RBS 2012 Annual Report Download - page 222

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Business review Risk and balance sheet management continued
Balance sheet analysis continued
Derivatives
Summary
The table below analyses the fair value of the Group’s derivatives by type of contract. Master netting arrangements in respect of mark-to-market (mtm)
positions and collateral shown below do not result in a net presentation on the Group’s balance sheet under IFRS.
2012 2011 2010
Notional (1)
Contract type GBP
£bn
USD
£bn
Euro
£bn
Other
£bn
Total
£bn
Assets
£m
Liabilities
£m
Notional
£bn
Assets
£m
Liabilities
£m
Notional
£bn
Assets
£m
Liabilities
£m
Interest rate (2) 5,144 10,395 11,343 6,601 33,483 363,454 345,565 38,727 422,553 406,784 39,764 312,111 299,209
Exchange rate 370 1,987 716 1,625 4,698 63,067 70,481 4,482 74,526 81,022 4,854 83,253 89,396
Credit 4 320 202 27 553 11,005 10,353 1,054 26,836 26,743 1,357 26,872 25,344
Other (3) 18 50 27 16 111 4,392 7,941 123 6,142 9,560 384 9,989 15,060
441,918 434,340 530,057 524,109 432,225 429,009
Counterparty mtm
netting (373,906)(373,906)(441,626)(441,626)(330,397)(330,397)
Cash collateral (34,099)(24,633)(37,222)(31,368)(31,096)(31,015)
Securities collateral (5,616)(8,264)(5,312)(8,585)(2,904)(3,343)
28,297 27,537 45,897 42,530 67,828 64,254
Notes:
(1) Exchange traded contracts were £2,497 billion, principally interest rate. Trades are generally closed out daily hence mark-to-market was insignificant (assets - £41 million; liabilities - £255 million).
(2) Interest rate notional includes £15,864 billion (2011 - £16,377 billion) relating to contracts with central clearing houses.
(3) Comprises equity and commodity derivatives.
Key points
x Net exposure, after taking account of position and collateral netting
arrangements, decreased by 38% (liabilities decreased by 35%) due
to lower derivative fair values, driven by market movements,
including foreign exchange rates and increased use of compression
cycles.
x Interest rate contracts decreased due to the increased use of
compression cycles reflecting a greater number of market
participants and hence trade-matching and the effect of exchange
rate movements. This was partially offset by downward shifts in
interest rate yields.
x The decrease in exchange rate contracts reflected the impact of
exchange rate movements and trade maturities. This was partially
offset by higher trade volumes, reflecting hedge funds taking
advantage of market uncertainty.
x Credit derivatives decreased due to a managed risk reduction and
an increase in trades compressed through compression cycles.
Derivative fair values are driven by complex factors such as changes in
foreign exchange rates, interest rates, credit default swap spreads and
other underlying rates. At 31 December 2012, derivative fair values were
in a net asset position of £7.6 billion. More specifically:
x Group Treasury issues long term fixed rate debt that is hedged with
floating rate interest rate swaps and also uses swaps to hedge fixed
rate indefinite maturity liabilities such as equity and customer
accounts. As interest rates have fallen over recent years the fair
value of these swaps has increased. This net asset position mirrored
by the net liability position relating to the difference between the fair
value and carrying value on fixed rate loans and current accounts.
x Within Markets the hedging of issued notes, more exotic derivatives
and long dated zero coupon inflation structures have led to a
positive fair value which is not offset by other derivatives or hedges.