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Salomon - IR 98 1 Q (Page 7)

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Salomon - IR 98 1 Q
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 Travelers
Group 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
IBCA, Inc.
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
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.
Salomon Swapco Inc
Summary of Accounting Policies
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
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
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.

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