3.3.6

Concentration Risks (resulting from Risk Concentrations identified 3.3.7

in each risk category) .......................................................................................................... 43

3.4 RISK REPORTING ....................................................................................................................... 44

4 SECURITIZATIONS ..................................................................................................................... 45

5 DISCLOSURE OF THE COMPENSATION FOR THE FINANCIAL YEAR 2013 ACCORDING

TO § 7 OF THE GERMAN REMUNERATION ORDINANCE FOR INSTITUTIONS

(“INSTITUTSVERGV”) ................................................................................................................. 48

5.1 COMPENSATION STRUCTURE ................................................................................................. 48

5.2 TABLE ACCORDING TO § 7 INSTITUTSVERGV ....................................................................... 50

6 NON-APPLICABLE DISCLOSURE REQUIREMENTS ............................................................... 51

7 GLOSSARY .................................................................................................................................. 52

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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 ................................................................................................................ 11

Illustration 4: ICAAP worst case utilization as of December 31, 2013 ................................................... 13

Illustration 5: Structure of risk management and committees ................................................................ 18

Table 1: Liable Equity according to § 10 KWG before and after ratification of the financial statement ... 9

Table 2: Capital requirements for Credit Risks according to SolvV ....................................................... 14

Table 3: Capital requirements for Market Risks according to SolvV ...................................................... 14

Table 4: Capital requirements for Operational Risks according to SolvV .............................................. 15

Table 5: Total capital requirements ........................................................................................................ 15

Table 6: Tier 1 and total capital ratio of State Street Bank GmbH ......................................................... 15

Table 7: Tier 1 and total capital ratio of State Street Bank S.p.A. .......................................................... 16

Table 8: Responsibilities for Risk Management broken down by risk types .......................................... 19

Table 9: Capital requirements for derivative positions ........................................................................... 24

Table 10: Rating agencies broken down by exposure categories .......................................................... 26

Table 11: Gross exposure and average gross exposure broken down to exposure type ...................... 26

Table 12: Total amount of receivables broken down by significant geographic regions ........................ 27

Table 13: Total amount of receivables broken down by industry sector ................................................ 28

Table 14: Total amount of receivables broken down by remaining time to maturity .............................. 29

Table 15: Total amount of receivables before and after credit risk mitigation ........................................ 29

Table 16: Total amount of collateralized receivables ............................................................................. 30

Table 17: Capital requirements for Market Risk positions ...................................................................... 35

Table 18: Impact of interest rate shocks on the liable equity ................................................................. 35

Table 19: Securitization positions ........................................................................................................... 47

Table 20: Total remuneration 2013 according to § 7 (2) sent. 1 no. 2 InstitutsVergV ............................ 50

Table 21: Non-applicable disclosure requirements ................................................................................ 51

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1 SCOPE

Since 2004, the regulatory framework concerning capital adequacy of internationally active banks

(“Basel II”) of the Basel Committee on Banking Supervision has been based on three mutually

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

Illustration 1: Pillars of Basel II

On January 1st, 2007, the regulation on the capital adequacy of institutions, groups of institutions and

financial holding groups (German Solvency Regulation – “SolvV”1) came into effect. This regulation

constitutes the national implementation of the banking directive (2006/48/EC), the capital adequacy

directive (2006/49/EC) as well as their corresponding amendments to the regulation and their

accordant guidelines of “Basel II” on capital adequacy respectively. The regulation specifies the capital

adequacy required by institutions in § 10 of the German Banking Act (“KWG”)2 with guidelines for

establishing regulatory capital requirements.

In accordance with § 26a (1) KWG, State Street Bank GmbH (“SSB GmbH” or “the Bank”) is obliged to

regularly publish qualitative and quantitative information concerning liable equity, the risks taken, the

risk management processes applied including the internal methodologies used in accordance with

§ 10 (1) sent. 2 KWG, the methods used to mitigate credit risk and the securitization transactions. The

nature and scope of the information to be published are specified in part 5 of the SolvV. The

information required in accordance with the supervisory regulation in the version as of December 31,

2013 is the subject matter of this disclosure report (“report”). In the course of implementation of Basel

III in Europe the regulatory requirements for disclosure were amended by the Capital Requirements

Directive and Capital Requirements Regulation and became effective as of January 1, 2014.

1 German Solvency Regulation SolvV in the version valid as of December 31, 2013.

2 German Banking Act KWG in the version valid as of December 31, 2013.

Supervisory review

process

Enhanced

disclosure

Pillar 3Pillar 2Pillar 1

Minimum capital

requirements

Basel II

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

requirements according to § 26a of the KWG and of part 5 of the SolvV. Furthermore, this report is

intended to fulfil the disclosure requirements resulting from § 7 (2) InstitutsVergV3. 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. The report refers to all relevant

and material risks which have an impact on the capital adequacy of the Bank.

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

Credit Risks, the Standardized Approach for Operational Risks and the Standardized Approach for

Market Risks to determine its regulatory capital requirements.

This report has not been examined by independent external auditors. However, according to § 29

KWG, the auditor of the annual financial statements validates, if the Bank fulfilled the disclosure

requirement.

Quantitative data may show differences due to rounding. In addition, in case of any ambiguity in the

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

1.1 ORGANIZATIONAL STRUCTURE

GROUP BACKGROUND 1.1.1

Through a 100% stake of State Street International Holdings (“SSIH”), 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. State Street Holdings Germany GmbH, Munich, holds a direct 100%

stake in the Bank and hence it is an indirect subsidiary of SSIH. 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.

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 refer to the next section).

3 InstitutsVergV in the version valid as of December 31, 2013.

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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 to 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 certain U.S. rules and laws which apply to subsidiaries of

U.S. banks and with certain Luxembourgian rules and laws respectively which apply to subsidiaries of

Luxembourgian banks.

STRUCTURE AND BUSINESS MODEL 1.1.2

The Bank was founded in 1970 as a provider of innovative solutions for global custody and securities

management. Since 1994 it has been a deposit bank and since 1996, it has offered the full range of

services of a custodian bank (since 2013 of a depositary) to the German and European markets. As of

December 31, 2013 with its headquarters in Munich the Bank operated a German branch office in

Frankfurt a.M., one non-EU branch in Zurich, as well as EU-branches in Amsterdam, Milan, London,

Luxembourg, Krakow and Vienna and hence with a total of 2.506 employees the Bank was active in

the leading financial centers in Europe. For strategic purposes the Bank holds a direct stake in State

Street Holdings Italy S.r.l., Milan, Italy (90% voting rights and 97% shares) and via this an indirect

strategic majority stake in State Street Bank S.p.A, Milan, Italy. Furthermore, the Bank also owns a

direct strategic 100% stake in State Street Fondsleitung AG, Zurich, Switzerland.

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

London

Established: 2007

Munich

Established: 1970

Zurich

Acquisition: 2007

Vienna

Established: 2003

Frankfurt

Acquisition: 2003

ZurichState Street Fondsleitung AG

Acquisition: 2008

Luxembourg

Established: 2009

Milan and TurinState Street Bank S.p.A. State Street Holdings Italy S.r.l.

Acquisition: 2010

EU branch office

Investment

Amsterdam

Established: 2013Krakow (unregulated)

Established: 2013

German branch office

Legend:

Milan

Established: 2013

Non-EU branch office

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The Bank concentrates its activities on the specific requirements of institutional clients over their entire

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

custody bank business / depositary activities including reporting services for asset managers as well as

supporting activities for the middle and back office of investment/ investment management companies.

Further to that the Bank renders securities services in the form of principal broking and contract

broking within Agent Fund Trading (“AFT”) and in the form of principal broking as a Future Commission

Merchant (“State Street Futures” Business) on the securities exchanges EUREX and ICE Clear

Europe, further to that in the form of proprietary trading in forward exchange agreements and in the

form of contract broking of securities lending transactions; finally the Bank manages the collateral

provided in the course of securities lending transactions. In connection with its core business, the Bank

offers lending transactions and conducts money market transactions and investing in securities in the

form of proprietary trading.

1.2 CONSOLIDATION

CONSOLIDATION REQUIREMENTS FROM A REGULATORY AND BALANCE SHEET POINT 1.2.1

OF VIEW

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

direct strategic stake in State Street Holdings Italy S.r.l. Milan, Italy (90% voting rights and 97% shares)

and through the latter an indirect majority stake 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 § 31 (3) sent. 4 KWG. A consolidation with respect to German

Commercial Law4 is likewise not necessary and hence is not conducted. With regard to State Street

Holdings Italy S.r.l. as well as 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 § 1 (7c)

KWG).

RESTRICTIONS AND OTHER SIGNIFICANT BARRIERS CONCERNING THE TRANSFER OF FUNDS OR 1.2.2

LIABLE EQUITY WITHIN THE GROUP

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

liable equity 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 liable equity

from its parent companies or subsidiaries at any time, if this is necessary, or if the circumstances justify

this.

4 State Street Bank GmbH consolidated its annual financial statements in accordance with the specifications of the German

Commercial Code (“HGB”).

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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 regulatory capital requirements and other

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

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

SSIH (which is the indirect parent company of the Bank) are restricted; simultaneously capability of

SSIH to transfer equity to its subsidiaries is also limited.

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2 EQUITY

2.1 EQUITY STRUCTURE

The liable equity of the Bank according to § 10 KWG as of December 31, 2013 was composed as

shown in the following table:

Table 1: Liable Equity according to § 10 KWG before and after ratification of the financial statement

As it can be seen in the table, the modified available equity equals the liable equity. The modified

available equity consists of Tier 1 capital components in 92.68% calculated before ratification of the

financial statement and respectively in 92.76% after the ratification and of Tier 2 capital components in

7.32% calculated before ratification of the financial statement and respectively in 7.24% after the

ratification.

Tier 1 Capital

Regulatory Tier 1 capital of the Bank is composed of share capital, capital and revenue reserves as

well as reserves for general banking risks according to § 340g HGB. Deductions from Tier 1 capital,

pursuant to § 10 (2a) KWG, consist of only intangible assets in their full amount.

The following conditions are the same for all of the above-mentioned capital components:

paid up in full and fully allocated to reserves,

shown in the external reporting,

available to the Bank for an unlimited period, and,

if applicable, would participate in loss.

Capital elements

Tier 1 capital Subscribed capital 109,267 109,267

Capital reserve 1,039,287 1,039,287

Revenue reserve 104,328 104,328

Reserves for general banking risks acc.

to § 340g HGB 22,000 34,000

Deductions from Tier 1 capital Intangible assets -8,540 -5,506

Tier 1 capital Total 1,266,342 1,281,376

Tier 2 capital long-term subordinated liabilities 100,000 100,000

Deductions from Tier 2 capital - - -

Liable equity Total 1,366,342 1,381,376

Deductions from liable equity - - -

Modified available equity Total 1,366,342 1,381,376

Tier 3 capital - - -

Liable Equity Total 1,366,342 1,381,376

Before ratification of

the financial

statement (in kEUR)

After ratification of

the financial

statement (in kEUR)

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Tier 2 Capital

Regulatory Tier 2 capital consists of a subordinated loan issued by State Street Bank Luxembourg

S.A., which is a long-term subordinated liability in the amount of nominal 100,000 kEUR and at the rate

of 7.75% p.a. and therefore classified as lower Tier 2 capital. The contractual maturity is August 25,

2038.

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.

2.2 CAPITAL ADEQUACY

The aim of capital management is to ensure sufficient capitalization of the Bank in the present and in

the future. 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 obliged to manage its own funds, so that a sound capital basis, allowing financial flexibility

with respect to the capital requirements resulting from the core and annex business segments, is

provided. This financial flexibility includes 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 the

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.

ICAAP / Risk Bearing Capacity Concept

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 adequacy of the capital from the

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. The structure of the ICAAP is depicted in

Illustration 3.

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Illustration 3: ICAAP structure

On the one hand the ICAAP takes into account the Bank’s risks specified by Pillar 1 of Basel II

Framework and its corresponding regulations in the SolvV, 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 from 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.

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In accordance with the aforementioned Guidelines, the Bank’s Risk-Taking Potential 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.

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 either no separate capital allocation

to Business Risks because they remain to be considered in the ICAAP at the aggregated level, within

calculation of the free Risk-Taking Potential (please compare section 3.3.5).

In summary, the ICAAP considers both Pillar 1 Risks according to Basel II / SolvV and all material risk

types from an economic view.

Each material risk type (with the exception of Liquidity Risks and Business 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. Within the allocation, Risk Concentrations are

restricted as well as a sufficient capital buffer for immaterial risks, extreme situations as well as

Business Risks, future organic and inorganic growth is held available.

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 47.40% as of December 31, 2013. 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.

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Illustration 4: ICAAP worst case utilization as of December 31, 2013

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REGULATORY CAPITAL REQUIREMENTS FOR CREDIT RISKS UNDER THE CREDIT RISK STANDARDIZED 2.2.1

APPROACH (“CRSA”)

The following table presents the Bank’s regulatory capital requirements for Credit Risks, broken down

by asset class in accordance with SolvV as of December 31, 2013:

Table 2: Capital requirements for Credit Risks according to SolvV

REGULATORY CAPITAL REQUIREMENTS FOR MARKET RISKS POSITIONS UNDER THE STANDARDIZED 2.2.2

APPROACH

To calculate regulatory capital requirements, the Standardized Approach is applied for all Market Risk

positions. The capital requirements as of December 31, 2013, in accordance with SolvV, were

composed as follows:

Table 3: Capital requirements for Market Risks according to SolvV

CRSA Exposure Class in kEUR

Central governments 0

Regional governments and local authorities -

Other public-sector entities -

Multilateral development banks -

International organizations -

Institutions 11,861

Corporates 176,226

Retail business -

Exposures secured by real estate property -

Past due items -

Equity exposures 39,939

Bonds issued by credit institutions 2,562

Collective Investment Undertakings (CIUs) 228

Other items 3,549

Securitizations 108,912

Total capital requirements for Credit Risks 343,277

Risk position in kEUR

Interest Rate Risks 10

Equity Risks -

Foreign Exchange Risks 7,392

Commodity Risks 32,801

Other risks -

Capital requirements for Market Risks 40,202

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REGULATORY CAPITAL REQUIREMENTS FOR OPERATIONAL RISKS UNDER THE STANDARDIZED 2.2.3

APPROACH

To determine regulatory capital requirements for Operational Risks, the Standardized Approach is

applied. The capital requirements as of December 31, 2013 were as follows:

Table 4: Capital requirements for Operational Risks according to SolvV

OVERVIEW OF THE REGULATORY CAPITAL REQUIREMENTS 2.2.4

The following table presents total regulatory capital requirements for all risk types considered under

SolvV as of December 31, 2013:

Table 5: Total capital requirements

OVERVIEW OF THE TIER 1 AND TOTAL CAPITAL RATIO 2.2.5

As of December 31, 2013, the Tier 1 and total capital ratios of SSB GmbH (before ratification of the

financial statement) were as follows:

Table 6: Tier 1 and total capital ratio of State Street Bank GmbH

Risk type in kEUR

Operational Risks 45,332

Capital requirements for Operational Risks 45,332

Risk type in kEUR

Credit Risks 343,277

Market Risks 40,202

Operational Risks 45,332

Total capital requirements 428,812

Ratio in %

Tier 1 capital ratio 23.63

Total capital ratio 25.49

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As of December 31, 2013, the Tier 1 and total capital ratios of State Street Bank S.p.A., which is

considered to be a significant subsidiary of the Bank, were as follows:

Table 7: Tier 1 and total capital ratio of State Street Bank S.p.A.

The further subsidiaries of State Street Bank GmbH: State Street Fondsleitung AG – as a fund

management company according to the Swiss law and analogous to § 2 (6) German Investment

Regulation – and State Street Holdings Italy S.r.l. – as a financial holding company according to the

Italian law and analogous to § 1 (3a) KWG – are not subject to requirements on the own funds

according to § 10 KWG or similar regulations.

Ratio in %

Tier 1 capital ratio 49.03

Total capital ratio 49.03

17


3 RISK MANAGEMENT

3.1 STRUCTURE AND ORGANIZATION OF RISK MANAGEMENT

The Board of Managing Directors is the highest body with regard to authority and decision-making for

risk management. Within this scope, the Board of Managing Directors is responsible for setting the

management goals; in particular, these are the content of the business strategy and the risk strategy. It

is also responsible for determining the risk standards and assessment methods and for the risk

management including the economic capital allocation and limitation.

For the purpose of risk management the Bank has established a Risk Management (MaRisk)

Committee and an Asset-Liability Committee (ALCO) to ensure overall risk control. Additionally an

MaSan5 Committee has been set up. The MaSan Committee is responsible for preparing,

implementing and revising the Recovery Plan6 of the Bank and its execution during a potential crisis

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

5 MaSan stands for the Minimum Requirements for the Design of Recovery Plans.

6 Information regarding the Recovery Plan of SSB GmbH can be obtained under the following link:

http://www.statestreet.com/content/dam/statestreet/officelocations/RP_at_SSB_GmbH_2013.pdf

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

18


Illustration 5: Structure of risk management and committees

The operational responsibility for risk management is distributed within the Bank depending on the risk

type to different departments. The precise operational responsibilities for the risk management of the

individual risk types can be found in the following table:

MaSan

recovery & resiolution planning;

extended Risk Management

Other risks

Liquidity Risks

Concentration Risks

Investment Risks

Business Risks

ALCO

balance sheet review ,

liquidity risk,

current situation & economic

outlook

RISK MANAGEMENT

ICAAP / Risk Bearing Capacity Conceptintegrated capital and risk management

Credit Risks

Market Risks

Operational Risks

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

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Table 8: 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

All of the strategies, guidelines and organizational guidelines are reviewed at least on an annual basis

and, if applicable, are adjusted and reapproved accordingly.

Risk type / Function Responsible department

ICAAP 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

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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

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

and Business 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.

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CREDIT RISKS 3.3.1

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 clients, 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 the group entity SSBT. Mid- to long-term investments are made by acquiring variable-

yield or fixed-income securities. The Bank pursues a conservative lending policy.

Furthermore, the risk strategy of the Bank 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 clients.

Risk Situation

The Bank is exposed to on-balance-sheet Credit Risks from the following products:

Utilization or breaches of internal limits by clients within the course of custody or custody bank

business 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 client 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 the group entity (SSBT), although here Credit Risk relates

to both the group entity and the issuer of the securities purchased.

22


Investments in securities on the basis of the trading policies solely in government bonds

denominated in euro from countries with an A rating or better (at the purchase time) and asset

backed securities, collateralized debt obligations and residential mortgage backed securities as

well as covered bonds - all denominated in euro - with an A rating or better and a fixed-interest

period as short as possible. This results in Credit Risks in relation to the issuer of the securities

held in the portfolio.

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

requirements to the respective exchange and debiting the client's account.

Loans to affiliated companies.

Principal broking and contract broking services within Agent Fund Trading (“AFT”).

Collective investments undertakings (“CIUs”) held for the purpose of the optional conversion of

salary to pension plan by the employees.

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

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

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

Risk Quantification

The Bank’s internal rating system quantifies the risk of default by a counterparty using a 15-point scale.

This methodology corresponds to the corporate internal ratings-based approach used by SSC (IRBA-

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

repurchase transactions and the securities held in the portfolio; they are mapped to the internal ratings

where appropriate.

To measure the capital charges for Credit Risks, SSB GmbH applies the Credit Risk Standardized

Approach pursuant to SolvV and the financial collateral comprehensive method (with regard to

repurchase transactions and its activity as Futures Commission Merchant), also in accordance with

SolvV. To measure its internal capital requirements under ICAAP the “Pillar 1 Plus” approach has been

used in accordance with the Standard Approach for covering any unexpected losses. In addition, a

Pillar 2 capital requirement is set to cover the expected loss. The requirement is based on internal

ratings, stress tests and scenario calculations applied to these ratings.

23


Risk Management

The internal rating system is a central element of the management of on-balance sheet Credit Risks.

The initial rating of counterparty is conducted prior to entering into a business relationship. This

ensures that possible Credit Risks can be made transparent beforehand. The internal rating of

counterparty is considered in the decision on whether to accept business from a new client and it

represents the basis for the internal limits, taking account of client-specific information and the relevant

regulatory requirements. The creditworthiness of counterparties and clients is reviewed at least once

annually. The resulting ratings are updated regularly.

Securities held in the Bank’s portfolio and securities acquired under repurchase transactions are

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

agencies.

In addition, for the securities held in the Bank’s portfolio, regular monitoring in the form of analyses and

scenario-based stress tests are conducted.

Provided that the criteria stipulated by the Solvency Regulation are met, the securities acquired as

collateral for repurchase transactions 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

with an appropriate haircut.

Two different limits are set for clients using the derivatives clearing service. The initial margin limit sets

the aggregate for the initial margins of all State Street Futures transactions of any one client 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.

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.

24


Risk Situation

Off-balance sheet Credit Risks originate from client-driven forward exchange, from derivatives clearing

as well as from issuing rental guarantees for an affiliated company. Additional risks have arisen from a

guarantee in favor of State Street Bank S.p.A. for the possible overdrafts of certain clients, a guarantee

issued for a client of State Street Bank S.p.A. and a credit facility- towards two clients. In addition, off-

balance sheet Credit Risks can be incurred through unsettled deals.

Risk Quantification

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

The details regarding capital requirements for derivative positions as of December 31, 2013 are

displayed in Table 9.

Table 9: Capital requirements for derivative positions

Risk Management

Forward exchange contracts with clients 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

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

leads to more intensive monitoring of the client’s circumstances and possibly cancellation of the deal.

The management of other off-balance sheet Credit Risks is conducted correspondingly to the methods

applied for the on-balance sheet Credit Risks.

Counterparty

Gross positive

fair values

(in kEUR)

Recognizable

counterparty credit risk

(in kEUR)

Capital

requirements

(in kEUR)

Banks 85,758 152,574 2,441

Corporates 41,365 357,622 28,610

Total 127,123 510,196 31,051

25


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). Further to that, 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 – conditional upon

their original form – and derivatives clearing transactions. In this context, securities and cash deposits

assigned by way of collateral serve as collateral. For this purpose, the Bank applies the comprehensive

method for financial securities according to §§ 186 ff. SolvV. From a regulatory point of view, financial

securities that are listed in § 155 SolvV as well as § 157 SolvV (for repurchase agreements only) are

considered in the process. These financial securities are valued at their market value after the

regulatory haircuts (maturity mismatch adjustment, market value volatility adjustment, currency

volatility adjustment). As part of the economic risk consideration, when calculating the ability to bear

risk, all of the securities are considered after deduction of the particular regulatory haircut.

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

Agreement.

The strategy and associated processes with regard to the provision of collateral for these transactions

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

The purchased securities are evaluated basically daily. This is the responsibility of the Risk

Management department in the Credit & Market Risk Office division. Issuer-related risk concentrations

within the security instruments are limited by internal limits.

The Board of Managing Directors regularly receives reports on the security sale, repurchase

agreements as well as derivatives clearing transactions. In particular the related risk position and the

development of the securities assigned by way of collateral are also set out in the report.

26


3.3.1.4 FURTHER INFORMATION ON THE CREDIT RISK STANDARDIZED APPROACH

To determine the risk weighting for Credit Risk quantification under the Standardized Approach, the

Bank has nominated the following rating agencies:

Table 10: Rating agencies broken down by exposure categories

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 significant exposure types as of December 31, 2013:

Table 11: Gross exposure and average gross exposure broken down to exposure type

Credit assessment-related

exposure category

(Table 12 appendix 1 SolvV)

Rating agency

Central governments- The McGraw-Hill Companies under the brand name

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

- The McGraw-Hill Companies under the brand name

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

- Fitch Ratings

- Moody’s Investors Service

Securitizations

Exposure type

Gross exposure

as of Dec. 31, 2013

(in kEUR)

Average gross exposure

based on quarter-end

exposures

(in kEUR)

Credits, commitments and other non-

derivative off-balance sheet positions10,170,199 9,638,253

Securities 5,584,231 5,360,137

Derivatives 922,034 748,638

Total 16,676,464 15,747,028

27


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

exposure types as of December 31, 2013:

Table 12: Total amount of receivables broken down by significant geographic regions

Region

Loans, loan

commitments and

other non-

derivative off

balance sheet

positions

(in kEUR)

Securities

(in kEUR)

Derivatives

(in kEUR)

Total

(in kEUR)

Africa 8 - 18,281 18,289

Asia 16,844 - - 16,844

Australia 0 283,152 48,697 331,849

Europe 2,094,804 5,301,079 697,635 8,093,518

Latin America - - - -

North America 8,058,543 - 157,421 8,215,964

Total 10,170,199 5,584,231 922,034 16,676,464

28


c) Total amount of receivables broken down by industry sector and significant exposure types as of

December 31, 2013:

Table 13: Total amount of receivables broken down by industry sector

Industry sector

Loans, loan

commitments and

other non-

derivative off-

balance sheet

positions

(in kEUR)

Securities

(in kEUR)

Derivatives

(in kEUR)

Total

(in kEUR)

Investment companies 858,711 - - 858,711

Special purpose vehicles - 4,873,399 - 4,873,399

Investment funds 547,317 2,849 362,540 912,706

Other services 151,611 - 77,926 229,538

Other financial

intermediations 385,144 74,994 249,783 709,921

Insurance business 2,680 - 66,952 69,631

Banks (incl.

central banks) 8,224,706 632,990 164,833 9,022,529

Non-profit organizations 30 - - 30

Total 10,170,199 5,584,231 922,034 16,676,464

29


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

types as of December 31, 2013:

Table 14: Total amount of receivables broken down by remaining time to maturity

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

of December 31, 2013:

Table 15: Total amount of receivables before and after credit risk mitigation

Maturity

Loans, loan

commitments and

other non-

derivative off

balance sheet

positions

(in kEUR)

Securities

(in kEUR)

Derivatives

(in kEUR)

Total

(in kEUR)

< 1 year 9,297,314 59,286 906,529 10,263,129

≥ 1 year and < 5 years 133,581 825,520 15,505 974,606

≥ 5 years 739,304 4,699,424 0 5,438,729

Total 10,170,199 5,584,231 922,034 16,676,464

before CRMT after CRMT

0% 229,121 229,121

10% 320,249 320,249

20% 13,323,206 5,462,332

50% 50,877 50,877

100% 2,724,385 2,315,762

150% - -

1250% 28,625 28,625

Total 16,676,464 8,406,967

Risk weight

Total of CRSA position values

before credit risk mitigation techniques ("CRMT")

under the standardized approach (in kEUR)

30


f) The amount of receivables, which was collateralized as of December 31, 2013 broken down by

asset class and CRMT:

Table 16: Total amount of collateralized receivables

Exposure Class Credit risk mitigation technique

Gross exposure

Standardized Approach

(in kEUR)

covered by eligible financial collateral after haircuts 7,860,874

covered by guarantees -

covered by credit derivatives -

covered by eligible financial collateral after haircuts 408,623

covered by guarantees -

covered by credit derivatives -

Total 8,269,497

Banks

Corporates

31


3.3.1.5 DEFINITION – “PAST DUE”, “OVERDUE” 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 “overdue.”

Overdue

A loan is considered “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 taken credit agreements.

This may be related to all debt obligations a client holds with a credit granted.

Default

With regard to § 125 SolvV, a “default” is considered to have occurred with regard to a particular

obligor when either one or both of the two following events has taken place:

The obligor is considered by the institution, 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);

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.

32


3.3.1.6 RISK PROVISIONING

As part of the early warning process for risk 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 would be made. The amount of the respective individual provision is calculated

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

expectation of a recovery rate, the receivable would be written off accordingly, taking into account the

individual provision which has already been made.

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

provisions – or to write off on-balance sheet or off-balance sheet receivables, there are currently no

provisions recorded by the Bank.

As of December 31, 2013, none of the Bank’s lending commitments were assigned to intensive care,

restructuring or liquidation. In particular, this is due to the specific business model

(custodian / custodian bank).

Due to the above-mentioned situation, the quantitative information in accordance with

§ 327 (2) nos. 5 and 6 SolvV is not provided.

33


MARKET RISKS 3.3.2

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 bonds, shares, currencies, commodities or derivatives (relating to bonds, shares,

currencies and commodities).

Given the business activities of the Bank, this risk category comprises Foreign Exchange Risks,

Interest Rate Risks as well as Securities Price Risks.

As a result of the materiality assessment, Interest Rate Risks and Securities Price Risks are classified

as material, whereas 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.

Risk Strategy

For Foreign Exchange Risks and for Securities Price Risks the strategy consists of exactly determining

any Market Risk before becoming exposed to the corresponding risk position (selective approach) and

also closely monitoring existing risks. Active acceptance of Securities Price Risks is not a core element

of the risk strategy of the Bank, but to a limited extent it is necessary for the efficient management of

assets.

Interest Rate Risks are 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 the Bank.

Principally there are no foreign exchange exposures from foreign exchange transactions initiated by

clients 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 can arise from derivative trading that the Bank performs for its

clients.

The securities acquired as collateral within securities repurchase transactions or derivate trading are

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

fluctuate.

34


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

a fall in their market rate. However, due to their classification as fixed assets and their resulting

recognition at the modified lower of cost or market principle, a temporary impairment has no impact on

the measurement or the carrying value of the securities.

Derivatives clearing implies Market Risks solely in case of a counterparty default. However, this risk

remains only for as long as the securities provided as collateral can be liquidated.

Interest Rate Risks can arise from money market transactions, loans granted and received and the

Bank’s own portfolio. With the exception of the loans received/ granted and the Bank’s own investment

portfolio, the majority of interest-bearing items is payable/ due on demand. The long 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 collective investments undertakings (“CIUs”) held by the Bank

for the purpose of the optional conversion of salary to pension plan by the employees.

Risk Quantification

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

initiated by clients. These immaterial amounts are measured when the monthly balance sheets are

prepared.

Potential measurement risks from the portfolio of securities are calculated 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.

Interest Rate Risks in the trading book are quantified using the methods defined by Part 4, Chapter 3

SolvV. 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 Quantitative Risk Management

(QRM) model. This model, which is applied by SSC throughout the group, 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.

35


A breakdown of the capital requirements of the Bank for Market Risk positions in the Standardized

Approach as of December 31, 2013, can be found in the following table:

Table 17: Capital requirements for Market Risk positions

Table 18 presents the quantitative impact of the regulatory interest rate shocks in the banking book on

the Bank’s capital as of December 31, 2013 in accordance with the BaFin Circular 11 / 2011 (BA)

(issued as of November 9th, 2011):

Table 18: Impact of interest rate shocks on the liable equity

Risk Management

Foreign exchange transactions with clients and the respective offsetting deals with SSBT are

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

positions resulting from proprietary trading are subject to a limit system and compliance with these

limits is monitored daily. Any breaches of the limits are clarified immediately with the front office, which

ensures that the breaches are offset with foreign exchange deals with SSBT.

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

transactions allows 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.

Risk position in kEUR

Interest Rate Risks 10

Equity Risks -

Foreign Exchange Risks 7,392

Commodity Risks 32,801

Other risks -

Capital requirements for Market Risk 40,202

+200 BPs -200 BPs

in kEUR -179,108 229,812

in % of the liable equity -13.11 16.82

Present value change

Interest Rate Risks in the banking book

as of December 31, 2013

Interest rate shock – parallel shift of the yield curve:

36


The investment portfolio securities are allocated to fixed assets and are generally not sold until they

mature. There is no need to write down these securities due to lower market prices on account of the

fact that they are valuated using the modified lower of cost or market principle. Write-downs would be

recorded in the event of a permanent impairment. To date, there has not been any need to record such

impairments.

The results of the simulation of the Interest Rate Risks are communicated to the management each

month. For particular Interest Rate Risk scenarios limits have been implemented, which are monitored

accordingly.

37


OPERATIONAL RISKS 3.3.3

Risk Definition

Operational Risks are defined as the risk of loss resulting from inadequacies or failures of internal

processes, people and systems or from external events. This definition includes IT risks, outsourcing

risks, settlement risks, legal risks and compliance 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 Federal Financial

Supervisory Authority.

Compliance with relevant legal and regulatory requirements is a critical component of the Bank’s

business activity.

With regard to the management of Compliance Risks, the objective of the Bank is to comply with all

legal and regulatory requirements that must be met when rendering banking services, financial

services and ancillary securities-related services. The responsibility for complying with these

requirements lies with every single employee wherever the requirements apply to the scope of the

employee’s tasks and duties.

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 purchase transactions can entail settlement risks.

At the Bank, Legal Risks exist in the form of the risk of the loss that might arise from not performing

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

activities of the Bank.

38


Compliance Risks exist both from an external and an internal perspective. On the one hand, the Bank

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 in particular by SSC.

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

additional outsourcing can also increase Operational Risks.

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

technology used and the processes themselves. The Bank 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 Outsourcing Risks are also potentially higher.

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 regulatory capital requirement for Operational Risks, the Bank applies the

Standardized Approach pursuant to SolvV. Internal capital needs to cover Operational Risks are

measured under the ICAAP (the risk-bearing capacity concept) pursuant to MaRisk using the “Pillar 1

Plus” approach based on the distribution function parameters – the expected value and standard

deviation – estimated from the Bank’s historic Operational Risk events. Additionally since 2013,

Operational Risks have been validated and quantified within the “normal”, “middle” and “worst case”

scenarios.

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 Group 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.

39


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.

In addition, compliance department monitors and hence secures on an ongoing basis compliance with

the relevant laws and regulatory requirements as well as the group’s and local internal 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 are 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.

The Bank 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.

The Bank 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.

40


INVESTMENT RISKS 3.3.4

Risk Definition

Investment Risks are defined as 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

The Bank directly holds a direct stake in State Street Holdings Italy S.r.l., Milan, Italy, (90% voting

rights and 97% shares) and, via these, an indirect majority stake in State Street Bank S.p.A. In

addition, it holds a 100% stake in State Street Fondsleitung AG, Zurich.

Risk Quantification

Risks are quantified depending on actual historic investment write-down amounts.

Risk Management

The measures to steer and control investment risks include a monthly scenario analysis depending on

the internal ratings. Limits have been implemented for the individual scenarios and are monitored

accordingly.

Balance Sheet Value

Shares in affiliated companies (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. As of December 31, 2013 following investment values were reported:

State Street Holding Italy S.r.l. 489,010 kEUR and State Street Fondsleitung AG 10,233 kEUR.

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.

Due to the nature of the investment, most of the quantitative information required by § 332 no. 2 SolvV

is not provided.

41


BUSINESS RISKS 3.3.5

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 plan and business strategy.

Business Risks therefore comprise Strategic Risks, the risk of loss of customers and the risk of

mismatch of cost and revenue.

Risk Strategy

The risk strategy is based on early identification 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 the daily business frustrates absolute planning certainty.

In particular, the business risks for the Bank 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 clients 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.

Risk Quantification

Business Risks are characterized by a great deal of interdependency to other risk categories.

Consequently, quantification of these risks within a single risk category is much restricted. In addition, it

needs to be noted that realization of Business Risk would have a direct impact on the risk-bearing

capacity of the Bank. For this reason, Business Risks remain considered in the ICAAP of the Bank,

primarily at the aggregated level i.e. within the calculation of the risk-bearing capacity. Calculation of

the risk-bearing capacity - both with regard to the Bank's current as well as its planned risk position –

proves free capacity available to cover possible present or future Business Risks.

Risk Management

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

and complete implementation of such changes. In order to further minimize the risk, the following

controls were established:

At least annual revision of the business strategy

Balanced scorecards prepared quarterly to review fulfillment of the targets

Regular recording of financial data

Monitoring the P&L at client level

A fee-structure-adjustment process

A process for launching new products pursuant to AT 8 MaRisk

42


LIQUIDITY RISKS 3.3.6

Risk Definition

Liquidity Risks are defined as current and future risks that payment obligations cannot be met on the

due date. The risk comprises Funding Liquidity Risk, Market Liquidity Risk and Credit Spread Risk.

Risk Strategy

For the Bank’s 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 the Bank, Liquidity Risks can realize when there is a mismatch between asset and liability positions

if, for example, clients 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 from Banque Central Luxembourg (emergency cash plan).

The Bank pursues a liabilities-driven investment strategy. This means the liquidity held by clients within

the framework of existing relationships with the Bank is invested in suitable investments. As a result,

the Bank is not exposed to any material Funding Liquidity Risk.

Risk Quantification

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

Liquidity Management Policy and Guidelines and the Liquidity Management Framework. This allows

the Liquidity Risks to be quantified for both a normal and a stressed market environment during the

monthly cash flow forecast and the stress scenario tests conducted by the Bank.

Risk Management

The measures taken to manage Liquidity Risks include monthly scenario testing, daily calculation and

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

liquidity contingency plan.

43


CONCENTRATION RISKS (RESULTING FROM RISK CONCENTRATIONS IDENTIFIED IN EACH RISK 3.3.7

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

single risk category (“Intra-Risk Concentrations”),

c) Risk concentrations that arise due to 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 Concentration Risk taking account of the business model of

the Bank. Risk concentrations are initially identified and then mitigated as far as possible. Existing

Concentration Risks undergo both qualitative and quantitative monitoring.

Risk Situation

Significant risk concentrations can be found in all of the Bank’s main risk categories, i.e. Credit Risks,

Market Risks, Operational Risks, Liquidity Risks, Investment Risks and Business Risks.

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

represent the largest concentrations of risk.

Risk Quantification

These risks are quantified using a bottom-up 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 Concentration Risks, a

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

under the ICAAP.

Risk Management

The process-related measures used to manage Concentration Risks include an analysis of potential

concentrations of risk exposures before these risk exposures are accepted (taking a selective

approach) and also analysis, management and monitoring of existing risk concentrations.

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

country/counterparty and asset class level.

44


3.4 RISK REPORTING

The risk situation of the Bank is communicated via a comprehensive reporting system to the Managing

Directors and to other relevant divisions. Apart from the reports delivered within the Committees

described in Section 3.1, the risk situation of SSB GmbH is reported by the following means:

The monthly report prepared as a part of the Management Information System (“MIS”) of SSB

GmbH. The MIS contents, which are crucial for the overall bank management, are coordinated

by a central division.

Other reports prepared for relevant risk types.

The information flow takes place within the scope of the above-mentioned reporting and, if applicable,

as ad-hoc reports.

45


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 within any securitization processes and did not hold or purchase any re-

securitizations. The goal of the Bank’s securitization activities was revenue generation through long-

term investment.

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 § 1a KWG. They are valued as fixed assets according to commercial law

specifications in § 253 (3) HGB. The securitization positions are to be held to the final maturity.

The 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.

Non-Credit and non-Market Risks within the Bank’s securitization activities

Liquidity Risk associated with the Bank’s investment activities results from the long-term earmarking 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 Banque Central Luxembourg, the Bank considers

the Liquidity Risk of the securitization position not to be material. The expected maturities of

securitizations held in the own portfolio are monitored on an ongoing basis.

Further to this, the Bank identifies and monitors country and product concentrations within the

securitization positions.

Approach for determination of risk-weighted securitization positions

For all securitization positions held in 2013 the risk-weighted securitization positions within the Credit

Risk Standardized Approach were calculated using the specifications of § 242 SolvV. 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 applied the relevant credit rating assessment in accordance with § 44 SolvV.

46


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 herewith, which additionally

serves as documented evidence for conformity to § 18a (4) KWG. In the scope of the regular post-

trade portfolio monitoring processes, next to a regular scenario-based stress test, the comprehensive

reporting and monthly Surveillance Group Meetings take place, which consider the risks of the Bank’s

entire securities portfolio. Alongside this, liquidity and investment topics of the Bank are presented on

a quarterly basis to the decision-making body – ALCO Committee. In addition, the risk situation of the

securitizations portfolio is discussed in the quarterly MaRisk Committee meetings. The structure of the

aforementioned Committees can be seen in Illustration 5. The post-trade portfolio monitoring process

fulfills the requirements of § 18b (1) to (3) KWG.

Further to this, Credit and Market Risks of the securitization positions are monitored within the monthly

ICAAP and next reported to the Managing Directors in the course of the MIS reporting.

Hedging

The Bank has not implemented any hedging strategy with respect to securitization positions.

Quantitative information

In 2013, 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 further increased its stock of securitizations in order to optimize

interest revenue, while taking into account the appropriate risk. The value of the portfolio rose from

4,131,913 kEUR as of December 31, 2012 to 4,873,399 kEUR as of December 31, 2013. 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 2013. Downgrades

within the securitizations portfolio caused that risk weights of only three positions (1.54% of the total

CRSA-position value) increased in comparison to the previous year. Majority of the securitization

positions were assigned the risk-weight according to the highest credit quality step for the CRSA

exposure class “Securitization positions” (97.87% of the total CRSA-position value).

47


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, 2013 (all securitizations were assigned to the banking book):

Table 19: Securitization positions

Securitized asset classCRSA position

(in kEUR)

CRSA

risk weight

Capital requirements

(in kEUR)

2,472,718 20% 39,563

50,877 50% 2,035

24,209 100% 1,937

28,625 1250% 28,625

Car / auto loans 1,981,772 20% 31,708

Credit card receivables 188,282 20% 3,013

Corporate loan receivables 126,916 20% 2,031

Total 4,873,399 108,912

Receivables from residential mortgages

48


5 DISCLOSURE OF THE COMPENSATION FOR THE FINANCIAL YEAR 2013 ACCORDING TO § 7 OF THE GERMAN REMUNERATION ORDINANCE FOR INSTITUTIONS (“INSTITUTSVERGV”)

5.1 COMPENSATION STRUCTURE

The Bank is not subject to any collective labor agreement, but applies its own compensation structure

– the “Total Compensation Strategy” (“TCS”) – which largely applies analogously to all departments.

The principle of this structure is guided by the following points:

Performance and risk assumed

Market orientation and competitiveness as well as regulations

Support of an corporation operating worldwide

Flexibility to fulfill the requirements of the business lines

Uniform structure within all State Street departments and branches.

The compensation components are as follows:

Base Salary

Each employee is included in the TCS structure, and a basic salary is contractually agreed

upon in which, factors such as the personal performance, qualification, professional

experience, budget, and the market position are taken into consideration.

Incentive Compensation / Salary Increase

Apart from the base salary, the Bank provides for a performance-oriented compensation

component (bonus). The company grants this bonus at its own discretion. The distribution of

the available bonus budget to the individual employees is based on the individual performance

as well as the company’s overall performance. The achievement of individual performance

goals (Performance Planning Review „PPR“ – Rating), which arise from the structured goal

setting process (“PPR”), forms a component of the individual performance. The bonus, which

is allotted to an employee, is composed of cash and deferred equity and starting 2013/2014 of

deferred cash value components. In the process, the equity and cash value components are

transferred to the employee quarterly over four years in equal allotments. The proportion

between cash and deferred components is set by the company on an annual basis. Since

2012/2013 a small group of sales executives has been participating in the so-called "Global

Services EMEA Sales Incentive Plan" ("SIP"). The Plan aims to align the variable

remuneration, which was granted to the Plan participants, with the revenues that were

generated by them by taking account of non-financial performance indicators.

49


Promotion

Changed duties and achievements of the employees can be accommodated and the base

salary can be adjusted by way of promotion.

In our opinion, the compensation structure does not provide any negative incentives for employees to

take disproportionately high risks. This is especially evident from the following characteristics of the

compensation components:

No bonus guarantee exists, either for the management or for the employees (except possible

guarantees for the first year of employment).

Bonus payments depend on the individual performance and on the company’s overall success.

Except for the participants in “GS EMEA Sales Incentive Plan” (“SIP”) there is no defined (e.g.

percentual) performance relationship between transaction volume and the bonus. This means that,

for example the bonus is not linked to trading results or volume. There is the principle that the

individual employee contributes directly to the overall performance of the company, reflected

monetarily in the amount of the bonus, yet still through his contribution only indirectly to the overall

performance of the company. The bonus budget is not bottom-up distributed but individually top-

down distributed based on the relevant company performance. In the course of “SIP” individual

assignment of the bonus payment is made on the basis of a “Balanced Scorecard”, which mirrors

the practices and the performance.

In terms of the budget to be distributed, both the bonus of the management and that of the

individual employees depend on the success of the overall bank and not only on the specific

success of the individual.

There are no single contract-based claims to severance pay in case of employment termination,

which were agreed upon the beginning of the employment relationship.

The amount of the compensation of employees of the control units and of the employees in the

organizational units controlled by these depends on the respective function or the specific job. The

requirements for the function / job are also reflected in the individual goal-setting. The fulfillment of

these individual performance goals and their achievement, which is measured, is a decisive

parameter for the assignment of a bonus payment. As the parameters are fundamentally different,

a conflict of interests is highly unlikely.

50


5.2 TABLE ACCORDING TO § 7 INSTITUTSVERGV

The total compensation of the Bank for the financial year 2013, as presented here, includes the bonus

for the financial year 2013, which was granted in February 2014. The total bonus granted for the

financial year 2014 amounted to 10,506 kEUR. The amount includes the bonuses granted in this year,

which will not expire in the future, and excludes the expenses for the deferred compensations, which

were granted in the preceding years.

Table 20: Total remuneration 2013 according to § 7 (2) sent. 1 no. 2 InstitutsVergV

Remuneration

in kEUR

Global

Custody &

Depositary

Services

Insourcing

Services

Add-on

Services

Corporate

Functions

Operational

Support

Services

2013

Total

Total remuneration 31,145 4,704 8,487 13,549 5,950 63,835

of which fixed

remuneration26,859 4,206 6,542 11,216 4,506 53,329

of which variable

remuneration4,286 499 1,945 2,333 1,444 10,506

Number of employees that

received variable

remuneration

408 67 84 159 1,533 2,251

51


6 NON-APPLICABLE DISCLOSURE REQUIREMENTS

As long as for the Bank non-applicable disclosure requirements according to SolvV are not evident

from the report, they are outlined in the following table:

Table 21: Non-applicable disclosure requirements

At the Bank, any disclosure requirements regarding Internal Model Approaches for Credit Risks,

Market Risks and Operational Risks are also not applicable.

Disclosure requirement Legal basis according to SolvV

Decription of the process used to transfer

issue credit assessments onto exposures§ 328 (1) No. 3 SolvV

Information regarding use of balance

and off-balance netting agreements§ 336 (2) SolvV

52


7 GLOSSARY

AFT Agent Fund Trading

AG Stock corporation under German law (Aktiengesellschaft)

AGB General business terms (Allgemeine Geschäftsbedingungen)

ALCO SSB GmbH Asset & Liability Committee

BaFin Federal Financial Supervisory Authority (Bundesanstalt für

Finanzdienstleistungsaufsicht)

BS Balance Sheet

CIUs Collective Investments Undertakings

CRMT Credit Risk Mitigation Technique

CRSA Credit Risk Standardized Approach

EU European Union

FCM Futures Clearing Merchant

GmbH German limited liability company (Gesellschaft mit beschränkter Haftung)

GS Global Services

ICAAP Internal Capital Adequacy Assessment Process

IMS Investment Managers Solutions

InstitutsVergV German Remuneration Ordinance for Institutions (Institutsvergütungsverordnung)

IP Investment portfolio

IRBA Internal Ratings Based Approach

KPI Key Performance Indicator

KWG German Banking Act (Kreditwesengesetz)

MaRisk Minimum Requirements for Risk Management

(Mindestanforderungen an das Risikomanagement)

MaSan Minimum Requirements for the Design of Recovery Plans

(Mindestanforderungen an die Ausgestaltung von Sanierungsplänen)

MIS Management Information System

P&L Profit & Loss statement

PPR Performance Planning Review

QRM Quantitative Risk Management

S&P Standard & Poor’s

S.p.A. Stock corporation under Italian law

S.r.l. Limited liability company under Italian law

SIP Sales Incentive Plan

SolvV German Solvency regulation (Solvabilitätsverordnung)

SSB GmbH State Street Bank GmbH

SSBT State Street Bank & Trust Company

SSC State Street Corporation

SSIH State Street International Holdings

TCS Total Compensation Strategy

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