BT 2011 Annual Report Download - page 143

140
FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
29. Financial instruments and risk management continued
Financial risk management
The group’s activities exposes it to a variety of financial risks: market risk (including interest rate risk and foreign exchange risk); credit risk
and liquidity risk.
Funding and exposure management
The group finances its operations primarily by a mixture of issued share capital, retained profits and long-term and short-term borrowing.
The group borrows in the major long-term bond markets in major currencies and typically, but not exclusively, these markets provide the
most cost effective means of long-term borrowing. The group uses derivative financial instruments primarily to manage its exposure to
changes in interest and foreign exchange rates against these borrowings. The derivatives used for this purpose are principally interest rate
swaps, cross currency swaps and forward currency contracts. The group also uses forward currency contracts to hedge some of its currency
exposures arising from funding its overseas operations, acquisitions, overseas assets, liabilities and forward purchase commitments. The
group does not hold or issue derivative financial instruments for trading purposes. All transactions in derivative financial instruments are
undertaken to manage the risks arising from underlying business activities.
Treasury operations
The group has a centralised treasury operation whose primary role is to manage liquidity, funding, investments and counterparty credit risk
arising from transactions with financial institutions. The treasury operation also manages the group’s market exposures, including risks from
volatility in currency and interest rates. The treasury operation acts as a central bank to group entities providing central deposit taking,
funding and foreign exchange management services. Funding and deposit taking is usually provided in the functional currency of the
relevant entity. The treasury operation is not a profit centre and its objective is to manage financial risk at optimum cost.
Treasury policy
The Board sets the policy for the group’s treasury operation. Group treasury activities are subject to a set of controls commensurate with the
magnitude of the borrowing, investments and group-wide exposures. The Board has delegated its authority to operate these policies to a
series of panels that are responsible for the management of key treasury risks and operations. Appointment to and removal from the key
panels requires approval from two of the Chairman, the Chief Executive or the Group Finance Director.
The financial risk management of exposures arising from trading related financial instruments, primarily trade receivables and trade
payables, is through a series of policies and procedures set at a group and line of business level. Line of business management apply these
policies and procedures and perform review processes to assess and manage financial risk exposures arising from these financial instruments.
There has been no change in the nature of the group’s risk profile between 31 March 2011 and the date of approval of these financial
statements.
Interest rate risk management
Management policy
The group has interest bearing financial assets and liabilities which may expose the group to either cash flow or fair value volatility. The
group’s policy, as prescribed by the Board, is to ensure that at least 70% of net debt is at fixed rates. Short-term interest rate management is
delegated to the treasury operation while long-term interest rate management decisions require further approval from the Group Finance
Director, Director Treasury, Tax and Risk Management or the Treasurer who have been delegated such authority from the Board.
Hedging strategy
In order to manage the group’s interest rate mix profile, the group has entered into cross currency and interest rate swap agreements with
commercial banks and other institutions to vary the amounts and periods for which interest rates on borrowings are fixed. The duration of
the swap agreements matches the duration of the debt instruments. The majority of the group’s long-term borrowings have been, and are,
subject to fixed Sterling interest rates after applying the impact of these hedging instruments. Outstanding cross currency and interest rate
swaps at 31 March 2011 are detailed in the Hedging activities and Other derivatives section below.
The group’s fixed to floating interest rate profile, after hedging, on gross borrowings was:
2011 2010
Fixed rate Floating rate Fixed rate Floating rate
interest interest Total interest interest Total
At 31 March £m £m £m £m £m £m
Total borrowingsa7,972 1,215 9,187 10,110 1,029 11,139
Ratio of fixed to floating 87% 13% 100% 91% 9% 100%
aSee note 20.
OVERVIEWBUSINESS REVIEWFINANCIAL REVIEWREPORT OF THE DIRECTORSFINANCIAL STATEMENTSADDITIONAL INFORMATION