RBS 2012 Annual Report Download - page 531

RBS GROUP 2012
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Commercial paper conduit - a special purpose entity that issues
commercial paper and uses the proceeds to purchase or fund a pool of
assets. The commercial paper is secured on the assets and is redeemed
either by further commercial paper issuance, repayment of assets or
liquidity drawings.
Commercial real estate - freehold and leasehold properties used for
business activities. Commercial real estate includes office buildings,
industrial property, medical centres, hotels, retail stores, shopping
centres, agricultural land and buildings, warehouses, garages etc.
Compression trades - portfolio compression reduces the overall notional
size and number of outstanding contracts in credit derivative portfolios
without changing the overall risk profiles of these portfolios. This is
achieved by terminating existing trades on single name reference entities
and on indices and replacing them with a smaller number of new trades
with substantially smaller notionals that carry the same risk profile and
cash flows as the initial portfolio.
Contractual maturity - the date in the terms of a financial instrument on
which the last payment or receipt under the contract is due for settlement.
Core Tier 1 capital - called-up share capital and eligible reserves plus
equity non-controlling interests, less intangible assets and other
regulatory deductions.
Core Tier 1 capital ratio - core Tier 1 capital as a percentage of risk-
weighted assets.
Cost:income ratio - operating expenses as a percentage of total income.
Counterparty credit risk - the risk that a counterparty defaults before the
maturity of a derivative or sale and repurchase contract. In contrast to
non-counterparty credit risk, the exposure to counterparty credit risk
varies by reference to a market factor (e.g. interest rate, exchange rate,
asset price).
Coverage ratio - impairment provisions as a percentage of impaired
loans.
Covered bonds - debt securities backed by a portfolio of mortgages that
are segregated from the issuer's other assets solely for the benefit of the
holders of the covered bonds.
CRD III - the CRD III package came into force on 1 January 2011. It
requires higher capital requirements for re-securitisations; upgrades
disclosure standards for securitisation exposures; strengthens capital
requirements for the trading book; and introduces new remuneration
rules.
CRD IV - in July 2011, the European Commission published its proposed
legislation for a Capital Requirements Directive and a Capital
Requirements Regulation, which together form the CRD IV package. The
package implements the Basel III capital proposals and also includes
new proposals on sanctions for non-compliance with prudential rules,
corporate governance and remuneration. CRD IV has yet to be enacted
into European law and its implementation date remains uncertain.
Credit default swap (CDS) - a contract where the protection seller
receives premium or interest-related payments in return for contracting to
make payments to the protection buyer upon a defined credit event in
relation to a reference financial asset or portfolio of financial assets.
Credit events usually include bankruptcy, payment default and rating
downgrades.
Credit derivative product company (CDPC) - a special purpose entity that
sells credit protection under credit default swaps or certain approved
forms of insurance policies. Sometimes they can also buy credit
protection. CDPCs are similar to monoline insurers. However, unlike
monoline insurers, they are not regulated as insurers.
Credit derivatives - contractual agreements that provide protection
against a credit event on one or more reference entities or financial
assets. The nature of a credit event is established by the protection buyer
and protection seller at the inception of a transaction, and such events
include bankruptcy, insolvency or failure to meet payment obligations
when due. The buyer of the credit derivative pays a periodic fee in return
for a payment by the protection seller upon the occurrence, if any, of a
credit event. Credit derivatives include credit default swaps, total return
swaps and credit swap options.
Credit enhancements - techniques that improve the credit standing of
financial obligations; generally those issued by an SPE in a securitisation.
External credit enhancements include financial guarantees and letters of
credit from third-party providers. Internal enhancements include excess
spread - the difference between the interest rate received on the
underlying portfolio and the coupon on the issued securities; and over-
collateralisation - on securitisation, the value of the underlying portfolio is
greater than the securities issued.
Credit grade - a rating that represents an assessment of the credit
worthiness of a customer. It is a point on a scale representing the
probability of default of a customer.
Credit risk - the risk that the Group will incur losses owing to the failure of
customers to meet their financial obligations to the Group.
Credit risk mitigation - reducing the credit risk of an exposure by
application of techniques such as netting, collateral, guarantees and
credit derivatives.
Credit risk spread - the yield spread between securities with the same
currency and maturity structure but with different associated credit risks,
with the yield spread rising as the credit rating worsens. It is the premium
over the benchmark or risk-free rate required by the market to take on a
lower credit quality.
Credit valuation adjustments (CVA) - the CVA is the difference between
the risk- free value of a portfolio of trades and its market value, taking into
account the counterparty’s risk of default. It represents the market value
of counterparty credit risk, or an estimate of the adjustment to fair value
that a market participant would make to reflect the creditworthiness of its
counterparty.