13. Derivatives and other financial instruments

A substantial portion of Reuters revenue is receivable in foreign currencies and committed under one- and two-year contracts with terms of payment up to six months in advance. As such, Reuters is subject to currency exposure from committed revenue. In addition, Reuters is subject to interest rate risk from the investment of cash balances. Reuters seeks to limit these risks by entering into a mix of derivative financial instruments which include forward contracts, options (including cylinders), swaps and forward rate agreements. A more detailed discussion on Reuters Treasury Management can be found in the operating and financial review.

If the derivative financial instruments were considered separately from the underlying future revenue and interest income, Reuters would be subject to market risk on these financial instruments from fluctuations in currency and interest rates. Reuters only enters into such derivative financial instruments to hedge (or reduce) the underlying exposure described above. There is, therefore, no net market risk on such derivative financial instruments and only a credit risk from the potential non-performance by counterparties. The amount of this credit risk is generally restricted to any hedging gain and not the principal amount hedged.

Reuters may also purchase options to hedge translation exposure arising on the conversion of the results of subsidiaries whose functional currency is not sterling – principally Instinet and TIBCO. In such cases the maximum cash outflow from this activity is the cost of the option premia.

Derivative instruments held at 31 December were:
Click icon for this table in Excel format		1998			1997			1996
		Gross contract amounts £m	Carrying value £m	Fair value £m	Gross contract amounts £m	Carrying value £m	Fair value £m	Gross contract amounts £m	Carrying value £m	Fair value £m
Currency management
Foreign exchange
forward contracts:
	Contracts in profit	97	–	5	324	–	39	531	–	29
	Contracts in loss	257	–	(10)	59	–	–	7	–	–
Foreign currency options		399	–	(1)	53	2	2	166	3	13
		753	–	(6)	436	2	41	704	3	42
Interest rate management
Interest rate swaps		100	–	(1)	140	1	3	250	2	8
Forward rate agreements		–	–	–	50	–	–	450	–	–
		100	–	(1)	190	1	3	700	2	8

Carrying values are amounts recorded in the balance sheet and comprise deferred option premia, which are recognised over the period to which the option relates, and certain locked in profits on swap contracts which have been recognised for accounting purposes but where settlement in cash has not yet occurred. Fair values represent the mark to market value of contracts at the balance sheet date.

The foreign exchange forward contracts are held 52% in continental European currencies (1997 – 56%, 1996 – 74%). The remaining contracts were principally in Japanese yen and US dollars.

Foreign exchange forward contracts and options mature at dates up to 22 months from the balance sheet date. Interest forward rate agreements, swaps and options on swaps commence and mature at various dates through April 2000.

The fair value of foreign currency and interest rate management instruments is estimated on the basis of market quotes, discounted to current value using market-quoted interest rates.

The weighted average fixed rate receivable on the interest rate swaps at 31 December 1998 was 7% (1997 – 8%, 1996 – 9%) and the weighted average variable rate payable was 6% (1997 – 7%, 1996 – 7%). The weighted average variable rate is based on the rate implied in the yield curve at the balance sheet date.

All derivative instruments are unsecured. However, Reuters does not anticipate non-performance by the counterparties who are all banks with recognised credit ratings of ‘A’ or higher.

Carrying and fair values of group financial assets and liabilities at 31 December were:

		1998		1997		1996
		Carrying value £m	Fair value £m	Carrying value £m	Fair value £m	Carrying value £m	Fair value £m
Derivative instruments		–	(7)	3	44	5	50
Other assets:
	Interests in own shares	45	77	39	79	28	73
	Other fixed asset investments	25	67	19	33	22	46
		463	463	344	344	269	269
		1,006	1,006	1,356	1,356	1,096	1,096
Liabilities:
	Current liabilities	(1,507)	(1,507)	(436)	(436)	(360)	(360)
	Long-term liabilities	(4)	(4)	(18)	(18)	(22)	(22)

Financial instruments exclude prepayments and accrued income and taxation classified with debtors and accruals, deferred income and taxation classified within creditors.

Monetary assets and liabilities by currency, excluding the functional currency of each operation at 31 December 1998, were:

	Net foreign currency monetary assets/(liabilities) £m
	Sterling	US dollar	Swiss franc	French franc	Singapore dollar	Hong Kong dollar	Other	Total
Functional currency of operation
Sterling	–	16	(21)	9	(10)	(26)	48	16
US dollar	32	–	8	–	–	21	9	70
Total	32	16	(13)	9	(10)	(5)	57	86

Net currency gains and losses arising from monetary assets/(liabilities) not in the functional currency of an operation are recognised in its profit and loss account. Those arising from the translation of US dollar functional currency financial statements into sterling (principally Instinet and TIBCO) are recognised in the statement of recognised gains and losses.

The currency and interest rate profile of the group’s short-term investments at 31 December 1998 was:

	Short-term investments				Fixed rate investments
	Total £m	Floating rate investments £m	Fixed rate investments £m		Weighted average interest rate at 31 December %	Weighted average time for which rate is fixed years
Sterling	620	615	5		7	2
US dollar	267	171	96		6	2
Other	75	71	4		4	5
Total short-term investments
31 December 1998	962	857	105		6	2
31 December 1997	1,275	1,212	63		7	2
31 December 1996	1,019	979	40		7	2

Sterling and US dollar floating rate investments include £623 million (1997 – £789 million) of money market deposits and nil (1997 – £265 million) of equity based investments which mature within three months of the balance sheet date.

Fixed rate investments are those investments which have an interest rate fixed for a period of greater than one year.

The currency and interest rate profile of the group’s total borrowings at 31 December 1998 was:

	Borrowings				Fixed rate Borrowings
	Total £m	Floating rate borrowings £m	Fixed rate borrowings £m		Weighted average interest rate at 31 December %	Weighted average time for which rate is fixed years
Sterling	994	990	4		9	1
Other	15	15	–		–	–
Total borrowings
31 December 1998	1,009	1,005	4		9	1
31 December 1997	66	58	8		9	2
31 December 1996	46	35	11		9	3

The floating rate borrowings comprise bank loans and overdrafts bearing interest at rates based on local money market rates and commercial paper with a maturity of less than 12 months. The weighted average interest rate on bank borrowings at 31 December 1998 was 4% (1997 – 4%, 1996 – 4%).

Total borrowings are repayable as follows:

	1998 £m	1997 £m	1996 £m
Within one year	1,005	48	24
Between one and two years	4	18	4
Between two and five years	–	–	18
	1,009	66	46
Bank borrowings secured against freehold property	3	15	19

Bank borrowings at 31 December 1998 included a short-term loan denominated in sterling, secured on freehold property held at a cost of £93 million. The interest rate payable on this loan was 8.8%.

In December 1997, Reuters Group PLC entered into syndicated credit facilities for £1.5 billion to cover payments due to shareholders under the capital reorganisation. A facility of £1.0 billion expired on 2 December 1998. The remaining £0.5 billion which is at variable interest rates based on LIBOR, the London Interbank Offer Rate, may be drawn and redrawn up to one month prior to its maturity in December 2002.

In March 1998 Reuters established a Euro Commercial Paper Programme. This provides access to £1.5 billion of uncommitted finance of which £511 million was unused at 31 December 1998. In December 1998 Reuters established a £1.0 billion Euro Medium Term Note Programme.

In addition, at 31 December 1998 Reuters had unused, short-term, uncommitted bank borrowing facilities denominated in various currencies, the sterling equivalent of which was approximately £230 million, at money market rates varying principally between 2% and 13%, depending on the currency.