DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2021

Disclosure of derivative financial instruments [Abstract]

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.