DERIVATIVE FINANCIAL INSTRUMENTS |
NOTE 17: DERIVATIVE FINANCIAL INSTRUMENTS The fair values and notional amounts of derivative instruments are set out in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | Contract/ notional amount | | Fair value assets | | Fair value liabilities | | Contract/ notional amount | | Fair value assets | | Fair value liabilities | | £m | | £m | | £m | | £m | | £m | | £m | Trading and other | | | | | | | | | | | | Exchange rate contracts: | | | | | | | | | | | | Spot, forwards and futures | 60,638 | | | 611 | | | 663 | | | 49,400 | | | 882 | | | 764 | | Currency swaps | 319,882 | | | 3,451 | | | 3,171 | | | 350,882 | | | 5,469 | | | 6,161 | | Options purchased | 5,045 | | | 371 | | | — | | | 5,769 | | | 428 | | | — | | Options written | 5,660 | | | — | | | 428 | | | 7,560 | | | — | | | 489 | | | 391,225 | | | 4,433 | | | 4,262 | | | 413,611 | | | 6,779 | | | 7,414 | | Interest rate contracts: | | | | | | | | | | | | Interest rate swaps | 3,582,028 | | | 14,775 | | | 10,814 | | | 5,669,551 | | | 18,577 | | | 15,799 | | Forward rate agreements | 6,437 | | | 1 | | | 1 | | | 633,279 | | | 8 | | | 6 | | Options purchased | 19,145 | | | 1,907 | | | — | | | 24,087 | | | 3,053 | | | — | | Options written | 18,483 | | | — | | | 1,590 | | | 19,735 | | | — | | | 2,746 | | Futures | 214,983 | | | 19 | | | 13 | | | 275,377 | | | 6 | | | 13 | | | 3,841,076 | | | 16,702 | | | 12,418 | | | 6,622,029 | | | 21,644 | | | 18,564 | | Credit derivatives | 6,740 | | | 95 | | | 175 | | | 7,707 | | | 108 | | | 174 | | Equity and other contracts | 12,539 | | | 735 | | | 878 | | | 10,058 | | | 266 | | | 477 | | Total derivative assets/liabilities – trading and other | 4,251,580 | | | 21,965 | | | 17,733 | | | 7,053,405 | | | 28,797 | | | 26,629 | | Hedging | | | | | | | | | | | | Derivatives designated as fair value hedges: | | | | | | | | | | | | Interest rate and other swaps | 172,695 | | | 46 | | | 308 | | | 215,325 | | | 467 | | | 256 | | Currency swaps | 34 | | | 7 | | | — | | | 36 | | | 11 | | | — | | | 172,729 | | | 53 | | | 308 | | | 215,361 | | | 478 | | | 256 | | Derivatives designated as cash flow hedges: | | | | | | | | | | | | Interest rate swaps | 109,093 | | | 6 | | | 1 | | | 326,386 | | | 295 | | | 265 | | Currency swaps | 1,895 | | | 27 | | | 18 | | | 5,829 | | | 43 | | | 163 | | | 110,988 | | | 33 | | | 19 | | | 332,215 | | | 338 | | | 428 | | Total derivative assets/liabilities – hedging | 283,717 | | | 86 | | | 327 | | | 547,576 | | | 816 | | | 684 | | Total recognised derivative assets/liabilities | 4,535,297 | | | 22,051 | | | 18,060 | | | 7,600,981 | | | 29,613 | | | 27,313 | |
The notional amount of the contract does not represent the Group’s exposure to credit risk, which is limited to the current cost of replacing contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure; a large proportion of the Group's derivatives are held through exchanges such as London Clearing House and are collateralised through those exchanges. Further details are provided in note 51 Credit risk. The Group holds derivatives as part of the following strategies: –Customer driven, where derivatives are held as part of the provision of risk management products to Group customers –To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy adopted by the Group is to utilise a combination of fair value and cash flow hedge approaches as described in note 51 –Derivatives held in policyholder funds as permitted by the investment strategies of those funds The principal derivatives used by the Group are as follows: –Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two parties to exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying principal amounts. Forward rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference rate, applied to a notional principal amount at a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to fix the rate of interest on a future loan or deposit, for a specified period and commencing on a specified future date –Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; the exchange of principal can be notional or actual. A currency option gives the buyer, on payment of a premium, the right, but not the obligation, to sell specified amounts of currency at agreed rates of exchange on or before a specified future date –Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit risk. A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place –Equity derivatives are also used by the Group as part of its equity-based retail product activity to eliminate the Group’s exposure to fluctuations in various international stock exchange indices. Index-linked equity options are purchased which give the Group the right, but not the obligation, to buy or sell a specified amount of equities, or basket of equities, in the form of published indices on or before a specified future date Details of the Group’s hedging instruments are set out below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Maturity | | Up to 1 month | | 1-3 months | 3-12 months | | 1-5 years | Over 5 years | | Total | At 31 December 2021 | £m | | £m | | £m | | £m | | £m | | £m | Fair value hedges | | | | | | | | | | | | Interest rate | | | | | | | | | | | | Cross currency swap | | | | | | | | | | | | Notional | — | | | — | | | — | | | — | | | 34 | | | 34 | | Average fixed interest rate | — | | | — | | | — | | | — | | | 1.28% | | | Average EUR/GBP exchange rate | — | | | — | | | — | | | — | | | 1.38 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swap | | | | | | | | | | | | Notional | 1,396 | | | 2,784 | | | 18,568 | | | 121,878 | | | 28,069 | | | 172,695 | | Average fixed interest rate | 2.84% | | 1.31% | | 0.95% | | 0.68% | | 1.94% | | | Cash flow hedges | | | | | | | | | | | | Foreign exchange | | | | | | | | | | | | Currency swap | | | | | | | | | | | | Notional | 46 | | | 200 | | | 821 | | | 828 | | | — | | | 1,895 | | | | | | | | | | | | | | Average USD/GBP exchange rate | 1.36 | | | 1.36 | | | 1.36 | | | 1.35 | | | 1.27 | | | | Interest rate | | | | | | | | | | | | Interest rate swap | | | | | | | | | | | | Notional | 1,000 | | | 625 | | | 10,428 | | | 58,896 | | | 38,144 | | | 109,093 | | Average fixed interest rate | 0.00% | | 0.23% | | 0.55% | | 0.81% | | 0.65% | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Maturity | | Up to 1 month | | 1-3 months | | 3-12 months | | 1-5 years | | Over 5 years | | Total | At 31 December 2020 | £m | | £m | | £m | | £m | | £m | | £m | Fair value hedges | | | | | | | | | | | | Interest rate | | | | | | | | | | | | Cross currency swap | | | | | | | | | | | | Notional | — | | | — | | | — | | | — | | | 36 | | | 36 | | Average fixed interest rate | — | | | — | | | — | | | — | | | 1.28% | | | Average EUR/GBP exchange rate | — | | | — | | | — | | | — | | | 1.38 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swap | | | | | | | | | | | | Notional | 6,032 | | | 6,031 | | | 39,811 | | | 136,527 | | | 26,924 | | | 215,325 | | Average fixed interest rate | 2.01% | | 1.69% | | 1.42% | | 1.26% | | 2.36% | | | Cash flow hedges | | | | | | | | | | | | Foreign exchange | | | | | | | | | | | | Currency swap | | | | | | | | | | | | Notional | 28 | | | 469 | | | 1,274 | | | 1,505 | | | 2,553 | | | 5,829 | | | | | | | | | | | | | | Average USD/GBP exchange rate | 1.30 | | | 1.33 | | | 1.30 | | | 1.32 | | | 1.32 | | | | Interest rate | | | | | | | | | | | | Interest rate swap | | | | | | | | | | | | Notional | 5,026 | | | 11,614 | | | 42,364 | | | 169,499 | | | 97,883 | | | 326,386 | | Average fixed interest rate | 1.09% | | 1.05% | | 1.16% | | 1.55% | | 2.31% | | |
The carrying amounts of the Group’s hedging instruments are as follows: | | | | | | | | | | | | | | | | Carrying amount of the hedging instrument | | Contract/ notional amount | Assets | Liabilities | Changes in fair value used for calculating hedge ineffectiveness | At 31 December 2021 | £m | £m | £m | £m | Fair value hedges | | | | | Interest rate | | | | | Currency swaps | 34 | | 7 | | — | | (2) | | Interest rate swaps | 172,695 | | 46 | | 308 | | 946 | | Cash flow hedges | | | | | Foreign exchange | | | | | Currency swaps | 1,895 | | 27 | | 18 | | (6) | | Interest rate | | | | | Interest rate swaps | 109,093 | | 6 | | 1 | | (2,642) | |
| | | | | | | | | | | | | | | | Carrying amount of the hedging instrument | | Contract/ notional amount | Assets | Liabilities | Changes in fair value used for calculating hedge ineffectiveness | At 31 December 2020 | £m | £m | £m | £m | Fair value hedges | | | | | Interest rate | | | | | Currency swaps | 36 | | 11 | | — | | 1 | | Interest rate swaps | 215,325 | | 467 | | 256 | | 987 | | Cash flow hedges | | | | | Foreign exchange | | | | | Currency swaps | 5,829 | | 43 | | 163 | | (132) | | Interest rate | | | | | Interest rate swaps | 326,386 | | 295 | | 265 | | 603 | |
All amounts are held within derivative financial instruments. The Group’s hedged items are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying amount of the hedged item | | Accumulated amount of fair value adjustment on the hedged item | | Change in fair value of hedged item for ineffectiveness assessment | | Cash flow hedging reserve | | | | | Continuing hedges | | Discontinued hedges | | Assets | | Liabilities | | Assets | | Liabilities | | | | At 31 December 2021 | £m | | £m | | £m | | £m | | £m | | £m | | £m | Fair value hedges | | | | | | | | | | | | | | Interest rate | | | | | | | | | | | | | | Fixed rate mortgages1 | 88,791 | | | — | | | (872) | | | — | | | (2,080) | | | | | | Fixed rate issuance2 | — | | | 58,648 | | | — | | | 1,967 | | | 2,071 | | | | | | Fixed rate bonds3 | 25,019 | | | — | | | 342 | | | — | | | (758) | | | | | | Cash flow hedges | | | | | | | | | | | | | | Foreign exchange | | | | | | | | | | | | | | Foreign currency issuance2 | | | | | | | | | (15) | | | (28) | | | 76 | | Customer deposits4 | | | | | | | | | 21 | | | — | | | — | | Interest rate | | | | | | | | | | | | | | Customer loans1 | | | | | | | | | 1,873 | | | (742) | | | 378 | | Central bank balances5 | | | | | | | | | 767 | | | (212) | | | (78) | | Customer deposits4 | | | | | | | | | (110) | | | 43 | | | (109) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying amount of the hedged item | | Accumulated amount of fair value adjustment on the hedged item | | Change in fair value of hedged item for ineffectiveness assessment | | Cash flow hedging reserve | | | | | Continuing hedges | | Discontinued hedges | | Assets | | Liabilities | | Assets | | Liabilities | | | | At 31 December 2020 | £m | | £m | | £m | | £m | | £m | | £m | | £m | Fair value hedges | | | | | | | | | | | | | | Interest rate | | | | | | | | | | | | | | Fixed rate mortgages1 | 125,181 | | | — | | | 661 | | | — | | | 355 | | | | | | Fixed rate issuance2 | — | | | 68,539 | | | — | | | 4,253 | | | (1,437) | | | | | | Fixed rate bonds3 | 24,111 | | | — | | | 1,178 | | | — | | | 641 | | | | | | Cash flow hedges | | | | | | | | | | | | | | Foreign exchange | | | | | | | | | | | | | | Foreign currency issuance2 | | | | | | | | | 60 | | | (83) | | | 130 | | Customer deposits4 | | | | | | | | | 74 | | | 13 | | | (41) | | Interest rate | | | | | | | | | | | | | | Customer loans1 | | | | | | | | | (510) | | | 1,918 | | | 6 | | Central bank balances5 | | | | | | | | | (141) | | | 135 | | | 270 | | Customer deposits4 | | | | | | | | | 33 | | | (203) | | | 84 | |
1Included within loans and advances to customers. 2Included within debt securities in issue. 3Included within financial assets at fair value through other comprehensive income. 4Included within customer deposits. 5Included within cash and balances at central banks. The accumulated amount of fair value hedge adjustments remaining in the balance sheet for hedged items that have ceased to be adjusted for hedging gains and losses is a liability of £1,071 million relating to fixed rate issuances of £793 million and mortgages of £278 million (2020: liability of £761 million relating to fixed rate issuances only). Gains and losses arising from hedge accounting are summarised as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gain (loss) recognised in other comprehensive income1 | | Hedge ineffectiveness recognised in the income statement2 | | Amounts reclassified from reserves to income statement as: | | | | Hedged cash flows will no longer occur | | Hedged item affected income statement | | Income statement line item that includes reclassified amount | At 31 December 2021 | £m | | £m | | £m | | £m | | Fair value hedges | | | | | | | | | | Interest rate | | | | | | | | | | Fixed rate mortgages | | | 207 | | | | | | | | Fixed rate issuance | | | (23) | | | | | | | | Fixed rate bonds | | | (7) | | | | | | | | Cash flow hedges | | | | | | | | | | Foreign exchange | | | | | | | | | | Foreign currency issuance | 1 | | | — | | | 3 | | | (18) | | | Interest expense | Customer deposits | 28 | | | — | | | — | | | — | | | Interest expense | Interest rate | | | | | | | | | | Customer loans | (2,286) | | | (43) | | | — | | | (456) | | | Interest income | Central bank balances | (695) | | | (27) | | | — | | | (180) | | | Interest income | Customer deposits | 52 | | | 1 | | | — | | | 30 | | | Interest expense |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gain (loss) recognised in other comprehensive income1 | | Hedge ineffectiveness recognised in the income statement2 | | Amounts reclassified from reserves to income statement as: | | | | Hedged cash flows will no longer occur | | Hedged item affected income statement | | Income statement line item that includes reclassified amount | At 31 December 2020 | £m | | £m | | £m | | £m | | Fair value hedges | | | | | | | | | | Interest rate | | | | | | | | | | Fixed rate mortgages | | | 570 | | | | | | | | Fixed rate issuance | | | (32) | | | | | | | | Fixed rate bonds | | | 9 | | | | | | | | Cash flow hedges | | | | | | | | | | Foreign exchange | | | | | | | | | | Foreign currency issuance | (129) | | | — | | | (6) | | | (62) | | | Interest expense | Customer deposits | 3 | | | — | | | — | | | 5 | | | Interest expense | Interest rate | | | | | | | | | | Customer loans | 285 | | | (7) | | | — | | | (377) | | | Interest income | Central bank balances | 97 | | | 5 | | | — | | | (79) | | | Interest income | Customer deposits | (22) | | | — | | | — | | | 23 | | | Interest expense |
1Comprising the change in fair value of the hedging derivatives (a loss of £2,279 million; 2020: gain of £730 million) and the amounts reclassified from reserves to the income statement (negative £621 million; 2020: negative £496 million). 2Hedge ineffectiveness is included in the income statement within net trading income. There was a loss of £3 million (2020: gain of £6 million) reclassified from the cash flow hedging reserve for which hedge accounting had previously been used but for which the hedged future cash flows are no longer expected to occur.
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