Swapco has a separate board of direc-
tors, four members of whom are unaf-
filiated with Salomon. Additionally, one
Swapco senior officer also must be un-
affiliated with Salomon. Swapco main-
tains a separate staff responsible for
operations and compliance with estab-
lished procedures. The company ad-
heres to specific operating guidelines
that are monitored by external auditors
to ensure compliance.
Business Description
Exchange-traded and OTC derivative
products play an integral role in the
global capital markets, providing a
number of well established benefits.
Derivative products are used by debt
issuers and investors to: lower funding
costs; achieve greater diversification;
and shape risk and return. The OTC
derivatives market involves direct
transactions between two counterpar-
ties, without the benefit of credit inter-
mediation from an organized exchange.
As a result, the safety and timeliness of
cash flows over a transaction's term ul-
timately depend on the counterparties'
creditworthiness, particularly for longer
dated transactions and those involving
exchange of notional amounts.
Swapco's portfolio has shown moderate
growth recently, following several years
of rapid growth. At June 30, 1997, the
portfolio had a total notional value of
$200.9 billion, excluding matched
transactions with SBHC. This com-
pares with $166.3 billion at year-end
1996 and $113.2 billion at the end of
1995. It will become increasingly diffi-
cult for the portfolio to experience dra-
matic growth, given its size and
maturity profile. Instead, the portfolio
should experience relatively modest
growth in the future, as new transac-
tions largely replace those that are ma-
turing.
Under the terms of its operating proce-
dures, Swapco does not enter into com-
modity-linked transactions. The company
monitors its portfolio profile to limit
large credit exposures. Swapco's con-
servative product mix is underscored
by the portfolio's maturity profile. At
June 30, 1997, 58.2% of transactions
had maturities of five years or fewer (see
Portfolio Maturity Profile chart below left).
Swapco also guarantees affiliate deriva-
tive transactions, primarily equity op-
tions, when legal or regulatory restrictions
prohibit dealing directly with Swapco.
Guaranteed affiliates currently include
Salomon Brothers Inc, Salomon Broth-
ers International Ltd., Salomon Broth-
ers AG, Salomon Brothers AG (Tokyo
Branch), Salomon Brothers U.K. Eq-
uity Ltd., and Salomon Forex Inc.
Counterparty Credit
Quality
Over time, the market value of deriva-
tive transactions increases or decreases
according to general changes in interest
rates, foreign exchange rates, and other
market conditions. If a counterparty
defaults on a transaction that is "in the
money" for Swapco, the potential for
loss exists. Thus, counterparty credit
risk is a critical factor in assessing capi-
tal levels. Swapco minimizes counter-
party credit risk, and potential capital
usage, by limiting new transactions to
Counterparty Credit Profile
($ Mil., As of June 30, 1997)
Credit
Rating*
Exposure
%
`AAA'
440.3
60.9
`AA'
113.8
15.8
`A'
98.7
13.7
`BBB'
8.9
1.2
Other Acceptable Counterparties
60.7
8.4
Total
722.4
100.0
*Long-term debt rating. Net exposure based on mark-to-market valuations, excluding collateral
received from or advanced to counterparties.
Salomon Swapco Inc
2
Fitch Investors Service, L.P.
