RBS 2003 Annual Report Download - page 174

172
Notes on the accounts continued
Notes on the accounts
38 Assets charged as security for liabilities
2003 2002
Assets charged as security for liabilities £m £m
Loans and advances to customers 1,196 852
Debt securities 2,628 4,017
Tangible fixed assets 1,162 1,010
Other 126 599
5,112 6,478
Included above are assets pledged with overseas government agencies and banks, and margin deposits placed with exchanges.
2003 2002
Liabilities secured by charges on assets £m £m
Deposits by banks 3,000 2,778
Customer accounts 92 2,233
Debt securities in issue 1,550 591
4,642 5,602
In the normal course of business, the Group enters into a variety
of derivative transactions principally in the foreign exchange
and interest rate markets. These are used to provide financial
services to customers and to take, hedge and modify positions
as part of trading activities. Derivatives are also used to hedge
or modify risk exposures arising on the balance sheet from a
variety of activities including lending and securities investment.
The principal types of derivative contracts into which the
Group enters are described below.
Swaps
These are over-the-counter (“OTC”) agreements between two
parties to exchange periodic payments of interest,
or payments for the change in value of a commodity, or related
index, over a set period based on notional principal amounts.
The Group enters into swap transactions in several markets.
Interest rate swaps exchange fixed rates for floating rates of
interest based on notional amounts. Basis swaps exchange
floating or fixed interest calculated using different bases. Cross
currency swaps are the exchange of interest based on notional
values of different currencies. Equity and commodity swaps
exchange interest for the return on an equity or commodity, or
equity or commodity index.
Options
Currency and interest rate options confer the right, but not the
obligation, on the buyer to receive or pay a specific quantity of
an asset or financial instrument for a specified price at or
before a specified date. Options may be exchange traded or
OTC agreements. The Group principally buys and sells
currency and interest rate options.
Futures and forwards
Short-term interest rate futures, bond futures and forward
foreign exchange contracts are all agreements to deliver, or
take delivery of, a specified amount of an asset or financial
instrument based on the specified rate, price or index applied
against the underlying asset or financial instrument, at a
specified date. Futures are exchange traded at standardised
amounts of the underlying asset or financial instrument.
Forward contracts are OTC agreements and are principally
dealt in by the Group in interest rates as forward rate agreements
and in currency as forward foreign exchange contracts.
Collateral
The Group may require collateral in respect of the credit risk in
derivative transactions. The amount of credit risk is principally
the positive fair value of contracts. Collateral may be in the form
of cash or in the form of a lien over a customer’s assets entitling
the Group to make a claim for current and future liabilities.
39 Derivatives