14 Derivative assets and liabilities

The group’s activities expose it to the financial risks of changes in foreign exchange rates and interest rates. The group uses derivatives such as foreign exchange forward contracts and interest rate swap contracts to hedge these exposures. The group uses hedge accounting, provided the prescribed criteria in IAS 39 are met, to recognise the offsetting effects of changes in the fair value or cash flow of the derivative instrument and the hedged item. The group’s principal uses of hedge accounting are to:

  • recognise in shareholders’ equity the changes in the fair value of derivatives designated as hedges of a net investment in a foreign operation. Any cumulative gains and/or losses are recognised in the Consolidated Income Statement on disposal of the foreign operation;
  • defer in equity the changes in the fair value of derivatives designated as the hedge of a future cash flow attributable to a recognised asset or liability, a highly probable forecast transaction, or a firm commitment until the period in which the future transaction affects profit or loss or is no longer expected to occur; and
  • hedge the fair value movements in loans due to interest rate and exchange rate fluctuations. Any gain or loss from remeasuring the hedging instrument at fair value is recognised immediately in the Consolidated Income Statement. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognised in the Consolidated Income Statement.

The relationship between the hedging instrument and the hedged item, together with the risk management objective and strategy for undertaking the hedge transaction, are documented at the inception of the transaction. The effectiveness of the hedge is documented and monitored on an ongoing basis. Hedge accounting is only applied for highly effective hedges (between 80% and 125% effectiveness) with any ineffective portion of the gain or loss recognised in the income statement, within other expenses, in the current year.

Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments which do not qualify for hedge accounting are recognised immediately in the Consolidated Income Statement.

Where the risks and characteristics of derivatives embedded in other contracts are not closely related to those of the host contract and the whole contract is not carried at fair value, the derivative is separated from that host contract and measured at fair value, with fair value movements reflected within investment return, unless the embedded derivative itself meets the definition of an insurance contract.

 

 

Fair values

Contract/notional amount
2013
£m

Fair values

 

Contract/notional amount
2014
£m

Assets
2014
£m

Liabilities1
2014
£m

Assets
2013
£m

Liabilities1
2013
£m

1.

Derivative liabilities are reported in the Consolidated Balance Sheet within Payables and other financial liabilities (Note 28).

Shareholder derivatives:

 

 

 

 

 

 

Interest rate contracts – held for trading

1,605

31

49

2,809

58

57

Forward foreign exchange contracts – net investment hedges

589

1

1

558

9

2

Forward foreign exchange contracts – held for trading

577

77

29

616

133

Equity/index derivatives – held for trading

(324)

2

1

(901)

3

22

Credit derivatives – held for trading

99

1

3

4

5

Other derivatives – held for trading

83

1

1

Total shareholder derivatives

 

113

84

 

207

86

Non profit non-unit linked derivatives:

 

 

 

 

 

 

Interest rate contracts – held for trading

22,692

3,615

1,991

24,603

1,760

1,044

Forward foreign exchange contracts – held for trading

41

149

170

1

Equity/index derivatives – held for trading

48

Currency swap contracts – held for trading

3,636

62

3,750

71

Inflation swap contracts – held for trading

6,387

118

475

6,274

98

188

Credit derivatives – held for trading

1,157

26

1

1,411

1

5

Other derivatives – held for trading

194

50

383

53

Total non profit non-unit linked derivatives

 

3,850

2,678

 

2,100

1,291

With-profits derivatives:

 

 

 

 

 

 

Interest rate contracts – held for trading

749

28

1

1,076

1

38

Forward foreign exchange contracts – held for trading

9

20

29

Equity/index derivatives – held for trading

(253)

24

32

(177)

18

27

Other derivatives – held for trading

1

Total with-profits derivatives

 

61

53

 

48

65

Unit linked derivatives:

 

 

 

 

 

 

Interest rate contracts – held for trading

11,576

5,507

1,669

19,194

1,619

617

Forward foreign exchange contracts – held for trading

387

269

561

182

Credit derivatives – held for trading

1,170

2

18

1,025

11

5

Equity/index derivatives – held for trading

3,514

99

1,498

3,232

31

791

Other derivatives – held for trading

19

6

22

Inflation rate contracts – held for trading

3,530

10

608

7,394

169

82

Total unit linked derivatives

 

6,011

4,062

 

2,391

1,677

Total derivative assets and liabilities

 

10,035

6,877

 

4,746

3,119

The notional amounts of some derivative instruments provide a basis for comparison with instruments recognised on the Consolidated Balance Sheet. However, these amounts do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the group’s exposure to credit or price risks.

The contractual undiscounted cash flows in relation to non-unit linked derivatives have the following maturity profile. Unit linked derivatives have not been included as shareholders are not directly exposed to liquidity risks.

 

Fair values
£m

Maturity profile of undiscounted cash flows

As at 31 December 2014

Within 1 year
£m

1-5 years
£m

5-15 years
£m

15-25 years
£m

Over 25 years
£m

Total
£m

Cash inflows

 

 

 

 

 

 

 

Shareholder derivatives

 

 

 

 

 

 

 

Derivative assets

113

966

966

Derivative liabilities

(84)

1,183

3

1

1,187

Non profit non-unit linked derivatives

 

 

 

 

 

 

 

Derivative assets

3,850

2,214

1,701

3,828

3,642

3,877

15,262

Derivative liabilities

(2,678)

8,813

2,430

3,133

2,557

2,500

19,433

With-profits derivatives

 

 

 

 

 

 

 

Derivative assets

61

406

47

70

23

1

547

Derivative liabilities

(53)

539

539

Total

1,209

14,121

4,181

7,032

6,222

6,378

37,934

Cash outflows

 

 

 

 

 

 

 

Shareholder derivatives

 

 

 

 

 

 

 

Derivative assets

113

(871)

(871)

Derivative liabilities

(84)

(1,226)

(9)

(1,235)

Non profit non-unit linked derivatives

 

 

 

 

 

 

 

Derivative assets

3,850

(1,939)

(831)

(2,666)

(2,638)

(2,307)

(10,381)

Derivative liabilities

(2,678)

(9,374)

(3,300)

(3,942)

(3,054)

(2,903)

(22,573)

With-profits derivatives

 

 

 

 

 

 

 

Derivative assets

61

(363)

(33)

(69)

(23)

(1)

(489)

Derivative liabilities

(53)

(591)

(591)

Total

1,209

(14,364)

(4,173)

(6,677)

(5,715)

(5,211)

(36,140)

Net shareholder derivatives cash flows

 

52

(6)

1

47

Net non profit non-unit linked derivatives cash flows

 

(286)

353

507

1,167

1,741

Net with-profits derivatives cash flows

 

(9)

14

1

6

 

Fair values
£m

Maturity profile of undiscounted cash flows

As at 31 December 2013

Within 1 year
£m

1-5 years
£m

5-15 years
£m

15-25 years
£m

Over 25 years
£m

Total
£m

Cash inflows

 

 

 

 

 

 

 

Shareholder derivatives

 

 

 

 

 

 

 

Derivative assets

207

1,541

502

17

2,060

Derivative liabilities

(86)

1

1

Non profit non-unit linked derivatives

 

 

 

 

 

 

 

Derivative assets

2,100

8,882

4,164

4,539

4,183

4,956

26,724

Derivative liabilities

(1,291)

213

1,189

4,002

3,657

3,549

12,610

With-profits derivatives

 

 

 

 

 

 

 

Derivative assets

48

928

3

931

Derivative liabilities

(65)

42

49

76

27

2

196

Total

913

11,607

5,907

8,617

7,867

8,524

42,522

Cash outflows

 

 

 

 

 

 

 

Shareholder derivatives

 

 

 

 

 

 

 

Derivative assets

207

(1,480)

(402)

(19)

(1,901)

Derivative liabilities

(86)

(42)

(14)

(56)

Non profit non-unit linked derivatives

 

 

 

 

 

 

 

Derivative assets

2,100

(8,469)

(3,567)

(3,782)

(3,469)

(4,107)

(23,394)

Derivative liabilities

(1,291)

(454)

(2,168)

(4,295)

(3,167)

(3,763)

(13,847)

With-profits derivatives

 

 

 

 

 

 

 

Derivative assets

48

(883)

(883)

Derivative liabilities

(65)

(62)

(56)

(121)

(35)

(2)

(276)

Total

913

(11,390)

(6,207)

(8,198)

(6,690)

(7,872)

(40,357)

Net shareholder derivatives cash flows

 

20

86

(19)

17

104

Net non profit non-unit linked derivatives cash flows

 

172

(382)

464

1,204

635

2,093

Net with-profits derivatives cash flows

 

25

(4)

(45)

(8)

(32)

Cash inflows and outflows are presented on a net basis where the group is required to settle net or has a legally enforceable right of offset and the intention is to settle on a net basis.

Future cash flows on the floating legs of interest rate and exchange derivatives are calculated using current spot rates, which may differ from the market expectation incorporated in the fair value.

Cash flows arising from implied events covered by credit derivatives are presented in the table above on an expected basis as cash flows within one year.

Forward foreign exchange contracts – net investment hedges

The group hedges part of the foreign exchange translation exposure on its net investment in its overseas subsidiaries, using forward foreign exchange contracts. It recognises the portion of the gain or loss which is determined to be an effective hedge through reserves within shareholders’ equity, along with the gain or loss on translation of the foreign subsidiaries.

Derivative contracts – held for trading

The group uses certain derivative contracts which are effective hedges of economic exposures in accordance with the group’s risk management policy, but for various reasons are not designated within a formal hedge accounting relationship. Therefore, these contracts must be designated as held for trading, and gains and losses on these contracts are recognised immediately in the Consolidated Income Statement.