## Note 38.1 Credit risk continued 

Derivative financial instruments 

Exchange traded derivatives contracts have limited credit risk as counterparties have to be members of the exchange and demonstrate they have adequate resources to fulfill obligations when they become due. Members are required to provide initial margins in accordance with the exchange rules in the form of cash or securities, and provide daily variation margins in cash to cover changes in market values. Further, all members are generally required to contribute to (and guarantee) the compensation or reserve fund which may be used in the event of default and shortfall of a member. Macquarie has exchange traded derivatives with positive replacement values (and for which counterparties would have had to place margin) as at 31 March 2014 of $2,565 million (2013: $2,610 million). Macquarie has also placed margins on House and Client positions with exchanges, the balance at 31 March 2014 being $2,831 million (2013: $3,459 million), which are recorded in Receivables from financial institutions and Loan assets held at amortised cost. 

For Over The Counter (OTC) derivative contracts, Macquarie often has master netting agreements (usually ISDA Master Agreements) with certain counterparties to manage the credit risk. The credit risk associated with positive replacement value contracts is reduced by master netting arrangements that in an event of default requires balances with a particular counterparty covered by the agreement (e.g. derivatives and cash margins) to be terminated and settled on a net basis. Macquarie also often executes a Credit Support Annex in conjunction with a master netting agreement, which facilitates the transfer of margin between 

parties during the term of arrangements, to mitigate counterparty risk arising from changes in market values of the derivatives. 

As at 31 March 2014, Macquarie held OTC contracts with a positive replacement value of $10,153 million (2013: $9,819 million). The credit risk of these contracts is reduced due to master netting agreements covering negative OTC contracts of $6,235 million (2013: $6,170 million) and margins held (excluding the impact of over-collateralisation) of $1,167 million (2013: $687 million). In addition, Macquarie has placed collateral of $1,643 million (2013: $2,043 million) which has negligible credit risk as this is fully offset by the related negative OTC contracts. 

Debt investments securities available for sale 

Included in this balance are holdings of $nil (2013: $683 million) issued by Australian banks which are subject to an Australian Government Guarantee. A further $255 million (2013: $243 million) is secured by specified Australian and Canadian assets under covered bonds. 

Other assets 

Security settlements of $6,094 million (2013: $5,567 million) are included in Other assets, which represent amounts owed by an exchange (or a client) for equities sold (or bought on behalf of a client). Macquarie holds the underlying equity security or cash until settled, which is usually less than 3 days after trade. 

Credit commitments and contingent liabilities 

Of the Undrawn facilities and lending commitments of $4,792 million (2013: $3,748 million), $2,129 million (2013: $1,591 million) are fully secured by underlying specific assets. 

