Salomon Swapco Inc
Summary of Accounting Policies
Related parties
Swapco is organized as a legally and financially separate,
bankruptcy remote corporation from its Salomon
affiliates. As a result, Swapco's creditors rely on
Swapco's credit, not on Salomon's.
SBHC has contributed capital to Swapco for the purpose
of enhancing the creditworthiness of Swapco's
obligations. This capital is not available for Salomon's
creditors until Swapco's creditors have been paid in full.
Under the terms of its Certificate of Incorporation,
Swapco is required to have two independent directors on
its board and two independent officers responsible for
important aspects of day-to-day operations.
Swapco's assets are invested separately from those of
Salomon and are held by a third-party custodian.
Significant relationships between Swapco and its
affiliates are governed by formal agreements which are
designed to compensate each of the parties on terms
which approximate those which would prevail in
comparable arms-length transactions.
Certain Swapco costs are incurred, in the first instance,
by Salomon Brothers Inc or other Salomon affiliates on
Swapco's behalf. Such amounts are reimbursed by
Swapco on a monthly basis.
Swapco employees are all seconded employees of
Salomon Brothers Inc. As such, those employees
participate in medical and other employee benefit plans
of Salomon Brothers Inc. Swapco reimburses Salomon
Brothers Inc on a monthly basis for the full cost of that
participation.
16
Salomon Swapco Inc
Notes to Financial Statements
Note 1. Derivatives portfolio
Swapco's derivatives portfolio at September 30, 1996
included transactions with an aggregate notional
principal amount of $161 billion. Each of those
transactions is matched with an offsetting trade with
SBHC, producing a total notional portfolio of $322
billion.
In addition, at September 30, Swapco had guaranteed
options written by Salomon affiliates with an aggregate
notional amount of $60 million. For these transactions,
Swapco has accepted a contingent liability only. Swapco
will be called upon to perform only in the event of a
default on the part of the Salomon entity which wrote the
option. The current market value of all guaranteed
options, plus a margin to protect against changes in
value, is included as part of Swapco's minimum required
capital. At September 30, 1996, Swapco also had hedge
swaps with SBHC, related to investment securities, with
a notional amount of $154 million.
The distribution of Swapco's notional book at September
30, 1996 by counterparty credit rating follows (dollar
amounts in thousands).
Notional Percent
Moody's rating
Aaa
$ 53,439,314
33.1%
Aa1
6,424,795
4.0
Aa2
37,436,744
23.2
Aa3
21,531,924
13.4
A1
24,347,805
15.1
A2
5,670,773
3.5
A3
3,802,893
2.4
Baa1
275,000
.2
Baa2
50,000
.0
Baa3
958,401
.6
Other acceptable
counterparties
7,255,087
4.5
Counterparties rated below
investment grade
0
.0
$161,192,736
100.0%
17
