ANNUAL REPORT & ACCOUNTS - Coventry Building Society

NOTES TO THE ACCOUNTS(continued)30. Derivative financial instruments (continued)• Interest rate swap agreements under which the Group receives a fixed rate of interest and pays interest based on LIBOR. Theseswaps are used to hedge the exposure to changes in the fair value of fixed rate share liabilities as a result of changes in marketinterest rates. These swaps have a nominal principal amount of £3,075.0 million (2011: £4,465.0 million) and a net positive fairvalue of £37.0 million (2011: net positive £37.0 million).• Interest rate swap agreements under which the Group pays a fixed rate of interest and receives interest based on LIBOR. Theseswaps are used to hedge the exposure to changes in the fair value of fixed rate gilts, Government guaranteed bonds, bondsissued by supranational organisation or covered bonds, purchased in the wholesale market as a result of changes in marketinterest rates. These swaps have a nominal principal amount of £1,398.0 million (2011: £1,448.0 million) and a net negative fairvalue of £254.8 million (2011: net negative £196.9 million).• Interest rate swap agreements under which the Group receives a fixed rate of interest and pays interest based on LIBOR. Theseswaps are used to hedge the exposure to changes in the fair value of fixed rate bonds or liabilities issued in the wholesalemarket as a result of changes in market interest rates. These swaps have a nominal principal amount of£1,664.1 million (2011: £2,148.3 million) and a net positive fair value of £241.9 million (2011: net positive £216.9 million).• Interest rate cap agreements under which the Group pays an initial premium and is subsequently compensated to the extentthat LIBOR exceeds the cap strike rate. These caps are used to hedge changes in the fair value of exposure to the risk thatmarket rates exceed the cap on capped rate mortgage assets. These caps have a nominal principal amount of £458.0 million(2011: £748.0 million) and a net positive fair value of £nil (2011: net positive £0.3 million).• Cross currency swaps under which the Group receives interest at a fixed rate of euros and pays interest based on LIBOR. Theseswaps are used to hedge the exposure to changes in the fair value of euro denominated bonds issued in the wholesale marketas a result of changes in market interest rates and exchange rates. These cross currency swaps have a nominal principalamount of £975.1 million (2011: £570.1 million) and a net negative fair value of £41.4 million (2011: £36.2 million).• The derivative gains and losses for the year in respect of fair value hedges comprise losses on derivatives of £2.6 million(2011: £12.3 million gains) and associated gains on hedged items of £3.0 million (2011: £11.6 million losses).Hedges not qualifying for hedge accountingAt 31 December 2012 the Group held the following interest rate derivative contracts which do not qualify for hedgeaccounting:• Interest rate floor agreements under which the Group pays an initial premium and is subsequently compensated to theextent that LIBOR falls below the floor strike rate. These floors are used to hedge the risk of long-term low rates ofinterest. These floors have a nominal principal amount of £40.0 million (2011: £40.0 million) and a net positive fair valueof £0.3 million (2011: £0.8 million).• The derivative gains and losses for the year in respect of hedges that do not qualify for hedge accounting compriselosses on derivatives of £0.3 million (2011: losses of £0.2 million).At 31 December 2012 the Society held the following interest rate derivative contracts, which do not qualify for hedgeaccounting:• Intra-group interest rate swaps with the subsidiary that operates the Group’s covered bond programme. Under thisagreement, the Society receives interest based on three-month LIBOR and pays interest based on one-month LIBOR.These swaps have a nominal principal amount of £500.0 million (2011: £nil) and a positive net positive fair value of£1.8 million (2011: £nil) at Society level but are eliminated at Group level.In addition to the above, the Society also has intra-group interest rate swaps with the subsidiaries that operate theGroup’s covered bonds and RMBS programmes. Under these agreements, the Society receives the interest income of thesubsidiaries’ mortgage books and pays LIBOR on the same basis as the subsidiaries’ interest expense. These swaps have anominal principal amount of £5,365.9 million (2011: £4,487.9) and are accounted for on an accruals basis, in accordance with90IAS 39.