RBS 2011 Annual Report Download - page 249

RBS Group 2011 247
Asset Protection Scheme*
All disclosures in this section (pages 247 to 249) are unaudited and are
marked with an asterisk (*).
Key aspects of the Scheme
On 22 December 2009, the Group acceded to the Asset Protection
Scheme (APS or ‘the Scheme’) with HM Treasury 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 HM Treasury. 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 the
APS. Receipts from HM Treasury 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 HM
Treasury that it has no objection. On termination, the Group is liable to
pay HM Treasury a termination fee, which comprises the difference
between £2.5 billion (or, if higher, a sum related to the economic benefit
of regulatory capital relief obtained from the APS) and the aggregate fees
paid. In addition, the Group would have to repay any amounts received
from HM Treasury under the terms of the APS. The Group has paid APS
premiums totalling £2,225 million (2011 - £125 million; 2010 - £700
million; 2009 - £1,400 million). From 31 December 2011 premiums of
£125 million are payable quarterly until the earlier of 2099 and the date
the Group leaves the Scheme.
Losses are recognised when a covered asset has experienced a trigger
event which comprises 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.
HM Treasury has the right to appoint step-in managers to carry out any
oversight, management or additional functions on their behalf, 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 HM Treasury in accordance with the terms of the APS.
HM Treasury 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.