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Salomon - Annual R 96 (Page 14)

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Salomon - Annual R 96
Salomon Swapco Inc
Summary of Accounting Policies
Description of business
Salomon Swapco Inc is a wholly-owned subsidiary of SBHC, itself a wholly-owned subsidiary of Salomon Inc.
Swapco enters into a broad range of derivative transactions, including swaps, options and forwards on interest
rates, currencies and equities, with creditworthy counterparties around the world. All of Swapco's derivative
transactions are hedged with offsetting trades with SBHC, leaving Swapco with no market risk. Resulting credit
exposure which Swapco may have to SBHC is more than fully collateralized by SBHC. The overcollateralization is
designed to protect Swapco from possible adverse market movements during a termination period. Swapco has
received credit ratings of Aaa from Moody's Investors Service, AAAt from Standard & Poor's Corporation, and
AAA from Fitch Investors Service.
Basis of presentation
The financial statements of Swapco are prepared in accordance with generally accepted accounting principles in
the United States and prevailing industry practice, both of which require the use of management's best judgment of
estimates. Estimates may vary from actual results. The financial statements are presented in U.S. dollars. Income
or expense denominated in other currencies is translated at rates prevailing when the income was earned or the
expense incurred. Non-U.S. dollar denominated assets and liabilities are translated at spot exchange rates
prevailing at close of business on the reporting date. The effect of translating non-U.S. dollar currency balances
into dollars is reflected in current earnings.
Securities purchased under agreements to resell
Securities purchased under agreements to resell are generally overnight agreements. They are carried at their
contractual amounts and are collateralized by U.S. Government securities. Swapco takes possession of the
underlying collateral, monitors its market value relative to the amounts due under the agreements, including
accrued interest, and when necessary, requires prompt transfer of additional collateral or reduction in the
repurchase agreement balance in order to maintain contractual margin protection.
Investment securities and related hedge swaps
Under its operating guidelines, Swapco may invest in U.S. Treasury and Agencies and other triple-A rated debt
securities. These positions are recorded at their market value on a trade date basis. Swapco has entered into
interest rate swap agreements with SBHC under which Swapco pays the total return on the investment securities
which it owns and receives the daily federal funds rate of interest. These hedge swaps effectively protect Swapco
from changes in the market value of its investment securities. Like the investment securities, the hedge swaps are
recorded at their market value on a trade date basis. Their carrying value is included in the Statement of Financial
Condition in the captions
SBHC derivative receivables and SBHC derivative payables at December 31, 1996 and
1995, respectively.
Derivative receivables and payables
Derivative receivables (and payables) represent the net mark-to-market amounts owed to (or by) Swapco from (or
to) individual counterparties under derivative transactions. Each Swapco« customer transaction is matched by an
equal and offsetting transaction with SBHC. Derivative transactions are recorded on trade date and are valued at
mid-market prices. Derivative receivables and payables also include cash collateral advanced to or by Swapco
under derivative master netting agreements. Derivative receivables and payables do not include the value of
securities pledged to or by Swapco.
______________
______________
«Swapco is a registered service mark of Salomon Swapco Inc.
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