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 that 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 presented 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
12
Salomon Swapco Inc
Summary of Accounting Policies
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 caption
SBHC derivative
receivables.
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.
Prepaid expenses and other assets
Prepaid expenses and other assets include, primarily, the
unamortized portion of sales commissions which
Swapco, up to September 30, 1994, paid to affiliated
companies when trades were consummated. Swapco
recognizes these payments as expense over the life of the
transactions involved.
__________
®
Swapco is a registered service mark of Salomon Swapco Inc.
13
