Barclays 2010 Annual Report Download - page 243

38 Off-balance sheet arrangements
In the ordinary course of business and primarily to facilitate client transactions, the Group enters into transactions which may involve the use of
off-balance sheet arrangements and special purpose entities (SPEs). These arrangements include the provision of guarantees, loan commitments,
retained interests in assets which have been transferred to an unconsolidated SPE or obligations arising from the Group’s involvements with such SPEs.
Guarantees
The Group issues guarantees on behalf of its customers. In the majority of cases, the Group will hold collateral against the exposure, have a right of
recourse to the customer or both. In addition, the Group issues guarantees on its own behalf. The main types of guarantees provided are: financial
guarantees given to banks and financial institutions on behalf of customers to secure loans; overdrafts; and other banking facilities, including stock
borrowing indemnities and standby letters of credit. Other guarantees provided include performance guarantees, advance payment guarantees, tender
guarantees, guarantees to Her Majesty’s Revenue and Customs and retention guarantees. The nominal principal amount of contingent liabilities with
off-balance sheet risk is set out in Note 25.
Loan commitments
The Group enters into commitments to lend to its customers subject to certain conditions. Such loan commitments are made either for a fixed period or
are cancellable by the Group subject to notice conditions. Information on loan commitments and similar facilities is set out in Note 25.
Leasing
The Group leases various offices, branches, other premises and equipment under non-cancellable operating lease arrangements. With such operating
lease arrangements, the asset is kept on the lessor’s balance sheet and the Group reports the future minimum lease payments as an expense over the
lease term. Information on leasing can be found in Note 37.
Special purpose entities
SPEs are entities that are created to accomplish a narrow and well defined objective. There are often specific restrictions or limits around their ongoing
activities. The Group’s transactions with SPEs take a number of forms, including:
– The provision of financing to fund asset purchases, or commitments to provide finance for future purchases.
– Derivative transactions to provide investors in the SPE with a specified exposure.
– The provision of liquidity or backstop facilities which may be drawn upon if the SPE experiences future funding difficulties.
– Direct investment in the notes issued by SPEs.
Depending on the nature of the Group’s resulting exposure, it may consolidate the SPE on to the Group’s balance sheet. The consolidation of SPEs is
considered at inception, based on the arrangements in place and the assessed risk exposures at that time. In accordance with IFRS, SPEs are consolidated
when the substance of the relationship between the Group and the entity indicates control. Potential indicators of control include, amongst others, an
assessment of the Group’s exposure to the risks and benefits of the SPE. The initial consolidation analysis is revisited at a later date if:
i) the Group acquires additional interests in the entity;
ii) the contractual arrangements of the entity are amended such that the relative exposures to risks and rewards change; or
iii) the Group acquires control over the main operating and financial decisions of the entity.
A number of the Group’s transactions have recourse only to the assets of unconsolidated SPEs. Typically, the majority of the exposure to these assets
is borne by third parties and the Group’s risk is mitigated through over-collateralisation, unwind features and other protective measures.
The business activities within the Group where SPEs are used include multi-seller conduit programmes, asset securitisations, client intermediation, credit
structuring, asset realisations and fund management. These activities are described below. In addition, later sections provide quantitative information on
the Group’s involvements with CDOs, SIVs SIV-Lites and conduits.
Multi-seller conduit programmes
Barclays creates, administers and provides liquidity and credit enhancements to several commercial paper conduit programmes, primarily in the United
States. These conduits provide clients access to liquidity in the commercial paper markets by allowing them to sell consumer or trade receivables to
the conduit, which then issues commercial paper to investors to fund the purchase. The conduits have sufficient collateral, credit enhancements and
liquidity support to maintain an investment grade rating for the commercial paper.
Asset securitisations
The Group has assisted its customers with the formation of asset securitisations, some of which are effected through the use of SPEs. These entities
have minimal equity and rely on funding in the form of notes to purchase the assets for securitisation. As these SPEs are created for other companies,
the Group does not usually control these entities and therefore does not consolidate them. The Group may provide financing in the form of senior notes
or junior notes and may also provide derivatives to the SPE. These transactions are included on the balance sheet.
The Group has also used SPEs to securitise part of its originated and purchased retail and commercial lending portfolios and credit card receivables.
These SPEs are usually consolidated and derecognition only occurs when the Group transfers its contractual right to receive cash flows from the
financial assets, or retains the contractual rights to receive the cash flows, but assumes a contractual obligation to pay the cash flows to another party
without material delay or reinvestment, and also transfers substantially all the risks and rewards of ownership, including credit risk, prepayment risk and
interest rate risk. The carrying amount of securitised assets together with the associated liabilities are set out in Note 36.
Barclays PLC Annual Report 2010 www.barclays.com/annualreport10 241
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