rbs201302286k6.htm
 
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For February 28, 2013
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F X
  
Form 40-F ___
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):_________

 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):_________


Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.


Yes
   ___
No X
 
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________

 
 
The following information was issued as a Company announcement in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K:

 
 
 
 
 

 
 
Risk and balance sheet management (continued)
 
 
Market risk
Introduction
236
Trading revenues
236
Trading book
237
VaR non-trading portfolios
238
  VaR
238
  Structured credit portfolio
240
Market risk capital
241
  Minimum capital requirements
241
  IRC by rating and product category
242
  Securitisation positions in the trading book
242
 

 
Risk and balance sheet management (continued)
 
Market risk
Introduction
Market risk arises from fluctuations in interest rates, foreign currency, credit spreads, equity prices, commodity prices and risk related factors such as market volatilities. The Group manages market risk within its trading and non-trading portfolios through a comprehensive market risk management framework. This control framework includes qualitative and quantitative guidance in the form of comprehensive policy statements, dealing authorities, limits based on, but not limited to, value-at-risk (VaR), stressed VaR (SVaR), stress testing and sensitivity analyses.
 
Trading revenues
The graph below shows the daily distribution of trading and related revenues for Markets for the years ended 31 December 2012 and 31 December 2011.
 
http://www.rns-pdf.londonstockexchange.com/rns/8694Y_-2013-2-28.pdf
 
 
 
Note:
 
(1)
The effect of any month end adjustments, not attributable to a specific daily market move, is spread evenly over the trading days in that specific month.
 
Key points
 
·
Both 2011 and 2012 benefited from market rallies, albeit weaker but more sustained during 2012 than 2011, primarily due to the supportive actions of the Federal Reserve and European Central Bank in Q3 2012. By way of contrast, in Q3 2011, heightened uncertainty in the Eurozone saw a sudden deterioration in credit markets. Hence a wider range of results in 2011 than 2012.
   
·
The average daily revenue earned by Markets' trading activities in 2012 was £16 million, compared with £18 million in 2011. The standard deviation of the daily revenues decreased from £20 million to £15 million. The number of days with negative revenue decreased to 34 from 45. The most frequent daily revenue was between £5 million and £10 million, which occurred 36 times. In 2011, the most frequent daily revenue was between £25 million and £30 million, which occurred 31 times.


 
Risk and balance sheet management (continued)
 
Market risk (continued)
 
Trading book
The table below analyses the VaR for the Group's trading portfolios, segregated by type of market risk exposure, and between Core, Non-Core, counterparty exposure management (CEM) and the Group's total trading VaR excluding CEM.
 
CEM manages the over-the-counter derivative counterparty credit and funding risk on behalf of Markets and Non-Core, by actively controlling risk concentrations and reducing unwanted risk exposures. The hedging transactions CEM enters into are booked in the trading book and therefore contribute to the market risk VaR exposure of the Group. The counterparty exposures themselves are not captured in VaR for regulatory capital. In the interest of transparency and to more properly represent the exposure, CEM trading book exposure and total trading VaR excluding CEM are disclosed separately.
 
 
 
Year ended
31 December 2012
  
31 December 2011
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
62.6 
75.6 
95.7 
40.8 
  
53.4 
68.1 
79.2 
27.5 
Credit spread
69.2 
74.1 
94.9 
44.9 
  
82.7 
74.3 
151.1 
47.4 
Currency
10.3 
7.6 
21.3 
2.6 
  
10.3 
16.2 
19.2 
5.2 
Equity
6.0 
3.9 
12.5 
1.7 
  
9.4 
8.0 
17.3 
4.6 
Commodity
2.0 
1.5 
6.0 
0.9 
  
1.4 
2.3 
7.0 
- 
Diversification (1)
  
(55.4)
        
(52.3)
    
                   
Total
97.3 
107.3 
137.0 
66.5 
  
105.5 
116.6 
181.3 
59.7 
                   
Core
74.6 
88.1 
118.0 
47.4 
  
75.8 
89.1 
133.9 
41.7 
Non-Core
30.1 
22.8 
41.9 
22.0 
  
64.4 
34.6 
128.6 
30.0 
                   
CEM
78.5 
84.9 
86.0 
71.7 
  
50.1 
75.8 
78.8 
30.3 
                   
Total (excluding CEM)
47.1 
57.6 
76.4 
32.2 
  
75.5 
49.9 
150.0 
41.6 
 
 
 
Quarter ended
31 December 2012
  
30 September 2012
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
59.1 
75.6 
82.1 
40.8 
  
58.6 
44.8 
75.4 
44.8 
Credit spread
68.7 
74.1 
76.9 
57.2 
  
56.8 
67.2 
67.2 
46.6 
Currency
7.1 
7.6 
11.6 
2.6 
  
9.1 
8.9 
15.3 
5.3 
Equity
5.3 
3.9 
9.2 
1.7 
  
6.2 
8.2 
11.7 
4.5 
Commodity
2.2 
1.5 
3.5 
1.3 
  
2.0 
2.7 
4.1 
1.2 
Diversification (1)
  
(55.4)
        
(40.8)
    
                   
Total
92.4 
107.3 
113.4 
72.3 
  
90.1 
91.0 
104.6 
78.4 
                   
Core
75.8 
88.1 
94.6 
58.4 
  
71.9 
69.4 
86.1 
60.0 
Non-Core
23.4 
22.8 
25.7 
22.0 
  
25.5 
26.5 
26.5 
24.1 
                   
CEM
80.8 
84.9 
86.0 
71.7 
  
76.8 
74.3 
80.2 
73.9 
                   
Total (excluding CEM)
49.3 
57.6 
61.1 
33.2 
  
38.3 
46.6 
54.0 
32.2 
 
Note:
 
(1)
The Group benefits from diversification, which reflects the risk reduction achieved by allocating investments across various financial instrument types, currencies and markets. The extent of diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time.


 
Risk and balance sheet management (continued)
 
Market risk: Trading book (continued)
 
Key points
 
·
The Group's average and maximum credit spread VaR for 2012 was lower than for 2011. This reflected the credit spread volatility experienced during the financial crisis dropping out of the time series window, combined with a reduction in the asset-backed securities trading inventory in Core and the sale of unencumbered asset-backed securities assets following the prior restructuring of some monoline hedges in the Non-Core banking book.
   
·
The average and period end interest rate VaR for 2012 were higher than for 2011 due to pre-hedging and positioning activity ahead of government bond auctions and syndications, combined with an increase in exposure to "safe haven" assets in December 2012, as the US "Fiscal Cliff" negotiations continued without resolution.
   
·
The Non-Core VaR was significantly lower in 2012, as Non-Core continued its de-risking strategy through the disposal of assets and unwinding of trades.
   
·
Since late 2011, CEM started to centrally manage the funding risk on over-the-counter derivatives contracts, causing the VaR to be considerably higher in 2012 than 2011.
 
VaR non-trading portfolios
VaR
The table below details VaR for the Group's non-trading portfolios, excluding the structured credit portfolio and loans and receivables.
 
 
Year ended
31 December 2012
  
31 December 2011
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
6.9 
4.5 
10.7 
4.1 
  
8.8 
9.9 
11.1 
5.7 
Credit spread
10.5 
8.8 
15.4 
7.3 
  
18.2 
13.6 
39.3 
12.1 
Currency
3.0 
1.3 
4.5 
1.3 
  
2.1 
4.0 
5.9 
0.1 
Equity
1.7 
0.3 
1.9 
0.3 
  
2.1 
1.9 
3.1 
1.6 
Diversification (1)
  
(5.4)
        
(13.6)
    
                   
Total
11.8 
9.5 
18.3 
8.5 
  
19.7 
15.8 
41.6 
13.4 
                   
Core
11.3 
7.5 
19.0 
7.1 
  
19.3 
15.1 
38.9 
13.5 
Non-Core
2.5 
3.4 
3.6 
1.6 
  
3.4 
2.5 
4.3 
2.2 
                   
CEM
1.0 
1.0 
1.1 
0.9 
  
0.4 
0.9 
0.9 
0.3 
                   
Total (excluding CEM)
11.5 
9.4 
17.8 
8.2 
  
19.7 
15.5 
41.4 
13.7 
 
 
Risk and balance sheet management (continued)
 
Market risk: VaR non-trading portfolios (continued)
 
 
 
Quarter ended
31 December 2012
  
30 September 2012
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
4.8 
4.5 
6.1 
4.1 
  
6.0 
5.5 
6.7 
5.3 
Credit spread
8.8 
8.8 
9.3 
7.5 
  
8.1 
8.6 
9.1 
7.3 
Currency
1.8 
1.3 
2.7 
1.3 
  
3.0 
1.5 
3.8 
1.3 
Equity
1.6 
0.3 
1.8 
0.3 
  
1.6 
1.7 
1.7 
1.6 
Diversification (1)
  
(5.4)
        
(8.0)
    
                   
Total
9.4 
9.5 
10.0 
8.5 
  
9.2 
9.3 
9.7 
8.6 
                   
Core
8.2 
7.5 
9.2 
7.1 
  
9.0 
9.2 
10.2 
8.3 
Non-Core
3.5 
3.4 
3.6 
2.8 
  
2.0 
3.6 
3.6 
1.6 
                   
CEM
1.0 
1.0 
1.0 
1.0 
  
1.0 
1.0 
1.1 
1.0 
                   
Total (excluding CEM)
9.1 
9.4 
9.8 
8.6 
  
8.9 
9.3 
9.7 
8.2 
 
Note:
 
(1)
The Group benefits from diversification, which reflects the risk reduction achieved by allocating investments across various financial instrument types, currencies and markets. The extent of diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time.
 
Key points
 
·
The average and period end total and credit spread VaR were lower in 2012, due to reduced volatility in the market data time series, position reductions and a decrease in the size of the collateral portfolio. The reduction in collateral was driven by the restructuring of certain Dutch residential mortgage-backed securities during H1 2012, enabling their eligibility as European Central Bank collateral. This allowed the disposal of additional collateral purchased during the corresponding period in 2011.
   
·
The average and period end interest rate VaR were lower in 2012, due to the implementation of an enhanced rates re-scaling methodology.
   
·
The Non-Core period end VaR was higher in 2012 than in 2011, due to improvements in the time series mapping on certain Australian bonds and the purchase of additional hedges.

 
Risk and balance sheet management (continued)
 
Market risk: VaR non-trading portfolios (continued)
 
Structured credit portfolio
The structured credit portfolio is within Non-Core. The risk in this portfolio is not disclosed using VaR, as the Group believes this is not an appropriate tool for the banking book portfolio, which comprises illiquid debt securities. These assets are reported on a drawn notional and fair value basis, and managed on a third party asset and risk-weighted assets basis. The table below shows the open market risk in the structured credit portfolio.
 
 
 
Drawn notional
  
Fair value
 
CDOs (1)
CLOs (2)
MBS (3)
Other 
ABS (4)
Total 
  
CDOs (1)
CLOs (2)
MBS (3)
Other 
ABS (4)
Total 
31 December 2012
£m 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
                       
1-2 years
- 
- 
- 
80 
80 
  
- 
- 
- 
74 
74 
3-4 years
- 
- 
27 
82 
109 
  
- 
- 
24 
76 
100 
4-5 years
- 
- 
95 
- 
95 
  
- 
- 
86 
- 
86 
5-10 years
- 
310 
92 
- 
402 
  
- 
295 
44 
- 
339 
>10 years
289 
279 
380 
398 
1,346 
  
116 
256 
253 
254 
879 
                       
 
289 
589 
594 
560 
2,032 
  
116 
551 
407 
404 
1,478 
                       
30 September 2012
                      
                       
1-2 years
- 
- 
- 
128 
128 
  
- 
- 
- 
120 
120 
2-3 years
- 
- 
6 
28 
34 
  
- 
- 
5 
27 
32 
3-4 years
- 
- 
- 
45 
45 
  
- 
- 
- 
43 
43 
4-5 years
- 
- 
161 
218 
379 
  
- 
- 
136 
198 
334 
5-10 years
- 
298 
110 
- 
408 
  
- 
278 
53 
- 
331 
>10 years
317 
313 
436 
553 
1,619 
  
127 
285 
267 
314 
993 
                       
 
317 
611 
713 
972 
2,613 
  
127 
563 
461 
702 
1,853 
                       
31 December 2011
                      
                       
1-2 years
- 
- 
- 
27 
27 
  
- 
- 
- 
22 
22 
2-3 years
- 
- 
10 
196 
206 
  
- 
- 
9 
182 
191 
4-5 years
- 
37 
37 
95 
169 
  
- 
34 
30 
88 
152 
5-10 years
32 
503 
270 
268 
1,073 
  
30 
455 
184 
229 
898 
>10 years
2,180 
442 
464 
593 
3,679 
  
766 
371 
291 
347 
1,775 
                       
 
2,212 
982 
781 
1,179 
5,154 
  
796 
860 
514 
868 
3,038 
 
Notes:
 
(1)
Collateralised debt obligations.
(2)
Collateralised loan obligations.
(3)
Mortgage-backed securities.
(4)
Asset-backed securities.
 
Key point
 
·
The structured credit portfolio drawn notional and fair values declined across all asset classes from 31 December 2011 to 31 December 2012. Key drivers were: (i) during H1 2012, the liquidation of legacy trust preferred securities and commercial real estate CDOs and subsequent sale of the underlying assets; and (ii) during H2 2012, the sale of underlying assets from CDO collateral pools and legacy conduits.

 
Risk and balance sheet management (continued)
 
Market risk (continued)
 
Market risk capital
Minimum capital requirements
The following table analyses the market risk minimum capital requirement, calculated in accordance with Basel 2.5.
 
 
31 December 
2012 
31 December 
2011 
 
£m 
£m 
     
Interest rate position risk requirement
254 
1,107 
Equity position risk requirement
1 
3 
Option position risk requirement
26 
26 
Commodity position risk requirement
2 
2 
Foreign currency position risk requirement
12 
10 
Specific interest rate risk of securitisation positions
156 
250 
     
Total (standard method)
451 
1,398 
Pillar 1 model based position risk requirement
2,959 
3,725 
     
Total position risk requirement
3,410 
5,123 
 
The principal contributors to the Pillar 1 model based position risk requirement (PRR) are:
 
 
 
31 December 2012
31 December 
2011 
Average (1)
Maximum (1)
Minimum (1)
Period end 
 
£m 
£m 
£m 
£m 
£m 
           
Value-at-risk (VaR) (1)
939 
1,190 
757 
825 
887 
Stressed VaR (SVaR)
1,523 
1,793 
1,160 
1,226 
1,682 
Incremental risk charge (IRC)
521 
659 
372 
467 
469 
All price risk (APR)
149 
290 
12 
12 
297 
 
Note:
 
(1)
The average, maximum and minimum are based on the monthly Pillar 1 model based capital requirements.
 
Key points
 
·
The FSA approved the inclusion of the Group's US trading subsidiary RBS Securities Inc. in the regulatory models in March 2012. This resulted in the model-based charges for VaR, SVaR and IRC increasing at that time and the standardised interest rate PRR decreasing significantly.
   
·
Stressed VaR decreased during the remainder of 2012, due to the disposal of assets in Non-Core and general de-risking in sovereign and agency positions in Markets.
   
·
The APR decreased significantly due to the disposal of assets and unwinding of trades.


 
Risk and balance sheet management (continued)
 
Market risk: Market risk capital (continued)
 
IRC by rating and product category
The following table analyses the IRC by rating and product.
 
 
 
Internal ratings
 
AAA 
AA 
A 
BBB 
BB 
B 
CCC 
Total (1)
31 December 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Product categories
                
Cash - ABS
59.2 
- 
- 
(0.1)
(0.9)
- 
- 
58.2 
Cash - regular
39.5 
146.9 
9.8 
59.9 
8.6 
16.9 
12.7 
294.3 
Derivatives - credit
(0.3)
(14.0)
4.0 
30.4 
28.4 
5.6 
(2.7)
51.4 
Derivatives - interest rate
(1.0)
- 
1.5 
0.1 
(2.1)
(0.3)
- 
(1.8)
Other
13.8 
- 
- 
- 
- 
- 
- 
13.8 
                 
Total
111.2 
132.9 
15.3 
90.3 
34.0 
22.2 
10.0 
415.9 
 
Note:
 
(1)
The figures presented are based on the spot IRC charge at 31 December 2012 and will therefore not agree with the IRC position risk requirement, as this is based on the 60 day average. The figures presented above are in capital terms.
 
Securitisation positions in the trading book
The following table analyses the trading book securitised exposures, by rating, subject to a market risk capital requirement.
 
 
Ratings (1)
Total 
 (1,2)
 
STD 
PRR (3)
Capital 
deductions 
AAA 
AA 
A 
BBB 
BB 
Below 
 BB 
31 December 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
% 
£m 
                   
Trading book securitisation charge
15.5 
7.4 
15.2 
35.3 
75.8 
6.2 
155.4 
36.6 
1,369.6 
 
Notes:
 
(1)
Based on S&P ratings.
(2)
Excludes the capital deductions.
(3)
Percentage of total standardised position risk requirement.
 
 
 
 

 
Signatures


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.







 
 
Date: 28 February 2013
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
 Jan Cargill
Deputy Secretary