Salomon Swapco Inc
Notes to Financial Statements
Note 5. Receivables from and payables to affiliates (continued)
Costs incurred by Salomon Brothers Inc or other affiliates on behalf of Swapco are reimbursed monthly. Fee
amounts are payable at least quarterly. Swapco has arranged a committed revolving credit facility with SBHC
under which it may borrow up to $150 million (and for which Swapco pays a negotiated commitment fee).
Unsecured loans from SBHC bear interest at market rates. Interest payments made during 1996 (both to third
parties and to SBHC) totaled $11.6 million; during 1995, they totaled $4.9 million.
Note 6. Capital
By resolutions adopted by its board of directors, and in accordance with agreements with rating agencies, Swapco
is required to maintain a level of capital, as defined, which varies with the size and composition of its derivatives
portfolio. Minimum required capital is recomputed every New York business day and is compared with actual
capital, as defined. Any excess of minimum required capital over actual capital must be eliminated within two
New York business days or Swapco will terminate its outstanding transactions at mid-market values.
Capital, as defined for capital adequacy purposes, differs from Stockholder's equity on the Statement of Financial
Condition in a number of respects. Most significantly,
Prepaid expenses and other assets and Deferred revenue,
which appear as assets and liabilities on the Statement of Financial Condition, are not included in the evaluation of
capital adequacy. Those balances represent amounts which have already been exchanged in cash and which will
not be recovered (in the case of
Prepaid expenses) or refunded (in the case of Deferred revenue) in the event of a
termination. They are, therefore, not relevant to an assessment of capital adequacy.
In addition, permitted investments are presented on the Statement of Financial Condition at their market values but
are subject to haircuts (which vary by security) in the evaluation of capital adequacy. These haircuts also vary
between Swapco's rating agencies, producing differences in the computation of capital for capital adequacy
purposes.
At December 31, 1996, the most conservative (i.e., lowest) computation of actual capital for capital adequacy
purposes was $278 million. The comparable amount at December 31, 1995 was $728 million. The difference
between that measure and Stockholder's equity at the same date is accounted for as follows (dollars in thousands):
December 31, 1996 1995
Stockholder's equity
$137,371
$666,319
Prepaid expenses and other assets
(16,661)
(22,372)
Deferred revenue
187,984
129,505
Haircuts on permitted investments
(31,528)
(49,106)
Other differences
1,121 3,827
Capital for capital adequacy purposes
$278,287 $728,173
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