RBS 2013 Annual Report Download - page 440
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Notes on the consolidated accounts
438
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 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 2013, variable rate financial assets of
£74 billion (2012 - £61 billion; 2011 - £49 billion) and variable rate
financial liabilities of £10 billion (2012 - £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. 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 2013, fixed rate financial assets of
£23 billion (2012 - £25 billion; 2011 - £33 billion) and fixed rate financial
liabilities of £34 billion (2012 - £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.
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.
2013 2012 2011
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 2,041 24,495 24,136 2,259 23,237 22,721 2,127 30,249 28,868
Currency swaps 956 18,576 22,846 1,071 22,238 30,223 1,071 25,212 33,541
Options purchased 792 18,852 — 683 17,580 — 640 19,031 —
Options written 766 — 18,767 684 — 17,536 641 — 18,571
Interest rate contracts
Interest rate swaps 27,483 179,891 172,618 25,474 300,907 286,620 29,976 346,682 333,968
Options purchased 1,568 37,437 — 1,934 61,798 — 2,398 74,600 —
Options written 1,513 — 35,410 1,884 — 58,289 2,592 — 71,998
Futures and forwards 5,025 712 669 4,191 749 653 3,756 874 743
Credit derivatives 253 5,306 5,388 553 11,005 10,353 1,054 26,836 26,743
Equity and commodity contracts 81 2,770 5,692 111 4,389 7,938 123 6,134 9,551
288,039 285,526 441,903 434,333 529,618 523,983