RBS 2013 Annual Report Download - page 429
Download and view the complete annual report
Please find page 429 of the 2013 RBS annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.-
1
-
2
-
3
-
4
-
5
-
6
-
7
-
8
-
9
-
10
-
11
-
12
-
13
-
14
-
15
-
16
-
17
-
18
-
19
-
20
-
21
-
22
-
23
-
24
-
25
-
26
-
27
-
28
-
29
-
30
-
31
-
32
-
33
-
34
-
35
-
36
-
37
-
38
-
39
-
40
-
41
-
42
-
43
-
44
-
45
-
46
-
47
-
48
-
49
-
50
-
51
-
52
-
53
-
54
-
55
-
56
-
57
-
58
-
59
-
60
-
61
-
62
-
63
-
64
-
65
-
66
-
67
-
68
-
69
-
70
-
71
-
72
-
73
-
74
-
75
-
76
-
77
-
78
-
79
-
80
-
81
-
82
-
83
-
84
-
85
-
86
-
87
-
88
-
89
-
90
-
91
-
92
-
93
-
94
-
95
-
96
-
97
-
98
-
99
-
100
-
101
-
102
-
103
-
104
-
105
-
106
-
107
-
108
-
109
-
110
-
111
-
112
-
113
-
114
-
115
-
116
-
117
-
118
-
119
-
120
-
121
-
122
-
123
-
124
-
125
-
126
-
127
-
128
-
129
-
130
-
131
-
132
-
133
-
134
-
135
-
136
-
137
-
138
-
139
-
140
-
141
-
142
-
143
-
144
-
145
-
146
-
147
-
148
-
149
-
150
-
151
-
152
-
153
-
154
-
155
-
156
-
157
-
158
-
159
-
160
-
161
-
162
-
163
-
164
-
165
-
166
-
167
-
168
-
169
-
170
-
171
-
172
-
173
-
174
-
175
-
176
-
177
-
178
-
179
-
180
-
181
-
182
-
183
-
184
-
185
-
186
-
187
-
188
-
189
-
190
-
191
-
192
-
193
-
194
-
195
-
196
-
197
-
198
-
199
-
200
-
201
-
202
-
203
-
204
-
205
-
206
-
207
-
208
-
209
-
210
-
211
-
212
-
213
-
214
-
215
-
216
-
217
-
218
-
219
-
220
-
221
-
222
-
223
-
224
-
225
-
226
-
227
-
228
-
229
-
230
-
231
-
232
-
233
-
234
-
235
-
236
-
237
-
238
-
239
-
240
-
241
-
242
-
243
-
244
-
245
-
246
-
247
-
248
-
249
-
250
-
251
-
252
-
253
-
254
-
255
-
256
-
257
-
258
-
259
-
260
-
261
-
262
-
263
-
264
-
265
-
266
-
267
-
268
-
269
-
270
-
271
-
272
-
273
-
274
-
275
-
276
-
277
-
278
-
279
-
280
-
281
-
282
-
283
-
284
-
285
-
286
-
287
-
288
-
289
-
290
-
291
-
292
-
293
-
294
-
295
-
296
-
297
-
298
-
299
-
300
-
301
-
302
-
303
-
304
-
305
-
306
-
307
-
308
-
309
-
310
-
311
-
312
-
313
-
314
-
315
-
316
-
317
-
318
-
319
-
320
-
321
-
322
-
323
-
324
-
325
-
326
-
327
-
328
-
329
-
330
-
331
-
332
-
333
-
334
-
335
-
336
-
337
-
338
-
339
-
340
-
341
-
342
-
343
-
344
-
345
-
346
-
347
-
348
-
349
-
350
-
351
-
352
-
353
-
354
-
355
-
356
-
357
-
358
-
359
-
360
-
361
-
362
-
363
-
364
-
365
-
366
-
367
-
368
-
369
-
370
-
371
-
372
-
373
-
374
-
375
-
376
-
377
-
378
-
379
-
380
-
381
-
382
-
383
-
384
-
385
-
386
-
387
-
388
-
389
-
390
-
391
-
392
-
393
-
394
-
395
-
396
-
397
-
398
-
399
-
400
-
401
-
402
-
403
-
404
-
405
-
406
-
407
-
408
-
409
-
410
-
411
-
412
-
413
-
414
-
415
-
416
-
417
-
418
-
419
-
420
-
421
-
422
-
423
-
424
-
425
-
426
-
427
-
428
-
429
-
430
-
431
-
432
-
433
-
434
-
435
-
436
-
437
-
438
-
439
-
440
-
441
-
442
-
443
-
444
-
445
-
446
-
447
-
448
-
449
-
450
-
451
-
452
-
453
-
454
-
455
-
456
-
457
-
458
-
459
-
460
-
461
-
462
-
463
-
464
-
465
-
466
-
467
-
468
-
469
-
470
-
471
-
472
-
473
-
474
-
475
-
476
-
477
-
478
-
479
-
480
-
481
-
482
-
483
-
484
-
485
-
486
-
487
-
488
-
489
-
490
-
491
-
492
-
493
-
494
-
495
-
496
-
497
-
498
-
499
-
500
-
501
-
502
-
503
-
504
-
505
-
506
-
507
-
508
-
509
-
510
-
511
-
512
-
513
-
514
-
515
-
516
-
517
-
518
-
519
-
520
-
521
-
522
-
523
-
524
-
525
-
526
-
527
-
528
-
529
-
530
-
531
-
532
-
533
-
534
-
535
-
536
-
537
-
538
-
539
-
540
-
541
-
542
-
543
-
544
-
545
-
546
-
547
-
548
-
549
-
550
-
551
-
552
-
553
-
554
-
555
-
556
-
557
-
558
-
559
-
560
-
561
-
562
-
563
-
564
Notes on the consolidated accounts
427
Other unique trades are valued using a specialised model for each
instrument and the same market data inputs as all other trades where
applicable. By their nature, the valuation is also driven by a variety of
other model inputs, many of which are unobservable in the market.
Where these instruments have embedded optionality they are valued
using a variation of the Black-Scholes option pricing formula, and where
they have correlation exposure they are valued using a variant of the
Gaussian Copula model. The volatility or unique correlation inputs
required to value these products are generally unobservable and the
instruments are therefore deemed to be level 3 instruments.
Equity derivatives
Equity derivative products are analysed into equity exotic derivatives and
equity hybrids. Exotic equity derivatives have payouts based on the
performance of one or more stocks, equity funds or indices. Most payouts
are based on the performance of a single asset and are valued using
observable market option data. Unobservable equity derivative trades are
typically complex basket options on stocks. Such basket option payouts
depend on the performance of more than one equity asset and require
correlations for their valuation. Valuation is then performed using industry
standard valuation models, with unobservable correlation inputs
calculated by reference to correlations observed between similar
underlyings.
Equity hybrids have payouts based on the performance of a basket of
underlyings where underlyings are from different asset classes.
Correlations between these different underlyings are typically
unobservable with no market information on closely related assets
available. Where no market for the correlation input exists, these inputs
are based on historical time series.
Interest rate and commodity derivatives
Interest rate and commodity options provide a payout (or series of
payouts) linked to the performance of one or more underlying, including
interest rates, foreign exchange rates and commodities.
Exotic options do not trade in active markets except in a small number of
cases. Consequently, the Group uses models to determine fair value
using valuation techniques typical for the industry. These techniques can
be divided firstly into modelling approaches and secondly, into methods
of assessing appropriate levels for model inputs. The Group uses a
variety of proprietary models for valuing exotic trades.
Exotic valuation inputs include the correlation between interest rates,
foreign exchange rates and commodity prices. Correlations for more
liquid rate pairs are valued using independently sourced consensus
pricing levels. Where a consensus pricing benchmark is unavailable,
these instruments are classified as level 3.
The carrying value of debt securities in issue is represented partly by
underlying cash and partly through a derivative component. The
classification of the amount in level 3 is driven by the derivative
component and not by the cash element.
Other financial instruments
In addition to the portfolios discussed above, there are other financial
instruments which are held at fair value determined from data which are
not market observable, or incorporating material adjustments to market
observed data.
Other considerations
Valuation adjustments
CVA applied to derivative exposures to other counterparties and own
credit adjustments applied to derivative liabilities (DVA) are calculated on
a portfolio basis. Whilst the methodology used to calculate each of these
adjustments references certain inputs which are not based on observable
market data, these inputs are not considered to have a significant effect
on the net valuation of the related portfolios. The classification of the
derivative portfolios which the valuation adjustments are applied to is not
determined by the observability of the valuation adjustments, and any
related sensitivity does not form part of the level 3 sensitivities presented.
Funding related adjustments
The discount rates applied to derivative cash-flows in determining fair
value reflect any underlying collateral agreements. Collateralised
derivative exposures are generally discounted at the relevant OIS rates
whilst funding valuation adjustments are applied to uncollateralised
derivative exposures. Whilst these adjustments reference certain inputs
which are not based on observable market data, these inputs are not
considered to have a significant effect on the valuation of the individual
trades. The classification of derivatives is not determined by the
observability of these adjustments, and any related sensitivity does not
form part of the level 3 sensitivities presented.
Own credit - issued debt
For structured notes issued the own credit adjustment is based on debt
issuance spreads above average inter-bank rates at the reporting date (at
a range of tenors). Whilst certain debt issuance spreads are not based on
observable market data, these inputs are not considered to have a
significant effect on the valuation of individual trades. Neither the
classification of structured notes issued nor any related valuation
sensitivities are determined by the observability of the debt issuance
spreads.