RBS 2012 Annual Report Download - page 419

RBS GROUP 2012
417
14 Derivatives
Companies in the Group transact derivatives as principal either as a
trading activity or to manage balance sheet foreign exchange, interest
rate and credit risk.
The Group enters into fair value hedges, cash flow hedges and hedges of
net investments in foreign operations. The majority of the Group's interest
rate hedges relate to the management of the Group's non-trading interest
rate risk. The Group manages this risk within approved limits. Residual
risk positions are hedged with derivatives principally interest rate swaps.
Suitable larger ticket financial instruments are fair value hedged; the
remaining exposure, where possible, is hedged by derivatives
documented as cash flow hedges and qualifying for hedge accounting.
The majority of the Group's fair value hedges involve interest rate swaps
hedging the interest rate risk in recognised financial assets and financial
liabilities. Cash flow hedges relate to exposures to the variability in future
interest payments and receipts on forecast transactions and on
recognised financial assets and financial liabilities. The Group hedges its
net investments in foreign operations with currency borrowings and
forward foreign exchange contracts.
For cash flow hedge relationships of interest rate risk, the hedged items
are actual and forecast variable interest rate cash flows arising from
financial assets and financial liabilities with interest rates linked to LIBOR,
EURIBOR or the Bank of England Official Bank Rate. The financial
assets are customer loans and the financial liabilities are customer
deposits and LIBOR linked medium-term notes and other issued
securities. At 31 December 2012, variable rate financial assets of
£61 billion (2011 - £49 billion) and variable rate financial liabilities of
£9 billion (2011 - £13 billion) were hedged in such cash flow hedge
relationships.
For cash flow hedging relationships, the initial and ongoing prospective
effectiveness is assessed by comparing movements in the fair value of
the expected highly probable forecast interest cash flows with
movements in the fair value of the expected changes in cash flows from
the hedging interest rate swap or by comparing the respective changes in
the price value of a basis point. Prospective effectiveness is measured on
a cumulative basis i.e. over the entire life of the hedge relationship. The
method of calculating hedge ineffectiveness is the hypothetical derivative
method. Retrospective effectiveness is assessed by comparing the actual
movements in the fair value of the cash flows and actual movements in
the fair value of the hedged cash flows from the interest rate swap over
the life to date of the hedging relationship.
For fair value hedge relationships of interest rate risk, the hedged items
are typically government bonds, large corporate fixed-rate loans, fixed
rate finance leases, fixed rate medium-term notes or preference shares
classified as debt. At 31 December 2012, fixed rate financial assets of
£25 billion (2011 - £33 billion) and fixed rate financial liabilities of
£39 billion (2011 - £41 billion) were hedged by interest rate swaps in fair
value hedge relationships.
The initial and ongoing prospective effectiveness of fair value hedge
relationships is assessed on a cumulative basis by comparing
movements in the fair value of the hedged item attributable to the hedged
risk with changes in the fair value of the hedging interest rate swap or by
comparing the respective changes in the price value of a basis point.
Retrospective effectiveness is assessed by comparing the actual
movements in the fair value of the hedged items attributable to the
hedged risk with actual movements in the fair value of the hedging
derivative over the life to date of the hedging relationship.
The following table shows the notional amounts and fair values of the
Group's derivatives.
2012 2011 2010
Notional Notional Notional
amount Assets Liabilities amount Assets Liabilities amount Assets Liabilities
£bn £m £m £bn £m £m £bn £m£m
Exchange rate contracts
Spot, forwards and futures 2,259 23,237 22,721 2,12730,249 28,868 2,807 39,859 41,424
Currency swaps 1,071 22,238 30,223 1,07125,212 33,541 1,000 28,696 34,328
Options purchased 683 17,580 — 64019,031 — 503 14,698 —
Options written 684 — 17,536 641— 18,571 544 — 13,623
Interest rate contracts
Interest rate swaps 25,474 300,907 286,620 29,976 346,682 333,968 29,792 251,312 243,807
Options purchased 1,934 61,798 —
2,398 74,600 — 2,619 57,359 —
Options written 1,884 — 58,289 2,592— 71,998 2,731 — 54,141
Futures and forwards 4,191 749 653 3,756 874 743 4,618 3,060 1,261
Credit derivatives 553 11,005 10,353 1,054 26,836 26,743 1,357 26,872 25,344
Equity and commodity contracts 111 4,389 7,938 1236,134 9,551 179 5,221 10,039
441,903 434,333 529,618 523,983 427,077 423,967
Certain derivative asset and liability balances with the London Clearing House, which meet the offset criteria in IAS 32 ‘Financial Instruments:
Presentation’, are shown net.