RBS 2009 Annual Report Download - page 176

Business review continued
RBS Group Annual Report and Accounts 2009174
Asset Protection Scheme*
All the disclosures in this section (pages 174 to 183) are unaudited and
indicated with an asterisk (*). References to ‘Group’ in this section relate
to ‘Group before RFS Holdings minority interest’.
Key aspects of the Scheme
On 22 December 2009, the Group acceded to the Asset Protection
Scheme (‘APS’ or ‘the Scheme’) with HM Treasury (HMT) acting on
behalf of the UK Government. Under the Scheme, the Group purchased
credit protection over a portfolio of specified assets and exposures
(“covered assets”) from HMT. The portfolio of covered assets had a par
value of approximately £282 billion as at 31 December 2008 and the
protection is subject to a first loss of £60 billion and covers 90% of
subsequent losses. Once through the first loss, when a covered asset
has experienced a trigger event(1) losses and recoveries in respect of
that asset are included in the balance receivable under the APS.
Receipts from HMT will, over time, amount to 90% of cumulative losses
(net of cumulative recoveries) on the portfolio of covered assets less the
first loss amount.
The Group has the right to terminate the Scheme at any time provided
that the Financial Services Authority has confirmed in writing to HMT
that it has no objection to the proposed termination. On termination, the
Group is liable to pay HMT a termination fee. The termination fee would
be the difference between £2.5 billion (or, if higher, a sum related to the
economic benefit of regulatory capital relief obtained as a result of
having entered the APS) and the aggregate fees paid. In addition, the
Group would have to repay any amounts received from HMT under the
terms of the APS (or as otherwise agreed with HMT). In consideration
for the protection provided by the APS, the Group paid an initial
premium of £1.4 billion on 31 December 2009 for the years 2009 and
2010. A further premium of £700 million is payable on 1 January 2011
and subsequently annual premiums of £500 million until the earlier of 31
December 2099 or the termination of the agreement.
The APS is a single contract providing credit protection in respect of a
portfolio of financial assets: the unit of account is the contract as a
whole. Under IFRS, credit protection is either treated as a financial
guarantee contract (‘FGC’) or a derivative depending on the terms of
the agreement and the nature of the protected assets and exposures.
The portfolio contains more than an insignificant element of derivatives
and limited recourse assets, and hence the contract does not meet the
definition of an FGC. The APS contract is therefore treated as a
derivative and is recognised at fair value, with changes in fair value
recognised in profit or loss. The APS derivative did not have any effect
on the Group’s 2009 income statement; however in future period’s
changes in value of the APS derivative will have an effect on the
Group’s profit or loss.
There is no change in the recognition and measurement of the covered
assets as a result of the APS. Impairment provisions on covered assets
measured at amortised cost are assessed and charged in accordance
with the Group’s accounting policy; held-for-trading assets, assets
designated at fair value and available-for-sale assets within the APS
portfolio continue to be measured at fair value with no adjustments to
reflect the protection provided by the APS. There is no change in how
gains and losses on the covered assets are recognised in the income
statement or in other comprehensive income.
Trigger events (subject to specific rules detailed in the terms of the
APS) comprise:
•failure to pay: the counterparty to the covered asset has (subject to
specified grace periods) failed to pay an amount due under the
terms of its agreement with the Group.
•bankruptcy: the counterparty is subject to a specified insolvency or
bankruptcy-related event.
•restructuring: a covered asset which is individually impaired and is
subject to a restructuring.
The selection of assets was carried out primarily between February and
April 2009 and was driven by three principal criteria:
(1) Risk and degree of impairment in base case and stressed
scenarios;
(2) Liquidity of exposure; and
(3) Capital intensity under procyclicality.
* unaudited