Derivative financial instruments

The fair values and notional amounts of derivative instruments are set out in the following table:


	2025			2024
	Contract/ notional amount £m	Fair value		Contract/ notional amount £m	Fair value
	Contract/ notional amount £m	Assets £m	Liabilities £m	Contract/ notional amount £m	Assets £m	Liabilities £m
Trading and other
Exchange rate contracts	689,215	7,594	6,454	707,329	10,247	9,172
Interest rate contracts	15,086,291	11,797	8,924	12,864,265	13,436	11,644
Credit derivatives	5,566	75	170	6,103	87	172
Equity, commodity and other contracts	8,914	236	294	8,678	247	333
Total derivative assets/liabilities – trading and other	15,789,986	19,702	15,842	13,586,375	24,017	21,321
Hedging
Interest rate
Currency swaps	35	4	–	43	2	–
Interest rate swaps	211,737	8	253	231,064	6	337
Designated as fair value hedges	211,772	12	253	231,107	8	337
Foreign exchange
Currency swaps	1,554	6	33	1,963	30	14
Interest rate
Interest rate swaps	571,126	7	4	484,996	10	4
Designated as cash flow hedges	572,680	13	37	486,959	40	18
Total derivative assets/liabilities – hedging	784,452	25	290	718,066	48	355
Total recognised derivative assets/liabilities	16,574,438	19,727	16,132	14,304,441	24,065	21,676

The notional amount of the contract does not represent the Group’s exposure to credit risk, which is limited to the current cost of replacing

contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit

enhancement techniques such as netting and collateralisation, where security is provided against the exposure; a large proportion of the

Group’s derivatives are held through exchanges such as London Clearing House and are collateralised through those exchanges.

The Group holds derivatives as part of the following strategies:

•Customer driven, where derivatives are held as part of the provision of risk management products to Group customers

•To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting

strategy adopted by the Group is to utilise a combination of fair value and cash flow hedge approaches

•Derivatives held in policyholder funds as permitted by the investment strategies of those funds

The principal derivatives used by the Group are as follows:

•Interest rate related contracts that include interest rate swaps, forward rate agreements and options. An interest rate swap is an

agreement between two parties to exchange fixed and floating interest payments, based upon interest rates defined in the contract,

without the exchange of the underlying principal amounts. Forward rate agreements are contracts for the payment of the difference

between a specified rate of interest and a reference rate, applied to a notional principal amount at a specific date in the future. An

interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to fix the rate of interest on a future

loan or deposit, for a specified period and commencing on a specified future date

•Exchange rate related contracts that include forward foreign exchange contracts, currency swaps and options. A forward foreign

exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate.

Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies. A currency option

gives the buyer, on payment of a premium, the right, but not the obligation, to sell specified amounts of currency at agreed rates of

exchange on or before a specified future date

•Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure

to credit risk. A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for

guaranteeing to make a specific payment should a negative credit event take place

•Equity, commodity and other contracts including commodity swaps and options

Note 19: Derivative financial instruments continued

The Group’s hedged items and gains and losses arising from hedge accounting are summarised as follows:


	Carrying amount of the hedged item		Accumulated amount of fair value adjustment on the hedged item		Change in fair value of hedged item for ineffectiveness assessment £m	Hedge ineffectiveness recognised in the income statement4 £m
	Carrying amount of the hedged item
Fair value hedges	Assets £m	Liabilities £m	Assets £m	Liabilities £m
At 31 December 2025
Interest rate
Fixed rate mortgages1	121,732	–	(178)	–	725	(68)
Fixed rate issuance2	–	45,053	–	829	(530)	10
Fixed rate bonds3	35,058	–	(1,053)	–	(138)	4
Total	156,790	45,053	(1,231)	829	57	(54)
At 31 December 2024
Interest rate
Fixed rate mortgages1	124,013	–	(890)	–	(184)	(52)
Fixed rate issuance2	–	51,499	–	1,340	(75)	(11)
Fixed rate bonds3	29,264	–	(1,070)	–	(1,158)	(18)
Total	153,277	51,499	(1,960)	1,340	(1,417)	(81)

1Included within loans and advances to customers.

2Included within debt securities in issue at amortised cost and subordinated liabilities.

3Included within financial assets at amortised cost and financial assets at fair value through other comprehensive income.

4Hedge ineffectiveness is included in the income statement within net trading income.


	Gain (loss) recognised in other comprehensive income £m	Amounts reclassified from reserves to net interest income as:			Cash flow hedge reserve		Change in fair value of hedged item for ineffectiveness assessment £m	Hedge ineffectiveness recognised in the income statement1 £m
Cash flow hedges	Gain (loss) recognised in other comprehensive income £m	Hedged cash flows that will no longer occur £m	Hedged item affected income statement £m		Continuing hedges £m	Discontinued hedges £m
At 31 December 2025
Foreign exchange
Foreign currency issuance2	(3)	–		(4)	(11)	138	7	–
Customer deposits3	–	–		4	–	9	–	–
Interest rate
Customer loans4	294	–		1,131	(2,159)	(1,475)	(802)	63
Central bank balances5	205	–		793	(100)	(831)	(487)	3
Customer deposits3	(14)	–		(55)	1,527	38	72	(12)
Total	482	–		1,869	(743)	(2,121)	(1,210)	54
At 31 December 2024
Foreign exchange
Foreign currency issuance2	61	–		(4)	75	59	(60)	–
Customer deposits3	–	–		–	–	5	–	–
Interest rate
Customer loans4	(2,700)	–		2,458	(3,470)	(1,590)	982	(61)
Central bank balances5	(780)	–		937	(1,012)	(917)	384	(7)
Customer deposits3	842	–		(794)	1,592	42	(51)	8
Total	(2,577)	–		2,597	(2,815)	(2,401)	1,255	(60)

1Hedge ineffectiveness is included in the income statement within net trading income. The reported hedge ineffectiveness includes an adjustment for off-market derivatives.

2Included within debt securities in issue at amortised cost and subordinated liabilities.

3Included within customer deposits.

4Included within loans and advances to customers.

5Included within cash and balances at central banks.

There was no gain or loss in either 2025 or 2024 reclassified from the cash flow hedge reserve for which hedge accounting had previously

been used but for which the hedged future cash flows are no longer expected to occur.

The accumulated amount of fair value hedge adjustments remaining on the balance sheet for hedged items that have ceased to be

adjusted for hedging gains and losses is a liability of £524 million relating to fixed rate issuances of £498 million and mortgages of

£26 million (2024: liability of £980 million relating to fixed rate issuances of £582 million and mortgages of £398 million).

Note 19: Derivative financial instruments continued

Details of the Group’s hedging instruments are set out below:


	Maturity								Changes in fair value used for calculating hedge ineffectiveness £m
Fair value hedges	Up to 1 month £m	1 to 3 months £m	3 to 12 months £m		1 to 5 years £m	Over 5 years £m		Total £m
At 31 December 2025
Interest rate
Cross currency swap
Notional	–	–		–	35		–	35	2
Average fixed interest rate	–	–		–	1.28%		–
Average EUR/GBP exchange rate	–	–		–	1.38		–
Interest rate swap
Notional	395	5,503		31,294	132,417		42,128	211,737	(113)
Average fixed interest rate	3.00%	3.24%		3.70%	3.33%		1.96%
								211,772	(111)
Cash flow hedges
At 31 December 2025
Foreign exchange
Currency swap
Notional	152	162		157	884		199	1,554	(7)
Average EUR/GBP exchange rate	1.13	1.16		1.14	0.98		0.95
Average USD/GBP exchange rate	1.33	1.31		1.30	1.29		–
Interest rate
Interest rate swap
Notional	12,636	31,911		114,577	321,862		90,140	571,126	1,771
Average fixed interest rate	4.03%	3.43%		3.65%	3.59%		3.56%
								572,680	1,764
Total								784,452	1,653

Fair value hedges
At 31 December 2024
Interest rate
Cross currency swap
Notional	–	–		–	–		43	43	–
Average fixed interest rate	–	–		–	–		1.28%
Average EUR/GBP exchange rate	–	–		–	–		1.38
Interest rate swap
Notional	5,236	13,781		55,607	111,300		45,140	231,064	1,336
Average fixed interest rate	3.04%	3.68%		4.04%	3.36%		2.27%
								231,107	1,336
Cash flow hedges
At 31 December 2024
Foreign exchange
Currency swap
Notional	107	441		646	763		6	1,963	61
Average EUR/GBP exchange rate	1.17	1.16		1.15	1.10		1.06
Average USD/GBP exchange rate	1.30	1.27		1.27	1.27		1.30
Interest rate
Interest rate swap
Notional	9,195	21,010		129,436	262,387		62,968	484,996	(600)
Average fixed interest rate	4.32%	4.36%		3.84%	3.34%		3.01%
								486,959	(539)
Total								718,066	797