RBS 2009 Annual Report Download - page 350

RBS Group Annual Report and Accounts 2009348
Notes on the accounts continued
41 Related parties continued
Asset protection scheme
On 22 December 2009, the Group entered into an agreement (the Asset
Protection Scheme (APS)) with HM Treasury (HMT), acting on behalf of
the UK Government, under which the Group purchased credit protection
over a portfolio of specified assets and exposures (covered assets) from
HMT. The portfolio of covered assets has a par value of £282 billion. The
protection is subject to a first loss of £60 billion and covers 90% of
subsequent losses. Once the first loss has been exhausted, losses and
recoveries in respect of assets for which a trigger event – failure to pay,
bankruptcy or restructuring – has occurred are included in the balance
receivable under the APS. Receipts from HMT will, over time, amount to
90% of cumulative losses (net of 90% of cumulative recoveries) on the
portfolio of covered assets less the first loss amount. The Group has a
right to terminate the APS 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 must
pay HMT the higher of the regulatory capital relief received and £2.5
billion less premiums paid plus the aggregate of amounts received from
the UK Government under the APS. In consideration for the protection
provided by the APS, the Group paid an initial premium of £1,400 million
on 31 December 2009. A further premium of £700 million is payable on
31 December 2010 and subsequently annual premiums of £500 million
until the earlier of 2099 and the termination of the agreement.
The APS is a single contract providing credit protection in respect of a
portfolio of financial assets. Under IFRS, credit protection is treated
either as a financial guarantee contract or as a derivative financial
instrument depending on the terms of the agreement and the nature of
the protected assets and exposures. The Group has concluded,
principally because the covered portfolio includes significant exposure
in the form of derivatives, that the APS does not meet the criteria to be
treated as a financial guarantee contract. The contract has therefore
been accounted for as a derivative financial instrument: it was
recognised initially and measured subsequently at fair value with
changes in fair value recognised in 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.
The Group also participates in a number of schemes operated by the
Bank of England and the UK Government and made available to eligible
banks and building societies.
Bank of England facilities include:
•Open market operations – these provide market participants with
funding at market rates on a tender basis in the form of short and
long-term repos on a wide range of collateral and outright purchases
of high-quality bonds to enable them to meet the reserves that they
must hold at the Bank of England.
•US dollar repo operations – these commenced in September 2008
taking the form of an auction. Eligible collateral consists of securities
routinely eligible in the Bank of England’s short-term repo open
market operations together with conventional US Treasuries.
•The special liquidity scheme – this was launched in April 2008 to
allow financial institutions to swap temporarily illiquid assets for
treasury bills, with fees charged based on the spread between
3-month LIBOR and the 3-month gilt repo rate. The scheme will
operate for up to three years after the end of the drawdown period
(30 January 2009) at the Bank of England’s discretion.
As at 31 December 2009, the Group’s utilisation of these facilities
amounted to £21.4 billion (2008 – £41.8 billion).
Government credit guarantee scheme – announced in October 2008, the
scheme provides a guarantee on eligible new debt issued by qualifying
institutions for a fee. The fee, payable to HM Treasury on guaranteed
issues is based on a per annum rate of 50 basis points plus 100% of
the institution’s median five-year Credit Default Swap (CDS) spread
during the twelve months to 7 July 2008.
As at 31 December 2009, the Group had obtained funding from the
Bank of England and issued debt guaranteed by the Government
totalling £51.5 billion (2008 – £32.2 billion)
Other related parties
(a) In their roles as providers of finance, Group companies provide
development and other types of capital support to businesses.
These investments are made in the normal course of business and
on arm’s-length terms. In some instances, the investment may extend
to ownership or control over 20% or more of the voting rights of the
investee company. However, these investments are not considered to
give rise to transactions of a materiality requiring disclosure under
IAS 24.
(b) The Group recharges The Royal Bank of Scotland Group Pension
Fund with the cost of administration services incurred by it. The
amounts involved are not material to the Group.
(c) In accordance with IAS 24, transactions or balances between Group
entities that have been eliminated on consolidation are not reported.
(d) The captions in the primary financial statements of the parent
company include amounts attributable to subsidiaries. These
amounts have been disclosed in aggregate in the relevant notes to
the financial statements.
42 Post balance sheet events
There have been no significant events between the year end and the
date of approval of these accounts which would require a change to or
disclosure in the accounts.