Barclays 2013 Annual Report Download - page 302

Note 15: Derivative financial instruments continued
Interest rate derivatives
The Group’s principal interest rate related contracts are interest rate swaps, forward rate agreements, basis swaps, caps, floors and swaptions.
Included in this product category are transactions that include combinations of these features. An interest rate swap is an agreement between two
parties to exchange fixed rate and floating rate interest by means of periodic payments based upon a notional principal amount and the interest
rates defined in the contract. Certain agreements combine interest rate and foreign currency swap transactions, which may or may not include the
exchange of principal amounts. A basis swap is a form of interest rate swap, in which both parties exchange interest payments based on floating
rates, where the floating rates are based upon different underlying reference indices. In a forward rate agreement, two parties agree a future
settlement of the difference between an agreed rate and a future interest rate, applied to a notional principal amount. The settlement, which
generally occurs at the start of the contract period, is the discounted present value of the payment that would otherwise be made at the end
of that period.
Interest rate derivatives, designated as cash flow hedges, primarily hedge the exposure to cash flow variability from interest rates of variable rate
loans to banks and customers, variable rate debt securities held and highly probable forecast financing transactions and reinvestments.
Interest rate derivatives designated as fair value hedges primarily hedge the interest rate risk of fixed rate borrowings in issue, fixed rate loans to
banks and customers and investments in fixed rate debt securities held.
Credit derivatives
The Group’s principal credit derivative-related contracts include credit default swaps and total return swaps. A credit derivative is an arrangement
whereby the credit risk of an asset (the reference asset) is transferred to the seller of protection. A credit default swap is a contract where the
protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer upon a defined
credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency. A total
return swap is an instrument whereby the seller of protection receives the full return of the asset, including both the income and change in the
capital value of the asset. The buyer of the protection in return receives a predetermined amount.
Equity derivatives
The Group’s principal equity-related contracts are equity and stock index swaps and options (including warrants, which are equity options listed
on an exchange). An equity swap is an agreement between two parties to exchange periodic payments, based upon a notional principal amount,
with one side paying fixed or floating interest and the other side paying based on the actual return of the stock or stock index. An equity option
provides the buyer with the right, but not the obligation, either to purchase or sell a specified stock, basket of stocks or stock index at a specified
price or level on or before a specified date. The Group also enters into fund-linked derivatives, being swaps and options whose underlyings include
mutual funds, hedge funds, indices and multi-asset portfolios.
Commodity derivatives
The Group’s principal commodity-related derivative contracts are swaps, options, forwards and futures. The main commodities transacted are
base metals, precious metals, oil and oil-related products, power and natural gas.
The Group’s total derivative asset and liability position as reported on the balance sheet is as follows:
Total derivatives
2013 2012
Notional
contract
amount
£m
Fair value Notional
contract
amount
£m
Fair value
Asset
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Total derivative assets/(liabilities) held for trading 41,494,363 321,590 (319,361) 40,193,114 465,357 (459,587)
Total derivative assets/(liabilities) held for risk management 303,645 2,745 (1,273) 302,822 3,799 (3,134)
Derivative assets/(liabilities) 41,798,008 324,335 (320,634) 40,495,936 469,156 (462,721)
The fair value of gross derivative assets decreased by 31% to £324bn reflecting increases in the major interest rate forward curves and the impact
of optimisation initiatives to reduce gross derivative exposures. Further information on netting of derivative financial instruments is included
within Note 19 Offsetting financial assets and financial liabilities.
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300 Barclays PLC Annual Report 2013
Notes to the financial statements
For the year ended 31 December 2013 continued