RBS 2010 Annual Report Download - page 223

Asset Protection Scheme*
All the disclosures in this section (pages 221 to 224) are unaudited and
are marked with an asterisk (*).
References to 'Group' in this section relate to 'Group before RFS MI'.
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 at 31 December 2008 and the protection is
subject to a first loss of £60 billion and covers 90% of subsequent losses
net of recoveries. Once through the first loss, when a covered asset has
experienced a trigger event losses and recoveries in respect of that asset
are included in the balance receivable under 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. On termination, the Group is liable to pay HMT a
termination fee. The termination fee comprises the difference between
£2.5 billion (or, if higher, a sum related to the economic benefit of
regulatory capital relief obtained from APS) and the aggregate fees paid.
In addition, the Group would have to repay any amounts received from
HMT under the terms of APS. In consideration for the protection
provided by the APS, the Group paid an initial premium of £1.4 billion on
31 December 2009. A further premium of £700 million was paid on 31
December 2010. Quarterly premiums of £125 million are payable from 31
December 2011 and subsequently until the earlier of 31 December 2099
and the termination of the agreement.
Losses are recognised when a covered asset has experienced a trigger
event which comprises of failure to pay subject to grace periods,
bankruptcy and restructuring.
APS assets are spread across the Group’s main divisions. High volume
commercial and retail exposures were selected on a portfolio basis where
assets were high risk and in arrears at 31 December 2008. Large
corporate and GBM exposures were selected at the counterparty/asset
level based on individual risk reviews and defaulted assets in the
workout/restructuring unit.
HMT has the right to appoint step-in managers to carry out any oversight,
management or additional functions on behalf of HMT to ensure that the
covered assets are managed and administered in compliance with the
agreed terms and conditions. This right is exercisable if certain step-in
triggers occur. These include:
xlosses on covered assets in total exceed 125% of the first loss
amount or losses on an individual covered asset class exceed
specified thresholds;
xabreach of specified obligations in the APS rules or the accession
agreement;
xthe Group has failed or is failing to comply with any of the conditions
in the APS rules in relation to asset management, monitoring and
reporting, and governance and oversight, and such failure is
persistent and material or it is evidence of a systematic problem;
and
xmaterial or systematic data deficiencies in the information provided
to HMT in accordance with the terms of the APS.
HMT may at any time elect to cease to exercise its step-in rights in whole
or part when it is satisfied that the step-in triggers have been remedied.
*unaudited
221RBS Group 2010
Business review
Risk and balance sheet management