RBS 2005 Annual Report Download - page 253

section
04
Additional
information
251
Additional information
Annual Report and Accounts 2005
Off-balance sheet arrangements
The Group is involved with several types of off-balance sheet
arrangements, including special purpose vehicles, lending
commitments and financial guarantees.
Special purpose entities (“SPEs”)
SPEs are vehicles set up for a specific, limited purpose, usually
do not carry out a business or trade and typically have
no employees. They take a variety of legal forms – trusts,
partnerships and companies – and fulfil many different
functions. They constitute a key element of securitisation
transactions in which an SPE acquires financial assets funded
by the issue of securities. In the normal course of business,
the Group arranges securitisations to facilitate client
transactions and undertakes securitisations to sell financial
assets or to obtain funding. It has established a number of
SPEs to act as commercial paper conduits for customers. SPEs
are also utilised in its fund management activities to structure
investment funds to which the Group provides investment
management services.
Commercial paper conduits – the Group has established a
number of SPEs that act as multi-seller commercial paper
conduits. These allow customers to access liquidity in the
commercial paper market by selling assets to the conduit
which it finances by issuing commercial paper to third parties.
The Group supplies certain services and contingent liquidity
support to these vehicles on an arm’s length basis as well as
programme credit enhancement. These vehicles with total
assets of £6,688 million at 31 December 2005 are consolidated
under IFRS and US GAAP.
Residential mortgages and credit card securitisations – in the
UK and Ireland, the Group has securitised portfolios of
residential mortgages and credit card receivables totalling
£5,279 million as at 31 December 2005. These assets have
been transferred to SPEs funded by the issue of notes to third-
party investors. These SPEs are consolidated under IFRS and
US GAAP and the securitised assets remain on the Group’s
balance sheet.
US securitisations – in the US, RBS Greenwich Capital
securitises commercial and residential mortgage loans,
commercial and residential mortgage related securities, US
Government agency collateralised mortgage obligations, and
other types of financial assets. It also acts as an underwriter
and depositor in securitisation transactions involving both client
and proprietary transactions. The majority of proprietary
securitisations undertaken by RBS Greenwich Capital result in
sales treatment under IFRS and US GAAP. Certain transactions
may not result in derecognition of the assets under IFRS or US
GAAP: under US GAAP, transactions involving vehicles that are
not qualifying special purpose entities and where the Group is
the primary beneficiary; under IFRS, those where the Group
has retained substantially all the risks and rewards of the assets.
Finance lease receivables – in the US, the Group has financed
lease receivables with non-recourse funding from third parties.
The transactions are shown gross of third-party financing
under IFRS but net under US GAAP.
Further disclosures about the Group’s securitisations are given
in Note 12 on the accounts.
Lending commitments and other commitments
Under a loan commitment, the Group agrees to make funds
available to a customer in the future. Loan commitments, which
are usually for a specified term, may be unconditionally
cancellable or may persist, provided all conditions in the loan
facility are satisfied or waived. Commitments to lend include
commercial standby facilities and credit lines, liquidity facilities
to commercial paper conduits and unutilised overdraft facilities.
Other commitments include documentary credits, which are
commercial letters of credit providing for payment by the
Group to a named beneficiary against presentation of
specified documents, forward asset purchases, forward
deposits placed and undrawn note issuance and revolving
underwriting facilities.
Guarantees and other contingent liabilities
The Group gives guarantees on behalf of customers. A financial
guarantee represents an irrevocable undertaking that the
Group will meet a customer’s obligations to third parties if the
customer fails to do so. The maximum amount that the Group
could be required to pay under a guarantee is its principal
amount. The Group expects most guarantees it provides to
expire unused. Other contingent liabilities include those arising
from standby letters of credit that support customer debt
issues and those relating to customers’ trading activities such
as performance and customs bonds, warranties and indemnities.