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Notes to the accounts
46 Derivatives and other financial instruments

The Group’s objectives and policies in managing the risks that arise in connection with the use of financial instruments are set out in Financial review under the headings ‘Risk management’; ‘Market risk management’ and ‘Treasury asset and liability management’. Short-term debtors and creditors are included in the following interest rate repricing and non-trading currency risk tables. All other disclosures in note 46 exclude these short-term balances.

Interest rate sensitivity gap analysis
The table below summarises the repricing profiles of the Group’s non-trading book as at 31st December 2000. Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date.

Interest rate repricing – as at 31st December 2000
Not more
than three
months
£m		 Over three
months but
not more
than six
months
£m		 Over
six
months
but not
more than
one year
£m		 Over
one year
but not
more than
three
years
£m		 Over
three
years
but not
more than
five years
£m		 Over
five
years
but not
more than
ten years
£m		 Over
ten
years
£m		 Non-
interest
bearing
£m		 Trading
balances
£m		 Total
£m
Assets:
Treasury bills and other
eligible bills 275 88 143 9 – – – – 5,049 5,564
Loans & advances to banks 3,323 438 68 66 39 8 1 289 32,194 36,426
Loans & advances to customers 83,377 4,792 4,576 14,478 6,597 3,961 1,058 539 42,732 162,110
Debt securities & equity shares 1,308 224 1,484 1,806 943 1,123 492 140 67,312 74,832
Other assets 768 1 – – – – – 10,176 17,602 28,547
Total assets 89,051 5,543 6,271 16,359 7,579 5,092 1,551 11,144 164,889 307,479
Liabilities:
Deposits by banks 3,976 400 72 296 184 505 – 654 43,669 49,756
Customer accounts 103,521 3,332 2,969 2,493 189 4 157 11,866 34,437 158,968
Debt securities in issue 6,265 599 84 231 791 429 101 – 23,383 31,883
Other liabilities – – – – – – – 6,815 38,900 45,715
Loan capital & other subordinated liabilities 2,405 46 286 402 – 978 2,044 – 209 6,370
Minority & other interests & shareholders’ funds – – – – – – – 14,787 – 14,787
Internal funding of trading business (17,892) 996 110 (261) 81 278 – (7,603) 24,291 –
Total liabilities 98,275 5,373 3,521 3,161 1,245 2,194 2,302 26,519 164,889 307,479
Off-balance sheet items (4,580) 935 (1,741) (3,177) 6,020 737 1,806 – – –
Interest rate repricing gap (13,804) 1,105 1,009 10,021 12,354 3,635 1,055 (15,375) – –
Cumulative gap (13,804) (12,699) (11,690) (1,669) 10,685 14,320 15,375 – – –
Total assets and liabilities exclude retail life-fund assets and liabilities. These are not relevant in considering the interest rate risk of the Group.

Trading balances for the purposes of this table are those where the risk is managed by DVAR.
Interest rate repricing – as at 31st December 1999
Not more
than three
months
£m		 Over three
months but
not more
than six
months
£m		 Over
six
months
but not
more than
one year
£m		 Over
one year
but not
more than
three
years
£m		 Over
three
years
but not
more than
five years
£m		 Over
five
years
but not
more than
ten years
£m		 Over
ten
years
£m		 Non-
interest
bearing
£m		 Trading
balances
£m		 Total
£m
Assets:
Treasury bills and other
eligible bills 445 109 94 3 – – – – 6,525 7,176
Loans & advances to banks 2,534 596 186 7 63 – – 255 35,985 39,626
Loans & advances to customers 52,329 3,308 3,361 8,932 5,833 3,262 774 284 38,485 116,568
Debt securities & equity shares 430 143 148 2,887 1,508 1,234 17 176 52,980 59,523
Other assets 853 – – – – – – 7,220 15,787 23,860
Total assets 56,591 4,156 3,789 11,829 7,404 4,496 791 7,935 149,762 246,753
Liabilities:
Deposits by banks 2,606 99 23 231 176 634 – 310 40,407 44,486
Customer accounts 80,515 2,480 1,474 1,080 166 2 188 11,208 26,853 123,966
Debt securities in issue 651 22 8 180 560 412 61 – 21,435 23,329
Other liabilities – – – – – – – 7,136 34,404 41,540
Loan capital & other subordinated liabilities 2,093 86 140 264 195 931 696 – 192 4,597
Minority & other interests & shareholders’ funds – – – – – – – 8,835 – 8,835
Internal funding of trading business (21,473) 29 361 62 6 91 176 (5,723) 26,471 –
Total liabilities 64,392 2,716 2,006 1,817 1,103 2,070 1,121 21,766 149,762 246,753
Off-balance sheet items (1,349) (3,906) 1,831 (3,925) 7,261 105 (17) – – –
Interest rate repricing gap (9,150) (2,466) 3,614 6,087 13,562 2,531 (347) (13,831) – –
Cumulative gap (9,150) (11,616) (8,002) (1,915) 11,647 14,178 13,831 – – –
Non-trading currency risk
Non-trading currency risk exposure arises principally from the Group’s investments in overseas branches and subsidiary and associated undertakings, principally in the United States, Japan and Europe.

The Group’s structural currency exposures at 31st December 2000 were as follows:
Net investments in
overseas operations		 Borrowings which hedge
the net investments		 Remaining structural
currency exposures
2000 1999 2000 1999 2000 1999
Functional currency of the operation involved £m £m £m £m £m £m
US dollar 628 627 619 620 9 7
Yen 109 87 – 56 109 31
Euro 3,090 2,752 2,671 2,264 419 488
Other non-sterling 480 394 129 48 351 346
Total 4,307 3,860 3,419 2,988 888 872
In accordance with Group policy, as at 31st December 2000 and 31st December 1999 there were no material net currency exposures in the non-trading book relating to transactional (or non-structural) positions that would give rise to net currency gains and losses recognised in the profit and loss account. Instruments used in hedging non-trading exposures are described in Treasury asset liability and management in the Financial Review.


Daily value at risk
The Daily Value at Risk (DVAR) methodology of estimating potential losses arising from the Group’s exposure to market risk is explained in Market risk management. The models used in estimating potential losses are based on past movements and may not be indicative of future market conditions.

The following table shows an analysis of the trading market risk related DVAR for the Group as an average for the year and the high and low during the year.
Year to 31st December 2000 Year to 31st December 1999
Average High* Low* Average High* Low*
£m £m £m £m £m £m
Interest rate risk 16.2 23.7 10.7 13.7 30.2 6.2
Foreign exchange risk 2.9 4.7 1.8 2.8 11.7 0.8
Equities risk 3.9 7.1 1.4 1.7 3.7 0.6
Commodities risk 1.4 3.5 0.9 1.2 2.2 0.5
Diversification effect (6.9) 3.5 0.9 (3.3) 2.2 0.5
Total DVAR 17.5 27.7 11.5 16.1 32.5 7.7
* The high (and low) DVAR figures reported for each category did not necessarily occur on the same day as the high (and low) DVAR reported as a whole. A corresponding diversification effect cannot be calculated and is therefore omitted from the above table.

The DVAR at 31st December 2000 was £19.0m, (1999 £20.2m).
Hedging
Non-trading derivatives are measured on an accruals basis, consistent with the assets, liabilities or positions being hedged. The gains and losses on these instruments (arising from changes in fair value) are not recognised in the profit and loss account immediately as they arise. Instead, they are either not recognised at all or are recognised and carried forward in the balance sheet. When the hedged transaction occurs, the gain or loss is recognised in the profit and loss account at the same time as the hedged item.
The tables below summarise, firstly, the unrecognised gains and losses on hedges at 31st December 2000 and 31st December 1999 and the movements therein during the year, and, secondly, the deferred gains and losses on hedges carried forward in the balance sheet at 31st December 2000 and 31st December 1999, pending their recognition in the profit and loss account.
Gains Losses Total net gains/(losses)
2000 1999 2000 1999 2000 1999
£m £m £m £m £m £m
Unrecognised gains and losses on hedges
At 1st January 655 1,406 (989) (1,210) (334) 196
(Gains)/losses arising in previous years that were recognised in 2000/1999 (194) (767) 279 496 85 (271)
Brought forward gains/(losses) not recognised in 2000/1999 461 639 (710) (714) (249) (75)
Gains/(losses) arising in 2000/1999 that were not recognised in 2000/1999 1,294 16 (999) (275) 295 (259)
At 31st December 1,755 655 (1,709) (989) 46 (334)
Of which:
Gains/(losses) expected to be recognised in 2001/2000 669 218 (633) (298) 36 (80)
Gains/(losses) expected to be recognised in 2002/2001
or later		 1,086 437 (1,076) (691) 10 (254)
Deferred gains and losses on hedges carried forward in the balance sheet
At 1st January 44 65 (64) (100) (20) (35)
Deferred (gains)/losses brought forward that were recognised in income in 2000/1999 (42) (51) 38 56 (4) 5
Brought forward deferred gains/(losses) not recognised in 2000/1999 2 14 (26) (44) (24) (30)
Gains/(losses) that became deferred in 2000/1999 18 30 (55) (20) (37) 10
At 31st December 20 44 (81) (64) (61) (20)
Of which:
Gains/(losses) expected to be recognised in income in 2001/2000 11 36 (40) (28) (29) 8
Gains/(losses) expected to be recognised 9 in income in 2002/2001 or later 9 8 (41) (36) (32) (28)
Where a non-trading derivative no longer represents a hedge because the underlying non-trading asset, liability or position has been de-recognised or transferred into a trading portfolio, it is restated at fair value and any resultant gains or losses taken directly to the profit and loss account. No such gains or losses were recognised in the year to 31st December 2000 (1999 £nil).

The disclosure of the fair value of financial instruments as required by FRS 13 is provided in note 47.
Derivatives held or issued for trading purposes
The tables set out below analyse the notional principal amounts and fair values (which, after netting, are the book values) of trading instruments entered into with third parties.
2000
Contract or
underlying
principal
amount
£m		 Year-end
positive
fair
value
£m		 Year-end
negative
fair
value
£m		 Average
positive
fair
value
£m		 Average
negative
fair
value
£m
Foreign exchange derivatives
Forward foreign exchange 235,015 4,690 4,345 3,969 3,686
Currency swaps 109,342 3,929 4,362 3,656 4,193
OTC options bought and sold 78,298 892 978 823 836
OTC derivatives 422,655 9,511 9,685 8,448 8,715
Exchange traded futures – bought and sold 15,010 – – – –
Exchange traded options – bought and sold 9,706 – – – –
Total 447,371 9,511 9,685 8,448 8,715
Interest rate derivatives
Swaps 1,140,887 18,528 18,023 14,825 14,818
Forward rate agreements 31,778 25 26 19 25
OTC options bought and sold 377,094 3,414 3,180 2,874 2,629
Other interest rate contracts 7 – – – –
OTC derivatives 1,549,766 21,967 21,229 17,718 17,472
Exchange traded futures – bought and sold 460,158 – – – –
OTC options bought and sold 71,701 – – – –
Total 2,081,625 21,967 21,229 17,718 17,472
Equity and stock index derivatives
OTC options bought and sold 21,791 1,115 1,754 1,153 1,386
Equity swaps and forwards 1,757 182 196 149 147
OTC derivatives 23,548 1,297 1,950 1,302 1,533
Exchange traded futures – bought and sold 414,305 – – – –
Exchange traded options – bought and sold 41,556 – – – –
Total 479,409 1,297 1,950 1,302 1,533
Commodity derivatives
OTC options bought and sold 1,874 20 96 14 20
Commodity swaps and forwards 5,995 354 389 268 243
OTC derivatives 7,869 374 485 282 263
Exchange traded futures – bought and sold 13,398 141 147 235 243
Exchange traded options – bought and sold 452 5 6 6 6
Total 21,719 520 638 523 512
Total trading derivatives 33,295 33,502
Effect of netting (20,748) (20,748)
Allowable offset – cash collateral (447) (783)
Balances arising from off-balance sheet financial instruments
(see Other assets/Other liabilities, notes 25 and 31) 12,100 11,971
The contract or underlying principal amount for interest rate swaps includes £6,891m relating to credit derivatives (1999 £3,816m).

Collateral held that reduced credit risk in respect of derivative instruments at 31st December 2000, but did not meet the offset criteria amounted to £267m (1999 £557m).
1999
Contract or
underlying
principal
amount
£m		 Year-end
positive
fair
value
£m		 Year-end
negative
fair
value
£m		 Average
positive
fair
value
£m		 Average
negative
fair
value
£m
Foreign exchange derivatives
Forward foreign exchange 221,681 3,286 3,271 3,775 4,018
Currency swaps 82,350 3,261 3,812 2,756 3,301
OTC options bought and sold 55,675 631 500 699 772
OTC derivatives 359,706 7,178 7,583 7,230 8,091
Exchange traded futures – bought and sold 9,883 – – – –
Exchange traded options – bought and sold 219 – – – –
Total 369,808 7,178 7,583 7,230 8,091
Interest rate derivatives
Swaps 882,871 13,587 13,338 14,717 14,383
Forward rate agreements 40,471 30 36 47 54
OTC options bought and sold 265,898 2,543 2,216 2,311 2,147
Other interest rate contracts 14 – – – –
OTC derivatives 1,189,254 16,160 15,590 17,075 16,584
Exchange traded futures – bought and sold 234,586 – – – –
OTC options bought and sold 36,848 – – – –
Total 1,460,688 16,160 15,590 17,075 16,584
Equity and stock index derivatives
OTC options bought and sold 24,447 1,882 2,350 1,617 2,045
Equity swaps and forwards 3,797 183 30 236 93
OTC derivatives 28,244 2,065 2,380 1,853 2,138
Exchange traded futures – bought and sold 34,920 – – – –
Exchange traded options – bought and sold 71,749 154 238 277 422
Total 134,913 2,219 2,618 2,130 2,560
Commodity derivatives
OTC options bought and sold 653 14 17 11 16
Commodity swaps and forwards 5,075 261 222 190 156
OTC derivatives 5,728 275 239 201 172
Exchange traded futures – bought and sold 10,634 364 398 329 339
Exchange traded options – bought and sold 753 14 11 6 6
Total 17,115 653 648 536 517
Total trading derivatives 26,210 26,439
Effect of netting (12,820) (12,820)
Balances arising from off-balance sheet financial instruments 13,390 13,619
Derivative financial instruments held for the purpose of managing
non-trading exposures
The following table, which includes only the derivative components of the Group’s hedging programme, summarises the nominal values, fair values and book values of derivatives held for the purpose of managing non-trading exposures. Included in the amounts below were £17,956m (1999 £6,998m) contract amount of foreign exchange derivatives and £92,680m (1999 £98,112m) of interest rate derivatives which were made for asset and liability management purposes with independently managed dealing units of the Group.

2000 1999
Contract or
underlying
principal
amount
£m		 Year-end
positive
fair
value
£m		 Year-end
negative
fair
value
£m		 Year-end
positive
book
value
£m		 Year-end
negative
book
value
£m		 Contract or
underlying
principal
amount
£m		 Year-end
positive
fair
value
£m		 Year-end
negative
fair
value
£m
Foreign exchange derivatives
Forward foreign exchange 5,420 128 68 16 101 3,837 28 17
Currency swaps 16,470 640 277 531 123 6,103 386 25
OTC options bought and sold 2,589 43 1 43 1 25 – –
OTC derivatives 24,479 811 346 590 225 9,965 414 42
Exchange traded options – bought and sold – – – – – – – –
Total 24,479 811 346 590 225 9,966 414 42
Interest rate derivatives
Swaps 106,818 2,319 1,870 1,210 710 92,849 798 1,162
Forward rate agreements 8,161 8 10 3 2 9,106 12 8
OTC options bought and sold 471 – – – – 187 – –
OTC derivatives 115,450 2,327 1,880 1,213 712 102,142 810 1,170
Exchange traded futures – bought and sold 2,013 – – – – 1,759 – –
Exchange traded options – bought and sold 1,678 – – – – 15 – –
Total 119,141 2,327 1,880 1,213 712 103,916 810 1,170
Equity, stock index and commodity derivatives 8 2 – 2 – 44 4 –
The contract or underlying principal amount for interest rate swaps includes £7,205m relating to credit derivatives (1999 £4,082m).

At 31st December 1999 the total positive book value of derivatives held for the purposes of managing non-trading exposures was £1,008m. The total negative book value of such contacts at 31st December 1999 was £658m.

The nominal amounts of OTC foreign exchange derivatives held to manage the non-trading exposure of the Group analysed by currency and final maturity are as follows:
2000 1999
One year
or less
£m		 Over one
year but
not more
than five
years
£m		 Over
five
years
£m		 Total
£m		 One
year
or less
£m		 Over one
year but
not more
than five
years
£m		 Over
five
years
£m		 Total
£m
£/euro 2,323 2,127 396 4,846 387 3034 497 3,918
£/Yen 5,934 1,640 32 7,606 822 1534 124 2,480
£/US Dollar 1,442 1,654 341 3,437 399 237 133 769
US Dollar/euro 204 6 – 210 548 10 – 558
US Dollar/Yen 238 3,505 191 3,934 55 44 188 287
US Dollar/South African Rand 502 – – 502 393 – – 393
US/Australian Dollar 340 – – 340 – – – –
Yen/euro 996 1,473 – 2,469 34 – – 34
Other 974 134 27 1,135 1,370 77 79 1,526
Total 12,953 10,539 987 24,479 4,008 4,936 1,021 9,965
Maturity of notional principal amounts as at 31st December 2000
At 31st December 2000 the notional principal amounts, by residual maturity, of the Group’s trading and non-trading derivatives were as follows:
One
year
or less
£m		 Over one
year but
not more
than five
years
£m		 Over
five
years
£m		 Total
£m
Foreign exchange derivatives
Forward foreign exchange 231,374 8,569 492 240,435
Currency swaps 32,233 61,514 32,065 125,812
OTC options bought and sold 70,755 9,640 492 80,887
OTC derivatives 334,362 79,723 33,049 447,134
Exchange traded futures – bought and sold 15,010 – – 15,010
Exchange traded options – bought and sold 9,706 – – 9,706
Total 359,078 79,723 33,049 471,850
Interest rate derivatives
Swaps 276,652 550,647 420,406 1,247,705
Forward rate agreements 32,884 7,055 – 39,939
OTC options bought and sold 108,792 188,503 80,270 377,565
Other interest rate contracts – 7 – 7
OTC derivatives 418,328 746,212 500,676 1,665,216
Exchange traded futures – bought and sold 357,147 105,024 – 462,171
OTC options bought and sold 73,379 – – 73,379
Total 848,854 851,236 500,676 2,200,766
Equity and stock index derivatives
OTC options bought and sold 8,934 12,605 260 21,799
Equity swaps and forwards 1,757 – – 1,757
OTC derivatives 10,691 12,605 260 23,556
Exchange traded futures – bought and sold 353,062 61,243 – 414,305
Exchange traded options – bought and sold 36,021 5,535 – 41,556
Total 399,774 79,383 260 479,417
Commodity derivatives
OTC options bought and sold 1,612 252 10 1,874
Commodity swaps and forwards 4,928 1,061 6 5,995
OTC derivatives 6,540 1,313 16 7,869
Exchange traded futures – bought and sold 11,425 1,973 – 13,398
Exchange traded options – bought and sold 452 – – 452
Total 18,417 3,286 16 21,719
Maturity of notional principal amounts as at 31st December 1999
One
year
or less
£m		 Over one
year but
not more
than five
years
£m		 Over
five
years
£m		 Total
£m
Foreign exchange derivatives
Forward foreign exchange 222,068 3,450 – 225,518
Currency swaps 22,113 46,231 20,109 88,453
OTC options bought and sold 54,226 1,340 134 55,700
OTC derivatives 298,407 51,021 20,243 369,671
Exchange traded futures – bought and sold 9,883 – – 9,883
Exchange traded options – bought and sold 220 – – 220
Total 308,510 51,021 20,243 379,774
Interest rate derivatives
Swaps 237,848 437,404 300,468 975,720
Forward rate agreements 45,319 4,258 – 49,577
OTC options bought and sold 69,359 147,262 49,464 266,085
Other interest rate contracts 14 – – 14
OTC derivatives 352,540 588,924 349,932 1,291,396
Exchange traded futures – bought and sold 210,360 25,985 – 236,345
Exchange traded options – bought and sold 36,863 – – 36,863
Total 599,763 614,909 349,932 1,564,604
Equity and stock index derivatives
OTC options bought and sold 9,599 14,779 113 24,491
Equity swaps and forwards 3,084 39 674 3,797
OTC derivatives 12,683 14,818 787 28,288
Exchange traded futures – bought and sold 34,782 138 – 34,920
Exchange traded options – bought and sold 70,561 388 800 71,749
Total 118,026 15,344 1,587 134,957
Commodity derivatives
OTC options bought and sold 392 210 51 653
Commodity swaps and forwards 4,335 735 5 5,075
OTC derivatives 4,727 945 56 5,728
Exchange traded futures – bought and sold 10,038 596 – 10,634
Exchange traded options – bought and sold 742 11 – 753
Total 15,507 1,552 56 17,115
Maturity and counterparty analyses of net replacement cost
The fair value of a derivative contract represents the amount at which that contract could be exchanged in an arm’s length transaction, calculated at market rates current at the balance sheet date. The totals of positive and negative fair values arising on trading derivatives at the balance sheet date have been netted where the Group has a legal right of offset with the relevant counterparty. The total positive fair value after permitted netting equates to net replacement cost.

The residual maturity and counterparty analyses of the net replacement cost of OTC and non-margined exchange traded derivatives held for trading and non-trading purposes at 31st December 2000 and 31st December 1999 are as follows:
2000 1999
Not more
than one
year
£m		 Over one
year but
not more
than five
years
£m		 Over
five
years
£m		 Total
£m		 Not more
than one
year
£m		 Over one
year but
not more
than five
years
£m		 Over
five
years
£m		 Total
£m
Foreign exchange derivatives 3,806 1,384 576 5,766 3,196 901 480 4,577
Interest rate derivatives 267 2,298 3,071 5,636 602 2,180 3,228 6,010
Equity and stock index derivatives 339 311 3 653 870 1,331 21 2,222
Commodity derivatives 375 42 3 420 576 46 2 624
4,787 4,035 3,653 12,475 5,244 4,458 3,731 13,433
Net replacement cost analysed by counterparty as follows:
Central banks 758 734
Banks, building societies and other financial institutions 7,969 9,340
Other corporate and public bodies 3,748 3,359
12,475 13,433