rbs201108056k7.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 August 5, 2011
 
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
Market risk arises from changes in interest rates, foreign currency, credit spreads, equity prices and risk related factors such as market volatilities. The Group manages market risk centrally within its trading and non-trading portfolios through a comprehensive market risk management framework. This framework includes limits based on, but not limited to, VaR, stress testing, position and sensitivity analyses.
 
VaR is a technique that produces estimates of the potential change in the market value of a portfolio over a specified time horizon at given confidence levels. For internal risk management purposes, the Group's VaR assumes a time horizon of one trading day and a confidence level of 99%. The Group's VaR model is based on a historical simulation model, utilising data from the previous 500 days of time series results.
 
The VaR disclosure is broken down into trading and non-trading. Trading VaR relates to the main trading activities of the Group and non-trading reflects the VaR associated with reclassified assets, money market business and the management of internal funds flow within the Group's businesses.
 
The Group's VaR should be interpreted in light of the limitations of the methodology used, as follows:
 
·
Historical simulation VaR may not provide the best estimate of future market movements. It can only provide a prediction of the future based on events that occurred in the 500 trading day time series. Therefore, events more severe than those in the historical data series cannot be predicted.
   
·
The use of a 99% confidence level does not reflect the extent of potential losses beyond that percentile.
   
·
The use of a one day time horizon will not fully capture the profit and loss implications of positions that cannot be liquidated or hedged within one day.
   
·
The Group computes the VaR of trading portfolios at the close of business. Positions may change substantially during the course of the trading day and intra-day profits and losses will be incurred.
 
These limitations mean that the Group cannot guarantee that profits or losses will not exceed the VaR.


 
Risk and balance sheet management (continued)
 
Market risk: GBM traded revenue*
 
 
 http://www.rns-pdf.londonstockexchange.com/rns/8175L_-2011-8-5.pdf 
 
Note:
(1)
The effect of any month end adjustments, not attributable to a specific daily market move, is spread evenly over the days in the month in question.
 
Key points*
·
The average daily revenue earned from GBM's trading activities in H1 2011 was £28 million, compared with £33 million in H1 2010. The standard deviation of these daily revenues was £19 million compared with £23 million in H1 2010. The standard deviation measures the variation of daily revenues about the mean value of those revenues.
   
·
An analysis of the frequency distribution of daily revenue shows that there were four days with negative revenue during H1 2011 compared with seven days in H1 2010.
   
·
The most frequent result is a daily revenue of between £25 million and £30 million with 16 occurrences in H1 2011, compared with 14 occurrences in H1 2010.
 

 
 
 
* not reviewed


 
Risk and balance sheet management (continued)
 
Market risk (continued)
 
The table below details VaR for the Group's trading portfolio, segregated by type of market risk exposure, and between Core and Non-Core, Counterparty Exposure Management (CEM) and Core excluding CEM.
 
 
Quarter ended
 
30 June 2011
  
31 March 2011
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
Trading VaR
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
39.4 
36.8 
75.7 
27.5 
  
60.4  
60.2 
79.2 
42.1 
Credit spread
73.2 
64.6 
95.0 
60.0 
  
134.1 
97.7 
151.1 
97.7 
Currency
9.4 
9.3 
14.2 
5.2 
  
12.2 
10.5 
18.0 
8.1 
Equity
10.4 
12.0 
17.3 
5.2 
  
11.1 
10.7 
14.5 
8.0 
Commodity
0.2 
0.3 
1.6 
- 
  
0.2 
0.1 
0.7 
-  
Diversification
  
(61.0)
        
(71.1)
    
                   
Total
78.7 
62.0 
117.9 
60.8 
  
156.4 
108.1 
181.3 
108.1 
                   
Core
60.2 
42.5 
86.0 
42.5 
  
108.2 
72.2 
133.9 
72.2 
CEM
26.5 
23.2 
33.2 
21.9 
  
40.0 
34.7 
47.6 
34.5 
Core excluding CEM
57.1 
39.4 
78.4 
39.2 
  
88.0 
70.6 
106.2 
65.2 
                   
Non-Core
69.3 
51.4 
110.1 
47.5 
  
113.9 
109.4 
128.6 
104.1 
 
Key points
 
Q2 2011 compared with Q1 2011
·
The Group's trading VaR reduced over the course of the second quarter as the exceptional volatility experienced during the financial crisis continued to drop out of the 500 days of time series data used in the VaR calculation.
   
·
The Core trading VaR and credit spread VaR decreased significantly at 31 March 2011 as GBM managed down its risk position given a volatile and risk averse environment and the adoption of more appropriate daily time series for sub-prime/subordinated RMBS. This decreased further in Q2 2011 as more inventory reductions were made and the reduced volatility in the time series continued to contribute to a lower VaR calculation.
   
·
The maximum interest rate VaR in Q2 2011 was driven by a higher exposure level ahead of the European Central Bank (ECB) meeting. Following the ECB meeting, positions were then reduced as the markets had fully factored in subsequent rate hikes, causing the interest rate VaR to reduce significantly. The VaR then remained at the lower level for the rest of the quarter.
   
·
The Non-Core trading VaR decreased significantly at the beginning of May 2011, as a result of continued de-risking of the Non-Core Markets portfolio in line with the overall strategy along with a period of high volatility dropping out of the VaR calculation.
 


 
Risk and balance sheet management (continued)
 
Market risk (continued)
 
 
Half year ended
 
30 June 2011
  
30 June 2010
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
Trading VaR
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
49.8 
36.8 
79.2 
27.5 
  
45.8 
42.8 
64.2 
32.5 
Credit spread
103.4 
64.6 
151.1 
60.0 
  
158.2 
203.0 
203.2 
113.0 
Currency
10.8 
9.3 
18.0 
5.2 
  
20.6 
21.4 
28.0 
13.9 
Equity
10.8 
12.0 
17.3 
5.2 
  
10.4 
6.7 
17.3 
6.6 
Commodity
0.2 
0.3 
1.6 
- 
  
10.7 
8.1 
15.8 
6.7 
Diversification
  
(61.0)
        
(71.5)
    
                   
Total
117.3 
62.0 
181.3 
60.8 
  
152.9 
210.5 
210.5 
103.0 
                   
Core
84.0 
42.5 
133.9 
42.5 
  
95.5 
118.1 
145.4 
58.9 
CEM
33.2 
23.2 
47.6 
21.9 
  
45.1 
75.5 
76.5 
30.3 
Core excluding CEM
72.5 
39.4 
106.2 
39.2 
  
82.8 
78.6 
108.7 
53.6 
                   
Non-Core
91.4 
51.4 
128.6 
47.5 
  
90.4 
104.9 
108.1 
63.2 
 
Key point
 
H1 2011 compared with H1 2010
·
The Group's trading VaR was significantly lower at 30 June 2011, compared with 30 June 2010. Both Core and Non-Core portfolios exhibited significantly reduced trading VaR in total and across asset class VaR components as the exceptional volatility of the market data from the period of the financial crisis dropped out of the time series data used in the VaR calculation and both portfolios engaged in active de-risking.
   
·
The commodity VaR was materially lower in H1 2011 compared with H1 2010 as the sale of the Group's interest in Sempra was completed at the end of 2010.


 
Risk and balance sheet management (continued)
 
Market risk (continued)
 
The table below details VaR for the Group's non-trading portfolio, excluding the SCP and loans and receivables (LAR), segregated by type of market risk exposure and between Core and Non-Core.
 
 
Quarter ended
 
30 June 2011
  
31 March 2011
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
Non-trading VaR
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
8.3 
8.3 
9.2 
5.7 
  
7.8 
7.0 
10.8 
6.5 
Credit spread
19.1 
18.0 
24.2 
16.1 
  
23.8 
22.5 
39.3 
14.2 
Currency
1.7 
3.3 
3.3 
0.2 
  
0.6 
0.6 
1.8 
0.1 
Equity
2.2 
2.0 
2.4 
2.0 
  
2.5 
2.3 
3.1 
2.2 
Diversification
  
(13.1)
        
(5.4)
    
                   
Total
18.7 
18.5 
22.5 
16.7 
  
26.5 
27.0 
41.6 
13.4 
                   
Core
18.5 
19.4 
24.6 
15.7 
  
25.5 
26.1 
38.9 
13.5 
Non-Core
3.7 
4.3 
4.3 
2.8 
  
2.6 
2.4 
3.4 
2.2 
 
Key points
 
Q2 2011 compared with Q1 2011
·
The Core non-trading VaR reduced over the course of the second quarter, primarily due to reduced volatility in the market data used in the VaR calculation.
   
·
The maximum non-trading credit spread VaR in Q2 2011 was significantly lower than in Q1 2011. The Q1 2011 maximum VaR was high due to a change in the time series used for the Dutch RMBS portfolio in RBS N.V. where more relevant and granular market data had become available and provided a better reflection of the risk in the portfolio. The Q2 2011 credit spread VaR decreased through the period as the volatile market data continued to drop out of the 500 day time series used in the VaR calculation.
 
 
 
Half year ended
 
30 June 2011
  
30 June 2010 (1)
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
Non-trading VaR
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
8.0 
8.3 
10.8 
5.7 
  
8.8 
7.3 
13.3 
5.5 
Credit spread
21.4 
18.0 
39.3 
14.2 
  
44.6 
23.0 
101.2 
23.0 
Currency
1.1 
3.3 
3.3 
0.1 
  
1.7 
3.4 
7.6 
0.3 
Equity
2.3 
2.0 
3.1 
2.0 
  
0.8 
0.3 
3.5 
0.2 
Diversification
  
(13.1)
        
(6.3)
    
                   
Total
22.6 
18.5 
41.6 
13.4 
  
42.0 
27.7 
98.0 
25.0 
                   
Core
22.0 
19.4 
38.9 
13.5 
  
41.6 
27.4 
98.1 
25.0 
Non-Core
3.2 
4.3 
4.3 
2.2 
  
0.9 
1.2 
3.6 
0.3 
 
Note:
(1)
Revised to exclude LAR portfolios.
 


 
Risk and balance sheet management (continued)
 
Market risk (continued)
 
Key points
·
As for traded VaR, the Group's non-trading VaR was significantly lower at the end of H1 2011, when compared with the period end H1 2010, as the exceptional volatility of the market data from the period of the financial crises continued to drop out of the 500 days of time series data used in the VaR calculation.
   
·
The maximum credit spread VaR was significantly higher in the half year ended in 2010 than in  the half year ended 2011. This was primarily due to the increased market volatility experienced since the credit crisis being fully incorporated into the two year time series used by the VaR model.  This volatility was particularly pronounced in respect of credit spreads and had a marked impact on credit spread VaR.
   
·
A methodology enhancement to the ABS VaR was approved and incorporated into the regulatory model in mid-January 2010 which significantly reduced the credit spread VaR and the total and Core VaR. The enhancement better reflected the risk in the context of position changes, downgrades and vintage as well as improving differentiation between prime, Alt-A and sub-prime exposures.
 
 
 


 
Risk and balance sheet management (continued)
 
Market risk (continued)
 
Structured Credit Portfolio (SCP)
 
 
Drawn notional
  
Fair value
 
CDOs 
CLOs 
MBS (1)
Other 
 ABS 
Total 
  
CDOs 
CLOs 
MBS (1)
Other 
 ABS 
Total 
 
£m 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
                       
30 June 2011
                      
1-2 years
- 
- 
45 
46 
91 
  
- 
- 
44 
41 
85 
2-3 years
11 
- 
- 
183 
194 
  
10 
- 
- 
170 
180 
3-4 years
5 
- 
11 
48 
64 
  
5 
- 
10 
46 
61 
4-5 years
- 
15 
- 
56 
71 
  
- 
14 
- 
53 
67 
5-10 years
95 
396 
315 
365 
1,171 
  
84 
370 
245 
322 
1,021 
>10 years
390 
498 
551 
526 
1,965 
  
167 
420 
391 
388 
1,366 
                       
 
501 
909 
922 
1,224 
3,556 
  
266 
804 
690 
1,020 
2,780 
                       
31 March 2011
                      
1-2 years
- 
19 
- 
38 
57 
  
- 
18 
- 
34 
52 
2-3 years
12 
19 
43 
70 
144 
  
12 
17 
42 
64 
135 
3-4 years
- 
5 
11 
206 
222 
  
- 
5 
10 
194 
209 
4-5 years
15 
15 
- 
36 
66 
  
15 
14 
- 
33 
62 
5-10 years
96 
467 
313 
385 
1,261 
  
85 
435 
232 
342 
1,094 
>10 years
397 
624 
561 
530 
2,112 
  
154 
500 
400 
369 
1,423 
                       
 
520 
1,149 
928 
1,265 
3,862 
  
266 
989 
684 
1,036 
2,975 
                       
31 December 2010
                      
1-2 years
- 
- 
- 
47 
47 
  
- 
- 
- 
42 
42 
2-3 years
85 
19 
44 
98 
246 
  
81 
18 
37 
91 
227 
3-4 years
- 
41 
20 
205 
266 
  
-  
37 
19 
191 
247 
4-5 years
16 
- 
- 
- 
16 
  
15 
- 
- 
- 
15 
5-10 years
98 
466 
311 
437 
1,312 
  
87 
422 
220 
384 
1,113 
>10 years
412 
663 
584 
550 
2,209 
  
161 
515 
397 
367 
1,440 
                       
 
611 
1,189 
959 
1,337 
4,096 
  
344 
992 
673 
1,075 
3,084 
 
Note:
(1)
MBS include sub-prime RMBS with a notional amount of £451 million (31 March 2011 - £455 million; 31 December 2010 - £471 million) and a fair value of £325 million (31 March 2011 - £330 million; 31 December 2010 - £329 million), all with residual maturities of greater than 10 years.
 
The SCP non-trading risk in Non-Core is not measured using VaR as the Group believes this is not an appropriate tool for this portfolio of illiquid debt securities. The reduction in CLO drawn notional and fair value in Q2 2011 was due to positions paying down.
 
 

 

 
 
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: 5 August 2011
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary