DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2022

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:

	2022			2021
	Contract/ notional amount £m	Fair value assets £m	Fair value liabilities £m	Contract/ notional amount £m	Fair value assets £m	Fair value liabilities £m
Trading and other
Exchange rate contracts:
Spot, forwards and futures	75,619	1,135	1,266	60,638	611	663
Currency swaps	373,735	7,181	7,480	319,882	3,451	3,171
Options purchased	7,820	417	–	5,045	371	–
Options written	7,049	–	470	5,660	–	428
	464,223	8,733	9,216	391,225	4,433	4,262
Interest rate contracts:
Interest rate swaps	6,108,594	14,073	12,308	3,582,028	14,775	10,814
Forward rate agreements	75,499	3	4	6,437	1	1
Options purchased	18,875	864	–	19,145	1,907	–
Options written	23,245	–	986	18,483	–	1,590
Futures	31,335	26	34	214,983	19	13
	6,257,548	14,966	13,332	3,841,076	16,702	12,418
Credit derivatives	6,689	134	118	6,740	95	175
Equity and other contracts	16,490	845	849	12,539	735	878
Total derivative assets/liabilities – trading and other	6,744,950	24,678	23,515	4,251,580	21,965	17,733
Hedging
Derivatives designated as fair value hedges:
Interest rate and other swaps	152,662	10	503	172,695	46	308
Currency swaps	35	1	–	34	7	–
	152,697	11	503	172,729	53	308
Derivatives designated as cash flow hedges:
Interest rate swaps	249,703	1	3	109,093	6	1
Exchange rate forward rate agreements	1,542	63	21	1,895	27	18
	251,245	64	24	110,988	33	19
Total derivative assets/liabilities – hedging	403,942	75	527	283,717	86	327
Total recognised derivative assets/liabilities	7,148,892	24,753	24,042	4,535,297	22,051	18,060

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 52 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 52

•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
At 31 December 2022	Up to 1 month £m	1–3 months £m	3–12 months £m		1–5 years £m	Over 5 years £m		Total £m
Fair value hedges
Interest rate
Cross currency swap
Notional	–	–		–	–		35	35
Average fixed interest rate	–	–		–	–		1.28%
Average EUR/GBP exchange rate	–	–		–	–		1.38
Interest rate swap
Notional	1,904	12,765		37,488	64,307		36,198	152,662
Average fixed interest rate	1.51%	0.17%		0.72%	1.92%		1.94%
Cash flow hedges
Foreign exchange
Currency swap
Notional	–	–		509	1,004		29	1,542
Average EUR/GBP exchange rate	–	–		1.15	1.10		1.04
Average USD/GBP exchange rate	–	–		1.24	1.25		–
Interest rate
Interest rate swap
Notional	4,741	6,472		26,175	161,391		50,924	249,703
Average fixed interest rate	3.01%	1.18%		2.36%	2.40%		1.60%

	Maturity
At 31 December 2021	Up to 1 month £m	1–3 months £m	3–12 months £m	1–5 years £m	Over 5 years £m	Total £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%

The carrying amounts of the Group’s hedging instruments are as follows:

	Carrying amount of the hedging instrument
At 31 December 2022	Contract/ notional amount £m	Assets £m	Liabilities £m	Changes in fair value used for calculating hedge ineffectiveness £m
Fair value hedges
Interest rate
Currency swaps	35	1	–	(2)
Interest rate swaps	152,662	10	503	1,286
Cash flow hedges
Foreign exchange
Currency swaps	1,542	63	21	198
Interest rate
Interest rate swaps	249,703	1	3	(6,990)

	Carrying amount of the hedging instrument
At 31 December 2021	Contract/ notional amount £m	Assets £m	Liabilities £m	Changes in fair value used for calculating hedge ineffectiveness £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)

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 £m	Cash flow hedging reserve
At 31 December 2022	Assets £m	Liabilities £m	Assets £m	Liabilities £m		Continuing hedges £m	Discontinued hedges £m
Fair value hedges
Interest rate
Fixed rate mortgages1	73,282	–	(2,602)	–	(3,198)
Fixed rate issuance2	–	52,190	–	2,392	4,223
Fixed rate bonds3	19,259	–	(1,549)	–	(2,350)
Cash flow hedges
Foreign exchange
Foreign currency issuance2					(198)	134	90
Customer deposits4					–	–	3
Interest rate
Customer loans1					5,636	(5,587)	(868)
Central bank balances5					2,703	(2,130)	(965)
Customer deposits4					(1,295)	1,781	(76)

	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 £m	Cash flow hedging reserve
At 31 December 2021	Assets £m	Liabilities £m	Assets £m	Liabilities £m		Continuing hedges £m	Discontinued hedges £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)

1    Included within loans and advances to customers.

2    Included within debt securities in issue.

3    Included within financial assets at fair value through other comprehensive income.

4    Included within customer deposits.

5    Included 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 £1,988 million relating to fixed rate issuances of £760 million and mortgages of £1,228 million (2021: liability of £1,071 million relating to fixed rate issuances of £793 million and mortgages of £278 million).

Gains and losses arising from hedge accounting are summarised as follows:

	Gain (loss) recognised in other comprehensive income £m	Hedge ineffectiveness recognised in the income statement1 £m	Amounts reclassified from reserves to income statement as:
At 31 December 2022			Hedged cash flows will no longer occur £m	Hedged item affected income statement £m	Income statement line item that includes reclassified amount
Fair value hedges
Interest rate
Fixed rate mortgages		22
Fixed rate issuance		(49)
Fixed rate bonds		(14)
Cash flow hedges
Foreign exchange
Foreign currency issuance	198	–	–	(22)	Interest expense
Customer deposits	3	–	–	–	Interest expense
Interest rate
Customer loans	(6,145)	(30)	–	53	Interest income
Central bank balances	(2,831)	–	–	26	Interest income
Customer deposits	1,785	20	–	(14)	Interest expense

	Gain (loss) recognised in other comprehensive income £m	Hedge ineffectiveness recognised in the income statement1 £m	Amounts reclassified from reserves to income statement as:
At 31 December 2021			Hedged cash flows will no longer occur £m	Hedged item affected income statement £m	Income statement line item that includes reclassified amount
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	16	–	3	(18)	Interest expense
Customer deposits	28	–	–	–	Interest expense
Interest rate
Customer loans	(1,830)	(43)	–	(456)	Interest income
Central bank balances	(515)	(27)	–	(180)	Interest income
Customer deposits	22	1	–	30	Interest expense

1    Hedge ineffectiveness is included in the income statement within net trading income.

In 2021 there was a loss of £3 million (2022: £nil) 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.