Natwest Group PLC

Natwest Markets PLC RR3QWICWWIPCS8A4S074 2020-01-01 2020-12-31 RR3QWICWWIPCS8A4S074 2021-01-01 2021-12-31 RR3QWICWWIPCS8A4S074 2020-12-31 RR3QWICWWIPCS8A4S074 2021-12-31 RR3QWICWWIPCS8A4S074 2019-12-31 RR3QWICWWIPCS8A4S074 2020-01-01 2020-12-31 ifrs-full:SharePremiumMember RR3QWICWWIPCS8A4S074 2020-01-01 2020-12-31 ifrs-full:RetainedEarningsMember RR3QWICWWIPCS8A4S074 2020-01-01 2020-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember RR3QWICWWIPCS8A4S074 2020-01-01 2020-12-31 ifrs-full:ReserveOfCashFlowHedgesMember RR3QWICWWIPCS8A4S074 2020-01-01 2020-12-31 nwmp:ReserveOfExchangeDifferencesOnTranslationAndHedgesOfNetInvestmentsInForeignOperationsMember RR3QWICWWIPCS8A4S074 2020-01-01 2020-12-31 ifrs-full:NoncontrollingInterestsMember RR3QWICWWIPCS8A4S074 2021-01-01 2021-12-31 ifrs-full:SharePremiumMember RR3QWICWWIPCS8A4S074 2021-01-01 2021-12-31 ifrs-full:RetainedEarningsMember RR3QWICWWIPCS8A4S074 2021-01-01 2021-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember RR3QWICWWIPCS8A4S074 2021-01-01 2021-12-31 ifrs-full:ReserveOfCashFlowHedgesMember RR3QWICWWIPCS8A4S074 2021-01-01 2021-12-31 nwmp:ReserveOfExchangeDifferencesOnTranslationAndHedgesOfNetInvestmentsInForeignOperationsMember RR3QWICWWIPCS8A4S074 2021-01-01 2021-12-31 ifrs-full:NoncontrollingInterestsMember RR3QWICWWIPCS8A4S074 2019-12-31 ifrs-full:AdditionalPaidinCapitalMember RR3QWICWWIPCS8A4S074 2019-12-31 ifrs-full:IssuedCapitalMember RR3QWICWWIPCS8A4S074 2019-12-31 ifrs-full:NoncontrollingInterestsMember RR3QWICWWIPCS8A4S074 2019-12-31 ifrs-full:RetainedEarningsMember RR3QWICWWIPCS8A4S074 2019-12-31 nwmp:ReserveOfExchangeDifferencesOnTranslationAndHedgesOfNetInvestmentsInForeignOperationsMember RR3QWICWWIPCS8A4S074 2019-12-31 ifrs-full:ReserveOfCashFlowHedgesMember RR3QWICWWIPCS8A4S074 2019-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember RR3QWICWWIPCS8A4S074 2019-12-31 ifrs-full:SharePremiumMember RR3QWICWWIPCS8A4S074 2020-12-31 ifrs-full:NoncontrollingInterestsMember RR3QWICWWIPCS8A4S074 2020-12-31 ifrs-full:EquityAttributableToOwnersOfParentMember RR3QWICWWIPCS8A4S074 2020-12-31 ifrs-full:RetainedEarningsMember RR3QWICWWIPCS8A4S074 2020-12-31 nwmp:ReserveOfExchangeDifferencesOnTranslationAndHedgesOfNetInvestmentsInForeignOperationsMember RR3QWICWWIPCS8A4S074 2020-12-31 ifrs-full:ReserveOfCashFlowHedgesMember RR3QWICWWIPCS8A4S074 2020-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember RR3QWICWWIPCS8A4S074 2020-12-31 ifrs-full:AdditionalPaidinCapitalMember RR3QWICWWIPCS8A4S074 2020-12-31 ifrs-full:SharePremiumMember RR3QWICWWIPCS8A4S074 2020-12-31 ifrs-full:IssuedCapitalMember RR3QWICWWIPCS8A4S074 2021-12-31 ifrs-full:NoncontrollingInterestsMember RR3QWICWWIPCS8A4S074 2021-12-31 ifrs-full:EquityAttributableToOwnersOfParentMember RR3QWICWWIPCS8A4S074 2021-12-31 ifrs-full:RetainedEarningsMember RR3QWICWWIPCS8A4S074 2021-12-31 nwmp:ReserveOfExchangeDifferencesOnTranslationAndHedgesOfNetInvestmentsInForeignOperationsMember RR3QWICWWIPCS8A4S074 2021-12-31 ifrs-full:ReserveOfCashFlowHedgesMember RR3QWICWWIPCS8A4S074 2021-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember RR3QWICWWIPCS8A4S074 2021-12-31 ifrs-full:AdditionalPaidinCapitalMember RR3QWICWWIPCS8A4S074 2021-12-31 ifrs-full:SharePremiumMember RR3QWICWWIPCS8A4S074 2021-12-31 ifrs-full:IssuedCapitalMember iso4217:GBP NatW est M ark ets Plc 2021 Annual Report and Accounts Contents Strategic report 1 2021 Performance highlights 2 Our purpose framework 4 Chief Executive’s review 5 Outlook 6 Our business model 8 Our strategy 10 Operating environment 12 Risk management 16 Our stakeholders 20 Our colleagues 21 Learning and enterprise 22 Climate-related disclosures 36 Financial review 41 Board of directors and secretary 42 Risk and capital management 89 Report of the directors 93 Statement of directors’ responsibilities 94 Financial statements 179 Risk factors 201 Forward-looking statements Approval of Strategic report The Strategic report for the year ended 31 December 2021 set out on pages 1 to 33 was approved by the Board of Directors on 17 February 2022. By order of the Board Company Secretary Scott Gibson 17 February 2022 Chairman Frank Dangeard Executive Directors Robert Begbie, CEO David King, CFO Non-Executive Directors Vivek Ahuja Tamsin Rowe Anne Simpson Sarah Wilkinson Presentation of information NatWest Markets Plc (‘NWM Plc’) is a wholly owned subsidiary of NatWest Group plc or ‘the ultimate holding company’. The NatWest Markets Group (‘NWM Group’) comprises NWM Plc and its subsidiary and associated undertakings. The term ‘NatWest Group’ comprises NatWest Group plc and its subsidiary and associated undertakings. At natwestgroup.com: NatWest Group Annual Report and Accounts Gives an overview of our business and our 2021 financial and non-financial performance. Also includes our Financial statements and related notes on our governance and remuneration, and Risk and capital management reports. NatWest Group Climate-related Disclosures Report Details our progress in 2021 on our climate-related strategy, scenario analysis, risk management and metrics. NatWest Group ESG Supplement Provides an overview of our purpose in action and key environmental, social and governance matters including progress in 2021. NatWest Group Pillar 3 report Focuses on our regulatory reporting requirements and provides an explanation of our risk profile, including our capital adequacy, risk appetite and risk management. 2021 Performance highlights We have supported customers’ evolving needs with innovative solution s and continued to deliver an integrated customer proposition across NatWest Group. We have made good progress on building towards a sustainable business and creating a platform for growth in its chosen areas. We have reduced our risk-weighted assets (RWAs) and operating expenses in the year and, in Q4 2021, introduced changes to Rates within Fixed income which will improve the strategic alignment with the rest of the business and drive sustainable income growth. Please refer to the Chief Executive’s review on page 4 and the Financial review section on page 36 for further details on the financial performance for the period. MREL ratio ( 3) 42.1% 2020: 49.6% Liquidity coverage ratio ( 3) 205% 2020: 268% Capital and leverage highlights CET1 ratio ( 3) 17.9% 2020: 21.7% CRR leverage ( 3) 4.3% 2020: 5.2% RWAs ( 3) £22.7bn 2020: £25.6bn ESG highlights Climate and Sustainable Funding and Financing (4) £9.7bn 2020: £7.2bn Financial highlights Total income £401m 2020: £1,158m Income excl. asset disposals/strategic risk reduction & OCA (1) £459m 2020: £1,265m Other operating expenses ( 2) £919m 2020: £1,106m Operating loss before tax £(714)m 2020: £(315)m We help NatWest Group’s corporate and institutional customers manage their financial risks safely and achieve their short-term and long-term sustainable financial goals. We think and act as one bank for our customers, collaborating with teams across the NatWest Group to be the partner of choice for our customers and their financial markets needs. By focusing on the things we do best and that matter most to our customers, we help champion their potential. When people, families and businesses thrive, we all… Thrive Together (1) Asset disposals/strategic risk reduction includes the costs of exiting positions and the impact of risk reduction transactions entered into as part of the optimisation of the entity’s capital usage following the strategic announcements of 14 February 2020. OCA refers to own credit adjustments. (2) Excludes strategic costs and litigation and conduct costs. (3) These metrics are shown for NWM Plc. Capital, leverage and RWAs are based on the PRA transitional arrangements for NWM Plc. Regulatory capital is monitored and reported at NWM Plc level. (4) Funding and financing for climate and sustainable finance to support transition towards a net-zero and climate resilient economy. NatWest Group use internally defined Climate and Sustainable Finance Inclusion Criteria (CSFI criteria) to determine the assets, activities and companies that are eligible to be counted towards its targets for Climate and Sustainable Funding and Financing. 1 NatWest Markets Plc 2021 Annual Report and Accounts Our purpose framework A relationship bank for a digital world We champion potential, helping people, families and businesses to thrive Read more in the NatWest Group Annual Report and Accounts 2021 We are guided by our purpose …creating a positive impact through our areas of focus Driven to achieve our growth strategy, supporting NatWest Group… Current accounts Lending & financing Currencies Fixed income Working capital Cards & payments Capital markets Transaction banking Asset & trade finance NatWest Markets NatWest Group operates as One Bank working across boundaries to serve our customers Read more on page 16 Delivering long-term sustainable value and attractive returns, now and for the next generation Customers Regulators Communities Suppliers Colleagues Investors We are informed by the needs of our stakeholders Read more on page 8 We have four strategic priorities… Enterprise Climate Learning Read more on pages 21 and 22 Focused on growth, underpinned by our values and an intelligent approach to risk: Supporting customers at every stage of their lives Simple to deal with Sharpened capital allocation Powered by innovation and partnerships 2 NatWest Markets Plc 2021 Annual Report and Accounts Our purpose As part of NatWest Group we are aligned under their Purpose, which is at the heart of everything we do. This helps us ensure we are the partner of choice to meet the financial markets needs of NatWest Group’s customers, knowing that when they thrive, so do we. Our business is focused on operating in partnership across NatWest Group. We have the products our customers need, aligning our expertise, global footprint and talent to drive long-term sustainable returns. Our stakeholders As a purpose-led organisation, we balance the different interests of all our stakeholders – customers, colleagues, communities and shareholders – in our decision-making, especially when there are difficult choices to be made. Our growth strategy Our purpose-driven strategy for growth ensures that we are focused on what’s relevant and right for our customers, society and the environment. It focuses on how we will grow our business and financial returns to make NatWest Markets a winning and sustainable business. We will also maintain our leadership in climate and sustainable financing and continue to drive innovation in this area. Finally, we will work together as one team, leveraging our global platform and continuing to develop our culture. Our values Our values are at the heart of how we deliver our purpose driven strategy. In 2021, responding to feedback from stakeholders, we have engaged with colleagues, customers and communities to re-envision a modernized set of values that fully align with our strategic priorities. These collaborative and evolved values will be launched in 2022 and will form an integral part of our company’s cultural identity. Our positive impact We recognise the huge responsibilities that our role brings, and this informs our considered approach. From supporting local housing to funding initiatives for sustainability-based targets across our global clients, we continue to have a positive impact on the environment and wider society. We contribute to the three focus areas of NatWest Group, where we can make a meaningful contribution and build long-term value in our business: Climate We will continue to grow our climate and ESG activities to maintain our leadership in climate and sustainable financing, supported by our dedicated climate and sustainability teams. Enterprise We continue to serve more of our core NatWest Group customers, removing barriers to enterprise and providing businesses in the UK with the backing they need to grow. Learning As we drive towards winning with purpose, we are creating the conditions that allow our colleagues to thrive personally and professionally. We have continued to share our market- leading insight on a number of initiatives with customers. We also recognise that to be purpose-led requires a significant mind-set change and as such we have engaged with thought leaders on this topic to challenge and develop our strategy. This new way of thinking has already led to great customer innovation, colleague development and collaboration across the bank. We have delivered several initiatives to drive this cultural shift this year, including purpose workshops for over 800 colleagues and research and training to explore what it is that colleagues need to thrive. We have also continued to hold our purpose and engagement forums to provide a platform for open discussion and to drive sustainable progress. Our blueprint for better business Honest and fair with customers and suppliers A responsible and responsive employer A good citizen A guardian for future generations Our purpose: Deliver long-term sustainable performance by championing potential, helping people, families and businesses to thrive 3 NatWest Markets Plc 2021 Annual Report and Accounts Chief Executive’s review A more focused business By simplifying our organisational structure, prioritising the products that matter most to our customers and leveraging the benefits of a One Bank approach, we are now well-positioned for growth. Robert Begbie CEO, NatWest Markets Supporting our customers Our clear growth plans, with increased collaboration across NatWest Group, have already started to deliver benefits. We have strengthened our overall foreign exchange (FX) and international payments proposition so that more customers can benefit from our market-leading service. We collaborated across RBSI, NatWest Markets and Commercial Banking to establish a team to grow our offering to the investment management sector enabling us to provide a more integrated experience for our funds and sponsors customer base. Our business in Europe, which is in collaboration with Commercial Banking, is strong and primed for growth. Simplifying our business, innovating and working with partners Following the announcement of our plans in February 2020, the transformation of NatWest Markets is largely complete. I believe this is a great achievement against the backdrop of a global pandemic and is testament to the expertise and dedication of our colleagues. To enable becoming a more sustainable business, we have leveraged NatWest Group investment in technology both for colleagues and customers. I’m pleased that our first API (application programming interface) product, Indicative FX Rates, has been added to the NatWest bank of APIs, enhancing our ability to connect with our customers and partners. We also progressed the development of our digital bond capability, completing a pilot trade of a ‘blockchain bond’ in the secondary market. To build on this progress and support the growth of the business will require continued significant investment in our technology transformation. This investment is expected to have an impact on our 2022 results, as will the incurrence of further costs, if any, associated with litigation and regulatory matters. Financial performance Our total income was £401 million and the operating loss for the year was £714 million. This reflected a weak performance in Fixed Income, contrasting with the exceptional levels of market activity in the prior period caused by the pandemic, and ongoing strategic costs associated with restructuring the business and strengthening the balance sheet. We continued to reduce operating costs in line with the strategic announcement in February 2020 and progressed in closing legacy matters. We returned £1 billion capital to NatWest Group via dividends during the year up to 31 December 2021, with a further £250 million to be declared and payable to NatWest Group plc on 18 February. We have also made significant progress in rightsizing our cost and capital base to support a sustainable and profitable future business. Our risk-weighted asset (RWA) reduction is largely complete with a decrease of c£2.9 billion during the year reflected in a strong CET1 ratio of 17.9% and leverage ratio of 4.3%. Performance in Capital Markets and Currencies was in line with expectations, but the under- performance in Fixed Income was driven by the continued reshaping of the business as well as an unfavourable market environment. 4 NatWest Markets Plc 2021 Annual Report and Accounts Read more about our strategy in action on pages 8 and 9. Outlook (1,5) Outlook We aim to generate sustainable and attractive returns over the medium term, with efficient capital usage. 2022 outlook NWM Plc 2022 funding plan targets £4-5 billion of public benchmark issuance. Medium-term outlook Metric (2) Estimate CET1 ratio (3) ~14% MREL ratio (4) >30% Leverage ratio >4% Notes: (1) This supersedes all prior guidance. (2) All metrics presented relate to NWM Plc. (3) NWM Plc expects to run above the 15% target on a solo basis in 2022. (4) Includes total regulatory capital, non-eligible capital plus downstreamed internal MREL. (5) The targets, expectations and trends discussed in this section represent management’s current expectations and are subject to change, including as a result of the factors described in the ‘Risk factors’ section on pages 179 to 200 in this document. These statements constitute forward-looking statements. Refer to ‘Forward-looking statements’ in this document. Sharpening our capital allocation Our Capital Management unit has actively managed capital allocation and optimisation across our businesses. We have reduced market-risk RWAs and counterparty-risk RWAs across the trading businesses, allowing for reallocation of capital to support our growth priorities and we have returned capital to NatWest Group via dividends. Climate and ESG We’ve had a strong year supporting our customers’ climate and ESG-related finance needs, with product innovation across bonds, FX, interest rate derivatives and private finance. In 2021, we completed £9.7 billion of Climate and Sustainable Funding and Financing, including £3.3 billion in H2 2021 which will contribute towards the new NatWest Group target of £100 billion between 1 July 2021 and the end of 2025. A great example of our support for renewables is on Vineyard Wind 1, the first commercial scale offshore wind farm in the US where our regional expertise supported other NatWest Group teams. And we’ve also been able to tap into the Asia investor base, supporting Hitachi Capital (UK) Plc with its first green bond. With NatWest Group a principal partner for COP26, I was delighted to attend the conference and be involved in industry events such as the International Emissions Trading Association (IETA) CEO Roundtable and Global Financial Alliance for Zero (GFANZ) events. Our thought leadership in this area, as well as our commitment to customers, ensures we remain a leading underwriter for green, social and sustainability (GSS) bonds issued by UK corporates and sterling-denominated GSS bonds across all sectors. Colleagues and ways of working I’m proud of the way colleagues have adapted to the changes in ways of working, while also keeping our culture front of mind. Our purpose is helping to drive our culture and we’ve been running a dedicated programme for colleagues to explore and understand the role they play in delivering Purpose and how it shapes our business. This engagement and connection to our purpose is vital to the success of our growth ambition and strategy. This year, we have also stepped up our focus on developing a culture that champions diversity and creates an inclusive workplace that gives all of our people the best opportunity to succeed and grow their careers. I look forward to seeing more progress in this crucial area of diversity, equity and inclusion in the coming months. As I reflect on the year, I’m delighted by how we’ve progressed our transformation to a sustainable business. I believe that the creation of the new Commercial and Institutional franchise will further enhance our plans for sustainable growth and enable us to deepen our relationships with customers and support their growth ambitions – helping them, as ever, to thrive. 5 NatWest Markets Plc 2021 Annual Report and Accounts Our business model How we create and protect value As part of NatWest Group, we support our corporate and institutional customers, which includes banks, asset managers, insurers, pension funds, sponsors, sovereigns, supranationals and agencies. Our customers 1 Our key strengths and resources Digitally-led Currencies business that’s well connected across NatWest Group, operating seamlessly to deliver for customers. Innovative Capital Markets platform with market leading structuring and distribution expertise and climate and ESG capabilities. Strong commitment to climate and ESG and award-winning innovation in sustainable financing. Talented and diverse workforce with inclusive and collaborative culture. Strong capital and liquidity positions. We provide liquidity and risk management in Currencies and Fixed Income through a combination of voice and electronic delivery. Through our Capital Markets business, we provide an integrated proposition across financing, solutions and advisory services. Our products and solutions Underpinned by our focus on ESG as a driver of value creation Our business Fixed income We have long-standing expertise in the fixed income markets and offer cash bond, repo and interest rate derivatives with a focus in sterling, euros and US dollars that supports our customers’ financing and hedging needs. In addition, we provide liquidity and credit for investment grade and high yield bonds and loans for both financial institutions and corporate issuers. Currencies We’re an award-winning foreign exchange service provider offering FX spot, forwards, cross currency swaps and options well as an FX prime brokerage service and FX digital solutions. 2 We understand the power of building deep and enduring relationships and one of the ways we do this is by providing relevant market colour, content and ideas to customers. Our strategists and content experts across Currencies, Fixed Income and Capital Markets offer We work in close collaboration with teams across NatWest Group to provide capital markets and risk management solutions to its customers and be the partner of choice for those customers’ financial markets needs. Our purpose NWM Group will be the partner of choice to meet the financial markets needs of NatWest Group customers. 6 NatWest Markets Plc 2021 Annual Report and Accounts Our customers Our products and solutions Underpinned by our focus on ESG as a driver of value creation Our business Capital markets We’re a leading partner for our customers, helping them to access global debt capital markets across a wide variety of products and target markets, including bonds, loans, commercial paper, medium-term notes (MTNs) and private placements, as well as bespoke financing solutions and primary lending products. We also provide customers with thought leadership, advice and products to support their climate and ESG strategies through our ESG and Climate Capital Markets platform. Also refer to Board engagement with key stakeholders on page 16 NatWest Group – Providing access to financial markets for NatWest Group customers, providing an integrated proposition and expertise. – Consistent return of capital to NatWest Group via dividends throughout 2021 totalling £1 billion. Customers Refer to page 9 for further examples of how NatWest Markets creates value for its customers. Our support for customers has been recognised by a number of industry awards including: – ‘Lead manager of the year, sustainability bonds – local authority/municipality’, and ‘Lead manager of the year, green bonds – supranational, sub-sovereign and agency (SSAs), from the Environmental Finance Bond Awards 2021. – ‘Sterling Bond House of the Year’ from the IFR Awards 2020 (awarded February 2021). – ‘Best Agent of International US Private Placements’ from the GlobalCapital Private Debt Awards 2020 (awarded February 2021). – ‘Best Bank for ALM and Libor Transition Management’ from the GlobalCapital Covered Bond Awards 2021. – ‘#1 bank for Overall FX Service Quality to the UK corporate sector’ from Coalition Greenwich 2021. Colleagues – We are committed to investing in our workforce and our integrated wellbeing strategy allows us to support colleagues, customers and communities, and is a key part of being a purpose-led organisation. NatWest Markets investors – We maintain a strong capital base and liquidity to minimise the risk of defaulting and provide comfort to existing and future investors on the stability of NWM Group as a business. Community and environment – We completed £9.7 billion of Climate and Sustainable Funding and Financing (CSFF) in 2021, including £3.3 billion in H2 2021 which will contribute towards the new NatWest Group target of £100 billion between 1 July 2021 and the end of 2025. Regulators and industry bodies – We provide insights via our active participation in trade associations and industry-wide forums on key topics such as the transition away from LIBOR and climate-related and ESG financing. – For more details on our role in industry-wide climate-related and ESG forums, refer to the climate-related disclosures on page 22. We think and act as one bank for our customers, leveraging NatWest Group’s expertise and shared services. NWM Group is centred in the UK with trading hubs in Amsterdam, London, Singapore and Stamford (US), with sales offices across key locations in the UK, EU, US and Asia. Financial markets access is offered by the NWM Group across NatWest Markets Plc (NWM Plc) and its subsidiaries, including NatWest Markets Securities Inc. and NatWest Markets N.V. (NWM N.V.). Our operations fresh thinking alongside market-leading economic insights in the key economies where our customers do business. We have a sharp focus on digitisation and automation with our range of digital FX, fixed income, risk management and international payments options which use our applications or APIs (application programme interfaces), including Agile Markets and FXmicropay. 3 Value created for our stakeholders Our purpose NWM Group will be the partner of choice to meet the financial markets needs of NatWest Group customers. 7 NatWest Markets Plc 2021 Annual Report and Accounts Our strategy A strategy to deliver our purpose and drive sustainable returns Our execution delivers on our purpose using our strengths to support customers’ needs. Strategic priorities Progress in the year Our priorities Supporting our customers Work as part of One Bank to invest in growth areas that matter the most to our customers. – Supported customers across Capital Markets with innovative transactions in public and private finance markets as well as continued the development of our product offering in sustainable finance, transition finance and sustainable-linked debt. – We collaborated across RBSI, NatWest Markets and Commercial Banking to establish a team to grow our offering to the investment management sector and provide a more integrated experience for our Funds and Sponsors customers. – Through close collaboration across NatWest Group, we have strengthened the overall foreign exchange (FX) and international payments proposition. – Continue delivery of growth initiatives as part of our One Bank plans. – The delivery of FX and international payments features in 2022 are set to unlock further opportunities. Powered by innovation and partnerships Use new technology, leverage our digital expertise and partner with leading external organisations to deliver excellent customer experience. – We made significant progress on the implementation of our agreement with BNP Paribas for the provision of house futures and associated back-office services and in January 2022 we successfully went live with the outsourcing of back office services for our US-based Listed Derivatives business. – We developed our sustainability and ESG-linked product suite for customers across FX, interest rate derivatives and private financing. – By supporting NatWest Group’s collaboration with other international banks to develop a transparent global marketplace for carbon offsets with clear and consistent pricing and standards known as Carbonplace, we advanced product innovation in the voluntary carbon market. – We progressed the development of our digital bond capability, completing a pilot trade of a ‘blockchain bond” in the secondary market. – Continue innovation to support customer needs and explore opportunities as we develop our Digital Capital Markets capability. – Continue development of Carbonplace partnership. Simple to deal with Transform how we operate and simplify the business to improve efficiency, and the customer and colleague experience. – Refined our country footprint and product range over the year to further align with customers’ needs. – Through the introduction of our first API (application programming interface) product, Indicative FX Rates, onto the Bank of APIs, we have enhanced our ability to connect with our customers and partners. – We leveraged NatWest Group’s investment in the technology platform, streamlining the colleague desktop experience to interface more easily with NatWest Markets colleagues. – In line with NatWest Group’s strategy, Other operating expenses has reduced by £187 million reflecting progress on underlying cost reductions. – Investment in technology to support a simpler and more digital business model for our customers including further developing our API-first approach. – Migrating all colleagues to NatWest Group technology platform by end of 2022. Sharpened capital allocation Demonstrate effective capital management by reducing risk- weighted assets (RWAs) while redeploying capital to our growth areas. – Our Capital Management unit has actively managed capital allocation and optimisation across the businesses. – We reduced market risk RWAs and counterparty risk RWAs across the trading businesses, allowing for reallocation of capital to support our growth agenda. Total RWAs have reduced to £22.7 billion from £25.6 billion in 2020. – We returned £1 billion capital to NatWest Group via dividends during the year up to 31 December 2021, with a further £250 million to be declared and payable to NatWest Group plc on 18 February 2022. This has been applied to the year-end regulatory capital position. – Continue dividends/ capital allocations to NatWest Group. Underpinned by our commitment to sustainability and climate action. 8 NatWest Markets Plc 2021 Annual Report and Accounts Our strategy in action Supporting the UK Government to tackle climate change NatWest Markets has a vital role to play in green finance. Being purpose led is about knowing and fulfilling our responsibilities. It means delivering on our commitments to our stakeholders, society and the environment. One of the most important ways we can do this is by helping tackle climate change. To build out the green infrastructure needed to reach net-zero targets first requires the funding and the market mechanisms to deliver it. This is where NatWest Markets has a vital role to play. Following the UK Government’s announcement of its first-ever sovereign green bond, we supported the second issuance of green gilts in October 2021 as joint bookrunner. The bond, which matures in July 2053, is the longest-dated sovereign green bond currently outstanding in the market. Crucially, it will help finance a whole range of climate projects such as offshore windfarms, zero-emission transport and schemes to decarbonise homes and buildings. With these two green issuances, the UK’s Debt Management Office has become one of the top three largest sovereign issuers of green bonds in the world. NatWest Markets is proud to be part of this process, and to have helped deliver on the government’s commitment to issue a minimum of £15 billion of green gilts in 2021-22. Sustainability-linked FX in action When a long-standing customer wanted to leverage our expertise to help with its sustainability goals, we were there to help. The Co-op – a major food retailer and the UK’s largest consumer co-operative – is accelerating its action to help tackle climate change. As part of its ‘Co-operating for a Fairer World’ vision, the organisation has launched a ten-point climate plan, laying out how it will reach net zero by 2040 across its business areas. The company turned to NatWest Market’s FX team to discuss aligning its FX activities with its emissions targets – a concept NatWest Markets previously introduced to the Co-op team. In order to establish a sustainability-linked FX agreement, Co-op and NatWest Markets settled on slightly adjusted longer-term green key performance indicators in Co-op’s revolving credit facility. The agreement specified that if the Co-op meets its approved science-based target to reduce operational emissions by 2025, then it will qualify for a sustainability-linked rebate. This is to be correlated to the volume of FX trades booked with NatWest Markets between July 2021 and the end of the 2021 financial year. At the same time, the agreement allows the Co-op to continue to book FX transactions with NatWest with no change to its daily process. By adopting this concept, the Co-op is a valuable role model for other companies in different sectors to link sustainability performance and financials. For us, it’s another example of how we collaborate with our customers, using product innovation to help solve their problems and fulfil their ESG goals. Supporting EnBW’s climate neutrality plan Helping our customers achieve their climate ambitions is fundamental to our purpose. For us, it’s about understanding their journey and using our expertise to help. When it came to working with German integrated utility EnBW Energie Baden-Württemberg AG, we knew it had clear and long-standing plans for transitioning towards a lower-carbon operating model. After investing massively in the expansion of green energy, EnBW now delivers renewables, electromobility and sustainable energy solutions for its customers. What’s more, it is developing smart grids to ensure that electricity networks can continue to absorb the increasing proportion of decentralised renewable energy generation. The company also offers access to the largest electric vehicle charging network in Germany. Having already supported EnBW in the role of structuring adviser and global coordinator for its €500 million NC6 hybrid bond in June 2020, the utility turned to NatWest Markets for support again. We were mandated by the company as joint bookrunner on its first ever hybrid bond transaction, consisting of a green and a non-green tranche marketed simultaneously. This demonstrated our expertise in the sustainable debt hybrid market which is an important pillar of our sustainable finance offering. The two bonds, with an issue size of €500 million each, replaced two existing non-green EnBW hybrids, and will be used for projects such as offshore wind power and large-scale solar schemes. This is a great example of NatWest’s strategy in action, building on our relationship to offer further areas of expertise and supporting our customer to deliver a climate-positive outcome. 9 NatWest Markets Plc 2021 Annual Report and Accounts Economy Overview NWM Group’s activities primarily relate to the UK, Europe and the US, with the majority of its income from operations in the UK. In all of these regions, economies expanded rapidly in 2021 as the roll-out of vaccination programmes allowed governments to remove social restrictions introduced to limit the spread of COVID-19. Governments also maintained substantial support for firms and consumers through the year with transfers and loan guarantees, while central banks kept monetary policy loose and engaged in quantitative easing. Conditions in the second half of 2021 were more challenging as demand returned to pre-pandemic levels and supply constraints emerged. Unemployment remained lower than forecast in many countries and business investment benefited from some reduction in uncertainty. Against this backdrop, inflationary pressure began to build with an increase in energy prices particularly notable. Asset prices were volatile, reflecting the varying sentiment towards the outlook. Our response NWM Group’s business and financial position correlates to the economic conditions (in particular, economic growth and the general level of interest rates and volume of transactions) prevailing in its primary markets. Despite an uncertain economic outlook, NatWest Markets remained focused on meeting the diverse needs of customers across the UK and internationally. Regulation Overview NWM Group is comprised of NatWest Markets Plc (NWM Plc) and its operating subsidiaries and associated undertakings. It is primarily regulated by: the Financial Conduct Authority and Prudential Regulation Authority in the UK; De Nederlandsche Bank, Authority for the Financial Markets, and BaFin in Europe; the Securities and Exchange Commission, Commodity Futures Trading Commission, Chicago Mercantile Exchange, Federal Reserve Bank of New York, Office of the Comptroller of the Currency, and National Futures Association in the US; and the Monetary Authority of Singapore, Hong Kong Monetary Authority and Financial Services Agency in Asia. Both the EU and UK have given significant focus to sustainable finance regulation, with both jurisdictions having laid out clear and ambitious roadmaps. With regard to the EU disclosure regime, the level of firms’ alignment with the EU taxonomy (which is divided into six climate and environmental categories) will form the basis of metrics they are required to disclose, such as the Green Asset Ratio (GAR). The UK will adopt a similar approach and develop its own taxonomy, with two of six categories to be defined before the end of 2022. The environment we operate in is constantly changing. Understanding the multiple influences on our business enables us to be prepared for change, to respond quickly, and to create value for the long term. NWM Group continues to adapt to evolving market trends Competitive landscape Overview NWM Group offers risk management, trading solutions and debt financing to financial institutions and UK and European corporate customers. It competes with large domestic banks, major international banks and a number of investment banks. We observed international banks and investment banks have been hiring to grow their businesses across Fixed Income and Capital Markets, notably in the US and selected areas in Europe and APAC. During 2021 investment to build out ESG and sustainable finance platforms has been a common theme across corporate and investment banks. Competition is also increasingly coming from non-bank liquidity providers using low-latency and algorithmic trading to participate in high- volume flow markets. During 2021 there was solid performance across investment banking divisions in the industry, particularly in mergers and acquisitions and equities which showed robust performance on the back of elevated activity. Across Fixed Income, credit markets outperformed on a relative basis compared to rates and FX following normalisation from COVID-19, lower customer activity and challenging market conditions. With the first signs of recovery from COVID-19, debt capital markets also saw increased issuance activity. Our response During 2021, NWM Group continued to refine and innovate its products and services to support the needs of corporate and institutional customers. By doing so, we also looked to preserve strong market positions in FX and Capital Markets in our areas of focus, whilst reshaping our offering in Fixed Income to align with the needs of our customers. Operating environment 10 NatWest Markets Plc 2021 Annual Report and Accounts Our response An established prudential programme coordinates the regulatory changes encompassed by Capital Requirements Regulation (CRR2) and the Finalised Basel III framework. The programme oversees required capital model changes, Internal Models Approach (IMA) eligibility and business readiness for the revised regulations as well as required changes across trading, risk, finance and technology and simulates the capital impact of the revised regulations. Climate change Overview NWM Group recognises that climate change is a global issue which has significant implications for our customers, colleagues, suppliers, partners and NWM Group itself. Our response Throughout 2021, NWM Group has continued to play a key role in NatWest Group’s climate ambition and climate-related targets and commitments, while working to help our customers better understand the role they can play in tackling climate change. For further details refer to climate-related disclosures on page 22 and NatWest Group’s Climate-related Disclosures Report 2021 on our corporate website at natwestgroup.com Technology Overview Post COVID-19 market growth has accelerated the need for digital products that meet the changing needs of customers and partners. As a result, there is increased investment in key technologies such as APIs, data analytics and cloud infrastructure to deliver digital propositions to customers how and when they want them. These digital propositions must respond to and anticipate changing customer needs including growing demand for ESG – and deliver them in their preferred medium quickly and efficiently. Our response In 2021 we invested £213 million in technology across three of our key areas: customers, colleagues and capability. We are enhancing the customer experience and generating revenue growth by designing and delivering the digital products and services that matter most to them. For colleagues, we’re modernising our desktop and trading floor to provide the tools they need to deliver value to customers. And for capability, we are simplifying and modernising our application and infrastructure estate, embedding digital capability, and transforming through innovation. Against this backdrop, we are also aligning to a consistent technology platform with the rest of NatWest Group and creating strong partnerships with our technology suppliers. Cyber threats Overview Cyberattacks pose a constant risk to our operations, both in relation to our own digital estate and indirectly with regards to our supply chain, reinforcing the importance of due diligence with the third parties on which we rely. Our response We continue to invest significant resources in the development and evolution of cybersecurity controls, deploy rigorous due diligence with regards to third parties and work to protect and educate our customers on fraud and scam activity. Human rights and modern slavery Overview At NatWest Markets, we understand that businesses have an important role to play in promoting respect for human rights. We believe that tackling modern slavery forms an integral part of our approach to human rights. Our response We seek to operate in accordance with the Universal Declaration of Human Rights and our approach to respecting human rights is informed by other internationally accepted standards and principles including the United Nations Guiding Principles on Business and Human Rights. We are a member of the human rights steering group, a management group that brings representatives from across NatWest Group together to co-ordinate activities, and to make recommendations to NatWest Group Executive Committee and Board to develop and strengthen our approach. We seek to tackle modern slavery through continued implementation of policies covering our customers, colleagues and suppliers. For the third year, our colleagues supported the TRIBE Freedom Foundation and raised over £30,000 to assist their anti-slavery projects, enabling long-term support for survivors and helping to prevent modern slavery. Our approach to tackling modern slavery is outlined in the NatWest Group annual Modern Slavery and Human Trafficking Statement which can be found at natwestgroup.com. 11 NatWest Markets Plc 2021 Annual Report and Accounts Risk management Risk overview Impactful and effective risk management is a vital part of delivering NWM Group’s strategy and purpose. Risk is an inherent part of doing business. Some types of risk – such as market risk or credit risk for example – are an integral part of NWM Group’s day-to-day activities and are a vital part of revenue generation. Other risks, such as those arising as a result of changes in the economy or the competitive landscape, are an inescapable part of the environment in which the Group operates and must also be managed and mitigated. Effective risk management is a vital element of ensuring NWM Group is able to achieve its long-term strategy and fulfil its purpose. NWM Group operates within NatWest Group’s enterprise-wide risk management framework. The framework is aligned to NatWest Group’s purpose and is designed to support intelligent risk-taking. While all colleagues share ownership of risk management, the three lines of defence model is used to define responsibilities and accountabilities. This aims to ensure that risks are properly identified, measured, monitored, controlled and reported. NatWest Group’s independent Risk function designs and maintains the framework. The Risk function also provides oversight and monitoring of all risk management activities. NatWest Group has identified a number of principal risks. These are risks that are an inherent part of banking activity and have the potential to significantly affect the Group’s performance or prospects. They are categorised as financial and non-financial principal risks. Principal financial risks Principal non-financial risks Traded Market Risk Conduct Risk Non-Traded Market Risk Financial Crime Risk Capital Adequacy Operational Risk Liquidity & Funding Regulatory Compliance Risk Credit Risk Model Risk Earnings Stability Climate Risk Pension Risk Reputational Risk In addition, a regular process identifies top and emerging risks – specific scenarios of concern that, without appropriate management and mitigation, could have a significant negative impact on NWM Group’s ability to meet its strategic objectives. These are detailed in the Risk & Capital Management section, beginning on p42. Risk appetite is a key component of the framework. It defines the level and types of risk NWM Group is willing to take as part of its business activities. Risk appetite is set in line with overall strategy and approved by the Board. It supports the strategic aim of building a sustainable business by providing colleagues with a structured approach to risk-taking within agreed boundaries. Information on the risk profile relative to risk appetite, as well as details of new and emerging risks, is reported regularly to the Board and senior risk committees. Areas of focus in 2021 The global economy continued to grow, though more slowly than expected. The continuing effects of the pandemic also intensified uncertainty across a number of markets. Accordingly, risk management played a critical role throughout the year, focusing both on striking the correct balance between risk and opportunity but also in ensuring that supporting processes, policies and controls were properly optimised. The traded market risk profile remained broadly stable, though given the heightened uncertainty, this was an area of significant risk management focus. The non-traded market risk profile also remained stable in line with expectations. Compliance and conduct While further progress was made on the compliance and conduct agendas during 2021, in December NWM plc pled guilty in the United States Federal Court to one count of wire fraud and one count of securities fraud. This related to historical spoofing conduct by former employees in US Treasuries markets between January 2008 and May 2014 as well as, separately, during approximately three months in 2018. As the result of a plea agreement with the US Department of Justice and the United States Attorney’s Office, District of Connecticut, NWM will pay a criminal fine of $25.2 million, approximately $2.8 million of criminal forfeiture and approximately $6.8 million in restitution. The plea agreement also imposes an independent corporate monitor. NWM has also committed to compliance programme reviews and improvements. Reporting and cooperation obligations have also been agreed. Financial crime As changes in technology, the economy and wider society take place, risks relating to money-laundering, bribery and corruption, financial sanctions, tax evasion and terrorist financing continue to evolve. NatWest Group has invested significantly in a multi-year transformation programme to strengthen and improve its overall response to the evolving threat. This investment continued during 2021 and there was significant risk management focus on the systems and processes relating to customer due diligence, transaction monitoring and automated customer screening. The embedding of a consistent approach to managing financial crime risk continued, co-ordinated by the enterprise-wide Financial Crime Hub, and work to enhance capabilities and controls remained a focus. Both NatWest Group and NWM Group itself continue to work with law enforcement agencies, industry bodies and regulators to develop intelligence and collaborative solutions to prevent financial crime. Anti-bribery and corruption (ABC) NWM Group is committed to ensuring it acts responsibly and ethically, both when pursuing its own business opportunities and when awarding business. Consequently, it has embedded appropriate policies, mandatory procedures and controls to 12 NatWest Markets Plc 2021 Annual Report and Accounts ensure its employees, and any other parties it does business with, understand these obligations and abide by them whenever they act for the Group. ABC training is mandatory for all staff on an annual basis, with targeted training appropriate for certain roles. The Group considers ABC risk in its business processes including, but not limited to, corporate donations, charitable sponsorships, political activities and commercial sponsorships. Where appropriate, ABC contract clauses are required in written agreements. Internal service management NWM Group relies on a number of services provided by the ring-fenced entities within NatWest Group. There continued to be significant focus on this during 2021 to ensure such arrangements are managed within the terms of the UK’s ring-fencing legislation. In addition, there was a strong emphasis on ensuring the risk management aspects of such services are optimised for NWM Group’s business lines, products and customer base. Climate risk The impact of climate change on NWM Group and its customers continued to be a central risk management focus during the year. This included participation in a number of working groups – both internally and externally – set up to address this agenda as well as oversight of programmes designed to support customers as they tackle the challenges posed by both the physical and transition risks of climate change. NatWest Markets also contributed to NatWest Group’s submission to the Bank of England Climate Biennial Exploratory Scenario stress test. LIBOR Risks relating to the reform of interest-rate benchmarks were a consistent focus during the year. With the exception of certain tenors, publication of the London Inter-Bank Offered Rate (LIBOR), a key benchmark in the global financial markets for many years, ceased on 31 December 2021. In preparation for the move to alternative risk-free rates – including the Sterling Overnight Index Average (SONIA) – NatWest Group stopped offering Sterling LIBOR for new transactions on 31 March 2021. A Group-wide transition programme co-ordinated work to help customers smoothly transition from a range of LIBOR- based products, such as investment-backed lending and derivatives, to those using alternative benchmarks. Significant attention was paid to the potential conduct risks arising from transition activity, as well as related operational risks, in order to ensure positive customer outcomes. In addition, there was a strong focus on carefully managing the associated compliance risk, market risk and counterparty credit risk. The complexity of the transition, especially in relation to so-called “tough legacy” contracts that cannot be transitioned to alternative reference rates, also heightened execution risk. Given additional challenges experienced by customers during the pandemic, the FCA has proposed that use of synthetic sterling LIBOR may be permitted for a number of legacy contracts. It’s expected that management of related risks will remain a focus into 2022 as NWM Group continues to support its customers through the transition. Information and cyber security Cybercrime is an ever-present threat across the digital landscape and continues to evolve rapidly. Attacks may be from individuals or highly-organised criminal groups intent on stealing money or sensitive data, or potentially holding organisations to ransom. NWM Group takes this threat seriously and continues to work with industry bodies, peers and the National Cyber Security Centre to gather and share intelligence. During 2021, there was continued risk management focus on ensuring defences remain optimised for the evolving threat. Risk culture NatWest Group’s multi-year programme to enhance risk management capability at every level of the organisation continued with an ongoing emphasis on risk culture. This work aims to embed a generative risk culture across all three lines of defence – where risk management is an integral part of the way colleagues work and think. The approach supports intelligent risk-taking, better customer outcomes, stronger and more sustainable business as well as an improved cost base. During 2021, NWM Group focused on a number of risk culture initiatives, including improvements in risk data and systems alignment as well as enhancements to risk identification processes and risk culture management information. Control There was significant focus on NWM Group’s control environment throughout the year. Enhancements were made to the testing regime in order to ensure assurance protocols continue to be as robust as possible. Work to review and strengthen NWM Group’s control environment will continue in 2022. Model risk An effective understanding of likely future outcomes and the scale of likely hazards is an essential part of forward-looking risk management. NWM Group is heavily reliant on modelling across all aspects of its business. Ensuring that its models are designed effectively – and that associated assumptions, data inputs and techniques are appropriate – remained a key risk management focus in 2021. This included activity within NWM N.V. to review and upgrade certain models to ensure statistical estimates and outputs remain in line with requirements in the rapidly-evolving business landscape. Strategy Potential execution risks relating to the NWM Group strategy were also a significant consideration. This included striking a balance between the risks related to implementation and other correlated threats as the year progressed, such as the possible impact of further lockdowns. 13 NatWest Markets Plc 2021 Annual Report and Accounts Risk management continued Top and emerging risks NWM Group employs a regular process for identifying and managing its top and emerging risks. These are specific scenarios of concern that could have a significant negative impact on NWM Group’s ability to operate or meet its strategic objectives. Details of these risks – and actions taken to mitigate them – are set out below. External Climate- related risks Accelerating climate change may lead to heightened financial risks and faster-than-anticipated impacts on NWM Group and the wider economy. Such impacts could include financial loss as a result of a deterioration in credit quality, or a rise in market risk exposure or operational risk – all of which underline the importance of NatWest Group’s climate commitments. NWM Group continues to adapt its operations and business strategy to mitigate the risks of both climate change and the transition to a low-carbon economy. It is also embedding climate risk into its risk management framework. Competitive environment NWM Group’s target markets are highly competitive, with changes in technology, regulation, customer behaviour and business models continuing to accelerate competitive pressure. As these evolve, there is a risk that NWM Group is not able to adapt or compete effectively with the appropriate product offerings and geography. NWM Group monitors the competitive environment and adapts strategy as appropriate to ensure its business model remains sustainable and viable. It remains focused on innovating to deliver compelling propositions for customers. While customer demands and expectations are high and increasing, NWM Group is focused on delivering increased customer satisfaction as well as ensuring customers are offered all of NatWest Group’s services appropriate to their needs. Cyber threats Cyber attacks continue to increase in frequency, sophistication and severity. There is a risk that a catastrophic cyber attack could damage NWM Group’s ability to do business and/or compromise data security. NWM Group operates a multi-layered approach to its defences and continues to invest in building its resilience and cyber-security capabilities. Regulatory, legal and conduct risk NWM Group operates in a highly-regulated market and must manage compliance with current regulations and prepare for future regulations, including the finalised Basel III framework and development of capital models in NWM N.V. The implications of proposed, or potential, regulatory developments are incorporated into business and financial plans. Conduct and supervisory risks have been heightened by both strategic change and changing ways of working. NWM Group monitors conduct risk through the Conduct Risk framework and continues to adapt and monitor adherence and appetite position through NWM Group’s Conduct Committee. This aims to deliver strong customer and business outcomes, reducing the risk of material staff misconduct and supporting business sustainability. UK-EU divergence NWM Group has implemented plans to operate in the EU market and continues to monitor the evolving situation arising from the UK’s withdrawal from the EU for any developments that may adversely affect NWM Group and its operating environment. NWM continues to monitor the emerging regulatory environment – and likely associated scenarios – to facilitate continuity of business. 14 NatWest Markets Plc 2021 Annual Report and Accounts Internal People risk NWM Group’s operational risk could increase through the loss of key staff, the recalibration of roles or the loss of institutional knowledge due to strategic change. NWM Group monitors people risk closely and has plans in place to support retention of key roles. Wider NatWest Group programmes that support engagement and training are in place for all employees. Given the importance of diversity – particularly the proportion of females in senior roles, pay gaps and ethnic diversity – the risk of not supporting and promoting a diverse and inclusive workforce could have an adverse impact on NWM Group employee engagement and strategy. This could also lead to a reputational impact among investors and regulators. Creating an inclusive workplace is an important part of NWM Group’s purpose and plays a powerful role in shaping the business as well as the views of stakeholders. Strategy execution NWM Group’s strategy includes an increased focus on serving NatWest Group’s corporate and institutional customer base. NWM Group has already simplified its operating model and reduced its cost base, but challenges still remain to meet income and cost targets in future years. This will entail material execution risks, commercial risks and operational risks for NWM Group. There is a dependency on NatWest Group’s strategic decisions which could affect NWM Group’s own strategy. NWM Group’s Board maintains proactive engagement with NatWest Group to ensure strategic alignment. Sustainable control environment The internal system of controls is key to NWM Group’s management of its risks. Failure to maintain a sustainable control environment, due to changes in NWM Group’s operating environment or business strategy, could result in an increase in risks. To mitigate these risks, a robust operational risk management framework is in place that supports ongoing identification, management and monitoring of our risk and control profile. NWM Group’s control environment (including operational, conduct and financial crime controls) is formally assessed half-yearly to ensure NWM Group’s control environment position remains within appetite. 15 NatWest Markets Plc 2021 Annual Report and Accounts What matters to them How we engaged Outcome of engagement Customers The NWM Plc Board is mindful of the significance of providing a reliable service to our customers and supporting them to manage their financial risks and achieve their short and long-term financial goals. – The NWM Plc Board received regular updates on customer issues via reports from the NWM Plc CEO and business heads, along with deep dive sessions on product lines and customer segments. – The NWM Plc Board was regularly updated on the nature and extent of ESG issuances and financing activity provided to customers following COVID-19. The customer touchpoint rating and client profitability dashboard provided the NWM Plc Board with regular analytics. The NWM Plc CEO continued to meet with customers throughout the year to enhance relationships and explain the impact of the refocusing of NWM Group. Colleagues The NWM Plc Board appreciates the importance of a wide range of topics impacting the workforce including diversity, equity and inclusion, COVID-19 and talent management. – The NWM Plc Board asked colleagues to share thoughts on what it’s like to work for NatWest Group, including in NWM Plc, by completing colleague opinion surveys. – The NatWest Group-level Colleague Advisory Panel provided a mechanism for directors to engage directly with colleagues on topics of strategic interest. – Colleagues were encouraged to report any concerns relating to wrongdoing or misconduct using NatWest Group’s whistleblowing service, Speak Up. – The 2021 Talent academy provided a purpose-led opportunity to create a talent pool of colleagues across all business areas, demographics and grades. The NWM Plc Taskforce continued to support delivery of NatWest Group’s commitments to support our Black, Asian and Minority Ethnic colleagues to create a more diverse and inclusive culture. Communications on the new ways of working and hybrid return to the office were circulated to colleagues and supporting colleagues’ wellbeing became increasingly important during the COVID-19 pandemic and subsequent transition to the new ways of working. Community and environment The NWM Plc Board recognises the growing importance of climate change and its potential impact on our society. – The NWM Plc Board received regular updates on the significant progress made on green finance and the NWM Plc Board supported NatWest Group as the banking sponsor of COP26. – The NWM Plc CEO led a forum which oversaw the response to the risks posed by climate change as well as exploring the opportunities for growth in the ESG market. The NWM Plc Board is committed to managing the wider social, environmental and economic impacts of NWM Plc’s operations and there has been recognition of NWM Group’s strong ESG credentials and climate initiatives in Europe. Regulators The focus of regulatory engagement in 2021 was on the strategic change programme and go-forward European strategy, front office changes and trading controls given the new ways of working and growth initiatives as NWM Group’s restructuring phase draws to a close. – The NWM Plc Board recognised the importance of open and continuous dialogue with regulators and the NWM Plc Chairman, executive directors and non-executive directors had regular meetings with the PRA and FCA. The NWM Plc Board received regular reports on regulatory matters from the Chief Governance & Regulatory Officer. Suppliers The NWM Plc Board is mindful of the role suppliers play in ensuring a reliable service is delivered to customers and of the importance of our relationships with key suppliers. – The NWM Plc Board regularly received analytics as NWM Plc progressed further through the multi-year transformation programme which included the transfer of support functions to NatWest Group to improve operating efficiency and are provided using service level agreements. This allowed NWM Plc to isolate any issues for remediation. The NWM Plc Board, through the NWM Plc Board Risk Committee, approved further key performance indicators which are used to monitor delivery of the outsourced services. Our stakeholders Board engagement with key stakeholders Here we highlight who our key stakeholders are and how the NWM Plc Board engages with them to create value. 16 NatWest Markets Plc 2021 Annual Report and Accounts What matters to them How we engaged Outcome of engagement Customers The NWM Plc Board is mindful of the significance of providing a reliable service to our customers and supporting them to manage their financial risks and achieve their short and long-term financial goals. – The NWM Plc Board received regular updates on customer issues via reports from the NWM Plc CEO and business heads, along with deep dive sessions on product lines and customer segments. – The NWM Plc Board was regularly updated on the nature and extent of ESG issuances and financing activity provided to customers following COVID-19. The customer touchpoint rating and client profitability dashboard provided the NWM Plc Board with regular analytics. The NWM Plc CEO continued to meet with customers throughout the year to enhance relationships and explain the impact of the refocusing of NWM Group. Colleagues The NWM Plc Board appreciates the importance of a wide range of topics impacting the workforce including diversity, equity and inclusion, COVID-19 and talent management. – The NWM Plc Board asked colleagues to share thoughts on what it’s like to work for NatWest Group, including in NWM Plc, by completing colleague opinion surveys. – The NatWest Group-level Colleague Advisory Panel provided a mechanism for directors to engage directly with colleagues on topics of strategic interest. – Colleagues were encouraged to report any concerns relating to wrongdoing or misconduct using NatWest Group’s whistleblowing service, Speak Up. – The 2021 Talent academy provided a purpose-led opportunity to create a talent pool of colleagues across all business areas, demographics and grades. The NWM Plc Taskforce continued to support delivery of NatWest Group’s commitments to support our Black, Asian and Minority Ethnic colleagues to create a more diverse and inclusive culture. Communications on the new ways of working and hybrid return to the office were circulated to colleagues and supporting colleagues’ wellbeing became increasingly important during the COVID-19 pandemic and subsequent transition to the new ways of working. Community and environment The NWM Plc Board recognises the growing importance of climate change and its potential impact on our society. – The NWM Plc Board received regular updates on the significant progress made on green finance and the NWM Plc Board supported NatWest Group as the banking sponsor of COP26. – The NWM Plc CEO led a forum which oversaw the response to the risks posed by climate change as well as exploring the opportunities for growth in the ESG market. The NWM Plc Board is committed to managing the wider social, environmental and economic impacts of NWM Plc’s operations and there has been recognition of NWM Group’s strong ESG credentials and climate initiatives in Europe. Regulators The focus of regulatory engagement in 2021 was on the strategic change programme and go-forward European strategy, front office changes and trading controls given the new ways of working and growth initiatives as NWM Group’s restructuring phase draws to a close. – The NWM Plc Board recognised the importance of open and continuous dialogue with regulators and the NWM Plc Chairman, executive directors and non-executive directors had regular meetings with the PRA and FCA. The NWM Plc Board received regular reports on regulatory matters from the Chief Governance & Regulatory Officer. Suppliers The NWM Plc Board is mindful of the role suppliers play in ensuring a reliable service is delivered to customers and of the importance of our relationships with key suppliers. – The NWM Plc Board regularly received analytics as NWM Plc progressed further through the multi-year transformation programme which included the transfer of support functions to NatWest Group to improve operating efficiency and are provided using service level agreements. This allowed NWM Plc to isolate any issues for remediation. The NWM Plc Board, through the NWM Plc Board Risk Committee, approved further key performance indicators which are used to monitor delivery of the outsourced services. 17 NatWest Markets Plc 2021 Annual Report and Accounts In this statement we describe how our directors have had regard to the matters set out in section 172(1) (a) to (f) of the Companies Act 2006 (section 172) when performing their duty to promote the success of the company. Board engagement with stakeholders The NWM Plc Board reviews and confirms its key stakeholder groups for the purposes of section 172 annually. For 2021, they remained customers, colleagues, community and environment, investors, regulators and suppliers. Examples of how the NWM Plc Board has engaged with key stakeholders, including the impact of principal decisions, can be found in this statement and on pages 16 and 17. Supporting effective NWM Plc Board discussions and decision-making Our purpose continues to influence NWM Plc Board discussions and decision-making. Our NWM Plc Board and Committee Terms of Reference reinforce the importance of considering both our purpose and the matters set out in section 172 in NWM Plc Board discussions and decision-making. Our NWM Plc Board and Committee paper template includes a section for paper authors to explain how the paper aligns with our purpose and a separate section for them to include an assessment of the relevant stakeholder impacts for the directors to consider. Our directors are mindful that it is not always possible to achieve an outcome which meets the requirements, needs and/or expectations of all stakeholders who are, or may be, impacted. For decisions which are particularly challenging or complex, we introduced an additional page to our paper template in 2021 which provides directors with further information to support purposeful decision-making. This additional page uses the ‘Blueprint for Better Business’ framework as a base and is aligned to our broader purpose framework. Principal decisions Principal decisions are those decisions taken by the NWM Plc Board that are material, or of strategic importance, to the company or are significant to NWM Plc’s key stakeholders. Set out on the next page is an example of the principal decisions taken by the NWM Plc Board during 2021. Likely long-term consequences. Employee interests. Relationships with customers, suppliers and others. The impact on community and environment. Maintaining a reputation for high standards of business conduct. Acting fairly between members of the company. Section 172(1) statement Our stakeholders continued 18 NatWest Markets Plc 2021 Annual Report and Accounts Factors considered: Approving the acceleration of capital distributions What was the decision-making process? As part of the NWM Plc Board’s approval of the 2021 Business Plan and Budget in December 2020, the NWM Plc three-year funding plan included a forecast of capital distributions across a three-year period. Across 2021 at quarterly intervals in February, June, and October, the NWM Plc Board approved updates to the three-year funding plan and accelerated a total of £1 billion in capital distributions to NatWest Group plc. The NWM Plc Board’s decisions were informed by regular updates on NWM Plc’s financial and capital positions and a key focus of NWM Plc Board level discussions was how surplus capital was being managed. The NWM Plc Board Risk Committee also reviewed all capital distribution proposals in advance of the NWM Plc Board and recommended them to the NWM Plc Board for approval. To support the NWM Plc Board in its decision- making, it received comprehensive papers prepared by management which updated the NWM Plc Board on the progress of the three-year funding plan and sought the NWM Plc Board’s support to accelerate each capital distribution. How did the directors fulfil their duties under section 172? How were stakeholder interests considered? How did the decision align to our purpose? In approving the accelerated capital distributions throughout 2021, directors were mindful of their duties under section 172 including the likely long- term consequences of the decision and whether the acceleration of the capital distributions would support the long-term sustainable success of the company. Each update the NWM Plc Board received provided an overview of the relevant stakeholder considerations. Substantial analysis was completed to evaluate options and assess the long-term impacts of accelerated capital distribution on key stakeholder groups (including colleagues, customers, investors and the environment), what their concerns were likely to be and the key messages that would support engagement. NWM Plc’s accelerated progress against the strategic plan as the restructuring phase draws to a close allows for increased focus on growth initiatives in areas such as green finance. There was also extensive engagement with representatives of NatWest Group to ensure proper alignment and that the end state would support the delivery of NatWest Group’s overarching purpose and promote a high standard of business conduct. This engagement ensured that the NWM Plc Board understood the views of NatWest Group and could balance these with the interests of other stakeholders in making their decision. Accelerated capital distributions from NWM Plc to NatWest Group facilitate NatWest Group’s management of its double leverage ratio. This ratio is crucial in how NatWest Group distributes its capital to support customers and the wider economy. It also enables NatWest Group to pass on excess capital to its shareholders and achieve its purpose of championing the potential of people, families and businesses. How was our purpose considered as part of the decision? Considering relevant stakeholder interests is key to purposeful decision-making. The new purposeful decision-making page referred to previously was used to provide the NWM Plc Board with a detailed analysis of stakeholder considerations and impacts using the five categories in the ‘Blueprint for Better Business’ framework, specifically: ‘honest and fair with customers and suppliers’; ‘a responsible and responsive employer’; ‘a good citizen’; ‘a guardian for future generations’; ‘and delivering long-term sustainable performance’. Actions and outcomes The NWM Plc Board approved the acceleration of capital distributions at its meetings throughout 2021 on 18 February 2021, 9 June 2021, and 28 October 2021. The NWM Plc Board continues to receive updates on the progress of the three-year funding plan. 19 NatWest Markets Plc 2021 Annual Report and Accounts Our colleagues Helping our colleagues thrive We aim for NatWest Markets to be a great place to work. By offering a fulfilling job, a healthy workplace, fair rewards, excellent development, and great leadership, we believe our colleagues can thrive in what they do. Our HR policies and procedures are aligned to NatWest Group wherever possible, and information on Groupwide progress can be found in the ‘Colleagues’ section in the NatWest Group Annual Report and Accounts 2021. Supporting colleagues’ wellbeing A vital part of being a purpose-led organisation is having a fully embedded wellbeing strategy. We take a holistic approach to wellbeing and our proposition covers mental health, physical health and financial wellbeing. In addition to NatWest Group activity: – NatWest Markets Wellbeing network continued to offer speaker sessions on topics such as resilience and mental health. – The Analyst and Associates network, which supports and promotes the development of the Graduate, Apprentice, Analyst and Associate communities, helped its members to navigate working from home at the early stage of their careers. Ways of Working In 2021 we have adopted new ways of working as outlined in NatWest Group’s ’Ways of Working’ framework. This is designed to be a flexible and dynamic way to both deliver colleague choice and better meet customer needs. The regulatory oversight of some roles in NatWest Markets means some colleagues have been assigned to the Office First model where people will perform the majority of their work at their designated hub. The remainder of colleagues align to the Hybrid model and split their time more evenly between their designated hub and home. As we’ve transitioned to the new ways of working we’ve taken a phased test and learn approach and ensured a focus on colleague wellbeing and health and safety. Helping colleagues realise their potential Participation in NatWest Group initiatives has been strong, with 1,300 colleagues accessing the NatWest Group Academy. A further 82 were then selected for the Talent Academy which supports high-potential colleagues through a programme of challenging and purposeful development opportunities. In addition we have supported around 100 senior women to extend their business networks and to hear from inspiring speakers through our continued sponsorship of the Reaching Further initiative. Diversity, equity and inclusion (DE&I) We are focused on developing a community that champions diversity while creating an inclusive workplace which gives our people the best opportunity to succeed and grow their careers. Examples of how we have worked towards this in 2021 include: – The NatWest Markets Diversity Task Force, which is chaired by Robert Begbie, was established to regularly discuss and progress the DE&I agenda in consultation with the senior leadership team in NatWest Markets. The Task Force also reviews all senior vacancies to ensure that a diverse pipeline of candidates are considered for opportunities. – The employee-led network, NatWest Markets Women, was enhanced in 2021 to create a community and voice for all women in NatWest Markets. In addition to a programme of events, the network set up a ‘buddy’ system to act as an informal support system. NatWest Markets Women also surveyed a number of customer-facing colleagues to determine the key challenges facing women in progressing their careers. – The ‘Talent to Watch’ global programme, which provides coaching, support and leadership sponsorship, was refreshed in 2021 to help it to continue to build and develop future talent. – The target for 2021 was to have female representation at CEO-3 or above at 25%. As of 31 December 2021 the representation was 21%. The reported mean gender pay gap is 38.3% (median: 28.4%) and the mean gender bonus gap is 59.1% (median: 50.0%). We recognise we have more to do and continue to focus on the recruitment, retention and advancement of women to meet our ambition of having full gender balance in our top three levels globally by 2030. – The 2021 target relating to representation of Black, Asian and Minority Ethnic colleagues in the top four leadership layers of the organisation was 18% and as of 31 December 2021, representation was 19.4%. For people risk please refer to Top and emerging risks on page 15. 20 NatWest Markets Plc 2021 Annual Report and Accounts Learning and enterprise focus areas Enterprise: We continue to work across NatWest to support initiatives that are removing barriers to enterprise and providing businesses in the UK the support they need to grow. This year we have made progress in several areas and have focused our attention on upskilling and further developing our understanding of the issues that enterprises face, in order to take meaningful action. NatWest COP26 SMI Action Forum event Members of the NatWest Markets team, including Robert Begbie, CEO, and Victoria Cleverley, Chief of Staff, NatWest Markets, were involved in creating and leading a One Bank event focused on SMEs, in collaboration with the Sustainable Markets Initiative, during COP26. As a principal partner of COP26, NatWest Group convened over 70 stakeholders in Glasgow to discuss practical and actionable steps for SMEs to tackle climate change. The purpose of the session was to bring together business leaders and owners to establish impactful shared visions that support SMEs to take action centred on our recent Springboard to Sustainable Recovery report and how to accelerate SMEs’ journey to net zero. Whilst focused on climate this allowed the team to hear directly from enterprises about what was required on issues related to funding and market access, amongst other topics. Treasury Training NatWest Markets worked in collaboration with Corporates & Institutions to run a successful week-long series of bite-sized customer seminars presented as the NatWest Treasury Training boxset. Hosted by a broad team of subject matter experts from across the businesses, the programme of 29 sessions was attended by participants from more than 400 companies and an average of 105 customers per session, with content ranging from capital markets and risk management, to working capital and open banking. Those involved shared a view that supporting customer education and building financial capability is an important part of NatWest’s purpose and the event is a great demonstration of how we can fulfil these ambitions while deepening customer relationships. Starting out as in-person, product specific training on a small scale four years ago, our approach to providing free training to customers has evolved and grown both in size and quality and embracing technology has played a huge part in the success. While seeing customers in person has significant benefits, the virtual format allowed a broader range of topics to be offered to a global external and internal audience, as well as providing a recording and a wealth of data about which topics are of most interest to which customers. Learning: As we continue to drive towards winning with purpose, we are creating environments to understand our colleagues’ thoughts and ideas and importantly, what conditions we need to create for colleagues to thrive. We are engaging with colleagues, to help them to connect their personal purpose to their roles. By doing so we believe we can unlock the potential within our organisation. Our goal is to create the conditions that allow our colleagues to thrive personally and professionally and to ensure our strategy, operating model, and culture are driven by purpose. To support this over 800 colleagues have now attended a purpose workshop. We have continued to share our market-leading insight with customers on a number of topics including ESG and the transition away from LIBOR. Our subject matter experts supported our customers’ learning on many ESG themes through events and insight articles. For colleagues we ran bi-monthly ESG Bitesize webinars covering a range of case studies and product innovation. Over 300 colleagues globally signed up to the University of Edinburgh’s Climate Change transformation programme, helping to integrate our climate ambition across different roles and functions. Learning and enterprise We are guided by our purpose and create a positive impact through our areas of focus. You can read about our climate focus from page 22. 21 NatWest Markets Plc 2021 Annual Report and Accounts The table below summarises the ongoing progress NWM Group has made during 2021 with regard to climate-related risks, opportunities and the areas of future focus. Climate disclosure themes Governance Strategy Risk management Metrics and targets Progress to date – Targeted training for NWM Plc Board (the “Board”) to build climate knowledge and support ongoing oversight of management’s response to climate-related risks and opportunities. – A monthly CEO led forum, the Climate & Sustainability Committee (CSC) is attended by members of the NWM Group Executive team to discuss the business’s progress on climate matters. – Established climate change roles and responsibilities across the senior management team. – Established a Climate and ESG Capital Markets team to provide centralised resource and expertise for customer facing and product teams. – Continued to build climate knowledge with all stakeholders. Delivered in excess of 180 publications and events throughout 2021 aimed at supporting learning journeys for customers and colleagues; in excess of 300 NWM Group colleagues globally signed up to the University of Edinburgh’s Climate Change training programme. – Advanced product innovation in the voluntary carbon market by supporting NatWest Group with the launch of Carbonplace. – Climate change is monitored and managed as a principal risk. NWM Group is aligned to the NatWest Group Climate Risk Policy. – Credit risk: NWM Group adopted the NatWest Group approach of integrating and embedding climate risk into wholesale credit risk management. This included mandatory qualitative climate commentary in credit risk assessments and the development of the qualitative scorecard approach to provide a standardised assessment of customers’ exposure to physical/transition climate- related risks and opportunities. – Market risk: A monthly climate sector and geography report was developed to monitor key climate risk concentrations. – Operational risk: Climate change considerations were incorporated into NWM Group’s operational risk assessment processes. A dedicated climate change scenario was developed to assess potential risks. – Established quantitative assessments for the following metrics: – NWM Group’s progress against its contribution to the £100 billion NatWest Group Climate and Sustainable Funding and Financing target. – NWM Group’s loan exposures to high-carbon sectors identified based on physical and transition risk assessment. – NWM Group’s capital markets transactions (financing) – lead management activity by sector. Areas of future focus – Continue to develop operating rhythm for Board review and oversight of climate-related risks and opportunities. – Continue to enhance management roles and responsibilities framework to incorporate management of climate-related risk and opportunities. – Quantify our climate impact across the balance sheet and consider the impact of our underwriting business on global emissions. – Establish NWM Group-specific management actions based on insights from scenario analysis. – Further develop technology and data capabilities to support customer engagement, business decision-making and governance. – NWM Group continues to refine and innovate ways to further integrate climate within risk management practices, including within the enterprise-wide risk management framework. – Credit risk: The approval and launch of five scorecards is scheduled for Q1 2022. The intention is to develop subsequent scorecards to expand coverage of the NWM Group portfolio. A more quantitative approach is in plan to be developed within this methodology as data becomes available. – Market risk: Ongoing engagement with regulators will continue to ensure NWM Group remains in line with industry standards. Additional work will be planned as required – for example if the Bank of England revises its approach and includes traded market risk in its scope for the Climate Biennial Exploratory Scenario (CBES) in 2022, NWM Group will provide further support for the NatWest Group submission. – Operational risk: There will be further design, implementation and embedding of climate change considerations in risk and control, as well as change impact assessments, which will require further training of colleagues. – There will be ongoing assessment of the impact of the European Central Bank (ECB) guidelines on our European franchise (NWM N.V. Group) on environmental risk. – Continue to work with NatWest Group, on developing NWM Group’s key metrics and targets to assess and manage own climate-related risks and opportunities. Climate-related disclosures overview Throughout 2021, NWM Group has continued to play a key role in NatWest Group’s climate ambition, while working to help our customers better understand the role they can play in addressing climate change. Climate-related disclosures 22 NatWest Markets Plc 2021 Annual Report and Accounts The table below summarises the ongoing progress NWM Group has made during 2021 with regard to climate-related risks, opportunities and the areas of future focus. Climate disclosure themes Governance Strategy Risk management Metrics and targets Progress to date – Targeted training for NWM Plc Board (the “Board”) to build climate knowledge and support ongoing oversight of management’s response to climate-related risks and opportunities. – A monthly CEO led forum, the Climate & Sustainability Committee (CSC) is attended by members of the NWM Group Executive team to discuss the business’s progress on climate matters. – Established climate change roles and responsibilities across the senior management team. – Established a Climate and ESG Capital Markets team to provide centralised resource and expertise for customer facing and product teams. – Continued to build climate knowledge with all stakeholders. Delivered in excess of 180 publications and events throughout 2021 aimed at supporting learning journeys for customers and colleagues; in excess of 300 NWM Group colleagues globally signed up to the University of Edinburgh’s Climate Change training programme. – Advanced product innovation in the voluntary carbon market by supporting NatWest Group with the launch of Carbonplace. – Climate change is monitored and managed as a principal risk. NWM Group is aligned to the NatWest Group Climate Risk Policy. – Credit risk: NWM Group adopted the NatWest Group approach of integrating and embedding climate risk into wholesale credit risk management. This included mandatory qualitative climate commentary in credit risk assessments and the development of the qualitative scorecard approach to provide a standardised assessment of customers’ exposure to physical/transition climate- related risks and opportunities. – Market risk: A monthly climate sector and geography report was developed to monitor key climate risk concentrations. – Operational risk: Climate change considerations were incorporated into NWM Group’s operational risk assessment processes. A dedicated climate change scenario was developed to assess potential risks. – Established quantitative assessments for the following metrics: – NWM Group’s progress against its contribution to the £100 billion NatWest Group Climate and Sustainable Funding and Financing target. – NWM Group’s loan exposures to high-carbon sectors identified based on physical and transition risk assessment. – NWM Group’s capital markets transactions (financing) – lead management activity by sector. Areas of future focus – Continue to develop operating rhythm for Board review and oversight of climate-related risks and opportunities. – Continue to enhance management roles and responsibilities framework to incorporate management of climate-related risk and opportunities. – Quantify our climate impact across the balance sheet and consider the impact of our underwriting business on global emissions. – Establish NWM Group-specific management actions based on insights from scenario analysis. – Further develop technology and data capabilities to support customer engagement, business decision-making and governance. – NWM Group continues to refine and innovate ways to further integrate climate within risk management practices, including within the enterprise-wide risk management framework. – Credit risk: The approval and launch of five scorecards is scheduled for Q1 2022. The intention is to develop subsequent scorecards to expand coverage of the NWM Group portfolio. A more quantitative approach is in plan to be developed within this methodology as data becomes available. – Market risk: Ongoing engagement with regulators will continue to ensure NWM Group remains in line with industry standards. Additional work will be planned as required – for example if the Bank of England revises its approach and includes traded market risk in its scope for the Climate Biennial Exploratory Scenario (CBES) in 2022, NWM Group will provide further support for the NatWest Group submission. – Operational risk: There will be further design, implementation and embedding of climate change considerations in risk and control, as well as change impact assessments, which will require further training of colleagues. – There will be ongoing assessment of the impact of the European Central Bank (ECB) guidelines on our European franchise (NWM N.V. Group) on environmental risk. – Continue to work with NatWest Group, on developing NWM Group’s key metrics and targets to assess and manage own climate-related risks and opportunities. 23 NatWest Markets Plc 2021 Annual Report and Accounts Climate-related disclosures continued Forum Role/Responsibility Board level governance NWM Plc Board The NWM Plc Board approves NWM Group’s strategy and objectives within the aims of the wider NatWest Group. This includes the progress towards delivering on NatWest Group’s strategy, including climate ambitions. The Board has received regular updates on the progress towards climate- related funding and financing targets and future commitments as part of NatWest Group ambitions. NWM Plc Board Risk Committee The NWM Plc Board Risk Committee (BRC) is responsible for the oversight of NWM Group’s risk profile. The BRC has been involved in discussion on the development of NWM Group’s climate risk appetite, including the quantitative risk appetite measures. NWM Plc Audit Committee The NWM Plc Audit Committee is responsible for oversight of the bank’s material disclosures, including non-financial disclosures as well as climate. Executive level governance NWM Climate & Sustainability Committee The Climate & Sustainability Committee (CSC) is the senior NWM Group forum which has the objective of assessing and managing climate-related risks and opportunities. The CSC supports the NWM Plc CEO discharge the delegated Senior Management Function (SMF) accountability from the NatWest Group CEO for identifying and managing financial risks and opportunities arising from climate change. Climate-related disclosures: Governance The NWM Plc Board and senior management team are committed to ensuring NWM Group, as part of NatWest Group, plays a leading role in the transition to a net-zero economy. Governance framework During 2021 NWM Group has continued to embed its approach to climate governance and build on the framework developed in 2020. A key focus has been to ensure clarity of responsibility over climate in relation to the NWM Plc Board, Board Committees, management forums and individuals across the business. The Board and senior management intend to continue to focus on the integration of climate into risk appetite and the embedding of climate within established governance operating rhythms. The chart below provides insight into climate accountabilities for both forums and individuals within NWM Group. NWM Plc Board oversight NWM Plc Board has ultimate oversight of how NWM Group identifies, measures, manages and mitigates climate-related risks and opportunities throughout the business. The NWM Plc Board is assisted by the NWM Plc Board Risk Committee in setting risk appetite and monitoring the risk management response to climate change-related physical and transition risks and opportunities within the business. The NWM Plc Board Risk Committee has discussed the bank’s progress towards meeting regulatory requirements as part of the wider risk response to the financial risks posed by climate change. The NWM Plc Audit Committee continues to review disclosures, including non-financial reporting and NWM Group specific climate-related disclosures. Management’s role in assessing and managing climate-related risks and opportunities NatWest Group has adopted an integrated climate governance structure with legal entity boards and accountable individuals within franchises expected to ensure that climate considerations are built into day-to-day decision-making. There are a number of cross-bank forums which support collaboration and escalation, including the NatWest Group Climate Change Executive Steering Group (CC ESG). The CC ESG is responsible for coordinating the NatWest Group response across climate- related regulations, risks and delivery of strategic climate ambitions. The CC ESG includes cross-franchise and functional representatives, including the NWM Plc CEO. As part of the integrated cross-bank approach the NWM CEO has been designated to support the NatWest Group CEO in discharging the Senior Management Function 1 (SMF1) accountability for identifying and managing the risk and opportunities from climate change, as well as delivery on NatWest Group’s ambition to be a leading bank in the UK helping to address the climate challenge. To support the CEO and accountable individuals with their responsibilities, and to further enhance the integration of climate-related issues into the business, NWM Group continues to operate a NWM Group Climate Programme (NWM CP) which is overseen by the CEO chaired Climate & Sustainability Committee (CSC). 24 NatWest Markets Plc 2021 Annual Report and Accounts Climate-related disclosures: Strategy Climate is one of the three focus areas under the NatWest Group purpose. The NWM Group’s climate strategy supports and contributes to NatWest Group’s ambition to be a leading bank in the UK helping to address the climate challenge. Climate-related risks Climate risk is classified as a principal risk and remains a significant area of focus for risk management activities. Climate-related risks are also considered as part of NWM Group’s top and emerging risks process, which also provides a focus on developing issues such as biodiversity and nature loss. Alongside regular reporting on the principal risks detailed within the Risk & Capital Management section, top and emerging risks are reported to the NWM Plc Board on a regular basis. NatWest Group’s enterprise-wide risk management framework, which also applies to NWM Group, sets out a consistent management approach for all principal risks, including climate risk. In addition, where appropriate, climate risk considerations are integrated into management activities for several of NWM Group’s other principal risks. Climate risk is also considered within internal risk and control assessments and scenario analysis activities. This supports an evolving understanding of climate-related impacts. Climate risk is regularly assessed at the NWM Climate & Sustainability Committee and progress was made during 2021 to enhance climate risk management capabilities. The risk events associated with NatWest Group failing to adequately mitigate the transition and physical risks arising from climate change are illustrated by a table within NatWest Group 2021 Climate-related Disclosures Report section 3.2. The table includes an initial assessment of expected time horizons, potential impacts and links to different risk types, where climate is considered to have a relatively significant impact in the relevant time frame: short (1-5 years), medium (10 years) and long term (30 years). Due to the nature of its business, NWM Group would additionally be affected by changes in the pricing of certain traded financial instruments and services, affecting market risk and model risk. NWM Group would be less affected than NatWest Group by changes to mortgages. NWM Group continues to leverage NatWest Group’s ongoing assessment of the transition and physical risks arising from climate change. NWM Group continues its work to assess the impact of the most meaningful such events on its strategy, operating model and risk profile, along the likely timeline of when such events are expected to occur. Climate-related opportunities Established in December 2020, the Climate Opportunities Group (COG) brings together colleagues from NatWest Group business segments to conceptualise and develop opportunities that complement the NatWest Group climate ambition. NWM Group also connects on opportunities across NatWest Group in the Green Finance forum – a One Bank collaboration with NWM Group, Commercial, RBSI and Coutts which aims to support customers’ ambitions around energy efficiency and low-carbon generation to accelerate the transition to a net-zero economy. The table in the NatWest Group 2021 Climate-related Disclosures Report section 3.3 illustrates the key climate- related opportunities which underpin the achievement of the NatWest Group climate ambition, which NWM Group is aligned to, along with the potential financial impacts and timing. Many of NWM Group’s climate opportunities, all of which have reputational benefits for us along with potentially increased revenues, impact on strategy and are discussed further within this section. In 2021, we have further adapted our business model to help customers navigate their own journeys to transition to a net-zero economy, and to provide them with climate-related funding and financing, as well as an advisory service: Centre of Excellence for climate and ESG financing and customer solutions We have established a Centre of Excellence for climate and ESG in our Capital Markets business as we build out capability and look to integrate climate into our customer and product offering across NWM Group. This forms part of an ecosystem across NWM Group that aims to provide thought leadership and support our customers with solutions across financing and risk management to achieve their climate ambitions. 25 NatWest Markets Plc 2021 Annual Report and Accounts Climate-related disclosures continued Climate-related disclosures: Strategy continued Championing climate-related product innovation We are a part of NatWest Group’s One Bank approach to climate-related opportunities. Current activities are centred on the scoping of product development opportunities aimed at producing a comprehensive climate and ESG product suite and broadening market presence into new areas such as private finance, repo, FX and ESG-linked transactions, as well as solutions to reduce the carbon intensity of portfolios. We anticipate these enhanced product offerings will help customers navigate their own transition to net zero. We have also been active in the voluntary carbon markets. These markets allow individuals, companies or governments to purchase greenhouse gas or carbon credits to mitigate or offset their own emissions. In 2021, we initiated dialogue with customers, building out our intelligence to determine options for a specialised role NWM Group can play in this market. We have supported NatWest Group to play a key role in establishing Carbonplace, a technology- based exchange platform for trading high-quality carbon credits, aligned with the Taskforce for Scaling Voluntary Carbon Markets (TSVCM). Overall, our performance has been expansive across green, social, and sustainability (GSS) bond transactions, as well as sustainability-linked bonds (SLBs) and sustainability-linked loans (SLLs). In 2021, NWM Group ranked in the top 2 bookrunners for supporting UK corporate issuers 1 , and in the top 2 supporting issuers globally in Sterling (GBP) issuance, with their GSS bonds 1 . NWM Group ranked in the top 5 for supporting Western Europe corporate issuers, with their GSS bonds 1 . We were also ranked number 6 for supporting European financial institutions with their green bond issuance 1 , as well as number 1 for all GBP-denominated GSS issues by financial institutions 1 . NWM Group continued to support financial institutions who were increasing their GSS issuance as a proportion of their overall funding, acting as bookrunner on 23 transactions which included 9 customers with their debut green and social issuance, and a further 6 who accessed a new currency or asset class within the green and social bond market. We also supported the corporate and public sector, as well as housing associations, with ESG structuring. Many of these transactions are part of the NatWest Group initial two-year target to provide £20 billion Climate and Sustainable Funding and Financing which was exceeded in under 18 months, and the additional £100 billion Climate and Sustainable Funding and Financing target announced in October 2021 that NatWest Group is aiming to provide between 1 July 2021 and the end of 2025. This reflects a shift in customer preferences and an opportunity for us to reach new customers. Thought leadership and influence NWM Group’s subject matter experts delivered 108 articles and 53 events throughout 2021 across many ESG themes aimed at supporting our customers’ learning journeys and bi-monthly ESG Bitesize webinars to the benefit of NWM Group’s colleagues. In excess of 300 NWM Group colleagues globally signed up to the University of Edinburgh’s Climate Change transformation programme, helping to integrate our climate ambition across different roles and functions. We play an active role in industry-wide sustainable finance- related forums to develop our thought leadership and help to shape and influence climate-related developments externally. We are a Board Member of the Global Financial Markets Association (GFMA), play a role with the International Capital Market Association (ICMA) and are a Board Member of the Association for Financial Markets in Europe (AFME), which are crucial to building market momentum and developing standardised frameworks and products. NWM Group co-sponsored a report by Boston Consulting Group and Global Financial Markets Association, ‘Unlocking the Potential of Carbon Markets to Achieve Global Net Zero’, which provides an overview of the developing carbon market and describes the evolving carbon ecosystem which contains both compliance and voluntary market alternatives. NWM Group colleagues are involved with a range of industry bodies that support the transition to net zero as well as the development of the sustainable finance market to ensure a strong and robust market for all participants. We have also taken steps to embed climate thought leadership into our US and APAC teams by expanding our engagement with institutional investors and building out our investor intelligence to support product development across our financing activity. In the US we have also been increasing the issuer dialogue with regard to ESG – both loans and bonds. Approach to climate-related risks We are part of NatWest Group’s One Bank approach to climate-related risks. Our climate ambition incorporates various climate-related opportunities and, at the same time, enables us to identify, assess and manage climate-related risks. In order to meet our commitments to help end the most harmful activities and at least halve the climate impact of our financing activity by 2030, NWM Group has assessed and acted upon a number of risks related to our financing of fossil fuels and are taking steps to develop our stance on nature and biodiversity loss. We intend this ambition to result in limiting activity with companies with more than 15% of activities related to thermal and lignite coal and major oil & gas producers, unless they had a Credible Transition Plan in line with the 2015 Paris Agreement in place by end of 2021; and over time reduced investment risk in customer portfolios associated with climate change and reduced impact of our financing activities. (1) Source, Dealogic. 26 NatWest Markets Plc 2021 Annual Report and Accounts Evolving climate data and analytics In light of the continued challenges we face in sourcing and evaluating climate-related data of varied scope and quality we have directed resources to invest in climate data and tools to equip our customer facing teams with the analytics to best support business origination and delivery. We plan to evolve our capability and enhance NWM Group’s own set of measurable KPIs for management information purposes as well as external disclosure. Over time we expect these enhancements to help us with the incorporation of climate and ESG factors as part of NWM Group’s capital and portfolio management; the standardisation of reporting and measurement in respect of Climate and Sustainable Funding and Financing products; as well as the enhancement of our climate risk appetite measures in light of continued product innovation. Our own operational footprint During 2021 (1) , NatWest Group reduced its direct own operational (2) carbon footprint 46% against 2019 baseline, and increased renewable electricity consumption to 97%. For NatWest Group own operations to support the public commitments to the Net Zero Banking Alliance, they plan to align to the Science Based Targets initiative (SBTi)’s ‘SBTi Corporate Net-Zero Standard’ released in October 2021 and account for the wider value chain (3) , including suppliers. NWM Group plan to work with NatWest Group to contribute to stretching targets for minimum 90% decarbonisation by 2050 for all emissions to achieve net zero (excluding financed emissions which is covered in more detail in the NatWest Group 2021 Climate-related Disclosures Report section 5.7). Climate-related impact on financial planning and future looking plan During 2021, we have worked with NatWest Group to incorporate climate into the financial planning process by developing the first carbon plan for NatWest Group. This work progressed alongside the NatWest Group financial planning process in the second half of the year. This included an assessment of climate impact of: – lending and investment changes incorporated in the financial plan over the next five years, – current and planned climate-related opportunities including, but not limited to, NatWest Group’s commitment to provide £100 billion Climate and Sustainable Funding and Financing and the role that NWM Group will play in that, – to acknowledge our dependence on policies, technology developments and customer behaviour, and the related risks, we also assessed current and expected policies based on the Climate Change Committee’s Sixth Carbon Budget published in 2020 and any potential impacts on our climate ambition. Refer to NatWest Group 2021 Climate-related Disclosures Report section 5.7 for details on policy and technology changes needed to support transition by sector. During 2022, we plan to continue to work with NatWest Group to develop capability to measure the impact of climate-related risks and opportunities arising from NatWest Group actions and also external factors. Our work on assessing emissions from our own direct operations and on our lending and investments is noted in the Natwest Group 2021 Climate-related Disclosures Report sections 5.6 and 5.7. Section 5.7 also outlines current estimates of 2030 emissions intensities for sectors analysed and consequently the level of emissions reductions that may be required, acknowledging the uncertainties arising from dependence on customer behaviour changes, their transition plans as well as policy and technology developments. In 2022, NatWest Group plan to further enhance carbon planning capability to support development of transition plans to measure and track progress towards the NatWest Group ambition to halve the climate impact of our financing activity by 2030. Scenario analysis In 2021, NWM Group participated in the Climate Biennial Exploratory Scenario (CBES) within the overall NatWest Group submission. While the trading book was excluded from scope under the Bank of England guidance, we have produced stressed credit risk results for the banking book, including both impairments and risk-weighted assets projections, for each of the ‘Early’, ‘Late’ and ‘No Policy Action’ scenarios. NWM Group supported the analysis of large financial counterparties. Beyond CBES, we continue to strengthen our overall climate- risk scenario capabilities and have explicitly included climate effects in one of the core scenarios to be used in this year’s Internal Capital Adequacy Assessment Process (ICAAP). We remain aligned to NatWest Group’s initiatives to develop the necessary methodology and processes to perform climate scenario analysis as an integral part of risk management and strategic decision-making. (1) Our own operational footprint reporting year runs from October 2020 to September 2021. (2) NatWest Group defines direct own operations as our Scope 1, Scope 2 market-based and Scope 3 (paper, water, waste, business travel, commuting and work from home emissions). It therefore excludes upstream and downstream emissions from our value chain. (3) Upstream operational value chain emissions are all the indirect Scope 3 emissions required for our operations to occur, including emissions from our suppliers, energy creation and transport to our facilities, and our mail. Downstream operational value chain emissions are all of the indirect Scope 3 emissions associated with our operations during and after serving our customers, including customer transport to and from our facilities, how our products are used and how they are disposed of. 27 NatWest Markets Plc 2021 Annual Report and Accounts Climate-related disclosures continued Climate-related disclosures: Risk management The organisation’s processes for identifying and assessing climate-related risks (1) . Climate risk is the risk of financial loss or adverse non-financial impacts associated with climate change and the political, economic and environmental responses to it. Climate change represents inherent risk to NWM Group, not only from its impact on the global economy and the businesses of its customers, but also through its potential effects on asset values, operational costs and business models. As a result, NWM Group has adopted a dual approach to climate risk management in line with the wider NatWest Group. Climate risk is recognised as a principal risk as well as a causal factor affecting other financial and non-financial risks. Throughout 2021, NatWest Group continued to embed this dual approach, updating existing risk policies and toolkits, where appropriate, to incorporate climate considerations. Climate-related risks are classified as either physical or transition risks (2) . In April 2021, the NatWest Group Board Risk Committee approved a principles-based climate risk policy, which defined the key requirements for effectively managing climate risk: the identification and assessment of climate risk through the incorporation of climate considerations in key risk management processes. This is largely delivered through the following mechanisms: – Scenario analysis to identify, assess, measure and mitigate climate risk on NatWest Group’s balance sheet. – Long-term balance sheet transformation driven by NatWest Group’s strategic ambition and purpose to reduce its climate impact. – Enhanced climate risk data capabilities. NatWest Group has adopted three first generation risk appetite measures to embed climate risk capabilities and support the identification, assessment and mitigation of climate risk in the day-to-day operations of the business. These will be considered by NWM Group when designing and embedding their risk appetite measures into their business-as-usual risk management practices in 2022. Integrating climate-related risks into our principal risk management Following inclusion of climate risk as a principal risk in the NatWest Group Risk Directory in Q1 2021, an approach which uses iterative multi-year enhancements was established to fully integrate climate risk as a factor within NatWest Group’s risk management, including NWM Group. The timing of this multi-year journey reflects both the complexity of the task and evolving nature of climate data capabilities and supporting tooling. A climate maturity rating scale has been developed to support the ongoing assessment of climate risk management throughout NatWest Group. This approach translated NatWest Group’s climate risk policy into thematic management outcomes. Implementation of processes, procedures and controls against these outcomes by the first line of defence provides a measurement of the level of maturity of climate risk management. This is overseen by the second line of defence. At year-end 2021, measured against this scale, NWM Group achieved the minimum expectation of first-generation implementation. This means a predominantly qualitative approach to the policy outcomes, with coverage across priority sectors or customers. For example, NWM Group now requires mandatory qualitative climate commentary in credit risk assessments and has developed qualitative scorecards to assess customers’ exposure to physical/transition risks and opportunities. Once all outcomes have been achieved to the most advanced maturity rating, the principal climate risk will no longer be required as the capabilities to manage climate-related risks effectively would be integrated to respective risk management activity. Within NWM Group, progress has been made in embedding climate considerations in credit and operational risk management, with all areas progressing and further development plans in place for 2022. Having the right climate- related data available is essential for further integration, and NWM Group is working closely with NatWest Group’s data teams to evolve capabilities. Climate Risk Challenges Climate risk management is an evolving discipline. Climate risk metrics are complex and require many methodological choices, judgements and assumptions. Many climate metrics and data are based on underlying assumptions made about climate changes, policies, technologies and other matters that are uncertain or not yet known. For further details see NatWest Group 2021 Climate-related Disclosures Report section 5.8. (1) For further information on our process for identifying and assessing climate-related risks please refer to 2021 NatWest Group Climate-related Disclosures Report section 4.1. (2) Physical risks can be either acute, such as extreme weather events resulting in business disruption to the bank’s own operations, or chronic effects such as prolonged drought conditions adversely affecting agricultural yields. Transition risks are those associated with shift towards a net-zero economy. 28 NatWest Markets Plc 2021 Annual Report and Accounts Credit risk NWM Group participates in NatWest Group’s Wholesale Credit Risk Climate Forum which brings together key stakeholders to integrate and embed climate risk into wholesale credit risk management. This activity is supported by working groups in the business segments carrying out detailed activity to integrate climate risk in the credit assessment process. Key climate decisions impacting credit risk frameworks, policies and risk- management activities are escalated to the NWM Group Credit Risk Committee for approval. During 2021, climate risk was further embedded in the credit risk-management process. Climate risk was included as a factor in determining sector classification. Transaction Acceptance Standards (TAS) were also updated to incorporate climate considerations. Qualitative assessment of climate risk and the mandatory inclusion of climate commentary was incorporated into the existing review processes for NWM Group’s credit portfolio from Q4 2021. This may include an assessment of physical and transition risks as well as the quality of transition plans, an understanding of customer capabilities to manage climate- related risks, emissions assessments and associated potential financial impacts. A methodology was also developed to assess climate-risk exposure among NatWest Group’s wholesale customers, including NWM Group, using scorecards. These provide a consistent approach to the qualitative assessment of customers’ exposure to physical or transition risks and opportunities. The scorecards are aligned with probability of default models. Scorecards are being phased in to ensure NatWest Group’s exposure to heightened climate risk sectors and key counterparty types are prioritised for assessment and monitoring. In Q4 2021, the first scorecards (mid-large and large corporate, property, housing association, banks and leveraged funds) were finalised for approval and launch in Q1 2022. These cover approximately 60% of NWM Group’s exposure at default (EAD) and 90% of EAD associated with heightened climate risk sectors. In Q4 2021, NatWest Group started planning a more quantitative assessment of climate risk within the credit assessment process. The aim is to integrate climate activities, seeking to improve customer-level analysis, including carbon budget reporting, credible transition plans, climate stress testing scenario output and climate scorecards. This is expected to help determine risk appetite, differentiate pricing and support appropriate business opportunities and risk management. Building on progress made over the past year, several enhancements are planned for 2022, including evolving TAS. Further scorecard development is planned to include those used to assess securitisation, then covering approximately 75% of NWM Group’s EAD. Strategic integration of the scorecards is expected with a phased migration into NatWest Group’s ratings platform, enhancing monitoring and reporting capabilities. As the availability of quantitative climate data improves, the aim is to incorporate it into the scorecard tool, which is expected to become increasingly automated to help improve the consistency of assessment. For further information please refer to NatWest Group 2021 Climate-related Disclosures Report section 4.3. Market risk The impact of extreme climate events or an acute shift in global climate-related regulation has the potential to affect market risk across all products. Increased market risk may also arise because of supply chain disruption, changes in demand for products, and sharp adjustments to market prices for affected sectors or geographies. The embedding of market risk climate-specific stress scenarios will follow industry standards and regulatory guidance. A monthly climate sector and geography report has been developed to monitor sector, issuer and country concentrations across traded bonds, loans and credit default swaps. The reporting provides information on the existing climate-risk profile as well as informing decisions on future profile and guideline setting. 29 NatWest Markets Plc 2021 Annual Report and Accounts Climate-related disclosures continued Climate-related disclosures: Risk management continued Model risk NWM Group leverages NatWest Group-wide models and policy standards where applicable for climate risk. Unlike other risk-estimation models, there are limited benchmarking options available for climate risk. As a result, an understanding of the underlying uncertainty and holistic view of the impact on existing models is still developing. Reputational risk The correlation between reputational risk and climate change issues remained a significant area of focus during 2021. Enhancements were made to the Environmental, Social & Ethical risk management framework to mitigate reputational risk arising from exposure to carbon-intensive sectors and to support the transition to a net-zero economy. NWM Group applies the NatWest Group reputational risk policy which sets out expectations around the identification and assessment of reputational risk. The policy links to Environmental, Social & Ethical mandatory procedures which provide clear guidance to employees when dealing with customers, projects and transactions that present heightened environmental, social and ethical risks. The NWM Group Reputational Risk Committee is the point for escalation and review of potential issues that arise at a transactional, business or legal entity level. It receives authority from the NWM Group Executive Risk Committee and is also overseen by the NWM Plc Board Risk Committee and the NatWest Group Reputational Risk Committee. The NWM Group Climate and Sustainability Committee also has a focus on environmental, social and ethical issues. Operational risk Climate change is a source of operational risk, including disruption to business services, damage to physical assets and supply chain disruption. The NatWest Group change and risk and control assessment frameworks that NWM Group uses have been enhanced to incorporate climate change considerations. NWM Group completed a risk discovery heat map in 2021 to ensure adequate coverage of climate change considerations across these assessments and scenario analysis. During 2021, a NatWest Group-wide operational risk climate scenario exercise was performed, focused on operations in UK and India. For full details of the scenario analysis see NatWest Group 2021 Climate-related Disclosures Report section 4.3. The impact for NWM Group was: – The customer impact from a 1-in-25 years scenario was categorised as ‘Important’, with a direct cost implication estimated at approximately £0.2 million. – The customer and reputation impact of a 1-in-100 years scenario was categorised as ‘Significant’, with direct costs estimated at approximately £2.9 million. The scenario outcomes and learnings will be used, alongside the risk discovery heatmap work, to support our 2022 planning. Conduct and compliance risk Climate change and responses to it may amplify existing conduct risks. These include risks associated with the design and distribution of products and NWM Group’s compliance with the rapid pace of change in climate legislation, regulation and best practice. NWM Group is committed to identifying, managing and mitigating these additional risks as part of its climate programme. It considers conduct risk as part of its product governance and approval processes for ESG-focused products. Climate-related risks are escalated to the CSC and other risk fora, as appropriate. NWM Group also considers potential legislative and regulatory changes in the jurisdictions in which it operates to ensure it continues to remain compliant with local requirements and expectations. To support NatWest Group’s purpose and climate agenda, NWM Group is reviewing its current product governance processes and procedures with enhancements being delivered to ensure they remain fit for purpose and effective in the management of conduct and compliance risk. 30 NatWest Markets Plc 2021 Annual Report and Accounts Climate-related disclosures: Metrics and targets NatWest Group has developed metrics and internal reporting tools to assess and monitor climate-related risks and opportunities. These metrics continue to evolve in step with NatWest Group’s growing climate capability and industry guidance. This section includes the metrics used to assess climate-related risks and opportunities as relevant to NWM Group. Heightened climate-related risk sectors As part of its risk-management activity, NatWest Group identified 13 sectors within its wholesale portfolio as exposed to heightened climate-related risk impacts (1) . The table below summarises NWM Group loan exposures (2,3) to these sectors; the amounts reported include all lending to customers including climate and sustainable lending. Total exposure to heightened climate-related risk sectors reduced by £1.7 billion during 2021. There is a decrease across the majority of sectors with the largest decrease, £0.5 billion, in the power utilities sector: 31 December 2021 31 December 2020 Heightened climate-related risk sectors Loans £m Off-Balance sheet £m Total sector exposure £m Total sector exposure as % of Total NWG % Loans £m Off-Balance sheet £m Total sector exposure £m Total sector exposure as % of Total NWG % Power utilities 88 1,398 1,486 7.3% 161 1,795 1,956 8.6% Automotive 49 686 735 3.6% 49 863 912 4.0% Land transport and logistics 75 231 306 1.5% 87 457 544 2.4% Commercial real estate 97 182 279 1.4% 166 313 479 2.1% Oil and gas 269 40 309 1.5% 64 377 441 1.9% Airlines and aerospace 7 207 214 1.1% 33 356 389 1.7% Chemicals 0 62 62 0.3% 0 164 164 0.7% Shipping 0 1 1 0.0% 0 96 96 0.4% Construction 0 76 76 0.4% 0 90 90 0.4% Building materials 3 12 15 0.1% 0 75 75 0.3% Agriculture 40 1 41 0.2% 38 1 39 0.2% Housing associations 23 0 23 0.1% 24 0 24 0.1% Mining and metals 3 0 3 0.0% 3 0 3 0.0% Total Heightened climate-related sectors 654 2,896 3,550 17.5% 625 4,587 5,212 23.0% Total NWM Group all sectors 8,547 11,714 20,261 100.0% 9,536 13,140 22,676 100.0% (1) Refer to NatWest Group 2021 Climate-related Disclosures Report section 4.3 for further details of the identification and review process. (2) Loans to customers and banks – amortised cost and FVOCI. This table shows gross loans only and excludes amounts that are outside the scope of the Expected Credit Loss (ECL) framework. (3) Off-balance sheet includes loan commitments and contingent liabilities. 31 NatWest Markets Plc 2021 Annual Report and Accounts Climate-related disclosures continued Climate-related disclosures: Metrics and targets continued Climate and Sustainable Funding and Financing NatWest Group aims to play a leading role in championing climate solutions by supporting its customers’ transition towards a net-zero, climate-resilient and sustainable economy through Climate and Sustainable Funding and Financing. NatWest Group uses its Climate and Sustainable Funding and Financing Inclusion Criteria (CSFI) criteria 1 to determine the assets, activities and customers that are eligible to be counted towards the NatWest Group Climate and Sustainable Funding and Financing targets. During H1 2021 NatWest Group exceeded its 2020-21 target of providing £20 billion of Climate and Sustainable Funding and Financing in the two years ended 2021. In October 2021, NatWest Group announced a new target to provide an additional £100 billion of Climate and Sustainable Funding and Financing between 1 July 2021 and the end of 2025. In the full year ended December 2021, NatWest Group completed £17.5 billion of Climate and Sustainable Funding and Financing. This comprised £9.7 billion in NWM Group from 71 deals. Of these 53 were green bonds and private placements totalling a notional amount of £38.7 billion which accounts for c.16% of the total lead managed transactions by NWM Group during the period (2) . Climate and Sustainable Funding and Financing (1) Full year ended 31 December 2021 £m Half year ended 31 December 2021 £m Half year ended 30 June 2021 £m Full year ended 31 December 2020 £m Green Public Bonds and Green Private Placements (2) 8,227 2,777 5,450 5,030 Green Loan Underwriting (2) 153 – 153 – Sustainability Linked Loans (3) 639 347 292 732 Sustainability Linked Bonds and Private Placements (3) 201 201 – – Other financing within the CSFI criteria (4) 430 – 430 1,395 Total 9,650 3,325 6,325 7,157 (1) For the full year ended 31 December 2021, the NatWest Group 2021 CSFI criteria published in February 2021 has been used to determine the assets, activities and companies that are eligible to be counted. The revised CSFI criteria published in October 2021 will be used from 1 January 2022. Full details of the CSFI criteria can be found at natwestgroup.com (2) Underwriting of specific use of proceeds debt capital market issuances for project expenditures, as well as green loan commitments when customers meet the CSFI criteria. Amounts represent the NWM Group share of the notional (total underwriting amount lead managed or placed by NWM Group), based on the number of underwriters within a specific deal. During the year ended 31 December 2021 53 green bonds and private placements totalling a notional amount of £38.7 billion (36 deals, £22.7 billion during full year 2020), account for c.16% of the total lead managed or placed transactions by NWM Group during the period (c.4% for full year 2020). (3) Sustainability Linked Loans, Bonds and private placements made to customers, in line with Loan Market Association (LMA) Sustainability Linked Loan principles and International Capital Market Association (ICMA) Sustainability Linked Bond principles where deal targets include green performance indicators, aligned to CSFI criteria. (4) In addition to transactions that directly meet CSFI criteria based on use of proceeds for green purposes, the CSFI criteria also includes certain general purpose bonds and private placements to customers who can evidence (to NatWest Group’s satisfaction through review of the customers’ profit and loss statement) 50% or more of revenues from the categories and sectors outlined in the criteria. In the year ended 31 December 2021, the £430 million relates to bonds and private placements on this basis. UK Debt Management Office NWM Group acted as joint lead manager raising £6 billion for the Debt Management Office’s second green bond; read more on page 9. Examples of green deals Origin Housing NWM Group acted as sole ESG structurer and agent on Origin Housing’s inaugural green £120 million private placement. We thereby helped this social landlord lock in long-term financing to develop affordable and energy-efficient homes for its tenants in London and Hertfordshire. KfW NWM Group acted as joint bookrunner on KfW’s €4 billion green bond issuance. This issuance supported KfW’s two green loan initiatives: the ‘Renewable Energies Programme’, which mainly funds wind and photovoltaics projects; and the ‘Energy-efficient Construction’ programme which supports energy- efficiency in new residential buildings in Germany. 32 NatWest Markets Plc 2021 Annual Report and Accounts Capital markets transactions (financing) NWM Group also supports customers through capital markets by providing an integrated proposition across financing, solutions and advisory services. We are a leading partner for our customers, helping them to access global debt capital markets across a wide variety of products, including bonds, loans, commercial paper, medium-term notes and private placements as well as bespoke financing solutions and primary lending products. As part of capital markets transactions, NWM Group acts as a facilitator (1) to support customers to issue debt instruments. These transactions are not recorded on the balance sheet since the climate-related exposure is held by the investor who places the bonds or private placements in their portfolio. The chart below shows NWM Group’s lead management activity during 2021 by sector. Finance: 42.2% Gov ernment: 20.8% Utility & Energy: 8.0% Real Es tate/Pr operty: 4.9% Oil & Gas: 1.6% Construction/Building: 3.3% Insurance: 1.6% Prof essional Services: 3.0% Computer & Electr onics: 1.7% T elecommunications : 2.0% Aut o/ T ruck: 1.8% Mining: 0.1% T ransportation: 3.8% Other: 5.1% NWM Gr oup ’ s Underwriting Business b y Sector in 2021 42.2% 20.8% 8.0% 4.9% 5.1% 1.8% 2.0% 1.7% 3.0% 1.6% 3.3% 1.6% 0.1% 3.8% The data is sourced from Dealogic, and uses the Dealogic General and Specific Industry Group classifications. Financing volumes are reported on a manager-proceeds basis including bonds and securitised bonds; no modifications have been made by NWM Group. This data represents a third party view of our financing and is subject to Dealogic’s league table methodology, which pro-rates volume across lead-managers. The table below shows value for financing related to mining, oil & gas and utility & energy sectors. These are identified as high risk as they are emissions intensive and therefore particularly exposed to rising carbon costs; however, those deals meeting the CSFI criteria have been shown separately given their decarbonisation scope/trajectory: Sector 2021 £m % of Total 2020 £m % of Total Utility & Energy 5,706 8.0% 5,761 7.4% Of which fall under the CSFI criteria 899 2,931 Mining 94 0.1% 270 0.3% Oil & Gas 1,166 1.6% 589 0.8% Grand Total of all industries (NWM Group apportioned value) 71,210 77,471 As methodologies are developed by the industry, NWM Group intends to incorporate facilitated emissions into its measuring and reporting cycle. (1) The Partnership for Carbon Accounting Financials (PCAF) discussion paper on Capital Markets, issued in November 2021 defines a facilitator as: ‘An institution (usually large international banks) that helps an entity (in this paper only corporates are in scope) to issue equity or debt instruments in the capital markets. The facilitator may carry out activities including advising the issuing entity on structure, pricing, and process; preparing materials for and engaging with investors; and arranging and guiding issuing entities on a roadshow. Formal roles encompassed by this term include Lead/Active/Passive Bookrunner(s) and Lead/Co-Manager(s).’ 33 NatWest Markets Plc 2021 Annual Report and Accounts 34 NatWest Markets Plc 2021 Annual Report and Accounts 36 Financial Review 41 Board of directors and secretary 42 Risk and capital management 89 Report of the directors 93 Statement of directors’ responsibilities 94 Financial statements 179 Risk factors 201 Forward-looking statements 35 NatWest Markets Plc 2021 Annual Report and Accounts Strategic report Financial review Risk and capital management Report of the directors Risk factors Financial statements Financial rev iew NWM Group Annu al Report an d Accounts 202 1 36 Presentation of information NatWest Markets Plc (‘NWM Plc’) is a wholly-owned su bsidiary of NatWest Group plc or ‘the ultimate hol ding company’. The term ‘NWM Group’ or ‘we’ refers to NWM Plc and its subsidiary and associated undertakings. The term ‘NatWest Group’ refers to NatWest G roup plc and its subsidiary and associated undertakings. The te rm ‘NWH Group’ refers to NatWest Holdings Limited (‘NWH’) and its su bsidiary and associated undertakings. The term ‘NatWest Bank Plc’ or ‘NWB Plc’ refers to National We stminster Bank Plc. NWM Group publishes its financial statemen ts in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£ bn’ represent millions and thousands of millions of p ounds sterling, respectively, and references to ‘pence’ represent pence where amounts are denominated in pound sterling (‘ GBP’). Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$b n’ represent millions and thousands of millions of dollars, respectively. T he abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ an d ‘€bn’ represent millions and thousands of millions of eur os, respectively. NWM Group legal entity disclosures There is a distinction between the disclosure of the N atWest Markets operating segment per formance in NatWest Group plc’s 2021 Annual Report and Acc ounts (ARA), and NWM Group’s disclosures as presented in this documen t, with differences primarily as follows:  NWM Group’s legal entity disclos ures include the Central items & other segment,  NatWest Group plc’s 2021 ARA reports the NatWes t Markets segment excluding the Central items & othe r segment. Non-IFRS financial measures NWM Group prepares its financial statemen ts in accordance with generally accepted accounting pri nciples (GAAP). This document contains a number of adjusted or alternati ve performance measures, also known as non- GAAP or non-IFRS performance measures. These measures are adjusted for certain items which management believe are no t representative of the underlying performance of the business an d which distort period-on-period comparison. These non-IFRS measures provide users of the financial statemen ts with a consistent basis for comparing business performance between financial pe riods and information on elements of performance that are one-off in nature. The non-IFRS measures also include the calculation of metrics that are used throughout the banking indus try. These non-IFRS measures are not measures within the s cope of IFRS and are not a substitute for IFRS measures. Re fer to the section, ‘Non-IFRS financial measures’, on page 178 for further information and calculations of non-IFRS financial measures included throughout this docu ment, and, where relevant, the most directly comparable IFRS financial measures. Financial review continued NWM Group Annu al Report an d Accounts 202 1 37 Performance overview NWM Group reported a loss for the year ended 31 December 2021 of £491 million compared with a loss of £327 million for the year ended 31 December 2020 . Lower income reflected under-performance in Fixed Income in 2021 and the exceptional market activity in the prio r year in response to the COVID-19 pandemic. Operating expenses f or the current year were lower than in 2020, largel y reflecting lower litigation and conduct costs and progress on u nderlying cost reductions. Financial performance  Income was £401 million in 2021 , compared with £1,158 million in 2020, driven by under-perform ance in Fixed Income, in contrast to the prior y ear which benefitted from exceptional levels of market ac tivity generated by the initial spread of the COVID-19 virus.  Operating expenses of £1,1 50 million were £281 million lower compared with £1,431 million in 20 20. Litigation and conduct costs of £17 million credit reflected progress in closing legacy matters and were £ 151 million lower than £134 million in 2020. Strategic costs were £2 48 million, up from £191 million in the prior ye ar, as work continued on the refocusing of NWM Group. Other operating expenses of £919 million were £187 million lower than i n 2020, reflecting progress on underlying cost reductions.  Impairment releases were £35 million in 2021, la rgely driven by credit improvements and releases on individual IFRS 9 Stage 2 and Stage 3 counterpa rties, compared with losses of £42 million in the prior year which were largely due to the credit deterioration of an individual counterp arty and the impact of expected credit losses recognised following the COVID-19 pandemic.  NWM Group’s total assets and liabilities dec reased by £70.1 billion and £68.2 billion to £203.0 billion and £195.6 billion respectively at 31 December 2021 , compared with the prior year. The decreases primarily r eflect lower derivative fair values, largely driven by increas es in interest rates across major currencies during the year.  Total dividends paid to NatWest Group plc during the year ended 31 December 2021 amounted to £ 1.0 billion. On 17 February 2022, the NWM Plc Board approved a further interim dividend of £250 million, to be declared and payable to NatWest Group plc on 18 February 2022 . There has been no adjustment to the year-end statutory financi al statements, however a £250 mi llion foreseeable dividend deduction has been applied to t he year-end regulatory capital position. Capital and leverage  Total NWM Plc RWAs reduced to £22 .7 billion at 31 December 2021 from £25.6 billion at 31 December 2020, reflecting lower levels of credit, c ounterparty credit, market and operational risk which have trended downwa rds as the business seeks to reduce RWAs through the execution of capital optimisation actions, including strategic risk reduction transactions and exit activity.  NWM Plc’s Common Equity Tier 1 (CET1) ratio was 17.9 % at 31 December 2021, compared with 21.7% at 31 Decem ber 2020. The decrease in the year ref lected the impact of dividends paid to NatWest Group plc and o ther reserve movements, partly offset by the reduction in RWAs. The CRR leverage ratio decreased to 4.3% from 5.2 % at 31 December 2020.  Total MREL for NWM Plc at 31 Dece mber 2021 was £9.6 billion, or 42.1% of RWAs, down from £12.7 billion o r 49.6% of RWAs at 31 December 2020. The dec rease in the year was largely due to the redemption of a $1. 5 billion internal instrument issued to NatWest Group plc an d the reduction in CET1 capital. Liquidity and funding  NWM Plc’s liquidity portfolio at 31 December 2021 was £16.1 billion with an LCR of 205%, compared with £19 .4 billion and an LCR of 268% at 31 December 2020 . Stressed coverage ratio was 146% at 31 December 202 1, compared with 207% at 31 December 2020.  NWM Plc issued £4.3 billion of term senior unsecured de bt securities during 2021, including two bench mark transactions under the US MTN pro gramme amounting to $2.55 billion of notes, two benchmark transac tions under the EMTN programme amounting to €2 .25 billion of notes, and other private placements. Financial review continued NWM Group Annu al Report an d Accounts 202 1 38 NWM Group business review The table below presents a segment al analysis of key lines of NWM Group’s inc ome statement. Commentary refers to the table below as well as the statutory income statement p resented on page 105. 2021 2020 Central Central NatWest items & NatWest items & Markets other Total Markets other Total Variance Income statement £m £m £m £m £m £m £m % Net interest income 8 — 8 (62) 2 (60) 68 (113%) Non - interest income 401 (8) 393 1,180 38 1,218 (825) (68%) Total income 409 (8) 401 1,118 40 1,158 (757) (65%) Strategic costs (236) (12) (248) (207) 16 (191) (57) 30% Litigation and conduct costs — 17 17 (4) (130) (134) 151 (113%) Other operating expenses (921) 2 (919) (1,106) — (1,106) 187 (17%) Operating expenses (1,157) 7 (1,150) (1,317) (114) (1,431) 281 (20%) Operating loss before impairments (748) (1) (749) (199) (74) (273) (476) 174% Impairment releases/(losses) 35 — 35 (40) (2) (42) 77 (183%) Operating loss before tax (713) (1) (714) (239) (76) (315) (399) 127% Tax credit/(charge) 223 (12) 235 (1,958%) Loss for the year (491) (327) (164) 50% Income (8) Fixed Income (1,2,3,4,5) (64) — (64) 511 — 511 (575) (113%) Currencies (2,4) 427 — 427 583 — 583 (156) (27%) Capital Markets (2,3,4) 336 — 336 384 — 384 (48) (13%) Capital Management Unit and other (1,2,5,6) (35) (8) (43) (60) 40 (20) (23) 115% Income before Revenue share paid, Asset disposals and OCA 664 (8) 656 1,418 40 1,458 (802) (55%) Revenue share with other NatWest Group segments (197) — (197) (193) — (193) (4) 2% Income excluding Asset disposals and OCA 467 (8) 459 1,225 40 1,265 (806) (64%) Asset disposals/Strategic risk reduction (7) (64) — (64) (83) — (83) 19 (23%) Own credit adjustments (OCA) 6 — 6 (24) — (24) 30 (125%) Total income 409 (8) 401 1,118 40 1,158 (757) (65%) (1) Income of £(12) million reported within Fixed Income relates to business subs equently reallocated to Capital Management Unit during 2021. Comparatives have not been restated. The full year equivalent amount for 2020 was £ 1 million. (2) Income of £(42) million, £(8) million and £ (14) mil lion reported within Fixed Income, Currencies a nd Capital Markets respectively in 2020 relates to business that was subsequently reallocated to Capital Management Unit during 2020. (3) Income of £33 million reported within Capital Markets in 2020 relates to business that was subsequently transferred to Fixed Income during 2020. (4) Income of £59 million and £8 million reported within Fixed Income in 2020 relates to business that was subsequently transferred to Currencies and Capital Markets respectively during 2020. (5) Fixed Income includes income of £(7) million (2020: £37 million) relating to miscellaneous balances that from Q2 2021 have been included in Capital Management Unit and other. (6) Capital Management Unit was set up in Q3 2020 to manage the capital usage and optimisation across all p arts of NatWest Markets. The income shown here relates to legacy assets and other miscellaneous balances. Other relates t o income booked to the Central items & other operating segment. (7) Asset disposals/Strategic risk reduction relates t o the costs of exiting positions, which includes changes in carrying value to align to the expected exit valuation, and the impact of risk reduction transactions entered into, in respect of the strategic announcements of 14 Februa ry 2020. (8) Product performance includes gross income earned on a NatWest group-wide basis, including amounts contributed to other segments. Financial review continued NWM Group Annu al Report an d Accounts 202 1 39 NWM Group business review continued Income Net interest income was £8 million for 2021 , compared with net interest expense of £60 million in 2 020. Net interest income largely represents interest income from le nding activity and capital hedges, offset by interest expense f rom the funding costs of the business. The mov ement in the year primarily reflected reduced funding costs for the business driven by the ongoing repayment of legacy debt. Non-interest income decreased by £82 5 million to £393 million, compared with £1,218 million in 2020 . Income from trading activities decreased to £263 mil lion from £1,088 million in 2020, reflecting under-performance in Fixed Income which was impacted by the re-shaping of the business , in contrast to the prior year which benefitted from the excep tional market activity generated by the initial spread of the COVI D-19 virus. Asset disposals/Strategic risk reduction was a £64 million loss for the year, compared with a £ 83 million loss in the prior year following the strategic announcements in Fe bruary 2020. Operating expenses Operating expenses of £1,1 50 million in the current year were £281 million lower than £1,431 million in 2020. Litigation and conduct costs credit of £17 milli on for the year reflected continued progress in closing legacy matters and we re down £151 million from £134 million i n 2020. Strategic costs were £248 million in 2021 compared with £191 million in 2020, as work continued on the refocusing of NWM Group. Othe r operating expenses decreased to £919 million from £1,1 06 million in 2020, primarily reflecting ongoing pro gress on underlying cost reductions. Impairments Impairment releases were £35 million in 2021, la rgely driven by credit improvements and releases on individual IFRS 9 S tage 2 and Stage 3 exposures, compared wi th losses of £42 million in 2020, which were largely due to the credit dete rioration of an individual counterparty and the increased expe cted credit losses recognised following the COVID-19 p andemic. NatWest Markets segment The operating loss before tax was £71 3 million compared with a loss of £239 million in 2020. Income excluding asset disposals and own credit adjustments of £4 67 million was £758 million lower than in 2020, reflecting under-pe rformance in Fixed Income which was impacted by the re-sh aping of the business, and the increased customer ac tivity in the prior year as the market reacted to COVID-19. O perating expenses of £1,15 7 million were £160 million lower than £1,317 million in 2020, largely driven by a decrease in other operating expenses reflecting continued progress on underlyin g cost reductions. Central items & other segment The operating loss before tax was £1 million c ompared with a loss of £76 million in 2020. Litigation and conduct costs of £1 7 million credit reflected progress in closing leg acy matters and were down £147 million from £1 30 million in 2020. Financial review continued NWM Group Annu al Report an d Accounts 202 1 40 NWM Group business review continued Balance sheet profile as at 31 December 2021 NWM Group’s balance sheet pr ofile is summarised below. Commentary refers to the tables below as well as the consolidated balance sheet on page 106. Assets Liabilities 2021 2020 2021 2020 £bn £bn £bn £bn Cash and balances at central banks 16.6 15.8 Securities 25.0 29.2 25.0 26.8 Short positions Reverse repos (1) 20.7 19.4 19.4 19.0 Repos (2) Derivative cash collateral posted (3) 12.0 18.5 17.6 23.2 Derivative cash collateral received (4) Other trading assets 1.4 1.6 2.5 3.3 Other trading liabilities Total trading assets 59.1 68.7 64.5 72.3 Total trading liabilities Loans - amortised cost 8.4 9.4 4.1 4.4 Deposits - amortised cost Settlement balances 2.1 2.3 2.1 2.2 Settlement balances Amounts due from holding company Amounts due to holding company and fellow subsidiaries 1.5 1.6 6.1 8.1 and fellow subsidiaries Other financial assets 8.8 9.0 19.3 18.2 Other financial liabilities Other assets 0.9 0.7 1.0 1.3 Other liabilities Funded assets 97.4 107.5 97.1 106.5 Liabilities excluding derivatives Derivative assets 105.6 165.6 98.5 157.3 Derivative liabilities Total assets 203.0 273.1 195.6 263.8 Total liabilities of which: 21.1 20.6 wholesale funding (5) 9.2 9.5 short-term wholesale funding (5) Net derivative assets 3.6 4.7 2.9 3.6 Net derivative liabilities (1) Comprises bank reverse repos of £3.9 billion (2020 - £2.2 billion) and customer reverse repos of £16.8 billion (2020 - £17.2 billion). (2) Comprises bank repos of £0.8 billion (2020 - £1.0 billion) and cust omer repos of £18.6 billion (2020 - £18.0 billion). (3) Comprises derivative cash collateral posted relating to banks of £4 .3 billion (2020 - £7.5 billi on) and customers of £7.7 billion (2020 - £11.0 billion). (4) Comprises derivative cash collateral received relating t o banks of £8.1 billion (2020 - £11.8 billion) and customers of £9.5 billion (2020 - £11.4 billion). (5) Predominantly comprises bank deposits (excluding repos), debt securities in issue and third party subordinated liabilities. Total assets and liabilities decreased by £70.1 billion a nd £68.2 billion to £203.0 billion and £19 5.6 billion respectively at 31 December 2021, compared with £273.1 billion a nd £263.8 billion at 31 December 2020. The decreases primarily refle ct lower derivative fair values, largely driven by increases in interest rates across major currencies . Funded assets, which exclude derivatives, decreased by £1 0.1 billion to £97.4 billion at 31 December 2021. Trading assets , which primarily relate to client-led activity as well as derivative cash collater al posted, decreased to £59.1 billion at 31 December 2021 from £68.7 billion at 31 December 2020, driven by decreases in d erivative cash collateral posted and securities, partially offset by an increase in reverse repos as the balance sheet was managed within limits. Trading liabilities decreased by £7.8 billion to £64.5 billion at 31 December 2021 (2020 - £72 .3 billion), driven largely by a reduction in derivative cash coll ateral received. Derivative assets and derivative liabilities were down £60.0 billion to £105.6 billion and £58.8 billion to £98.5 billion respectively compared with year end 202 0. The decreases in mark-to-market were largely driven by increases in in terest rates across major currencies during the ye ar. Other financial liabilities in creased to £19.3 billion from £18.2 billion at 31 December 2020, driven by new iss uance partially offset by maturities, and include s £12.4 billion of medium term notes issued. Board of dir ectors and s ecretary NWM Group Annu al Report an d Accounts 202 1 41 Board and committees Chairman Frank Dangeard Chairman of the Board and Chairman of the No minations and Governance Committee Executive directors Robert Begbie Chief Executive Officer David King Chief Financial Officer Independent non-executive directors Vivek Ahuja Chairman of Board Risk Committee Anne Simpson Chairman of Audit Committee Tamsin Rowe Chairman of the Performance and Remuneration Com mittee Sarah Wilkinson Board changes in 2021 Brendan Nelson (non-executive director) resigned o n 30 June 2021. Auditors Ernst & Young LLP Chartered Accountants and Statutory Audi tor 25 Churchill Place London E14 5EY Registered office 36 St Andrew Square Edinburgh EH2 2YB Principal office NatWest Markets Plc 250 Bishopsgate London EC2M 4AA NatWest Markets N.V. Claude Debussylaan 94 1082 MD Amsterdam The Netherlands NatWest Markets Holdings USA Inc . 600 Washington Blvd Stamford CT 06901 USA NatWest Markets Plc Registered in Scotland No. SC0 90312 Risk and ca pital managem ent NWM Group Annu al Report an d Accounts 202 1 42 Presentation of information Where marked as audited in the se ction header, certain information in the Risk and cap ital management section (pages 42 to 88) is within the scope of the Independen t auditor’s report. Risk and capital management is generally c onducted on an overall basis within NatWest Group such that com mon policies, procedures, frameworks and models apply across NatWest Group. Therefore, for the most p art, discussion on these qualitative aspects reflects those in NatWest Group as relevant for the businesses and operations in NWM Group. Update on COVID-19 While the immediate disruption diminished duri ng the year, the ongoing impacts of the global p andemic remained a significant focus for risk management in 20 21 and uncertainty in the operating environment continued. NWM Group remained committed to supporting its cus tomers while operating safely and soundly in line with its strategic objecti ves. Against the backdrop of a slowly -recovering economy, the credit risk profile remains heightened and there is an expectation that the impacts of the pandemic will continue to be seen in the performance of NWM G roup’s portfolios for some time. While the direct impact on NWM Group’s ope rational risk profile reduced, NWM Group continued to closely mo nitor the second- order impacts on its transformation agen da, with a significant focus on managing resource to protect key regulato ry deliveries. The continued evolution of NWM Group’s ways of working – to include large-scale working from home – also required significant operational risk focus, particularly in terms of business resilience. As a result of its strong balance she et and prudent approach to risk manageme nt, NWM Group remains well placed to withstand these aftershocks as well as providing support to customers when they need i t most. Risk management framework Introduction NWM Group operates under NatWest G roup’s enterprise-wide risk management framework, which is cent red around the embedding of a strong risk culture. T he framework ensures the governance, capabilities and methods are in place to f acilitate risk management and decision-making ac ross the organisation. The framework ensures that NWM G roup’s principal risks – which are detailed in this section – are appropri ately controlled and managed. It sets out the standards and objec tives for risk management as well as defining the division of role s and responsibilities. This seeks to ensure a consistent app roach to risk management across NWM Group. It aligns ris k management with NWM Group’s overall strategic object ives. The framework, which is designed and m aintained by NatWest Group’s independent Risk funct ion, is owned by the NatWest Group Chief Risk Officer. It is reviewed and approve d annually by the NatWest Group Board. The framework incorporates risk governance, NatWest Group’s t hree lines of defence operating model and the Risk function’s mandate. Risk appetite, supported by a robust set of p rinciples, policies and practices, defines the levels of tolerance for a variety of risks and provides a structured approach to risk-takin g within agreed boundaries. While all NWM Group colleague s are responsible for managing risk, the Risk function provides oversight and monitoring of risk management activities, including the implemen tation of the framework and adherence to its supporting policies, standards and operational procedures. The Chie f Risk Officer plays an integral role in providing the Bo ard with advice on NWM Group’s risk profile, the perfor mance of its controls and in providing challenge where a proposed business strate gy may exceed risk tolerance. In addition, there is a process to identify and man age top risks, which are those that could hav e a significant negative impact on NWM Group’s ability to mee t its strategic objectives. A complementary process operates to identify emerging risks. Both top and emerging risks may incorporate aspects of – or correlate to – a number of principal risks and are reported alongside them to the Board on a regular basis. Page Risk management framework Introduction 42 Culture 43 Governance 44 Risk appetite 46 Identification and measurement 47 Mitigation 47 Stress testing 47 Market risk Traded market risk 51 Non-traded market risk 54 Capital, liquidity and funding r isk Definitions and sources 57 Key developments in 2021 58 Capital management 58 Liquidity and funding management 58 Minimum requirements 59 Measurement 59 Credit risk Key developments 63 Impairment, provisioning and write-offs 64 Economic loss drivers and ECL s ensitivity 67 Trading activities and banking activities 73 Pension risk 83 Compliance & conduct risk 83 Financial crime risk 84 Climate risk 85 Operational risk 86 Model risk 87 Reputational risk 88 Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 43 Risk management framework continu ed Culture Risk culture is at the heart of NWM G roup’s risk management framework and its risk management practice. T he risk culture target is to make risk part of the way employees work and think. A focus on leaders as role models and action to build clarity, develop capability and motivate e mployees to reach the required standards of behaviour are key to achieving the risk culture target. Colleagues are expected to:  Take personal responsibility for understanding and proactively managing the risks associated with individual roles.  Respect risk management and the part it pl ays in daily work.  Understand the risks associated with individual roles.  Align decision-making to NWM Group’s risk appeti te.  Consider risk in all actions and decisions.  Escalate risks and issues early; taking action t o mitigate risks and learning from mistakes and near-misses .  Challenge others’ attitudes, ideas and actions.  Report and communicate risks transparently. The target risk culture behaviours are embedde d in NatWest Group’s Critical People Capabilities and are clea rly aligned to the core values of “serving cust omers”, “working together”, “doing the right thing” and “thinking long te rm”. These act as an effective basis for a strong risk culture because the C ritical People Capabilities form the ba sis of all recruitment and selection processes. Training Enabling employees to have th e capabilities and confidence to manage risk is core to NatWest Group’s le arning strategy. NatWest Group offers a wide r ange of learning, both technical and behavioural, across the ris k disciplines. This training can be mandatory, role-specific or for personal develop ment. Mandatory learning for all staff is f ocused on keeping employees, customers and NatWest Group safe. This is e asily accessed online and is assigned to each perso n according to their role and business area. The system allows monitoring at all levels to ensure completion. Our Code NatWest Group’s conduct guidance, Our Code, provides direction on expected behaviour and sets out the st andards of conduct that support the values . The code explains the effect of decisions that are taken and describes the p rinciples that must be followed. These principles cover conduct-related issues as well as wider business activities. They focus on desired outcomes, with practical guidelines to align the values wit h commercial strategy and actions. The emb edding of these principles facilitates sound decision-making and a clear focus on good customer outcomes. Where appropriate, if conduct falls short of Na tWest Group’s required standards, the accoun tability review process is used to assess how this should be reflec ted in pay outcomes for the individuals concerned. The NatWest Group remune ration policy ensures that the remuneration arrangements for all employees reflect the principles and standards prescribed by the PRA rulebook and the FCA handbook. Any e mployee falling short of the expected standards would also be subject to internal disciplinary policies and procedures. If appro priate, the relevant authority would be notified. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 44 Risk management framework continu ed Governance Committee structure The diagram shows NWM Plc’s risk com mittee structure in 2021 and the main purposes of ea ch committee. (1) The Executive Committee is chaired by the NWM Chief Executive Officer and supports him in discharging his individual accountabilities in accordance with the authority delegated to him by the NWM Plc Board of Directors. (2) The Executive Risk Committee is chaired by the NWM Ch ief Risk Officer and supports him in discharging his risk management accountabilities. (3) The Operating Committee is chaired by the NWM Ch ief Operating Officer and supports him in discharging his individual accountabilities in accordance with the authority delegated to him by the NWM Chief Executive Officer. (4) The Climate & Sustainability Committee is chaired by the NWM Chief Executive Officer and supports him in discharging his climate risk accountab ilities. (5) The Assets & Liabilities Committee is chaired by the NWM Chief Financial Off icer and supports him in discharging his individual accountabilities relating to treasury and balance sheet management. (6) The Pension Committee is chaired by the NWM Ch ief Financial Officer and supports him in discharging his individual accountabilities relating to the management of NatW est Markets’ pension schemes. (7) The Financial Crime Risk Committee, the E-Trading Oversight Committee, the Reput ational Risk Committee, the Valuations Committee, the Enterprise Wide Risk Committee, the Policy Approval Committee, the Model Risk Committee, the Provisions Committee and the Credit Risk Committee are not shown here. They support the Executive Risk Committee in discharging its risk management responsibilities. Ass et s & Lia bil iti es Committe e (5) Ex ecut iv e R isk Committe e (2) Ex ecut iv e Committe e (1) Pen si on Committe e (6) NW M Pl c B oar d of Di rec tors Boa rd Ri sk Committe e Aud it Committee Cli ma te & Su sta inab il ity Committe e (4) NW M S ecu riti es Ja pan Lim it ed Boa rd NW M N .V. Sup erv is ory Boa rd NW M S ecu riti es Inc B oard Considers the financial risks posed by climate change as well as the progress against NWM’s regulatory and strategic climate commitments. Reviews, challenges and debates all material and enterprise-wide risk and control matters. M an a ge s a nd ov e r se e s t he NW M Gr o up o t he r t ha n t h os e a s pe ct s r es er v ed t o t he Na t W es t G r ou p p l c Bo a rd or a n a pp r op r ia t e Bo a rd C om m it t ee . Oversees management of NWM Group’s current and future balance sheet aligned with chosen business strategy and approved risk appetite . Considers the financial strategy, risk management and policy implications of NatWest Markets’ pension schemes. Pr o v id e s ov e r si g ht an d ch a l l eng e o n cu rr e nt a nd p o t en t ia l f ut u r e r i sk e xp o su r e s, fu t ur e r i sk s tr a t eg y a nd th e ef f ec t i v en es s o f t h e r is k ma n ag e m en t fr a m ew or k . M on it o r s t h e in t eg r it y o f f in a nc ia l st a t em en t s a nd f o rm a l a nn o un c em e nt s r el at i ng t o a ct ua l an d fo r e ca st p er f or ma n c e. Ope ra tin g Committe e (3) Oversees all aspects of NWM Group’s control environment, and delivers the adoption of Group-wide risk frameworks. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 45 Risk management framework continu ed Governance Risk management structure The diagram shows NWM Group’s risk man agement structure in 2021. (1) The NWM Chief Risk Officer reports directly to the NWM Chief Executive Off icer and the NatWest Group Chief Risk Officer. The NWM Chief Risk Officer also has an additional reporting line to the chair of the NWM Board Risk Committee, and a right of access to the committee. (2) The NWM Group Risk function is independent and provides oversight of risk management activities to ensure risks are adequately monitored and controlled. The heads of risk work closely with the NWM N.V. Chief Risk Officer, the US Head of Risk and the Chief Risk Offic er Asia Pacific to ensure consistency across th e international businesses. (3) The NWH Group Risk function provides services a cross NatWest Group, including – where agreed – to the NWM Chief Risk Officer. These services are managed, as app licable, through service level agreements and resource augmentation agreements . NatWest Group Chi ef Risk Offi cer NWM Chief Ri sk O f fi c e r NWM Chief Execut ive Officer Head of Compliance, Conduct & Financial Crime Head of Credit Risk Head of Traded Market Risk Risk Chief Operating Officer and Head of Operational Risk Head of Model Risk and eTrading Oversight NatWest Group Chief Executive Officer NWM N.V . Chief Ri sk Of ficer Asia Pac ific Chief Ri sk Of ficer US Head of Risk Head of Capital Optimisation Risk Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 46 Risk management framework continu ed Three lines of defence NatWest Group uses the industry-standard th ree lines of defence model to articulate accountabilities a nd responsibilities for managing risk. This supports the embedding of eff ective risk management throughout the organisation. First line of defence The first line of defence incorporates most roles in N atWest Group, including those in the customer-facing f ranchises, Technology and Services as well as support func tions such as Human Resources, Legal and Finance. The first line of defence is emp owered to take risks within the constraints of the risk management framework and policie s as well as the risk appetite stateme nts set by NatWest Group and measures set by the Board. The first line of defence is responsible for managing its di rect risks. With the support of specialist functio ns such as Legal, Human Resources and Technology, it is also responsible for managing its consequential risks by identifying, assessing, mitigating, monitoring and reporting risks. Second line of defence The second line of defence comprises the Risk function and is independent of the first line. The second line of defence is empowered to design and maintain the risk management framework and its components. It undertakes proactive risk oversight and con tinuous monitoring activities to confirm that NatWest Group eng ages in permissible and sustainable risk-taking activities. The second line of defence advis es on, monitors, challenges, approves, escalates and reports on the risk-taking activities of the first line, ensuring that thes e are within the constraints of the risk management framework and policies as well a s the risk appetite statements set by NatWes t Group and measures set by the Board. Third line of defence The third line of defence is the Internal Audi t function and is independent of the first and se cond lines. The third line of defence is responsible for providing independent and objective assu rance to the Board, its subsidiary legal entity boards and executive management on the adequacy and effectiveness of ke y internal controls, governance and the risk management in place to monitor, manage and mitigate the key ris ks to NatWest Group and its subsidiary companies achieving their objectives. The third line of defence executes its duties freel y and objectively in accordance with the Charte red Institute of Internal Auditors’ Code of Ethics and Internation al Standards. Risk appetite Risk appetite defines the type and aggregate level of risk NWM Group is willing to accept in pursuit of its s trategic objectives and business plans. Risk appetite supports sound risk t aking, the promotion of robust risk practices and risk beh aviours, and is calibrated annually. For certain principal risks, risk capacity defines the maximum level of risk NWM Group can as sume before breaching constraints determined by regulatory capital and liquidity requirements, the operational environment, and fr om a conduct perspective. Establishing risk capacity helps dete rmine where risk appetite should be set, ensuring there is a buffer between internal risk appetite and NWM Group’s ulti mate capacity to absorb losses. Risk appetite framework The risk appetite framework supports eff ective risk management by promoting sound risk-taking t hrough a structured approach, within agreed bounda ries. It also ensures emerging risks and risk-taking activities that might be out of appetite are identified, assessed, es calated and addressed in a timely manner. To facilitate this, a detailed annu al review of the framework is carried out. The review includes:  Assessing the adequacy of the f ramework when compared to internal and external expectations.  Ensuring the framework remains ef fective and acts as a strong control environment for risk appetite.  Assessing the level of embedding of risk appetite across the organisation. The Board approves the risk appe tite framework annually. Establishing risk appetite In line with NatWest Group’s risk appetite framewo rk, risk appetite is maintained across NWM Group th rough risk appetite statements. These are in place for all princi pal risks and describe the extent and type of activi ties that can be undertaken. Risk appetite statements consist of quali tative statements of appetite supported by risk limits and triggers tha t operate as a defence against excessive risk-taking. Risk measures and their associated limits are an integral part of the risk a ppetite approach and a key part of embedding risk a ppetite in day-to- day risk management decisions. A cle ar tolerance for each principal risk is set in alignment with busi ness activities. The annual process of reviewing and upd ating risk appetite statements is completed alongside the business an d financial planning process. This ensures that plans and risk appetite are appropriately aligned. The Board sets risk appetite for all principal risks to help ensure NWM Group is well placed to meet its priorities and long- term targets even in challenging economic environ ments. This supports NWM Group in remaining resilient and secure as it pursues its strategic business objec tives. NWM Group’s risk profile is frequently reviewed an d monitored. Management focus is concentrated on all p rincipal risks as well as the top and emerging risk issue s which may correlate to them. Risk profile relative to risk appetite is reporte d regularly to senior management and the Board. NatWest Group policies directly support the quali tative aspects of risk appetite. They define the qualitative ex pectations, guidance and standards that stipulate the nature and extent of permissible risk taking and are consistently a pplied across NatWest Group and its subsidiaries. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 47 Risk management framework continu ed Identification and measuremen t Identification and measurement within the risk management process comprise:  Regular assessment of the overall risk profile, inco rporating market developments and trends, as well as ex ternal and internal factors.  Monitoring of the risks associat ed with lending and credit exposures.  Assessment of trading and non -trading portfolios.  Review of potential risks in new business activities and processes.  Analysis of potential risks in any complex and unusu al business transactions. The financial and non-financial risks that NWM G roup faces are detailed in its Risk Directory. This provides a common risk language to ensure consistent terminology is use d across NWM Group. The Risk Directory is subject to annu al review to ensure it continues to fully reflect the risk s that NWM Group faces. Mitigation Mitigation is a critical aspect of ensuring that risk profile remains within risk appetite. Risk mitigation st rategies are discussed and agreed within NWM G roup. When evaluating possible strategies , costs and benefits, residual risks (risks that are retained) and secondary risks ( those that arise from risk mitigation actions themselves) are also considered. Monitoring and review processes are in place t o evaluate results. Early identification, an d effective management of changes in legislation and regulation are cri tical to the successful mitigation of compliance an d conduct risk. The effects of all changes are managed to ensure the timely achievement of compliance. Those c hanges assessed as having a high or medium-high impact are managed mo re closely. Emerging risks that could affect future results and performance are also closely monitored. Action is taken to mitigate potential risks as and when required. Further in-depth an alysis, including the stress testing of exposures, is also carried out. Stress testing Stress testing – capital management Stress testing is a key risk managemen t tool and a fundamental component of NatWest Group’s approach to c apital management. It is used to quan tify and evaluate the potential impact of specified changes to risk factors on the fina ncial strength of NWM Group, including its capit al position. Stress testing includes:  Scenario testing, which examines the impact of a hypothetical future state to define changes in risk f actors.  Sensitivity testing, which exami nes the impact of an incremental change to one or more risk factors. The process for stress testing consists of four bro ad stages: Define scenarios  Identify macro and NWM Group spec ific vulnerabilities and risks.  Define and calibrate scenarios to examine risks and vulnerabilities.  Formal governance process to agree scenarios. Assess impact  Translate scenarios into risk drivers.  Assess impact to current and projected P&L and balance sheet across NWM Group. Calculate results and assess implications  Aggregate impacts into overall results.  Results form part of the risk management process.  Scenario results are used to inf orm NWM Group’s business and capital plans. Develop and agree management actions  Scenario results are analysed by su bject matter experts. Appropriate management actions are then developed.  Scenario results and manageme nt actions are reviewed by the relevant E xecutive Risk Committees and Board Risk Committees, and agreed by the rele vant Boards. Stress testing is used widely across NatWest Grou p, including at NWM Group level. The diagram below summarises key areas of focus. Specific areas that involve capi tal management include:  Strategic financial and capital planning – by assessing the impact of sensitivities and scenarios on the capital pl an and capital ratios.  Risk appetite – by gaining a be tter understanding of the drivers of, and the underlying risks associated with, risk appetite.  Risk monitoring – by monitoring the risks and horizon scanning events that could potentially affect NatWest Group’s financial strength and capital posi tion.  Risk mitigation – by identifying actions to mitigate risks, or those that could be taken, in the e vent of adverse changes to the business or economic environment. Key risk- mitigating actions are documented in NWM G roup’s recovery plan. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 48 Risk management framework continu ed Reverse stress testing is also ca rried out in order to identify circumstances that may lead to specific, defined outcomes such as business failure. Reverse stres s testing allows potential vulnerabilities in the business model to be exami ned more fully. Capital sufficiency – going concern forward-looking view Going concern capital requireme nts are examined on a forward-looking basis – including as part of t he annual budgeting process – by assessing the resilience of capital adequacy and leverage ratios under hypothe tical future states. These assessments include assumptions about regula tory and accounting factors (such as IFRS 9). The y incorporate economic variables and key ass umptions on balance sheet and P&L drivers, such as impairmen ts, to demonstrate that NWM Group and its operating subsidiaries main tain sufficient capital. A range of future states are tested. In pa rticular, capital requirements are assessed:  Based on a forecast of future busines s performance, given expectations of economic and market conditio ns over the forecast period.  Based on a forecast of future busines s performance under adverse economic and market conditions over the forecast period. Scenarios of different severity may be exa mined. The examination of capital requirements under both normal and adverse economic and market conditions enables Na tWest Group to determine whether its projected business performance meets internal plans and regulato ry capital requirements. The potential impact of normal and adverse economic and market conditions on capital requirements is asse ssed through stress testing, the results of which are not only us ed widely across NatWest Group but also by the regulators to se t specific capital buffers. NatWest Group takes part in st ress tests run by regulatory authorities to test industry-wide vulne r abilities under crystallising global and domestic sy stemic risks. Under stress testing, the peak-t o-trough change in CET1 may be affected by the transitions from Stage 1 to St age 2 in stress conditions. Stress and peak-to-trough movemen ts are used to help assess the amount of capital NWM Group needs to hold in stress conditions in accordance with the capital risk a ppetite framework. Internal assessment of capital adequacy An internal assessment of material risks is c arried out annually to enable an evaluation of the amount, type and distribution of capital required to cover these risks. T his is referred to as the Internal Capital Adequacy Assess ment Process (ICAAP). The ICAAP consists of a point-in-time assess ment of exposures and risks at the end of the financial y ear together with a forward- looking stress capital assessment. The ICAAP is a pproved by the Board and submitted to the PRA. The ICAAP is used to form a vie w of capital adequacy separately to the minimum regulatory requiremen ts. The ICAAP is used by the PRA to assess NWM Group’s specific ca pital requirements through the Pillar 2 f ramework. Capital allocation NWM Group has mechanisms to allocate capi tal across its businesses. These aim to optimise the use of capital resources taking into account applicable regulatory requi rements, strategic and business objectives and risk appetite. The framework for allocating capital is approved by the CFO with support from the Assets & Liabi lities Committee. Governance Capital management is subject to substantial review and governance. The Board approves the capital pl ans, including those for key legal entities and busines ses as well as the results of the stress tests relating to those capital plans. Stress testing – liquidity Liquidity risk monitoring and contingency planning A suite of tools is used to monitor, limit and st ress test the risks on the balance sheet. Limit frameworks are in place t o control the level of liquidity risk, asset and liability mism atches and funding concentrations. Liquidity risks are reviewed at significant legal entity and business levels daily, with performance reported to the A ssets & Liabilities Committee on a regular basis. Liquidity Condition Indicators are monitored daily. This ensures any build-up of stress is detected ea rly and the response escalated approp riately through recovery planning. Internal assessment of liquidity Under the liquidity risk management fra mework, NWM Group maintains the Internal Liquidity Adequacy As sessment Process. This includes assessment of net stressed liquidi ty outflows under a range of extreme but plausible stress scena rios detailed in the following table. Type Description Idiosyncratic scenario The market perceives NWM Group to be suffering from a severe stress event, which results in an immediate assump tion of increased credit risk or concerns over solvency. Market-wide scenario A market stress event affecting all participants in a market through contagion, potential counterparty failure and other market risks. NWM Group is affected under this scenario but no more severely than any other participants with equivalent exposure. Combined scenario This scenario models the combined impact of an idiosyncratic and market s tress occurring at once, severely affec ting funding markets and the liquidity of some assets. NWM Group uses the most severe outcome to set the internal stress testing scenario which u nderpins its internal liquidity risk appetite. This complements the regula tory liquidity coverage ratio requirement. Stress testing – recovery and resolution plan ning Within NWM Group, both NWM Plc and NWM N.V. e a ch have a recovery plan explaining how they would identify and respond to a financial stress event and res tore their financial position so that they remain viable on an ongoing basis. The recovery plan ensures risks that could del ay the implementation of a recovery strategy are highligh ted and preparations are made to minimise the impac t of these risks. Preparations include:  Developing a series of recovery indica tors to provide early warning of potential stress eve nts.  Clarifying roles, responsibilities and escal ation routes to minimise uncertainty or delay.  Developing a recovery playbook to provide a concise description of the actions required during recovery.  Detailing a range of options to address diff erent stress conditions.  Appointing dedicated option owners to reduce the risk of delay and capacity concerns. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 49 Risk management framework continu ed The plan is intended to enable critical services an d products to be maintained, as well as core business lines while operating within risk appetite and restoring financial con dition. It is assessed for appropriateness on an ongoin g basis and is updated annually. The NWM Plc plan is reviewed and approved by the Board prior to submission to the PRA each year. Fire drill simulations of possible recovery even ts are used to test the effectiveness of the recovery plans. T he fire drills are designed to replicate possible financial s tress conditions and allow senior management to rehearse the responses and decisions that may be required in an actual stress event. The results and lessons learnt from the fire drills a re used to enhance the overall approach to recovery pl anning. Under the resolution assessment part of the PRA rulebook, NatWest Group is required to carry out an assess ment of its preparations for resolution, sub mit a report of the assessment to the PRA and publish a summary of this repo rt. Resolution would be implement ed if NatWest Group was assessed by the UK authorities to have failed a nd the appropriate regulator put it into resolution. T he process of resolution is owned and implemented by the B ank of England (as the UK resolution authority). A multi-year program me is in place to further develop resolution capability in line wit h regulatory requirements. Stress testing – market risk Non-traded market risk Non-traded exposures are reported to the PRA on a quarterly basis. This provides the regulator with an ove rview of NatWest Group’s banking book interest rate exposu re. The report includes detailed product information analysed by in terest rate driver and other characteristics, including accounting classification, currency and counterparty type. Scenario analysis based on hypothetic al adverse scenarios is performed on non-traded exposures as part of the Bank of England and European Banking Authority stress test exercises. NatWest Group also produces an in ternal scenario analysis as part of its financial planning cycles . Non-traded exposures are capitalised through the ICAAP. This covers gap risk, basis risk, credit spread risk, pipeline risk, structural foreign exchange risk, prepayment risk, e quity risk and accounting volatility risk. The ICAA P is completed with a combination of value and earni ngs measures. The total non- traded market risk capital requirement is determined by adding the different charges for each sub risk type. The ICAAP methodology captures at least ten years of his torical volatility, produced with a 99% confidence level. Methodologies are reviewed by NatWest Group Model Risk and the results are approved by the NatWest Group T echnical Asset & Liability Management Committee. Non-traded market risk stress res ults are combined with those for other risks into the capital plan p resented to the Board. The cross-risk capital planning proce ss is conducted once a year, with a planning horizon of five years. The scenario narratives cover both regulatory scenarios and macroecono mic scenarios identified by NatWest Group. Vulnerability-based stress testing begins with the analysis of a portfolio and expresses its key vulnerabilities in terms of plausible, vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, macroeconomic or forward-looking/hypothetical. Vulner ability- based stress testing is used for internal man agement information and is not subject to limits. The resul t s for relevant scenarios are reported to senio r management. Traded market risk NatWest Markets carries out regular market risk s tress testing to identify vulnerabilities and potential losses in e xcess of, or not captured in, value-at-risk. T he calculated stresses measure the impact of changes in risk factors on the fair v alues of the trading portfolios. NatWest Markets conducts historical, macroeconomic and vulnerability-based stress testing. Historical s tress testing is a measure that is used for intern al management. Using the historical simulation framework e mployed for value-at-risk, the current portfolio is stressed usi ng historical data since 1 January 2005. This methodology simulates the impact of the 99.9 percentile loss that would be incur red by historical risk factor movements over the period, assuming variable hol ding periods specific to the risk factors and the busine sses. Historical stress tests form part of the m arket risk limit framework and their results are reported re gularly to senior management. Macroeconomic stress tests are ca rried out periodically as part of the bank-wide, cross-risk ca pital planning process. The scenario narratives are tra nslated into risk factor shocks using historical events a nd insights by economists, risk managers and the first line. Market risk stress results are combined wit h those for other risks into the capital plan presented to the Boa rd. The cross- risk capital planning process is conducted once a year, with a planning horizon of five years. The sc enario narratives cover both regulatory scenarios and macroeconomic scenarios. Vulnerability-based stress testing begins with the analysis of a portfolio and expresses its key vulnerabilities in terms of plausible, vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, macroeconomic or forward-looking/hypothetical. Vulner ability- based stress testing is used for internal man agement information and is not subject to limits. The resul t s for relevant scenarios are reported to senio r management. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 50 Risk management framework continu ed Internal scenarios During 2021, NWM Group continued to review a nd refine its internal scenarios where appropriate. In addition, NWM Group vulnerabilities are conside red as part of the development of all NatWes t Group-wide integrated scenarios and exercises. Regulatory stress testing In 2021, NWM Group contributed to NatWest Group’s submission to the regulatory stress tests conducted by the Bank of England. The scenario was hypothetical in n ature and does not represent a forecast of NatWest G roup’s future business or profitability. The results of regulatory stress tests are carefully assessed and form part of the wider risk management of NatWest Group. Following the UK’s exit from the Eu ropean Union on 31 December 2020, o nly relevant European subsidiaries of NatWest Group will take part in the European Banking Authority stress tests going forwa rd. NatWest Group itself will not participate. NWM Group also contributed to NatWest G roup’s submission to the Bank of England’s Climate Biennial Explo ratory Scenario (CBES). This exercise was designed to assess the resilience of the largest UK banks and insurers to the physical and transition risks associated with climate change. The CBES used three 30- year scenarios to explore the risks – Early Action (in whic h the transition to a net-zero emissions e conomy gets underway with carbon taxes and associated policie s intensifying gradually), Late Action (in which the transition is delayed u ntil 2031, with a sudden increase in the intensity of c arbon taxes and climate policy leading to a recession) and No Addi tional Action (in which no new climate policies are introduced a nd the physical impacts of climate change are most severe). The Ba nk of England is expected to publish aggregate findings in 20 22 though, given the exploratory nature of the exercise, it will not use CBES to set capital requirements. In addition to its participation in NatWest G roup’s stress testing programme, NWM Group has a fu rther regulatory commitment in relation to its traded risk model approvals for ma rket risk (IMA) and counterparty credit ris k (IMM). A robust stress testing framework is a regulatory requi rement. The purpose of this stress testing framework includes the identification of possible causes of large losses, a n estimation of their size and potential impact on capital adequ acy together with the identification of steps that could be taken t o manage those exposures as required. Such risk managemen t-led stress testing covers both traded marke t risk and counterparty credit risk and is used to monitor and set risk appetite. The requirements of NWM Gro up’s stress testing programme are codified in NWM Group’s stress testing policy and associated mandatory procedures. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 51 Market risk (audited) NWM Group is exposed to traded market risk throug h its trading activities and to non-traded market risk through its banking activities. Traded and non-traded ma rket risk exposures are managed and discuss ed separately. The traded market risk section begins below. T he non-traded market risk section begins on page 54. Pension-related activities also g ive rise to market risk. Refer to page 83 for more information on risk related to pensio ns. Traded market risk Definition (audited) Traded market risk is the risk arising from ch anges in fair value on positions, assets, liabilities or commitmen ts in trading portfolios as a result of fluctuations in market prices. Sources of risk (audited) Traded market risk mainly aris es from NWM Group’s trading activities. These activities provide a range of fin ancing, risk management and investment se rvices to clients – including corporations and financial instit utions – around the world. From a market risk perspective, activities are focused on rates; currencies; and traded credit. NWM Group undertakes transactions in fin ancial instruments including debt securities, as well as se curities financing and derivatives. The key categories of traded market risk are inte rest rate risk, credit spread risk and foreign currency price risk. Trading activities may also give rise to coun terparty credit risk. For further detail, refer to the C redit risk section. Key developments in 2021  The UK, US and Eurozone economies rebou nded strongly in 2021 following the rollout of COVID-19 v accines. However, inflation rose in H2 2021, in part due to global supply disruptions. This led to further market volatili ty, particularly in Rates, due to significant shifts in inflation expectations.  Traded VaR remained within appetite, with an average- basis year-on-year reduction d riven by de-risking activity in line with the strategic focus on RWA reduc tion. Governance (audited) Market risk policy statements set out the gove rnance and risk management framework. Responsibility for identifying, measuring, monitoring and controlling market risk arising from trading activities lies with the re levant trading business. The Market Risk function independently advises on, monitors and challenges the risk-taking activi ties undertaken by the trading business ensuring these are within the co nstraints of the market risk framework, policies, and risk appetite statements and measures. Risk appetite NWM Group’s qualitative appetite for traded m arket risk is set out in the traded market risk appetite statement. Qua ntitative appetite is expressed in terms of exposure limits. The limits at NWM Group level comprise value-at-risk (VaR) a nd stressed value-at-risk (SVaR). More details on these are provided on the following pages. For each trading business, a document known as a dealing authority compiles details of all applicable limits an d trading restrictions. The desk-level mandates comprise qualitative limits related to the product types wit hin the scope of each desk, as well as quantitative metrics spec ific to the desk’s market risk exposures. These additional limits and metrics ai m to control various risk dimensions such as exposure size, aged in ventory, currency and tenor. The limits are reviewed to reflect changes i n risk appetite, business plans, portfolio composition and the market and economic environments and rec alibrated to ensure that they remain aligned to NWM Group RWA targe ts. Limit reviews focus on optimising the alignment between t raded market risk exposure and capital usage. To ensure approved limits are not breached an d that NWM Group remains within its risk appetite, tri ggers have been set such that if exposures exceed a specified le vel, action plans are developed by the relevant business and the Ma rket Risk function and implemented. For more detail on risk appetite, refer to page 46. Monitoring and mitigation Traded market risk is identified and asse ssed by gathering, analysing, monitoring and reporting market risk info rmation at desk, business and NWM Group-wide levels. In dustry expertise, continued system developments and techniques suc h as stress testing are also used to enhance the eff ectiveness of the identification and assessment of all materi al market risks. Traded market risk exposures are monitored ag ainst limits and analysed daily. A daily report summarising the position of exposures against limits at desk, business and NWM G roup levels is provided to senior management and marke t risk managers across the function. Li mit reporting is supplemented with regulatory capital and stres s testing information as well as ad-hoc reporting. A risk review of trading busines ses is undertaken weekly with senior risk and front office staff. This includes a review of profit and loss drivers, notable position concentrations and other positions of concern. Business profit and loss performance is monitored automatically through loss trigge rs which, if breached, require a remedial action plan to be agreed between the Market Risk function and the business. The loss triggers are se t using both a fall-from-peak approach and an absolu te loss level. In addition, regular updates on traded market risk positions a re provided to NWM Group’s Executive Risk Committee and Boa rd Risk Committee. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 52 Traded market risk continued Measurement (audited) NWM Group uses VaR, SVaR and the incremental risk charge to measure traded market risk. Risks that are not adequately captured by VaR or SVaR are captured by the Risks Not In VaR (RNIV) framework to ensure that NWM Group is adequately capitalised for market risk. In addition, st ress testing is used to identify any vulnerabilities and poten tial losses. The key inputs into these measurement met hods are market data and risk factor sensitivities. Sensitivities ref er to the changes in trade or portfolio value that result f rom small changes in market parameters that are subject t o the market risk limit framework. Revaluatio n ladders are used in place of sensitivities to capture the impact of la rge moves in risk factors or the joint impact of two risk factors. The suite of internal metrics use d for risk management purposes at NWM Group level have been desig ned to capture correlation effects and to allow f or an aggregated view of traded market risk across risk types , markets and business lines while also taking into account the characte ristics of each risk type. Value-at-risk For internal risk management purposes, VaR assu mes a time horizon of one trading day and a confidence level of 99%. The internal VaR model – which captures all tradin g book positions including those products approved by the regulator – is based on a historical simulation, utilising m arket data from the previous 500 days on an equ ally-weighted basis. The model also captures the potential imp act of interest rate risk, credit spread risk, foreign currency price risk, equi ty price risk and commodity price risk. When simulating potential move ments in such risk factors, a combination of absolute, relativ e and rescaled returns is used. The performance and adequacy of the VaR model are tested regularly through the following processes:  Back-testing: Internal and regul atory back-testing is conducted on a daily basis. For f urther information on back-testing, refer to the following page.  Ongoing model validation: VaR model performance is assessed both regularly and on an ad-hoc basis if m arket conditions or portfolio profile change sig nificantly.  Model Risk Management revie w: As part of the model lifecycle, all risk models (including the VaR model) are independently reviewed to ensure the model is still fit for purpose given current market conditions and po rtfolio profile. For further detail on the independent model validation carried out by Model Risk Management, refer to page 87. More information relating to pricing and market risk models is presented in the NatWest G roup Pillar 3 Report. One-day 99% traded internal VaR (audited) The table below shows one-day 9 9% internal VaR for the trading portfolios of NWM G roup, split by exposure type. 2021 2020 Period Period Average Maximum Minimum end Average Maximum Minimum end Traded internal VaR (1-day 99%) £m £m £m £m £m £m £m £m Interest rate 10.4 25.3 4.5 8.9 8.7 20.2 4.8 6.3 Credit spread 11.3 13.4 9.4 10.7 15.3 27.2 9.1 10.3 Currency 3.4 9.4 1.7 2.2 4.2 8.4 2.1 3.0 Equity 0.4 0.8 — 0.2 0.6 2.0 0.2 0.7 Commodity 0.1 0.5 — — 0.1 0.6 — 0.2 Diversification (1) (12.3) (10.5) (12.8) (10.3) Total 13.3 23.9 9.3 11.5 16.1 25.7 10.1 10.2 (1) NWM Group benefits from diversification across various finan cial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a part icular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.  Traded VaR increase d in the first half of 2021 reflecti ng a rise in tenor basis risk in sterling flow t rading. This related to the transition from LIBOR to alternative risk-free r ates.  A regulator-approved update to the VaR mo del was applied in the second half of the year, to address the impa ct of this transition.  On an average basis, traded VaR decreased in 202 1 compared to 2020. This was driven by de-risking ac tivity in line with the strategic focus on RWA reduc tion. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 53 Traded market risk continued VaR back-testing The main approach employed to asses s the VaR model’s ongoing performance is b ack-testing, which counts the number of d ays when a loss exceeds the corresponding daily VaR esti mate, measured at a 99% confidence lev el. Two types of profit and loss (P&L) are used in back-testi ng comparisons: Actual P&L and Hyp othetical P&L. For more details on the back-testing approach and the differences between internal and regulatory VaR, refer to the Market risk section of the NatW est Group Pillar 3 Report. The table below shows regulat ory back-testing exceptions in NWM Plc fo r the 250-business-day period to 31 December 2021 for one-day 99% traded regulatory VaR compared with Ac tual and Hypothetical (Hypo) P&L. Back-testing exceptions Actual Hypo NWM Plc 1 3  In the 250-day rolling window to 3 1 December 2021, NWM Plc experienced one Actual and three Hypothetical VaR P&L back-testing exceptions.  The Actual exception and two of the Hypo thetical exceptions occurred in October 2 021, driven by market moves in sterling rates and inflation.  The third Hypothetical exception occurred in December 2021, driven by market moves in sterling and US d ollar rates. The table below shows internal back-tes ting exceptions in the major NWM business es for the 250-business-day period to 31 December 2021. Internal back-testing co mpares one-day 99% traded internal V aR with Actual and Hypo P&L. Back - testing except ions Actual Hypo Rates 1 2 Currencies 1 1 Credit — — xVA — —  The exceptions in the Rates bu siness were mainly driven by market moves in sterling, euro and US doll ar rates.  The exceptions in the Currenci es business were mainly driven by market moves related to the Turkish li ra. Stressed VaR (SVaR) As with VaR, the SVaR methodology produces e stimates of the potential change in the marke t value of a portfolio, over a specified time horizon, at a given confide nce level. SVaR is a VaR-based measure using histo rical data from a one-year period of s tressed market conditions. A simulation of 99 % VaR is run on the current portfolio for each 25 0-day period from 2005 to the cur rent VaR date, moving forward one day at a time. T he SVaR is the worst VaR outcome of the simul ated results. This is in contrast with VaR, which is based on a rolling 500-day historical data se t. A time horizon of ten trading days is assu med with a confidence level of 99%. NWM G roup’s internal traded SVaR model captures all tra ding book positions. The table below analyses 10 -day 99% internal SVaR for the trading portfolios of NW M Group. 2021 2020 Average Maximum Minimum Period end Average Maximum Minimum Period end £m £m £m £m £m £m £m £m Total internal traded SVaR 95 175 46 66 97 196 59 87  Traded SVaR increased in the first half of 2 021, reflecting a rise in tenor basis risk in sterling flow trading. This related to the transition from LIBOR to alterna tive risk-free rates.  Traded SVaR subsequently decreased in the second half of the year following changes to the treatment of tenor basis risk in the VaR model. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 54 Traded market risk continued Risks Not In VaR (RNIVs) The RNIV framework is used to identify and quantify m arket risks that are not fully captured by the intern al VaR and SVaR models. RNIV calculations form an integral part of ongoin g model and data improvement efforts to capture all marke t risks in scope for model approval in VaR and SVaR. For further qualitative and quantitative disclos ures on RNIVs, refer to the Market risk section of the NatWest Grou p Pillar 3 Report. Stress testing For information on stress testing, refer to pa ge 47. Incremental risk charge (IRC) The IRC model quantifies the impact of r ating migration and default events on the market value of instruments with embedded credit risk (in particular, bonds and c redit default swaps) held in the trading book . It further captures basis risk between different instruments, ma turities and reference entities. For further qualitative and quan titative disclosures on the IRC, refer to the Market risk s ection of the NatWest Group Pillar 3 Report. Non-traded market risk Definition (audited) Non-traded market risk is the risk to the value of assets or liabilities outside the trading book, or the risk to income, that arises from changes in market prices suc h as interest rates, foreign exchange rates and eq uity prices, or from changes in managed rates. Sources of risk (audited) The key sources of non-traded market risk are interest rate risk, credit spread risk, foreign exchange risk and equity risk. For detailed qualitative and quantitative info rmation on each of these risk types, refer to the separate sub-se ctions starting on the following page. Key developments in 2021  NWM Plc’s non-traded internal VaR expe rienced less volatility compared to 2020. O n an average basis, it decreased driven by the foreign exchange componen t, mainly due to the strategic focus on RWA reduction. NWM Plc continued to maintain a foreign exchange hedgi ng programme to mitigate the downside risk to its solo C ET1 capital ratio from movements in foreign exchange r ates. Ahead of a revised regulatory permission th at came into effect in the UK on 31 Decembe r 2021, increased hedging of some exposures was carried out. However, the aim of the programme remains uncha nged and the impact of the change was managed within risk appetite.  NWM Plc maintains a structural hedge of its co mmon equity and reserves. At 31 December 20 21, the notional amount of the structural hedge in place w as £3.9 billion (£4.8 billion at 31 December 2020). NWM policy is to align the notion al of the hedge to its business strate gy.  During the year, the structural hedging program me fully transitioned to SONIA-linked swaps, instead of LIBOR. Governance (audited) Responsibility for identifying, measuring, monito ring and controlling market risk arising from non-tradi ng activities lies with the relevant business. Oversight is provided by NWM Group’s Non-Traded Market Risk f unction. Risk positions are reported regularly to NWM Group’s Executive Risk Committee and the Board Ris k Committee, as well as to the Assets & Liabilities Committee (ALCo). Non-traded market risk policy statements set out the governance a nd risk management framework. Non-traded market risk is managed separately on bo th sides of the ring-fence. It is aggregated and monitored ag ainst risk appetite at both NWM Plc and NatWest G roup levels. Risk appetite NWM Group’s qualitative appetite is s et out in the non-traded market risk appetite statement. Its quantitative appetite is expresse d in terms of exposure limits. At NWM Plc level, the Bo ard limit comprises a VaR measure. This is supplemented with SVaR, sensi tivities (including to the CET1 ratio), earnings-at-risk and econo mic- value-of-equity measures monit ored at Executive governance level. To ensure limits are not breached and that NWM Plc remains within its risk appetite, triggers have been set such that if exposures exceed a specified leve l, action plans are developed by the business, Non-Traded Market Risk and Finance for implementation. Limits are revi ewed regularly to reflect changes in risk appetite, busine ss plans, portfolio composition and the external environment. For furthe r information on risk appetite, refer to page 46. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 55 Non-traded market risk continued Non-traded internal VaR (one-day 99%) (audited) The market risk exposures arisi ng as a result of banking activitie s are measured using a combination of value-based metrics (VaR and sensitivities) and earnings-based me trics. The following table shows NWM Plc’s one-day internal banking book V aR at a 99% confidence level, split by risk ty pe. VaR values for each year are calcula ted based on one-day values for each of the 12 month-end reporting dates. For NWM N.V., refe r to the appropriate key point below the table. 2021 2020 Average Maximum Minimum Period end Average Maximum Minimum Period end NWM Plc £m £m £m £m £m £m £m £m Interest rate 2.8 3.4 2.1 2.6 2.9 3.4 2.3 2.3 Credit spread 5.8 7.8 4.4 4.9 7.0 8.5 3.8 7.6 Foreign exchange rate 4.8 5.9 4.3 4.4 11.5 14.3 7.7 7.7 Equity risk 2.8 3.1 2.5 2.6 2.3 3.0 1.0 3.0 Diversification (1) (7.8) (7.0) (7.7) (8.9) Total 8.4 10.9 6.4 7.5 16.0 19.7 11.8 11.8 (1) NWM Plc benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on th e correlation between the assets and risk factors in the portfolio at a particular t ime. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.  In NWM Plc, non-traded interna l VaR decreased on an average basis.  This was driven by a decrease in the foreign e xchange VaR, mainly due to the strategic focus on RWA reduction. C redit spread VaR also decreased, mainly reflecting a reduction in risk sensitivities in FVOCI loan portfolios.  In NWM N.V., non-traded VaR was £0.9 million on an average basis (2020 - £1.3 million) and £0.5 million on a period end basis (2020 - £1.4 mill ion). Interest rate risk Non-traded interest rate risk (NT IRR) mainly arises from capital hedges, in portfolios held for liq uidity purposes and from interes t rate repricing mismatches betwe en assets and liabilities in other portfolios. When aggregated, thes e products form portfolios of assets and liabilities with varying degrees of s ensitivity to changes in market interest rate s. Mismatches can give rise to volatility in net interest income as interest rates vary. NTIRR comprises the following three primary risk types:  Gap risk: arises from the timing of rate changes in non- trading book instruments. The extent of gap risk depen ds on whether changes to the term structure of interes t rates occur consistently across the yie ld curve (parallel risk) or differentially by period (non-parallel risk).  Basis risk: captures the impact of relative chan ges in interest rates for financial instruments t hat have similar tenors but are priced using different interest rate indices, o r on the same interest rate indices but with different tenors.  Option risk: arises from option derivative p ositions or from optional elements embedded in asse ts, liabilities and/or off- balance sheet items, where NWM Group or its cust omer can alter the level and timing of their cash flows. To manage exposures within appetite, NWM Grou p aggregates its interest rate positions and hedges these externally us ing cash and derivatives (primarily intere st rate swaps). Credit spread risk Credit spread risk arises from the potential adverse economic impact of a change in the spread betwee n bond (or other credit-sensitive instrument) yiel ds and swap rates, where the portfolios are accounted at fair value. Credi t risk also arises on loan portfolios classified at fair value. To ensure NWM Group can con tinue to meet its obligations in the event that access to wholesale f unding markets is restricted, it maintains a liquidity buffer in the for m of bond portfolios – comprising primarily high-quality securities – and cent ral bank cash. Credit spread risk is monitored daily through sensiti vities and VaR measures. The dealing authorities in pl ace for the bond portfolios further mitigate the risk by imposing const raints by duration, asset class and credit rating. Exposures a nd limit utilisations are reported to senior managemen t on a daily basis. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 56 Non-traded market risk continued Foreign exchange risk Non-traded foreign exchange risk arises from two m ain sources:  Structural foreign exchange rat e risk: arises from the capital deployed in foreign curr ency operations (mainly overseas subsidiaries and bran ches) net of related currency hedging.  Transactional foreign exchange rate risk: a rises mainly from non-sterling denominated transac tions and associated gains and losses. Structural foreign exchange rat e risk is assessed and managed by NWM Plc Treasury, with the aim of reducing NWM Plc’s sol o CET1 ratio sensitivity to unexpe cted movements in spot foreign exchange rates. The position is managed within risk appetite levels under delegated authority from NWM Plc ALCo. T he sensitivity of the CET1 ratio to exchange rates is repo rted to NWM Plc senior management monthly. Gains or losses arising from the retranslation of net investments in overseas operations are reco gnised in equity reserves and reduce the sensitivity of capital ratios to foreign exc hange rate movements primarily arising from the retra nslation of non- sterling denominated RWAs. Foreign exchange exposures ari sing from customer transactions are sold down by businesse s on a regular basis in line with NatWest Group policy. Foreign exchange exposures (audited) The table below shows NWM Group’s structural fo reign currency e xposures. Residual Net Structural structural investments in Net foreign foreign foreign investment currency Economic currency operations hedges exposures hedges exposures 2021 £m £m £m £m £m US dollar (1) 1,250 ( 260) 990 ( 853) 137 Euro 2,400 ( 221) 2,179 — 2,179 Swiss franc 171 ( 171) — — — Other non - sterling 392 (69) 323 — 323 4,213 ( 721) 3,492 (853) 2,639 2020 US dollar (1) 1,300 — 1,300 (842) 458 Euro 2,349 ( 236) 2,113 — 2,113 Swiss franc 184 ( 174) 10 — 10 Other non - sterling 404 — 404 — 404 4,237 ( 410) 3,827 (842) 2,985 (1) Economic hedges of US dollar net investments in foreign operations represent US dollar equity securities that do not qualify as net investment hedges for accounting p urposes.  Against the euro, sterling strengthened to 1.19 at 31 December 2021 compared to 1.11 at 31 December 2020. Against the dollar, sterling weakened slightly to 1.35 a t 31 December 2021 compared to 1.37 at 31 December 2020.  During the year, NWM Plc incre ased net investment hedging in US dollars and other non-ste rling currencies to reduce the potential impact on RWAs of changes to its regulatory FX hedging permission.  Changes in foreign currency exchange rates aff ect equity in proportion to structural foreign currency exposure. Fo r example, a 5% strengthening or weakening in fo reign currencies against sterling would result in a gain o r loss of £0.2 billion in equity, respectivel y. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 57 Capital, liquidity and fundin g risk NWM Group continually ensures a comprehensive approach is taken to the management of capital, liquidi ty and funding, underpinned by frameworks, ris k appetite and policies, to manage and mitigate capital, liquidity & fundin g risks. The framework ensures the tools and capability a re in place to facilitate the management and mitigation of risk ensu ring the Group operates within its regulatory requirements an d risk appetite. Definitions (audited) Regulatory capital consists of r eserves and instruments issued that are available, have a degree of permanency and are capable of absorbing losses. A number of strict con ditions are set by applicable regulations to determine capital eligibility. Capital adequacy risk is the risk that there is or will be insufficient capital and loss abs orbing debt instruments to operate effectively including me eting minimum regulatory requirements for capital, leverage and MREL, oper ating within Board approved NWM Group ri sk appetite and supporting strategic goals. Liquidity consists of assets that can be readily con verted to cash within a short timeframe and with a reli able value. Liquidity risk is the risk of being u nable to meet financial obligations as and when they fall due. Funding consists of on-balance shee t liabilities that are used to provide cash to finance assets. Funding risk is the risk of not maintaining a diversified, stable and cost-effe ctive funding base. Liquidity and funding risks arise in a nu mber of ways, including through the maturity transformation role that banks perform. The risks are dependent on factors such as:  Maturity profile;  Composition of sources and uses of funding;  The quality and size of the liquidity portfolio;  Credit ratings;  Wholesale market conditions; a nd  Depositor and investor behaviour. Sources (audited) Capital The eligibility of instruments and financial resou rces as regulatory capital is laid down by applic able regulation. Capital is categorised by applicable regulation under two tiers (Tier 1 and Tier 2) according to the ability to absorb losses on either a going or gone concern basis, d egree of permanency and the ranking of loss absorption. There are three broad c ategories of capital across these two tiers:  CET1 capital - CET1 capital must be perpetual and capable of unrestricted and immediate use to cover risks or losses as soon as these occur. This includes ordinary sh ares issued and retained earnings.  Additional Tier 1 (AT1) capital - T his is the second type of loss absorbing capital and must be capable of abso rbing losses on a going concern basis. The se instruments are perpetual in nature, with an initial call period of at least five years from issue and are written off or converted into CET1 capital if a pre-specified CET1 ratio is reac hed. The sum of CET1 and AT1 capital is referred to as Tier 1 ca pital.  Tier 2 capital - Tier 2 capital is the bank entities ’ supplementary capital and provides loss abso rption on a gone concern basis. Gone concern refers to the si tuation in which resources must be available to enable an o rderly resolution, in the event that the Bank of Englan d (BoE) deems that NWM Plc has failed. T ier 2 capital absorbs losses after Tier 1 capital. It typic ally consists of subordinated debt securities with a minimum i nitial maturity of five years. Minimum requirement for own funds and eligible liabilities (MREL) In addition to capital, other spec ific loss absorbing instruments, including senior notes with a residual maturity of at least one year issued by NWM Plc, may be used to cover certain gone concern capital requirements. Liquidity NWM Group maintains a prudent approach to the definition of liquidity resources. Liquidity resources are divided i nto primary and secondary liquidity as follows:  Primary liquid assets include cash and bal ances at central banks, Treasury bills and other high-quality gover nment and US agency bonds.  Secondary liquid assets are elig ible as collateral for local central bank liquidity facilities. T hese assets may include lower-quality bonds and eligible loans that are retained on balance sheet and pre-positione d with a central bank so that they may be converted into additional sources of liquidity at very short notice. Funding NWM Group’s primary funding sources are as follows: Type Description Wholesale markets Includes:  Short-term (less than 1 year) unsecured money market funding.  Commercial paper and certificates of deposit.  Secured repo market funding. Term debt Includes:  Long-term (typically more than 1 year) senior unsecured and secu red debt securities.  Long-term subordinated liabilities. Internal capital and MREL Includes:  Equity, AT1, Tier 2 capital instruments and MREL issued to NatWest Group plc (under the Single Point of Entry regime). Managing capital, liquidity and funding requirements: regulated entities In line with paragraph 135 of I AS 1 ‘Presentation of Financial Statements’, NWM Group manages capital havi ng regard to regulatory requirements. Regulatory capital, MREL, RWA and leverage is monitored and reported on an individual regulated bank legal entity basis (‘bank entity’), which is the CRR transitional basis as relevant in the UK and EU. Liquidity metrics including the L CR are presented for the solo legal entity as regulated by the PRA. Funding sou rces and Notes issued disclosures are prese nted for NWM Group rather than for NatWest Markets Plc. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 58 Capital, liquidity and fundin g risk continued Key developments in 2021  NWM Plc’s CET1 ratio decreased by 38 0 basis points to 17.9% at 31 December 2021, from 21.7% at 31 Decembe r 2020, primarily driven by the de crease in CET1 capital, partially offset by impact of lower RWAs. The decrease in CET1 capital reflected the impact of dividends pai d to NatWest Group plc, including a £2 50 million foreseeable ordinary dividend deduction, a nd other reserve movements.  NWM Plc’s RWAs decreased by £2 .9 billion to £22.7 billion at 31 December 2021, reflecting lower levels of credit, counterparty credit and market risk which have trended downwards as the business seeks to reduce RWAs including through the execution of capital optimisation ac tions and exit activity. Operational risk RWAs reduced followi ng the annual recalculation.  CRR leverage exposure for NWM Plc decreased to £110.6 billion compared with £123.9 billion at 31 December 2020 .  The leverage ratio on a CRR ba sis, using PRA transitional capital, was 4.3% at 31 December 202 1 compared with 5.2% at the prior year end. The decrease was driven by a reduction in Tier 1 capital, offset partially by the dec rease in leverage exposure.  Following the Financial Policy Committee’s planned review of the UK’s leverage ratio framework, the PRA h as introduced changes to the fram ework. As per the new framework, NWM Plc is required to implement ch anges to the definition of leverage exposure measu re and to reporting and disclosure requirements with effe ct from 1 January 2022. The UK leverage ratio of 4.8 % for 2021 has been calculated under the exist ing CRR as well as the existing PRA UK leverage framework.  NWM Plc’s MREL at 31 December 202 1 was £9.6 billion, or 42.1% of RWAs, down from £12.7 billion and 49 .6% respectively at 31 December 2020 . The decrease in the year was largely due to the redemption of a $1.5 billion internal instrument issued to NatWest G roup and the reduction in CET1 capital.  The NWM Plc liquidity portfolio was £16.1 billion at 31 December 2021, a decrease of £3.3 billion from £19.4 billion at the prior year end.  The LCR for NWM Plc was 205% at 31 Decembe r 2021, compared with 268% at year end 20 20. Capital management Capital management is the process by which banks ensure that they have sufficient capital and other loss absorbing instruments to operate effec tively. This includes meeting minimum regulatory requireme nts, operating within Board- approved risk appetite, maintaining cre dit ratings and supporting strategic goals. Capital managemen t is critical in supporting banks businesses. Capital man agement within NWM Group is executed in accordan ce with the NatWest Group-wide framework. NWM Plc’s capital plans are produced and updated by the b ank on a monthly basis. This proces s includes integration into NatWest Group’s wider annual budgeting process and is summarised below. Other elem ents of capital management, including risk appetite and stress testing, are set out on pages 46 and 47. Produce capital plans  A capital plan is produced for NWM Plc using a five year planning horizon under expected and stress conditions. Stressed capital plans are produced to su pport internal stress testing through the ICAAP or for regulatory purposes.  A shorter term (rolling 12 month) forecas t is updated frequently in respon se to actual performance, changes in internal and external business environment and to manage risks and opportunities. Assess capital adequacy  Capital plans are developed to ensure that capital of sufficient quantity and quality is planned to be available to support NWM Group’s business and strategic plans over the planning horizon within approved risk appetite, as determined via stress testing, and minimum regulatory requir ements.  Impact assessment captures input from across NWM Group including from businesses. Inform capital actions  Capital planning informs potent ial capital actions including managing capital through new issuance, redemptions or i nternal transactions.  Decisions on capital actions will be influenced by strategic and regulatory requirements, the cost and prevailing market conditions.  As part of capital planning, NWM Group will monitor its portfolio of capital securiti es and assess the optimal blend. Capital planning is one of the tools that NW M Group uses to monitor and manage capital adequacy risk on a going and gone concern basis, including the risk of e xcessive leverage. Liquidity and funding managemen t Liquidity and funding management follows a simila r process to that outlined above for capital. Liquidity portfolio management The size of the portfolio is determined by reference t o NWM Group’s liquidity risk appetite. Consistent with NatWest Group, NWM Group retains a prudent approach to settin g the composition of the liquidity portfolio, which is subject to internal policies and limits over quality of counterpa rty, maturity mix and currency mix. NWM Group categorises its liquidi ty portfolio, including its locally managed liquidity por tfolios, into primary and secondary liquid assets. The majority of the N WM Plc portfolio is managed by NatWest Holdings Treasu ry on behalf of NWM Plc, for which the NatWest Markets Treasu rer is responsible. NatWest Markets Securities Inc. and NatWes t Markets N.V., both of which are significant ope rating subsidiaries of NWM Plc, hold locally managed liquidity portfolios to comply with local regulations that differ from PRA rules. The liquidity value of the portfolio is deter mined by taking current market prices and applying a discount o r haircut, to give a liquidity value that represe nts the amount of cash that can be generated by the asset. Funding risk management NWM Group manages funding risk through a co mprehensive framework which measures and monito rs the funding risk on the balance sheet. The long term obligations of NWM Group must be met with diverse and stable funding sources , the behavioural maturity of these liabilities must at a minimum equal those of the assets. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 59 Capital, liquidity and fundin g risk continued Minimum requirements Capital ratios The Bank entities are subject to minimum capital requirements relative to R WAs. The table below summarises the CRR end -point minimum requirements of capital to RWAs that the UK bank entities are expected to meet. Type CET1 Total Tier 1 Total capital Minimum capita l requirements 4.5% 6.0% 8.0% Capital conservatio n buffer (1) 2.5% 2.5% 2.5% Countercyclical capi tal buffer (1) 0.0% 0.0% 0.0% Total (2) 7.0% 8.5% 10.5% (1) The institution specific countercyclical capital buffer requirement is based on the weighted average of geographical exposures. The Financial Policy Committee (FPC) sets the UK countercyclical capital buffer. In December 2021, the FPC announced an increase in th e UK CCyB rate from 0% to 1%. This rate will come into effect from December 2022 in line with the 12 month implementation period. Foreign exposures may be subject to different countercyclical capital buffer rates dependent on the rate set in those jurisdictions. NWM Plc’s main relevant exposures are to the UK (54%) and the US (19%). The capital conservation buffer and the countercyclical capital buffer are required to be met with CET1 capital only. (2) In addition, NWM Plc is subject to Pillar 2A requirements which are not disclosed p ublicly. Leverage ratio At present, NWM Plc only has a le verage ratio reporting requirement, and not a regulatory minimum leverage requiremen t. Following the publication of the new UK lever age ratio framework on 8 October 2021 , NWM Plc will be subject to the minimum leverage requirement from 1 Ja nuary 2023. Measurement Capital, RWAs and leverage Capital resources, RWAs and le verage based on the PRA transitional arrange ments for NWM Plc are set out below. Regulato ry capital is monitored and reported at legal enti ty level for large subsidiaries of NatWest G roup. 2021 2020 Capital adequacy ratios % % CET1 17.9 21.7 Tier 1 21.0 25.2 Total 25.9 30.3 Total MREL 42.1 49.6 Capital (1) £m £m CET1 4,072 5,547 Tier 1 4,755 6,433 Total 5,870 7,753 Total MREL (2) 9,555 12,679 RWAs Credit risk 6,878 6,902 Counterparty credit risk 6,854 8,130 Market risk 6,934 8,150 Operational risk 2,020 2,382 Total RWAs 22,686 25,564 Leverage (3) CRR leverage exposure (£m) 110,603 123,927 Tier 1 capital (£m) 4,755 6,433 CRR leverage ratio (%) (4) 4.3 5.2 (1) CRR end-point for UK banks set by the PRA is 10.5% minimum total capital ratio, with a minimum CET1 ratio of 7.0%. (2) Includes senior internal debt instruments issued to NatWest Group plc with a regulatory value of £3.7 billion (2020 - £4.9 billion). (3) Leverage exposure is broadly aligned to the accounting value of on and off-balance sheet exposures, subject to specific adjustments for derivatives, securities financing positions and off-balance sheet exposures. (4) CRR leverage exposure includes netting of regular wa y deals pending settlement in line with CRR amendments that came into effect in June 2020. (5) Following the Financial Policy Committee’s planned review of the UK’s leverage ratio fram ework, the PRA has introduced chang es to the framework. As per the new framework, NWM Plc is required to implement changes to the def inition of leverage exposure measure and to reporting and disclosure requirements with effect from 1 January 2022. The UK leverage ratio of 4.8% for 2021 has been calculated under the existing CRR as well as the existing PRA UK leverage framework. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 60 Capital, liquidity and fundin g risk continued Leverage exposure The leverage exposure is based on the CRR Deleg ated Act. 2021 2020 Leverage £m £m Cash and balances at central banks 12,294 11,736 Trading assets 41,222 52,169 Derivatives 103,042 164,104 Net loans to customers 21,988 23,827 Other assets 4,008 4,246 Total assets 182,554 256,082 Derivatives - netting (106,317) (169,152) - potential future exposures 32,235 35,654 Securities financing transactions gross up 1,298 999 Undrawn commitments 4,993 5,037 Regulatory deductions and other adjustmen ts (3,186) (2,977) Exclusion of core UK-group exposures (974) (1,716) Leverage exposure 110,603 123,927 Liquidity portfolio (audited) The table below shows the liquidity po rtfolio by LCR product, with the inco rporation of discounts (or haircuts ) used within the internal stressed outflow coverage. Secondary li quidity comprises asse ts eligible for discount at central banks, which do no t form part of the liquid asset portfolio for LCR or stressed ou tflow coverage purposes. Liquidity va lue (1) 2021 2020 NatWest Markets Plc £m £m Cash and balances at central banks 12,277 11,773 AAA to AA- rated governments 3,457 7,207 A+ and lower rated governments 18 79 Government guaranteed issuers, public sector entities and government sponsored entities 13 — International organisations and multil ateral development banks 140 144 LCR level 1 bonds 3,628 7,430 LCR level 1 assets 15,905 19,203 LCR level 2 assets — — Non-LCR eligible assets — — Primary liquidity 15,905 19,203 Secondary liquidity (2) 190 224 Total liquidity value 16,095 19,427 The table below shows the liquidity value of the liquidity portfolio by currency. GBP USD EUR Other Total Total liquidity portfolio £m £m £m £m £m 2021 7,947 3,010 5,120 18 16,095 2020 8,838 3,793 6,716 80 19,427 (1) Liquidity value is aligned to the internal stressed outflow coverage, which is stated after discounts (or haircuts) are applied to the instruments. (2) Comprises assets eligible for discounting at the Bank of England and other central banks. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 61 Capital, liquidity and fundin g risk continued Funding sources (audited) The table below shows NWM Group’s car rying values of the principal funding sou rces based on contractual maturity. 2021 2020 Short - term Long - term Short - term Long - term less than more than less than more than 1 year 1 year Total 1 year 1 year Total £m £m £m £m £m £m Bank deposits 1,244 564 1,808 1,294 514 1,808 of which: repos (amortised co st) 522 — 522 200 — 200 Customer deposits 2,161 107 2,268 2,526 92 2,618 of which: repos (amortised co st) — — — — — — Trading liabilities (1) Repos (2) 19,389 — 19,389 19,036 — 19,036 Derivative cash collateral received 17,619 — 17,619 23,226 — 23,226 Other bank and customer deposits 832 704 1,536 818 985 1,803 Debt securities in issue 178 796 974 527 881 1,408 38,018 1,500 39,518 43,607 1 ,866 45,473 Other financial liabilities Customer deposits (designated at fair value) 568 — 568 616 180 796 Debt securities in issue commercial paper and certificates of deposits 5,179 115 5,294 3,253 168 3,421 medium term notes (MTNs) 2,693 9,737 12,430 4,441 8,407 12,848 Subordinated liabilities 275 688 963 — 1,105 1,105 8,715 10,540 19,255 8,310 9,860 18,170 Amounts due to holding company and fellow subsi diaries (3) Internal MREL 939 2,919 3,858 — 5,181 5,181 Other bank and customer deposits 623 — 623 925 — 925 Subordinated liabilities — 1,464 1,464 — 1,753 1,753 1,562 4,383 5,945 925 6,934 7,859 Total funding 51,700 17,094 68,794 56,662 19,266 75,928 Of which: available in resolutio n (4) 6,010 8,039 (1) Funding sources excludes short positions of £24,964 million (2020 - £26,779 million) reflected as trading liabilities on the balance sheet. (2) Comprises Central and other bank repos of £827 million (2020 - £1 ,048 million), other financial institution repos of £16,935 million (2020 - £15,973 million) and other corporate repos of £1,627 million (2020 - £2,015 million). (3) Amounts due to holding company and fellow subsidiaries relating t o non-financial instruments of £181 millio n (2020 - £275 million) have been excluded from the table. (4) Eligible liabilities (as defined in the Banking Act 2009 as a mended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or statements of the Bank of England including the Statement of Policy published in June 2018. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 62 Capital, liquidity and fundin g risk continued Senior notes and subordinated liabilities - residual ma turity profile by instrument type (audited) The table below shows NWM Group’s debt securi ties in issue, subordinated liabilities an d internal resolution instruments by re sidual maturity. Trading Amounts due t o holding liabilities Other finan cial liabilities company and fellow Debt Debt securities in iss ue subsidiaries securities Commercial in issue paper Subordinated Subordinated Total notes MTNs and CDs MTNs liabilities Total Internal MREL liabilities in issue 2021 £m £m £m £m £m £m £m £m Less than 1 year 178 5,179 2,693 275 8,147 939 — 9,264 1-3 years 335 105 4,907 222 5,234 2,919 824 9,312 3 - 5 years 112 10 4,425 21 4,456 — — 4,568 More than 5 years 349 — 405 445 850 — 640 1,839 Total 974 5,294 12,430 963 18,687 3,858 1,464 24,983 2020 Less than 1 year 527 3,253 4,441 — 7,694 — — 8,221 1-3 years 169 165 4,444 549 5,158 5,181 — 10,508 3-5 years 240 3 3,356 — 3,359 — 889 4,488 More than 5 years 472 — 607 556 1,163 — 864 2,499 Total 1,408 3,421 12,848 1,105 17,374 5,181 1,753 25,716 The table below shows the curr ency breakdown of total notes in issue. GBP USD EUR Other Total 2021 £m £m £m £m £m Commercial paper and CDs 257 1,801 3,236 — 5,294 MTNs 552 4,439 6,906 1,507 13,404 External subordinated liabilities 44 216 703 — 963 Internal MREL due to NatWest Group plc — 2,060 1,798 — 3,858 Subordinated liabilities due to NatWest G roup plc — 640 824 — 1,464 Total 853 9,156 13,467 1,507 24,983 2020 Total 724 8,029 14,588 2,375 25,716 Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 63 Credit risk Definition (audited) Credit risk is the risk that custo mers and counterparties fail to meet their contractual obligatio n to settle outstanding amounts. Sources of risk (audited) The principal sources of credit risk for NWM G roup are lending, off-balance sheet products, derivatives and securities financing, debt securities, and settlement risk th rough trading activities. Key developments in 2021 (audited)  The outlook for credit risk and asset quality imp roved during 2021 with the economic recovery from the disruption caused by COVID-19 being faster than initially forec ast.  NWM Group continues to monitor sector and coun try impact closely and adjust limits as necessary.  Stage 1 and Stage 2 expected credit loss (ECL) reduced due to the improved economic outlook, which led to a reduction in underlying PDs and LGDs. The S tage 2 population in particular saw a marked reduc tion, due to the strategic exit of some positions and the improved e conomic outlook leading to migration of asse ts into Stage 1.  Qualitative assessment of climate risk was made m andatory for the majority of the wholesal e credit risk portfolio. This was supported by enhancements to Transaction Acceptance Standards (TAS), with the inclusion of sector- specific climate considerations for the heightened risk sectors and generic climate considerations fo r all other TAS documents. Governance (audited) The Credit Risk function provid es oversight and challenge of frontline credit risk management activities. Autho rity is delegated to credit risk officers who operate within design ated limits set at a customer level an d a portfolio level. Governance activities include:  Defining credit risk appetite me asures for the management of concentration risk and credit policy to establish the key causes of risk in the process of providing credit and the controls that must be in place to mitiga te them.  Approving and monitoring operational limits for busine ss segments and credit limits for c ustomers.  Oversight of the first line of defence to ensure that credi t risk remains within the appetite set by the Board and that controls are being operated ade quately and effectively.  Assessing the adequacy of ECL provisions i ncluding approving key IFRS 9 inputs (su ch as significant increase in credit risk (SICR) thresholds) an d any necessary in-model and post model adjustments through pr ovisions and model committees.  Development and approval of credit gr ading models. A Credit Risk Committee provid es oversight of the overall credit risk profile and sector/product/asse t class concentrations. Risk appetite Credit risk appetite aligns to th e strategic risk appetite set by the Board and is set and monit ored through a risk appetite framework. The framework has been designed to refle ct factors that influence the ability to operate within risk a ppetite. Tools such as stress testing and economic capital are use d to measure credit risk volatility and develop links between t he framework and risk appetite limits. Four formal frameworks are use d, classifying, measuring and monitoring credit risk exposure across single na me, sector and country concentrations and product and asset cl asses with heightened risk characteristics. The framework is supported by a suite of t ransactional acceptance standards that set out the risk par ameters within which businesses should operate . Credit policy standards are in p lace and are expressed as a set of mandatory controls. Identification and measuremen t Credit stewardship (audited) Risks are identified through relationship man agement and credit stewardship of customers and portfolios. Credit risk stewardship takes place throughout the custo mer relationship, beginning with the initial approval. It includes the ap plication of credit assessment standards, c redit risk mitigation and collateral, ensuring that credit documen tation is complete and appropriate, carrying out regular portfolio o r customer reviews and problem debt identification and ma nagement. Asset quality (audited) All credit grades map to an ass et quality (AQ) scale, used for financial reporting. This AQ scale is based on Basel p robability of defaults. Performing loans are de fined as AQ1-AQ9 (where the probability of default (PD) is less than 100%) and defaulted non-performing loans as AQ10 or Stage 3 under IFRS 9 ( where the PD is 100%). Loans are defined as defaul ted when the payment status becomes 90 day s past due, or earlier if there is clear evidence that the borrower is unlikely to repay, for example bankruptcy or insolvency . Counterparty credit risk Counterparty credit risk arises from the obli gations of customers under derivative and secu rities financing transactions. It is a material pa rt of NWM Group’s credit risk. NWM Group mitigates counterparty credit risk t hrough collateralisation and netting agreements, w hich allow amounts owed by NWM Group to a counterp arty to be netted against amounts the counterparty owe s NWM Group. Mitigation Mitigation techniques, as set out in the ap propriate credit policies and transactional acceptance s tandards, are used in the management of credit portfolios across N WM Group. These techniques mitigate credit concentrations in rel ation to an individual customer, a borrower g roup or a collection of related borrowers. Where possible, customer credit balances a re netted against obligations. Mitigation tools can i nclude structuring a security interest in a physical or financial asset, the use of credit derivatives including credit default sw aps, credit-linked debt instruments and securi tisation structures, and the use of guarantees and similar ins truments (for example, credit insurance) from related and third parties . Assessment and monitoring Customers – including corporat es, banks and other financial institutions – are grouped by industry secto rs and geography as well as by product/asset class and are managed on an individual basis. Customers are aggregated as a single risk when sufficiently interconnected. A credit assessment is carried out before credit facilities are made available to customers. The assessment process is dependent on the complexity of the t ransaction. Credit approvals are subject to environmental, social and governance risk policies which restrict expos ure to certain highly carbon intensive industries as well as those with poten tially heightened reputational impacts. Customer specif ic climate risk commentary is now mandatory . Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 64 Credit risk continued In response to COVID-19, a new framework was int roduced to categorise clients in a consistent manne r across the portfolio, based on the effect of COVID-19 on their financi al position and outlook in relation to the sector risk appetite. This fr amework has been retained and updated to consider vi ability impacts beyond those directly related to COVID-19 and classific ation via the framework is now mandatory and must be refreshed annually. The framework extends to all bo rrowing customers and supplements the Risk of Credit Loss framewo rk in assessing whether customers exhibit a S ICR, if support is considered to be granting forbearance and the time i t would take for customers to return to operating within transactional acceptance standards. For lower risk transactions below spec ific thresholds, credit decisions can be approved through self -sanctioning within the business. This process is facilitated through sys tems, strategies and policy rules. For all other transactions, credit is only g ranted to customers following joint approval by an approver f rom the business and the credit risk function, or by t wo credit officers. The joint business and credit approvers act wi thin a delegated approval authority under the Wholesale Credit Authorities F ramework Policy. The level of delegated a uthority held by approvers is dependent on their experience and expertise with only a small number of senior executives holding the highest approval authority. Both business and credit approvers are acc ountable for the quality of each decision taken, although the credit risk approver holds ultimate sanctioning authority. Transactional acceptance standards provide de tailed transactional lending and risk a cceptance metrics and structuring guidance. As such, these standards provide a mechanism to manage risk appetite at the customer/transaction level and are supplementary to the established credit risk appetite. Credit grades and loss given default (LGD) are reviewed and, if appropriate, reapproved annually . The review process assesses borrower performance, includi ng reconfirmation or adjustment of risk parameter estimates; th e adequacy of security; compliance with terms and conditions; and refinancing risk. Problem debt management Early problem identification Each sector has defined early warning i ndicators to identify customers experiencing financial difficulty, and to incre ase monitoring if needed. Early warning in dicators may be internal, such as a customer’s bank account activi ty, or external, such as a publicly-listed customer’s share price. If ea rly warning indicators show a customer is experiencing potenti al or actual difficulty, or if relationship managers or credit office rs identify other signs of financial difficulty, they may decide to classify the customer within the Risk of Cre dit Loss framework. Risk of Credit Loss framework The Risk of Credit Loss framework is used whe re the credit profile of a customer has deteriorated mate rially since origination. Experienced credit risk off icers apply expert judgment to classify cases into categories th at reflect progressively deteriorating credit risk. The re are two classifications in the framework that apply to non- defaulted customers – Heightened Monitoring and Risk of C redit Loss. For the purposes of provisioning, all exposures subject to the framework are categorised as Stage 2 and subjec t to a lifetime loss assessment. The framewor k also applies to those customers that have met NWM Group’s default crite ria (AQ10 exposures). Defaulted exposures are catego rised as Stage 3 impaired for provisioning purposes. Customers classified in the Heightened Monitoring ca tegory are those who are still performing but have certain ch aracteristics – such as trading issues, covenant breaches, ma terial PD downgrades and past due facilities – that may affect the ability to meet repayment obligations. Heightened Moni toring customers require pre-emptive actions to return or m aintain their facilities within risk appetite prior to ma turity. Risk of Credit Loss customers a re performing customers that have met the criteria for Heighte ned Monitoring and also pose a risk of credit loss to NWM Group in the next 12 mont hs should mitigating action not be taken or not be succ essful. Once classified as either Heightened Monitoring o r Risk of Credit Loss, a number of mandatory actions a re taken in accordance with policies. Actions include a review of the customer’s credit grade, facility and security documentation and the valuation of security. De pending on the severity of the financial difficulty and the size of the exposu re, the customer relationship strategy is reassesse d by credit officers, by specialist credit risk or relationship m anagement units in the relevant business, or by Restructuring. Restructuring Where customers are categoris ed as Risk of Credit Loss, relationships are mainly managed by the Rest ructuring team in NatWest Bank Plc as a service to NWM Group. The tea m protects NWM Group’s capital by working with corporate and commercial customers to supp ort their turnaround and recovery strategies and enable them to return to mainstream banking. Forbearance (audited) Forbearance takes place when a conces sion is made on the contractual terms of a loan/debt in response to a customer’s financial difficulties. The aim of f orbearance is to support and restore the customer to financi al health while minimising risk. The type of forbearance offered is tailored to the customer’s individual circumstances and may involve cove nant waivers, amendments to margins, payment concessions and loa n rescheduling (including extensions in con tractual maturity), capitalisation of arrears, and de bt forgiveness or debt-for- equity swaps. Credit grading models Credit grading models is the colle ctive term used to describe all models, frameworks and methodologies used to c alculate PD, exposure at default (EAD), LGD , maturity and the production of credit grades. Credit grading models are designed to provide:  An assessment of customer and transaction cha racteristics.  A meaningful differentiation of credit risk.  Accurate internal default rate, loss and exposure es timates that are used in the capital calc ulation or wider risk management purposes. Impairment, provisioning and write-offs (audited) In the overall assessment of cre dit risk, impairment provisioning and write-offs are used as key indica tors of credit quality. NWM Group’s IFRS 9 provisioning models, which use e xisting Basel models as a starting point, inco rporate term structures and forward-looking information. Regulatory conse rvatism within the Basel models has been removed as app ropriate to comply with the IFRS 9 requirement fo r unbiased ECL estimates. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 65 Credit risk continued Five key areas may materially influence the measurement of credit impairment under IFRS 9 – two of these relate to model build and three relate to model application: Model build:  The determination of economic indica tors that have most influence on credit loss for each portfolio and the severity of impact (this leverages existing s tress testing models which are reviewed annually).  The build of term structures to extend the deter mination of the risk of loss beyond 12 mont hs that will influence the impact of lifetime loss for exposures in Stage 2. Model application:  The assessment of the SICR an d the formation of a framework capable of consistent application.  The determination of asset lifetimes that refl ect behavioural characteristics while also repre senting management actions and processes (using historical data and expe rience).  The choice of forward-looking economic scenarios a nd their respective probability weights. Refer to Accounting policies note 9 for further details. IFRS 9 ECL model design principles (audited) Modelling of ECL for IFRS 9 follows the conventio nal approach to divide the estimation of credit losse s into its component parts of PD, LGD and EAD. To meet IFRS 9 requirements, the PD, LGD and EA D parameters differ from their Pillar 1 in ternal ratings based counterparts in the following aspects:  Unbiased – material regulatory conservatism has been removed from IFRS 9 parameters to produce unbiased estimates.  Point-in-time – IFRS 9 parameters reflec t actual economic conditions at the reporting date instead of lo ng-run average or downturn conditions.  Forward-looking – IFRS 9 PD e stimates and, where appropriate, EAD and LGD estimates refle ct forward- looking economic conditions.  Lifetime measurement – IFRS 9 PD, L GD and EAD are provided as multi-period term structures up to exposure lifetimes instead of over a fixed one-ye ar horizon. IFRS 9 requires that at each repor ting date, an entity shall assess whether the credit risk on an accoun t has increased significantly since initial recognition. Part of this asse ssment requires a comparison to be made between the cur rent lifetime PD (i.e. the PD over the remaining life time at the reporting date) and the equivalent lifetime PD as de termined at the date of initial recognition. For assets originated before IFRS 9 was introduced, comparable lifetime origination PDs did no t exist. These have been retrospectively created using the relevan t model inputs applicable at initial recognition. PD estimates PD models use a point-in-time/through-the-cyc le framework to convert one-year regulatory PDs into point-in-ti me estimates that reflect economic conditions at the reporting date. The framework utilises credit cycle indices (CCIs) for a comprehensive set of region/industry seg ments. Further detail on CCIs is provided in the Economic loss d rivers section. One-year point-in-time PDs are extended to forwa rd-looking lifetime PDs using a conditional transition matrix approach and a set of econometric forecasting models. LGD estimates The general approach for the IFRS 9 LGD models is to leverage corresponding Basel LGD models with bespoke adjust ments to ensure estimates are unbiased and, where relevant, forward- looking. Forward-looking economic information is inco rporated into LGD estimates using the existing CCI framewo rk. For low- default portfolios, including sovereigns and b anks, loss data is too scarce to substantiate estimates that vary with economic conditions. Consequently, for th ese portfolios, LGD estimates are assumed to be constant throughout the p rojection horizon. EAD estimates EAD values are projected using product specific credi t conversion factors (CCFs), clos ely following the product segmentation and approach of the respective B asel model. However, the CCFs are estimate d over multi-year time horizons and contain no regulatory conse rvatism or downturn assumptions. No explicit forward-looking information is inco rporated, on the basis of analysis showing the temporal varia tion in CCFs is mainly attributable to changes in exposure ma nagement practices rather than economic conditions. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 66 Credit risk continued Governance and post model adjustm ents (audited) The IFRS 9 PD, EAD and LGD models are subject to NWM Group’s model risk policy that stipulates periodic model monitoring, periodic re-validation and define s approval procedures and authorities according to mo del materiality. Various post model adjustments were applied whe re management judged they were necessary to ensure an adequate level of overall ECL p rovision. All post model adjustments were subject to formal approval throu gh provisioning governance, and were categorised as follows:  Deferred model calibrations – EC L adjustments where PD model monitoring indicated that actual defaul ts were below estimated levels but where it was judged that an implied ECL release was not supportable due to the influence of government support schemes. As a consequence, any potential ECL release was deferred and ret ained on the balance sheet.  Economic uncertainty – ECL adjustments primarily a rising from uncertainties associated with multiple economic scenarios (also for 2020) and credit outco mes as a result of the effect of COVID-19 and the consequences of government support schemes. In both cases , management judged that additional ECL was required until furthe r credit performance data became available on the behaviou ral and loss consequences of COVID-19 .  Other adjustments – ECL adjustments where it w as judged that the modelled ECL required to be amended. Post model adjustments will re main a focus area of NWM Group’s ongoing ECL adequacy asse ssment process. A holistic framework has been established including reviewi ng a range of economic data, external benchmark inform ation and portfolio performance trends, particularl y with more observable outcomes from the unwinding of COVID-19 support schemes. A key part of the assessment is also understandi ng the current levels of ECL coverage (portfolio by portfolio) ag ainst pre- COVID-19 levels, recognising changes in portfolio/se ctor mix. ECL post model adjustments (audited) The table below shows ECL post model adjust ments. 2021 2020 £m £m Deferred model calibrations — — Economic uncertainty 2 2 Other adjustments — — Total 2 2 Of which: - Stage 1 — — - Stage 2 2 2 - Stage 3 — — Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 67 Credit risk continued Significant increase in credit risk (SICR) (audited) Exposures that are considered significantly c redit deteriorated since initial recognition are classifie d in Stage 2 and assessed for lifetime ECL measurement (e xposures not considered deteriorated carry a 12-month ECL). NWM Group h as adopted a framework to identify deterioration based p rimarily on relative movements in lifetime PD suppor ted by additional qualitative backstops. The princ iples applied are consistent across NWM Group and align to credit risk m anagement practices, where appropriate. The framework comprises the following elements:  IFRS 9 lifetime PD assessment ( the primary driver) – on modelled portfolios, the assessment is base d on the relative deterioration in forward-lookin g lifetime PD and is assessed monthly. To assess whether credit dete rioration has occurred, the residual lifetime PD at balance she et date (which PD is established at date of initial recogni tion) is compared to the current PD. If the current lifetime P D exceeds the residual origination PD by mo re than a threshold amount, deterioration is assu med to have occurred and the exposure transferred into Stage 2 fo r a lifetime loss assessment. In broad terms, a doubling of PD would indicate a SICR. However, the PD uplift mus t be at least 0.1%.  Qualitative high-risk backstops – the PD assessmen t is complemented with the use of qualitative high-risk backstops to further inform whe ther significant deterioration in lifetime risk of default has occur red. The qualitative high-risk backstop ass essment includes the use of the mandatory 30+ days past due backstop, as prescribed by IFRS 9 guidance, and other featu res such as forbearance support and expos ures managed within the Risk of Credit Loss framework. The criteria are based on a significant amount of e mpirical analysis and seek to meet thre e key objectives:  Criteria effectiveness – the criteria should be e ffective in identifying significant credit deterioration and prospective default population.  Stage 2 stability – the criteria should not in troduce unnecessary volatility in the Stage 2 popul ation.  Portfolio analysis – the criteria should produce results which are intuitive when report ed as part of the wider credit portfolio. Provisioning for forbearance Provisions for forborne loans are assessed in accordance with normal provisioning policies. Th e customer’s financial position and prospects – as well as the likely effect of the forbearance, including any concessions granted, and revised PD or L GD gradings – are considered in or der to establish whether an impairment provision increase i s required. Loans granted forbearance are individually credi t assessed in most cases. Performing loans subject to forbeara nce treatment are categorised as Stage 2 and subject to a life time loss assessment. Forbearance may result in the value of the outst anding debt exceeding the present value of the es timated future cash flows. This difference will lead to a cus tomer being classified as non- performing. In the case of non-performing f orborne loans, an individual loan impairment provision assessment generally t akes place prior to forbearance being granted. The amount of the loan impairment provision may change once the terms of the forbea rance are known, resulting in an addition al provision charge or a release of the provision in the period the f orbearance is granted. The transfer of loans from impaired to performing s tatus follows assessment by relationship manage rs and credit. When no further losses are anticipate d and the customer is expected to meet the loan’s revised terms , any provision is written-off or released and the balance of the loan returned to performing status. This is not dependent on a specified ti me period and follows the credit risk manager’s asse ssment. Customers seeking COVID-19 related support, includi ng payment holidays, who were not subject to any wider SICR triggers and who were assessed as having the ability in the medium term post-COVID-19 to be viable and meet credit appetite metrics, were not consi dered to have been granted forbearance. Asset lifetimes (audited) The choice of initial recognition and asse t duration is another critical judgment in determining the quantu m of lifetime losses that apply.  The date of initial recognition re flects the date that a transaction (or account) was firs t recognised on the balance sheet; the PD recorded at that time provides the baseline used for subsequent determination of S ICR as detailed above.  For asset duration, the approach applied in line wi th IFRS 9 requirements is:  Term lending – the contractual maturity date, reduced for behavioural trends where a ppropriate (such as, expected prepayment and amo rtisation).  Revolving facilities – asset duration is b ased on annual customer review schedules and will be se t to the next review date. Economic loss drivers (audited) Introduction The portfolio segmentation and se lection of economic loss drivers for IFRS 9 follow closely the approach used in stress testing. To enable robust modelling the fo recasting models for each portfolio segment (defined by pro duct or asset class and where relevant, industry sector and region) are based on a selected, small number of econ omic factors, (typically three to four) that best explain the temporal varia tions in portfolio loss rates. The process to select economic loss d rivers involves empirical analysis and expert judgment. The most material economic loss drivers for the UK po rtfolios include UK gross domestic product (GDP), wo rld GDP, the unemployment rate, the house price index, an d the Bank of England base rate. Similar metrics are used fo r other key country exposures in NWM Group. Economic scenarios At 31 December 2021, the range of anticipated future economic conditions was defined by a set of four i nternally developed scenarios and their r espective probabilities. In addition to the base case, they comprised upside, d ownside and extreme downside scenarios. The s cenarios primarily reflected a range of outcomes for the path of COVI D-19 as well as recovery, and the associated eff ects on labour and asset markets. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 68 Credit risk continued Economic loss drivers (audited) The four scenarios were deemed appropriate in ca pturing the uncertainty in economic forecasts and the no n-linearity in outcomes under different scen arios. The scenarios were developed to provide sufficient coverage acr oss potential changes in unemployment, asset price and the deg ree of permanent damage to the economy, aroun d which there are pronounced levels of uncertainty at this stage. Upside – This scenario assumes a very stron g recovery through 2022 as consumers dip into excess savings built up over the last two years. The labour market remains resilient, with the unemployment rate falling below pre-COVI D-19 levels. Inflation is higher than the base case but eventually comes back close to the target. The strong economic recovery enables tightening to be quicker than the base case. The housing market continues its recent strong pe rformance. Base case – COVID-19 related risks remain con tained. After a strong recovery in 2021, the gr owth moderates in 2022. Most of the furloughed workers can go back to their existing job or find a new job very quickly, with the unemploymen t rate reaching 4.1% by the end of 2022. Inflation initially increases but retreats over 2022. Interest rates are raised, s tarting in early 2022. There is a gradual cool down in the housing market but activity is still at healthy lev els. Downside – This scenario assumes a reversal in recove ry as inflation build up leads to a less ening of expectations. Interest rates are raised aggressively to counter the inflation risks. However, starting in 2023, the interest hikes are reversed to assist the recovery. Unemployment is higher than the base case and there is a modest decline in house prices. Extreme downside – This scenario assumes a resurgence of COVID-19 related risks. There is a renewed downturn wi th declines in consumer spending and business investment. Interest rates are reduced into negative territory to -0.5 %. There is wide-spread job shedding in the labou r market while asset prices see deep corrections, with housing market falls higher than those seen during previous episodes. The recovery is tepid throughout the five-year period, meaning only a gradual decline in joblessness. The approach of using four scenarios is s imilar to that as at 31 December 2020. Previously, NWM Group used five disc rete scenarios to characterise the dis tribution of risks in the economic outlook. For 2021, the f our scenarios were deemed appropriate in capturing the uncertainty in econo mic forecasts and the non-linearity in outcom es under different scenarios. These four scenarios were deve loped to provide sufficient coverage across potential rises in unemployment, inf lation, asset price falls and the degree of permanent damage to the economy, around which there remains pronounce d levels of uncertainty. The tables and commentary be low provide details of the key economic loss drivers under the f our scenarios. The main macroeconomic variables for each of the fou r scenarios used for ECL modelling are se t out in the main macroeconomic variables table below. The compound annual growth rate (CAGR) for GDP is s hown. It also shows the five- year average for unemployment and the Bank of En gland base rate. The house price index and commercial real est ate figures show the total change in each asse t over five years. Main macroeconomic variables 2021 2020 Extreme Extreme Upside Base case Downside downside Upside Base case Downside downside Five-year summary % % % % % % % % UK GDP - CAGR 2.4 1.7 1.4 0.6 3.6 3.1 2.8 1.3 Unemployment - average 3.5 4.2 4.8 6.7 4.4 5.7 7.1 9.7 House price index - total change 22.7 12.1 4.3 (5.3) 12.5 7.6 4.4 (19.0) Bank of England base rate - av erage 1.5 0.8 0.7 (0.5) 0.2 — (0.1) (0.5) Commercial real estate price - total cha nge 18.2 7.2 5.5 (6.4) 4.3 0.7 (12.0) (31.5) World GDP - CAGR 3.5 3.2 2.6 0.6 3.5 3.4 2.9 2.8 Probability weight 30.0 45.0 20.0 5.0 20.0 40.0 30.0 10.0 (1) The five year period starts after Q3 2021 for 2021 and Q3 2020 for 2020. Probability weightings of scenarios NWM Group’s approach to IFRS 9 multiple economic scenarios (MES) involves selecting a suitable se t of discrete scenarios to characterise the distribution of risks in the economic ou tlook and assigning appropriate prob ability weights. The scale of the economic impact of COVID-19 and the range of recovery p aths necessitates a change of approach to assigning p robability weights from that used in recent updates. Prio r to 2020, GDP paths for NWM Group’s scenarios were compa red against a set of 1,000 model runs, following which a percen tile in the distribution was established tha t most closely corresponded to the scenario. Instead, NWM Group has subje ctively applied probability weights, reflecting expert views within NWM Group. The probability weight assignment was judged to present good coverage to the central scenarios and the po tential for a robust recovery on the upside and exceptionally challenging ou tcomes on the downside. A 30% weighting was applied to the upside scenario, a 45% weighting applie d to the base case scenario, a 20% weighting applied to the downside sce nario and a 5% weighting applied to the extreme downside sce nario. NWM Group assessed the downside r isk posed by COVID-19 to be diminishing over the course of 2 021, with the vaccination roll- out and positive economic data being observed since t he gradual relaxing of lockdown res trictions. NWM Group therefore judged it was appropriate to apply a higher prob ability to upside-biased scenarios than at 31 December 2020 . However, compared to 31 December 2020, the base case h as a higher weight reflecting reduction in uncertainty as the path of economy recovery became clearer. The 25% weighting to the two downside scena rios gives appropriate consideration to the threats posed to the recove r y, including inflation, supply and COVID-19-rel ated risks. Balanced against that is the adaptability of the UK economy to succe ssive waves of COVID-19, and the re silience of labour and asset markets. The potential for further better than e xpected outcomes is reflected in the 30% p robability weighting applied to the upside scenario. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 69 Credit risk continued Economic loss drivers 75 80 85 90 95 100 105 110 115 Q4 2019 Q4 2020 Q4 2021 Q4 2022 Q4 2023 Q4 2024 Q4 2025 Q4 2026 UK gross domestic product Upside Base Downside Extreme downside -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Q4 2019 Q4 20 20 Q4 2021 Q4 2022 Q4 2023 Q4 2 024 Q4 2025 Q4 2026 % Bank of England base rate Upside Base Downsid e Extreme downside Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 70 Credit risk continued Economic loss drivers (audited) Annual figures Extreme Upside Base case Downside downside GDP - annual growth % % % % 2021 7.0 7.0 7.0 7.0 2022 8.1 5.0 1.5 (3.6) 2023 2.1 1.6 2.4 4.1 2024 1.2 0.9 1.6 1.2 2025 1.2 1.3 1.4 1.4 2026 1.2 1.5 1.6 1.5 Extreme Upside Base case Downside downside Unemployment rate - annual average % % % % 2021 4.6 4.6 4.6 4.6 2022 3.5 4.1 5.1 8.3 2023 3.3 4.0 5.2 8.8 2024 3.4 4.1 4.7 6.6 2025 3.4 4.2 4.5 5.2 2026 3.6 4.2 4.5 4.9 Extreme Upside Base case Downside downside House price index - four quarter growth % % % % 2021 6.9 6.9 6.9 6.9 2022 7.9 1.6 (2.9) (20.4) 2023 4.2 1.6 (0.2) ( 2.6) 2024 3.1 2.9 1.7 13.0 2025 3.0 2.7 3.0 4.7 2026 3.0 2.7 3.0 3.6 Extreme Upside Base case Downside downside Commercial real estate price - f our quarter growth % % % % 2021 8.4 8.4 8.4 8.4 2022 10.2 4.4 ( 2.7) (29.8) 2023 3.4 1.9 4.2 17.2 2024 1.7 0.2 1.7 5.2 2025 0.6 (0.8) 0.3 3.5 2026 (0.8) (0.8) ( 0.2) 3.2 Extreme Upside Base case Downside downside Bank of England base rate - an nual average % % % % 2021 0.10 0.10 0.10 0.10 2022 1.02 0.63 1.06 (0.40) 2023 1.58 1.00 1.06 (0.50) 2024 1.75 1.00 0.50 (0.50) 2025 1.75 0.90 0.50 (0.50) 2026 1.75 0.75 0.50 (0.50) Worst points 31 December 2021 31 December 2020 Extreme Extreme Downside downside Downside downside % Quarter % Quarter % Quarter % Quarter GDP (1.8) Q1 2022 (7.9) Q1 2022 (5.1) Q1 2021 (10.4) Q1 2021 Unemployment rate (peak) 5.4 Q1 2023 9.4 Q4 2022 9.4 Q4 2021 13.9 Q3 2021 House price index (3.0) Q3 2023 ( 26.0) Q2 2023 (11.2) Q2 2021 (32.0) Q4 2021 Commercial real estate price (2.5) Q1 2022 ( 29.8) Q3 2022 (28.9) Q2 2021 (40.4) Q2 2021 Bank of England base rate 1.5 Q4 2022 (0.5) Q2 2022 (0.1) Q3 2021 (0.5) Q1 2021 (1) For the unemployment rate, the figures show the peak levels. For the Bank of England base rate, the figures show highest or lowest levels. For other parameters, the figures show falls relative to the starting period. The calculations are performed over five years , with a starting point of Q3 2021 for 31 December 2021 scenarios. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 71 Credit risk continued Economic loss drivers (audited) Use of the scenarios in lending The lending ECL methodology is based on the concep t of credit cycle indices (CCIs). The CCIs re present all relevant economic loss drivers for a region/industry s egment aggregated into a single index value that describes the loss rate conditions in the respective segment relative to its long-run average. A CCI value of zero corresponds to lo ss rates at long-run average levels, a positive CCI value corresponds to loss rates below long-run average levels and a negative CC I value corresponds to loss rates above long-run av erage levels. The four economic scenarios a re translated into forward- looking projections of CCIs using a set of econo metric models. Subsequently the CCI projections for the indivi dual scenarios are averaged into a single central CCI projec tion according to the given scenario probabilities. T he central CCI projection is then overlaid with an additional mean reversion assumption i.e. that after reaching their worst forecast positio n the CCIs start to gradually revert to their long-run aver age of zero. Finally, ECL is calculated using a Monte Carlo a pproach by averaging PD and LGD values arising from many CCI p aths simulated around the central CCI projection. The rationale for the approach is the long-standing observation that loss rates in the portfolios tend to follow regular cycles. This allows NWM Group to enrich the range and de pth of future economic conditions embedded i n the final ECL beyond what would be obtained from using the discrete m acro-economic scenarios alone. UK economic uncertainty Treatment of COVID-19 relief mechanisms Use of COVID-19 relief mechan isms does not automatically merit identification of SICR and trigger a Stage 2 classific ation in isolation. NWM Group continues to provide support, where a ppropriate, to existing customers. Those who are deemed eithe r (a) to require a prolonged timescale to retu rn to within NWM Group’s risk appetite, (b) not to have bee n viable pre-COVID-19, or (c) not to be able to sustain their d ebt once COVID-19 is over, will trigger a SICR and, if concessions are sought, be categ orised as forborne, in line with regulatory guidance. P ayment holiday extensions beyond an aggregate of 12 months in an 18 month period to cover continuing COVID-19 business inte rruption are categorised as forbearance, inc luding for customers where no other SICR triggers are present. Model monitoring and enhancement The severe economic impact from COVI D-19 and the ensuing government support schemes have disru pted the normal relationships between key economic loss drivers and credit outcomes. While most governm ent support schemes have now been phased out and economic conditions a re normalising, the effect of this disruption is still evident in model monitoring and accounted for in judgments applied to the use and recalibrations of models. Most significantly, latest PD model moni toring shows general overprediction across all key portfolios, i.e., obse rved default rates still at or even below pre-CO VID-19 levels despite increased PD estimates from a deteriora tion in several key economic variables. Model rec alibrations to adjust for this overprediction have been deferred base d on the judgment that default rate actuals are distorted due to government support. In addition, to account for residual model unce rtainty and the risk of eventual default emergence hitherto sup ressed by government support, lag assumptions of up to 12 m onths are applied in the models. These assumptions are consistent with and unchanged from previous disclosures in 2 021, although their effective impact gradually reduces over time. Industry sector detail The economic impact of COVID-19 is highly diff erentiated by industry sector, with hospitality and other contact -based leisure, service, travel and pass enger transport activities significantly more affected than the overall econo my. On the other hand, the corporate and commercial econo metric forecasting models used in Wholesale are secto r agnostic. Sector performance was monitored throughou t the year and additional post model adjustments were recognised where a risk of higher than expected future default levels, includi ng their timing and value, was identified. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 72 Credit risk continued Measurement uncertainty and ECL sensitivity an alysis (audited) The recognition and measurement of ECL is co mplex and involves the use of significant judgment and esti mation, particularly in times of economi c volatility and uncertainty. This includes the formulation and inc orporation of multiple forward- looking economic conditions into ECL to meet the measu rement objective of IFRS 9. The ECL provision is sensi tive to the model inputs and economic assumptions u nderlying the estimate. The focus of the simulations is on ECL provisioning requirements on performing exposures in S tage 1 and Stage 2. The simulations are run on a stand-alone basis and a re independent of each other; the potential ECL impacts reflect the simulated impact at 31 Dece mber 2021. Scenario impacts on SICR should be considered when evaluating t he ECL movements of Stage 1 and Stage 2. In all scenarios the total exposure was the same but exposure by st age varied in each scenario. Stage 3 provisions are not subje ct to the same level of measurement uncertainty – default is an observed eve nt as at the balance sheet date. Stage 3 provisions therefo re have not been considered in this analysis. The impact arising from the bas e case, upside, downside and extreme downside scenarios has bee n simulated. In the simulations, NWM Group has assumed that the economic macro variables associated with these sc enarios replace the existing base case economic ass umptions, giving them a 100% probability weighting and therefore serving as a sin gle economic scenario. These scenarios have been applied to all modelled portfolios in the analysis below, with the simulation impacting both P Ds and LGDs. Modelled post model adjustments present i n the underlying ECL estimates are also sens itised in line with the modelled ECL movements, but those that were judg mental in nature, primarily those for deferred model c alibrations and economic uncertainty, were not (refer to the Go vernance and post model adjustments section). As expected, the s cenarios create differing impacts on EC L by portfolio and the impacts are deemed reasonable. In this simulation, it is assumed that existing modelled relationships between key economic variables and loss drivers hold, but in practice other f actors would also have an impact, for example, potential custo mer behaviour changes and policy changes by lenders that might i mpact on the wider availability of credit. NWM Group’s core criterion to identify a SICR is f ounded on PD deterioration, as discussed abo ve. Under the simulations, PDs change and result in exposures moving bet ween Stage 1 and Stage 2 contributing to the ECL impact. Extreme 31 December 2021 Actual Base case Upside Downside downside Stage 1 modelled exposure (£m) 7,723 7,723 7,723 7,723 7,225 Stage 1 modelled ECL (£m) 6 6 6 6 6 Stage 1 coverage (%) 0.08% 0.08% 0.08% 0.08% 0.08% Stage 2 modelled exposure (£m) 137 137 137 137 635 Stage 2 modelled ECL (£m) 3 3 3 3 11 Stage 2 coverage (%) 2.19% 2.19% 2.19% 2.19% 1.73% Stage 1 and Stage 2 modelled exposure (£m) 7,860 7,860 7,860 7,860 7,860 Stage 1 and Stage 2 modelled ECL (£m) 9 9 9 9 17 Stage 1 and Stage 2 coverage (%) 0.11% 0.11% 0.11% 0.11% 0.22% Variance – (lower)/higher to actual tot al Stage 1 and Stage 2 ECL — — — — 8 (1) Variations in future undrawn exposure values across the s cenarios are modelled, however the exposure position reported is that used to calculate modelled ECL as at 31 December 2021 and therefore does not include variation in f uture undrawn exposure values. (2) Reflects ECL for all modelled exposure in s cope for IFRS 9. The analysis excludes non-modelled portfolios and exposures relating to bonds and cash. (3) All simulations are run on a stand-alone basis and are ind ependent of each other, with the potential ECL impact reflecting the simulated impact as at 31 December 2021. The simulations change the composition of Stage 1 and Stage 2 exposure but total exposure is unchanged under each scenario as the loan population is static. (4) Refer to the Economic loss drivers section for details of economic scenarios. (5) Refer to the NWM Group 2020 Annual Report and Accounts for 2020 comparatives. Measurement uncertainty and ECL adequacy (audited) The improvement in the economic outlook an d scenarios used in the IFRS 9 MES framework in 202 1 resulted in a release of modelled ECL. Given that continued uncertain ty remains due to COVID-19 despite the improve d economic outlook, NWM Group utilised a framework of quantitative and qualitative measures to support the directional change and levels of ECL coverage, including economic data, credit performance i nsights and problem debt trends. This was particularly important for consideration of post model adjustments. As government support schem es continued to conclude during 2021, NWM Group anticipates further credit dete rioration in the portfolios. However, the income statement effect of this will be mitigated by the forward-looking provisions retained on the balance sheet at 31 December 202 1. There are a number of key factors that could d rive further downside to impairments, through deteriorating econo mic and credit metrics and increased stage migr ation as credit risk increases for more customers. A key factor would be a more adverse deterioration in GDP a nd unemployment in the economies in which NWM Grou p operates, but also, among others:  The ongoing trajectory of lockdown restric tions within the UK and any future repeated lockdown requirements.  The progress of the COVID-19 vaccination roll-out and its effectiveness against new variants.  The long-term efficacy of the various governmen t support schemes in terms of their ability to defray cust omer defaults is yet to be proven over an ext ended period.  The impact on customer afford ability in the event of sustained inflationary pressures.  The level of revenues lost by co rporate clients and pace of recovery of those revenues may affect NWM Group’s clients’ ability to service their borrowin g, especially in those sectors most exposed to the effects of COVID-19. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 73 Credit risk – Trading activities This section details the credit risk profile of NWM Group's trading activities. Securities financing transactions and collateral (audited) The table below shows securiti es financing transactions in NWM Group. B alance sheet captions include balances held a t all classifications under IFRS. Reverse repos Repos Outside Outside Of which: netting Of which: netting Total can be offset arrangements Total can be offset arrangements 2021 £m £m £m £m £m £m Gross 45,511 44,861 650 44,333 43,186 1,147 IFRS offset (24,422) (24,422) — (24,422) (24,422) — Carrying value 21,089 20,439 650 19,911 18,764 1,147 Master netting arrangements (900) (900) — (900) (900) — Securities collateral (19,467) (19,467) — (17,863) (17,863) — Potential for offset not recognised under IFRS (20,367) (20,367) — (18,763) (18,763) — Net 722 72 650 1,148 1 1,147 2020 Gross 46,169 45,806 363 44,102 42,402 1,700 IFRS offset (24,866) (24,866) — (24,866) (24,866) — Carrying value 21,303 20,940 363 19,236 17,536 1,700 Master netting arrangements (929) (929) — (929) (929) — Securities collateral (19,938) (19,938) — (16,607) (16,607) — Potential for offset not recognised under IFRS (20,867) (20,867) — (17,536) (17,536) — Net 436 73 363 1,700 — 1,700 Debt securities (audited) The table below shows debt securities held at manda tory fair value through profit or loss by i ssuer as well as ratings based on the lowest of Standard & Poor’s, Moody’s and Fi tch. Central and local g overnment Financial UK US Other institutions Corporate Total 2021 £m £m £m £m £m £m AAA — — 2,011 838 — 2,849 AA to AA+ — 3,329 3,145 1,401 62 7,937 A to AA- 6,919 — 1,950 308 57 9,234 BBB- to A- — — 3,792 346 513 4,651 Non - investment grade — — 31 163 82 276 Unrated — — — 3 3 6 Total 6,919 3,329 10,929 3,059 717 24,953 Short positions (9,790) ( 56) (12,907) (2,074) (137) (24,964) 2020 AAA — — 3,114 1,113 — 4,227 AA to AA+ — 5,149 3,651 576 49 9,425 A to AA- 4,184 — 1,358 272 81 5,895 BBB - to A - — — 8,277 444 656 9,377 Non-investment grade — — 36 127 53 216 Unrated — — — 150 1 151 Total 4,184 5,149 16,436 2,682 840 29,291 Short positions (5,704) (1,123) (18,135) (1,761) (56) (26,779) Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 74 Credit risk – Trading activities contin ued Derivatives (audited) The table below shows third party derivatives by type of co ntract. The master netting agreements and collateral shown do not result in a net presentation on t he balance sheet under IFRS. 2021 2020 Notional GBP USD EUR Other Total Assets Liabilities Notional Assets Liabilities £bn £bn £bn £bn £bn £m £m £bn £m £m Gross exposure 104,614 97,500 164,252 155,787 IFRS offset — — — — Carrying value 3,227 3,220 4,047 1,224 11,718 104,614 97,500 13,697 164,252 155,787 Of which: Interest rate (1) 2,907 1,844 3,493 314 8,558 66,091 57,955 10,371 111,879 100,632 Exchange rate 318 1,372 546 910 3,146 38,369 39,202 3,310 52,204 54,771 Credit 2 4 8 — 14 154 343 15 161 376 Equity and commodity — — — — — — — 1 8 8 Carrying value 11,718 104,614 97,500 13,697 164,252 155,787 Counterparty mark - to - market netting (83,633) (83,633) (134,913) ( 134,913) Cash collateral (14,938) (9,902) (19,606) (14,778) Securities collateral (2,428) (1,070) (5,053) (2,487) Net exposure 3,615 2,895 4,680 3,609 Banks (2) 314 404 206 532 Other financial institutions (3) 1,549 1,515 1,416 1,939 Corporate (4) 1,683 905 2,921 1,046 Government (5) 69 71 137 92 Net exposure 3,615 2,895 4,680 3,609 UK 1,940 1,030 2,833 1,516 Europe 709 1,008 1,076 1,192 US 645 653 470 644 RoW 321 204 301 257 Net exposure 3,615 2,895 4,680 3,609 Asset quality of uncollateralised derivative assets AQ1-AQ4 2,909 3,388 AQ5 - AQ8 649 1,263 AQ9-AQ10 57 29 Net exposure 3,615 4,680 (1) The notional amount of interest rate derivatives includes £5,830 b illion (2020 – £7,074 billion) in respect of contracts cleared through central clearing counterparties. (2) Transactions with certain counterparties with which NWM Group has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivat ive positions in certain jurisdictions, for example, China, where the collateral agreements are not deemed to be legally enforceable. (3) Includes transactions with securitisation vehicles and funds wh ere collateral posting is contingent on NWM Group’s external rating. (4) Mainly large corporates with which NWM Group may ha ve netting arrangements in place, but operational capability does not support collateral posting. (5) Sovereigns and supranational entities with no collateral arrangements, collatera l arrangements that are not considered enforceable, or one-way collateral agreements in their favour. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 75 Credit risk – Trading activities contin ued Derivatives: settlement basis and central coun terparties (audited) The table below shows the third party de rivative notional and fair value by trading and settlement method. Notional Asset Liability Traded over th e counter Traded on Settled Not settled Traded on Traded Traded on Traded recognised by central by central recognised over th e recognised over th e 2021 exchanges counterparties count erparties Total exchanges counter exchanges counter £bn £bn £bn £bn £m £m £m £m Interest rate 723 5,830 2,005 8,558 — 66,091 — 57,955 Exchange rate 2 — 3,144 3,146 — 38,369 — 39,202 Credit — — 14 14 — 154 — 343 Equity and commodity — — — — — — — — Total 725 5,830 5,163 11,718 — 104,614 — 97,500 2020 Interest rate 1,032 7,074 2,265 10,371 — 111,879 — 100,632 Exchange rate 2 — 3,308 3,310 — 52,203 — 54,771 Credit — — 15 15 — 162 — 376 Equity and commodity — — 1 1 — 8 — 8 Total 1,034 7,074 5,589 13,697 — 164,252 — 155,787 Credit risk – Net credit exposures for banking and trading activi ties Asset quality (audited) The table below shows the curr ent and potential exposure by high-level asset cl ass and asset quality. It represents total credit risk for assets held in the banking book in addition to counterparty credit risk for traded products. Refer to page 79 for a mapping of AQ band to probability of default range and indica tive external credit rating. Cash & Sovereign Loans Collateralised Uncollateralised balances at debt and other Other debt rate risk rate risk Repo and Off- balance central ban ks securities lending securities management management reverse repo sheet items Leasing Total 2021 £m £m £m £m £m £m £m £m £m £m AQ1-AQ4 16,645 5,176 6,998 3,060 2,355 1,520 510 669 49 36,982 AQ5-AQ8 — — 534 238 327 428 10 29 — 1,566 AQ9 — — 23 — 2 52 — — — 77 AQ10 — — 21 1 — 2 — — — 24 Current exposure 16,645 5,176 7,576 3,299 2,684 2,002 520 698 49 38,649 Potential exposure 16,645 5,176 18,065 3,299 10,493 3,865 1,590 2,014 49 61,196 2020 AQ1-AQ4 15,771 5,968 6,687 1,432 2,399 2,109 351 815 55 35,587 AQ5-AQ8 — — 1,183 58 479 985 — 59 — 2,764 AQ9 — — 168 — 2 3 — 1 — 174 AQ10 — — 30 1 1 8 — 1 4 45 Current exposure 15,771 5,968 8,068 1,491 2,881 3,105 351 876 59 38,570 Potential exposure 15,771 5,968 20,119 1,491 11,969 4,764 1,306 1,811 59 63,258  Measured against NWM Group’s asset quality s cale, 96% (2020 – 92%) of total current ex posure was rated in the AQ1-AQ4 bands, which in the c ontext of external credit ratings was equivalent to an inves tment grade rating of BBB- or better and a PD range of 0-0.381%.  The decrease in total exposure primarily refle cted lower levels of credit and counterparty c redit risk, due to risk reduction following the strategic decisi ons made in 2020.  Non-investment grade exposures were proportionally lower than the prior year and concentrated withi n loans and other lending, collateralised and uncollateralised rate risk management. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 76 Credit risk – Banking activities Introduction This section details the credit risk profile of NWM Group’s banking activities. Refer to Accoun ting policies note 9 and Note 14 to the financial statements for policies and c ritical judgments relating to impairment loss dete rmination. Financial instruments within the scope of the IFRS 9 ECL framework (audited) Refer to Note 9 to the financial statements for balance sheet a nalysis of financial assets that are classified as amor tised cost or fair value through other comprehensive income (FVOCI), the starting point for IFRS 9 ECL f ramework assessment. Financial assets 31 December 2021 31 December 2020 Gross ECL Net Gross ECL Net £bn £bn £bn £bn £bn £bn Balance sheet total gross amortised cost and FVOCI 36.0 36.6 In scope of IFRS 9 ECL framework 33.6 33.9 % in scope 93% 93% Loans to customers - in scope - amortised cost 7.5 0.1 7.4 8.5 0.2 8.3 Loans to customers - in scope - FVOCI 0.1 — 0.1 — — — Loans to banks - in scope - amortised cost 0.9 — 0.9 1.0 — 1.0 Total loans - in scope 8.5 0.1 8.4 9.5 0.2 9.3 Stage 1 8.3 — 8.3 7.8 — 7.8 Stage 2 0.1 — 0.1 1.6 0.1 1.5 Stage 3 0.1 0.1 — 0.1 0.1 — Other financial assets - in scope - amortised cost 19.8 — 19.8 18.3 — 18.3 Other financial assets - in scope - FVOCI 5.3 — 5.3 6.1 — 6.1 Total other financial assets - in scope 25.1 — 25.1 24.4 — 24.4 Stage 1 25.0 — 25.0 24.4 — 24.4 Stage 2 0.1 — 0.1 — — — Stage 3 — — — — — — Out of scope of IFRS 9 ECL framework 2.4 na 2.4 2.7 n a 2.7 Loans to customers - out of sco pe - amortised cost — na — 0.1 n a 0.1 Loans to banks - out of scope - amortised cos t — na — — n a — Other financial assets - out of scope - amortised cost 2.2 na 2.2 2.3 n a 2.3 Other financial assets - out of scope - FVOCI 0.2 na 0.2 0.3 n a 0.3 na = not applicable The assets outside the scope of IFRS 9 ECL framewo rk were as follows:  Settlement balances, items in t he course of collection, cash balances and other non-credit risk asse ts of £2.2 billion (2020 – £2.4 billion). These we re assessed as having no ECL unless there was evidence that they were defaul ted.  Equity shares of £0.1 billion (202 0 – £0.1 billion) as not within the IFRS 9 ECL framework by definition.  Fair value adjustments on loans and debt securities he dged by interest rate swaps, where the u nderlying loan was within the IFRS 9 ECL scope of £0.1 billion (2020 – £0.2 billion). In scope assets also include an addition al £0.7 billion (2020 – £0.8 billion) of inter-Group assets not shown in the table above. Contingent liabilities and commitments In addition to contingent liabilitie s and commitments disclosed in Note 25 to the financial statements, reputationally-committed limits are also included in the sc ope of the IFRS 9 ECL framework. These were offset by £ 0.2 billion (2020 – £0.2 billion) out of scope balances primarily related to facili ties that, if drawn, would not be classifie d as amortised cost or FVOCI, or undrawn limits relating to financ ial assets exclusions. Total contingent liabilities (including financial guarantees ) and commitments within IFRS 9 ECL s cope of £11.7 billion (2020 – £13.1 billion) comprised Stage 1 £1 1.4 billion (2020 – £10.8 billion); Stage 2 £0.3 billion (2020 – £2 .3 billion); and Stage 3 nil (2020 – nil). The ECL relating to off balance s heet exposures was nil (2020 – nil billion). The total ECL in the remainder of the cre dit risk section of £0.1 billion included ECL for both on and off b alance sheet exposures. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 77 Credit risk – Banking activities continued Portfolio summary (audited) The table below shows gross loans and ECL, by stage, within the scope of the IFRS 9 ECL f ramework. 2021 2020 £m £m Loans - amortised cost and FV OCI Stage 1 8,301 7,799 Stage 2 147 1,566 Stage 3 99 171 Of which: individual 91 162 Of which: collective 8 9 Inter-Group (1) 731 755 Total 9,278 10,291 ECL provisions Stage 1 6 12 Stage 2 3 49 Stage 3 75 132 Of which: individual 68 124 Of which: collective 7 8 Inter-Group — 1 Total 84 194 ECL provisions coverage (2) Stage 1 (%) 0.07 0.15 Stage 2 (%) 2.04 3.13 Stage 3 (%) 75.76 77.19 Inter - Group (%) — 0.13 Total 0.98 2.02 Impairment (releases)/losses ECL (release)/charge Stage 1 (14) (2) Stage 2 (11) 55 Stage 3 (9) (12) Of which: individual (6) (3) Of which: collective (3) (9) Third party (34) 41 Inter-Group (1) 1 Total (35) 42 Amounts written - off 67 11 Of which: individual 43 11 (1) NWM Group’s intercompany assets were classified in Stag e 1. The ECL for these loans was £0.2 million (2020 – £1.2 million). (2) ECL provisions coverage is calculated as ECL p rovisions divided by loans - amortised cost and FVOCI. It is calculated on third party loans and total ECL provisions . (3) The t able shows gross loans only and excludes a mounts that are outside t he scope of the ECL framework. R efer to the Financial instruments within the s cope of the IFR S 9 ECL framework section f or further details. Other financial assets within t he scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £16.6 billion (2020 – £15.8 billion) and debt securities of £8.4 b illion (2020 – £8.7 billion). (4) The stage allocation of the ECL charge was aligned to the stag e transition approach that underpins the analysis in the Flow statement section. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 78 Credit risk – Banking activities continued Sector analysis – portfolio summary (audited) The table below shows financial assets and off -balance sheet exposures gross of ECL and related ECL provisions, impairmen t by sector, asset quality and geographic al region based on the country of operation of the customer. The tables below report only third party exposures and related E CL provisions, charges and write-offs. Property Corporate FI (1) Sovereign Total 2021 £m £m £m £m £m Loans by geography 122 773 7,353 299 8,547 - UK 43 172 2,780 54 3,049 - Other Europe 78 447 1,374 174 2,073 - RoW 1 154 3,199 71 3,425 Loans by stage 122 773 7,353 299 8,547 - Stage 1 107 614 7,284 296 8,301 - Stage 2 — 81 66 — 147 - Stage 3 15 78 3 3 99 of which: individual 12 73 3 3 91 of which: collective 3 5 — — 8 Weighted average life - ECL measurement (years) 1 4 4 1 3 Weighted average 12 months PDs - IFRS 9 (%) 0.20 0.97 0.12 0.02 0.18 - Basel (%) 0.66 1.83 0.15 0.02 0.28 ECL provisions by geography 9 65 7 3 84 - UK 6 10 3 1 20 - Other Europe 3 5 2 — 10 - RoW — 50 2 2 54 ECL provisions by stage 9 65 7 3 84 - Stage 1 — — 5 1 6 - Stage 2 — 1 2 — 3 - Stage 3 9 64 — 2 75 of which: individual 7 59 — 2 68 of which: collective 2 5 — — 7 ECL provisions coverage (%) 7.38 8.41 0.10 1.00 0.98 - Stage 1 (%) — — 0.07 0.34 0.07 - Stage 2 (%) — 1.23 3.03 — 2.04 - Stage 3 (%) 60.00 82.05 — 66.67 75.76 ECL (release)/charge - Third party — (8) (25) (1) (34) Amounts written - off — 39 28 — 67 Other financial assets by asset quality (2) 55 — 3,563 21,465 25,083 - AQ1-AQ4 — — 3,181 21,465 24,646 - AQ5-AQ8 55 — 382 — 437 - AQ9 — — — — — Off-balance sheet 270 4,954 6,453 37 11,714 - Loan commitments 251 4,857 5,864 37 11,009 - Financial guarantees 19 97 589 — 705 Off-balance sheet by asset quality (2) 270 4,954 6,453 37 11,714 - AQ1-AQ4 190 4,204 6,102 37 10,533 - AQ5-AQ8 78 737 348 — 1,163 - AQ9 — — — — — - AQ10 2 13 3 — 18 Not within audit scope. For the notes to this table refer to the following pa ge. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 79 Credit risk – Banking activities continued Sector analysis – portfolio summary (audited) Property Corporate FI (1) Sovereign Total 2020 £m £m £m £m £m Loans by geography 190 958 8,208 180 9,536 - UK 50 167 3,726 66 4,009 - Other Europe 140 577 1,573 44 2,334 - RoW — 214 2,909 70 3,193 Loans by stage 190 958 8,208 180 9,536 - Stage 1 127 629 6,933 110 7,799 - Stage 2 45 182 1,272 67 1,566 - Stage 3 18 147 3 3 171 of which: individual 15 141 3 3 162 of which: collective 3 6 — — 9 Weighted average life - ECL measurement (years) 2 4 4 — 3 Weighted average 12 months PDs - IFRS 9 (%) 0.61 2.22 1.29 0.98 1.34 - Basel (%) 0.75 2.08 1.04 0.03 1.10 ECL provisions by geography 11 124 55 3 193 - UK 7 5 7 1 20 - Other Europe 4 62 42 — 108 - RoW — 57 6 2 65 ECL provisions by stage 11 124 55 3 193 - Stage 1 1 1 9 1 12 - Stage 2 — 6 43 — 49 - Stage 3 10 117 3 2 132 of which: individual 7 112 3 2 124 of which: collective 3 5 — — 8 ECL provisions coverage (%) 5.79 12.94 0.67 1.67 2.02 - Stage 1 (%) 0.79 0.16 0.13 0.91 0.15 - Stage 2 (%) — 3.30 3.38 — 3.13 - Stage 3 (%) 55.56 79.59 100.00 66.67 77.19 ECL (release)/charge - Third party (1) (2) 43 1 41 Amounts written-off 1 9 1 — 11 Other financial assets by asset quality (2) 98 107 2,905 21,251 24,361 - AQ1-AQ4 — 107 2,648 21,231 23,986 - AQ5-AQ8 98 — 257 20 375 - AQ9 — — — — — Off-balance sheet 478 6,421 6,204 37 13,140 - Loan commitments 446 6,291 5,591 37 12,365 - Financial guarantees 32 130 613 — 775 Off-balance sheet by asset quality (2) 478 6,421 6,204 37 13,140 - AQ1-AQ4 420 5,288 5,766 37 11,511 - AQ5-AQ8 52 1,101 432 — 1,585 - AQ9 1 — — — 1 - AQ10 5 32 6 — 43 Not within audit scope. (1) Financial institutions (FI) includes transactions, such as securitisations, where the und erlying assets may be in other sectors. (2) AQ bandings are based on Basel PDs and mapp ing is as follows: Internal asset quality band Probability of default range Indicative S&P rating AQ1 0% - 0.034% AAA to AA AQ2 0.034% - 0.048% AA to AA- AQ3 0.048% - 0.095% A+ to A AQ4 0.095% - 0.381% BBB+ to BBB- AQ5 0.381% - 1.076% BB+ to BB AQ6 1.076% - 2.153% BB- to B+ AQ7 2.153% - 6.089% B+ to B AQ8 6.089% - 17.222% B- to CCC+ AQ9 17.222% - 100% CCC to C AQ10 100% D Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 80 Credit risk – Banking activities continued Sector analysis – portfolio summary (audited) The table below shows ECL by stage, for key s ectors that continue to be affected by COVID-19 . Loans - amortised cos t and FVOCI Off-balance sh eet ECL provisions Stage 1 Stage 2 Stage 3 Total Loan Contingent Stage 1 Sta ge 2 Stage 3 Total 2021 £m £m £m £m commitment s l iabilities £m £m £m £m Property 107 — 15 122 251 19 — — 9 9 Financial institutions 7,284 66 3 7,353 5,864 589 5 2 — 7 Sovereign 296 — 3 299 37 — 1 — 2 3 Corporate 614 81 78 773 4,857 97 — 1 64 65 Of which: Airlines and aerospace — — 7 7 163 44 — — 6 6 Automotive 10 39 — 49 686 — — 1 — 1 Health 27 — 2 29 150 — — — 1 1 Land transport and logistics 74 1 — 75 230 1 — — — — Leisure — 3 — 3 304 — — — — — Oil and gas 252 — 17 269 39 1 — — 4 4 Retail — — — — 289 4 — — — — Total 8,301 147 99 8,547 11,009 705 6 3 75 84 2020 Property 127 45 18 190 446 32 1 — 10 11 Financial institutions 6,933 1,272 3 8,208 5,591 613 9 43 3 55 Sovereign 110 67 3 180 37 — 1 — 2 3 Corporate 629 182 147 958 6,291 130 1 6 117 1 24 Of which: Airlines and aerospace — 23 10 33 312 44 — — 9 9 Automotive 11 38 — 49 863 — — 1 — 1 Health 22 — 2 24 — — — — 1 1 Land transport and logistics 85 1 1 87 451 6 — — — — Leisure — 50 — 50 472 — — 1 — 1 Oil and gas 11 3 50 64 374 3 — — 35 35 Retail — — 10 10 342 5 — — 10 10 Total 7,799 1,566 171 9,536 12,365 775 12 49 132 193 Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 81 Credit risk – Banking activities continued Sector analysis – portfolio summary (audited) Forbearance The table below shows forbearance, Heigh tened Monitoring and Risk of Credi t Loss by sector. This table show current exp osure but reflects risk transfers where there is a gu arantee by another customer. FI Property Sovereign Other corporate Total 2021 £m £m £m £m £m Forbearance (flow) 1 5 — 5 11 Forbearance (stock) 1 5 — 62 68 Heightened Monitoring and Risk of Credit Loss 15 22 — 5 42 2020 Forbearance (flow) — 8 — 114 121 Forbearance (stock) — 8 — 155 163 Heightened Monitoring and Risk of Credit Loss — 29 — 295 324 Credit risk enhancement and mitigat ion (audited) The table below shows exposures of modelled portfolios within the scope of the ECL framework and related credit risk enhancement and mitigation (CREM). Gross Maximum credit risk CREM by type CREM coverage Exposure post CREM exposure ECL Total Stage 3 Financial (1) Property Other (2) Total St age 3 Total Stage 3 2021 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn Financial assets Cash and balances at central banks 16.6 — 16.6 — — — — — — 16.6 — Loans - amortised cost (3) 8.5 0.1 8.4 — 0.7 — — 0.7 — 7.7 — Debt securities 8.4 — 8.4 — — — — — — 8.4 — Total financial assets 33.5 0.1 33.4 — 0.7 — — 0.7 — 32.7 — Contingent liabilities and commitments 11.7 — 11.7 — 1.3 — — 1.3 — 10.4 — Total off-balance sheet 11.7 — 11.7 — 1.3 — — 1.3 — 10.4 — Total exposure 45.2 0.1 45.1 — 2.0 — — 2.0 — 43.1 — 2020 Financial assets Cash and balances at central banks 15.8 — 15.8 — — — — — — 15.8 — Loans - amortised cost (3) 9.5 0.2 9.3 — 2.2 — — 2.2 — 7.1 — Debt securities 8.6 — 8.6 — — — — — — 8.6 — Total financial assets 33.9 0.2 33.7 — 2.2 — — 2.2 — 31.5 — Contingent liabilities and commitments 13.1 — 13.1 — 2.0 — — 2.0 — 11.1 — Total off-balance sheet 13.1 — 13.1 — 2.0 — — 2.0 — 11.1 — Total exposure 47.0 0.2 46.8 — 4.2 — — 4.2 — 42.6 — (1) Includes cash and securities collateral. (2) Includes guarantees and charges over trade debt ors. (3) NWM Group holds collateral in respect of individual loans – amortised cost to banks and customers. Th is collateral includes mortgages over property; charges over business assets such as plant and equipment, inventories and trade debt ors; and guarantees of lending from parties other than the borrower. NWM Group obtains collateral in the form of securities in reverse repurchase agreements. Collateral values a re capped at the value of the loan. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 82 Credit risk – Banking activities continued Flow statement (audited) The flow statement that follows shows the main ECL a nd related income statement movements. It also shows t he changes in ECL as well as the changes in rela ted financial assets used in determining ECL. Due to diffe rences in scope, exposures may differ from those reported in other tables, principally in relation to exposures in Stage 1 an d Stage 2. These differences do not have a material ECL impact. Ot her points to note:  Financial assets include treasury liquidity portfolios, comprising balances at central banks and deb t securities, as well as loans. Both modelled and non-modelled p ortfolios are included.  Stage transfers (for example, exposures moving from Stage 1 into Stage 2) are a key feature of the ECL movements, with the net re-measurement cost of t ransitioning to a worse stage being a primary driver of income s tatement charges. Similarly, there is an ECL benef it for accounts improving stage.  Changes in risk parameters shows the reassessment of the ECL within a given stage, including any ECL ove rlays and residual income statement gains or losses at the point of write-off or accounting write-d own.  Other (P&L only items) includes any subsequent changes in the value of written-down assets along with other direct write-off items such as direct rec overy costs. Other (P&L only items) affects the income statement but does not affect balance sheet ECL movements.  Amounts written-off represent the gross asset written-down against accounts with ECL, including the net asset write- down for any debt sale activity. Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL asset s ECL a ssets ECL NWM Group £m £m £m £m £m £m £m £m At 1 January 2021 33,327 12 1,671 49 167 132 35,165 193 Currency translation and other adjustments (799) — (38) (1) (3) (9) (840) (10) Inter-group transfers (105) — — — — — (105) — Transfers from Stage 1 to Stage 2 (881) (1) 881 1 — — — — Transfers from Stage 2 to Stage 1 1,762 9 (1,762) (9) — — — — Transfers to Stage 3 — — (1) — 1 — — — Net re-measurement of ECL on stage transfer (7) 4 — (3) Changes in risk parameters (7) (9) (2) (18) Other changes in net exposure 79 — (530) (8) (27) (3) (478) (11) Other (P&L only items) — 2 (4) (2) Income statement (releases)/charges (14) (11) (9) (34) Amounts written-off — — (24) (24) (43) (43) (67) (67) At 31 December 2021 33,383 6 197 3 95 75 33,675 84 Net carrying amount 33,377 194 20 33,591 At 1 January 2020 32,877 10 188 4 184 132 33,249 146 2020 movements 450 2 1,483 45 (17) — 1,916 47 At 31 December 2020 33,327 12 1,671 49 167 132 35,165 193 Net carrying amount 33,315 1,622 35 34,972  Consistent with other Wholesale portfolios, Stage 1 an d Stage 2 ECL reduced due to the improved economic outlook which led to a reductio n in underlying PDs and LGDs.  The Stage 2 population reduce d materially with the improved economic outlook improving c redit metrics and resulting in migration of assets into Sta ge 1. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 83 Pension risk Definition Pension risk is the risk to NWM Group caused by i ts contractual or other liabilities to, or with respect to, a pension sche me (whether established for its employee s or those of a related company or otherwise). It is also the risk that NW M Group will make payments or other contributions to, o r with respect to, a pension scheme because of a moral obligation or because NatWest Group considers that it needs to do so for some other reason. Sources of risk NWM Group has exposure to pe nsion risk through its defined benefit schemes worldwide. The two largest NWM G roup schemes are the AA and the NatWest Ma rkets sections of The NatWest Group Pension Fund with a combined £1 .4 billion of assets and £1.1 billion of liabilitie s at 31 December 2021 (2020 – £1.5 billion of assets and £1.1 billion of liabilities). Ref er to Note 5 to the financial statements, for further details on N WM Group’s pension obligations, inclu ding sensitivities to the main risk factors. Pension scheme liabilities vary with changes in l ong-term interest rates and inflation as we ll as with pensionable salaries, the longevity of scheme members and legisl ation. Pension scheme assets vary with changes in interest rates, inflation expectations, credit spreads, exchange rates, a nd equity and property prices. NWM Group is e xposed to the risk that the schemes’ assets, together with future returns and addi tional future contributions, are estimated to be insuff icient to meet liabilities as they fall due. In such circumstances, NWM G roup could be obliged (or might choose ) to make additional contributions to the schemes, or be required to hold additional capital to mitigate this risk. Key developments in 2021  There were no material changes to NWM Group’s exposu re to pension risk during the year, and the overall positions of the main defined benefit scheme s that NWM Group sponsors remained broadly stable or improved.  The triennial actuarial valuations for the two l argest NWM Group schemes, with an effective date of 31 Decem ber 2020, were completed on 14 De cember 2021. As both schemes were in surplus at this date, no defici t repair contributions were required, although there remain ong oing contributions due in respect of f uture service benefits and scheme expenses. Governance The Pension Committee, chaired by the Chief Fi nancial Officer, reviews and monitors risk managemen t, asset and liability strategy and financing issues on behalf of NW M Group. As part of its remit, the Committee:  Considers the financial strategy, risk managemen t and policy implications of NWM Group pension schemes.  Reviews and recommends NW M Group pension risk appetite to the NWM Group Executive Risk C ommittee and the NWM Group Board Risk Committee.  Reviews the pension impact on the capi tal plan for NWM Group and escalates any concerns to the NW M Group Assets & Liabilities Committee. The performance of NatWest Group’s material pension funds (including those sponsored by NWM Group) is reviewed by NatWest Group’s Assets & Liabilities Committee. For further information on governance , refer to page 44. Risk appetite NWM Group maintains an independent view of the risk inherent in its pension funds. NWM Group has an annually reviewed pension risk appetite statement, incorpor ating defined metrics against which risk is measured. Policies and standards are in place to provide for mal controls for pension risk reporting, modelling, governance and s tress testing. A pension risk policy, which sits wi thin the NWM Group enterprise-wide risk management fr amework, is also in place and is subject to associated framework controls. Monitoring and measurement Pension risk is monitored by the NWM Group Executive Risk Committee and the NWM Group Board Risk Commit tee by way of the monthly Risk Management Report. Stress tests are carried out each y ear on NWM Group’s material defined benefit pension schemes. The se tests are also used to satisfy the requests of r egulatory bodies such as the Bank of England. The stress testing framework inclu des pension risk capital calculations for the purposes of the Internal Capital Adequacy Assessment Process as well as additional stress tests for a number of internal management pu rposes. The results of the stress tests and their consequential impact on NWM Group’s balance sheet, income statement and ca pital position are incorporated into NWM Group’ s and overall NatWest Group stress test results. Mitigation Following risk mitigation measures taken by the Trustee in recent years, the AA and the NatWest Markets sections of the NatWest Group Pension Fund are now well protected against interest rate and inflation risks and are being run on a low investment risk basis with relatively s mall equity risk exposure. The AA and the NatWest Markets se ctions of the NatWest Group Pension Fund also use derivatives to manage the allocation of the portfolio to different asset classes and to manage risk within asset classes. The potential impact of climate change is one of the factors considered in managing the asse ts of the pension schemes. The Trustee monitors the risk to its investments fro m changes in the global economy and invests, where return justifies t he risk, in sectors that reduce the world’s reliance on fossil f uels, or that may otherwise promote environmental benefits. Further details regarding the Trustee’s approac h to managing climate change risk can be found in its Responsible O wnership Policy and its net zero commitment. The Trustee has reported in line wi th the Task Force on Climate-related Financial Disclosures in its Annual Report and Accounts. Compliance & conduct risk Definition Compliance risk is the risk that the behaviour of NWM Group towards customers fails to comply with laws, regulations, rules, standards and codes of conduc t. Such a failure may lead to breaches of regulatory requirements, organisa tional standards or customer expectations and could result in legal o r regulatory sanctions, material financial loss or reputation al damage. Conduct risk is the risk that the c onduct of NWM Group and its subsidiaries and its staff towards cus tomers – or in the markets in which it operates – leads to u nfair or inappropriate customer outcomes and results in reputa tional damage, financial loss or both. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 84 Compliance & conduct risk continued Sources of risk Compliance and conduct risks exist ac ross all stages of NWM Group’s relationships with its customers and a rise from a variety of activities including product desig n, marketing and sales, complaint handling, staff training, an d handling of confidential inside information. As set out in Note 25 to the financial statements, members of NatWest Group are party to legal proceedings and are subject to inves tigation and other regulatory action in the UK, the US and other jurisdictions. Key developments in 2021  There was significant focus on a programme of work to enhance first and second line surveillance func tionality.  Risk appetite statements and measures were updated with an enhanced focus to provide better visibility of key risks across NWM Group.  Strategic oversight and advice was provided to N atWest Group’s LIBOR transition programme. Governance NWM Group defines appropriate standards of compliance and conduct and ensures adherence to those standards through its risk management framework. Re levant compliance and conduct matters are escalated through Executive Ris k Committee and Board Risk Committee. Risk appetite Risk appetite for compliance an d conduct risks is set at Board level. Risk appetite statements articulate the levels of risk t hat legal entities, businesses and fu nctions work within when pursuing their strategic objectives and business plans. A range of controls is operated to ensure t he business delivers good customer outcomes and is conducted in accordance with legal and regulatory requirements. A suite of policies addressing compliance and conduct risks set appropriate standards across NWM Group including policies relating to customers in vulnerable situations, cross-border ac tivities and market abuse. Continuous mon itoring and targeted assurance is carried out as appropriate. Monitoring and measurement Compliance and conduct risks are measured and managed through continuous assessment and repo rting to NWM Group’s senior risk committees and at B oard level. The compliance and conduct risk framework facilitates the consisten t monitoring and measurement of compliance with laws and regulations and the delivery of consistently goo d customer outcomes. The first line of defence is responsible for effec tive risk identification, reporting and monitoring, with oversight, ch allenge and review by the second line. Compliance and conduct risk management is also integrated into NWM Group’s s trategic planning cycle. Mitigation Activity to mitigate the most-material compliance and conduct risks is carried out across NWM Group with specif ic areas of focus in the customer-facing business es and legal entities. Examples of mitigation include consideration of customer needs in business and product planni ng, targeted training, complaints management, as well as independent monitoring activity. Internal policies help support a strong custo mer focus across NWM Group. Independent assessments of compliance with applicable regulations are also carried out at a leg al entity level. Financial crime risk Definition Financial crime risk is presented by cri minal activity in the form of money laundering, terrorist financing, b ribery and corruption, sanctions and tax evasion, as well as fr aud risk management. Sources of risk Financial crime risk may be prese nted if NWM Group’s customers, employees or third parties under take or facilitate financial crime, or if NWM Group’s products o r services are used to facilitate such crime. Fi nancial crime risk is an inherent risk across all lines of business. Key developments in 2021  There was a significant focus o n the financial crime control environment – including activity designed to strengthen customer due diligence standards and controls – across NatWest Group in 2021.  NWM Group is fully engaged with NatWest Group’s mul ti- year transformation plan. The plan has bee n developed to ensure that, as the financial crime th reat evolves with changes in technology, the economy and wi der society, risks relating to money-laundering, terrorist-financin g, tax evasion, bribery and corruption and financial s anctions are managed, mitigated and control led as effectively as possible. As part of this, NWM Group implemented the firs t two phases of a new external contextual transac tion monitoring system. A final phas e is scheduled for implementation.  NWM Group is represented on the new NatWest Group- wide Financial Crime Executive Steering Committee to provide oversight of the transformation plan and its implementation, and is part of NatWest G roup’s Transformation Committee, Financial Crime Pe rformance Committee and Customer Due Diligence E xecutive Steering Group. Governance The Financial Crime Risk Committee (FCRC), which is chaired by the Head of Compliance & Financial Crime, is N WM Group’s principal financial crime risk management foru m. The committee reviews and, where appropriate, escala tes material financial crime risks and issues across NW M Group to the NWM Executive Risk Committee and NWM Boa rd Risk Committee. Additionally, NWM Group is represe nted on NatWest Group’s Financial Crime Executive Steering Group, which ove rsees financial crime risk management, ope rational performance, and transformation matters across NatWest Group. Risk appetite There is no appetite to operate in an environmen t where systems and controls do not enable the identifica tion, assessment, monitoring, management and mitigation of financial crime risk. NWM Group’s systems and controls must be comprehensive and proporti onate to the nature, scale and complexity of its businesses. There is no tole rance to systematically or repeatedly breach relevant financial c rime regulations and laws. NWM Group operates a framework of preventa tive and detective controls designed to mitigate the risk that it could facilitate financial crime. These cont rols are supported by a suite of policies, procedures and guidance to ensu re they operate effectively. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 85 Financial crime risk continued Monitoring and measurement Financial crime risks are identifi ed and reported through continuous risk management and regular repo rting to NWM Group’s senior risk committees and the NatWest Group Board. Quantitative and qualitative data is reviewed and assessed to measure whether financial crime risk is within risk appetite. Mitigation Through the financial crime framework, releva nt policies, systems, processes and controls are used to miti gate and manage financial crime risk. This includes the use of dedicated screening and monitoring syste ms and controls to identify people, organisations, transactions and behaviours that may require further investigation or other actio ns. Centralised expertise within NatWest Group is available to detect and disrupt threats to NWM Group and its customers. Intelligence is shared with law enforcement, regulators and govern ment bodies to strengthen national and internation al defences against those who would misuse the financial sy stem for criminal motives. Climate risk Definition Climate risk is the threat of fina ncial loss or adverse non- financial impacts associated with clim ate change and the political, economic and environmental respo nses to it. Sources of risk Physical risks may arise from cl imate and weather-related events such as heatwaves, droughts, floo ds, storms and sea level rises. They can potentially result in fin ancial losses, impairing asset values and the creditworthiness of bo rrowers. NWM Group could be exposed to physical risks directly by the effects on its property portfolio and, indirec tly, by the impacts on the wider economy as well as on the proper ty and business interests of its customers. Transition risks may arise from the proce ss of adjustment towards a low-carbon economy. Changes in policy , technology and sentiment could prompt reasses sment of customers’ financial risk and may lead to falls in the v alue of a large range of assets. NWM Group could be exposed to transi tion risks directly through the costs of adaptation wi thin economic sectors and markets as well as supply chain disrup tion leading to financial impacts on it and its customers. Poten tial indirect effects include the erosion of NWM Group’s co mpetitiveness, profitability, or reputation damage. Key developments in 2021  NWM Group adopted the NatWes t Group’s principles-based climate risk policy, approved in A pril 2021.  A number of first-generation quantitative clim ate risk appetite measures were approved by Na tWest Group Board in December 2021. These will enable reporting of climate risk appetite and link business- as-usual risk management to NatWest Group’s strategic goals and prio rities.  NWM Group contributed to NatWest Group’s sub mission to the Bank of England’s Climate Biennial Explo ratory Scenario (CBES) exercise. This helped to strengthen cli mate scenario analysis capabilities with inc reased coverage across the balance sheet.  A new Climate Centre of Excellence was established to provide strategic horizon scanning, guidance and specialis t climate expertise across NatWest Group.  Qualitative assessment of climate risk was made m andatory for the majority of the wholesal e credit risk portfolio. This was supported by enhancements to Transaction Acceptance Standards (TAS) criteria, with the inclusion of sector-specific climate considerations fo r the heightened risk sectors and generic climate considerations fo r all other TAS documents. Risk governance The Board is responsible for monitoring and oversee ing climate-related risk within NWM Group’s ove rall business strategy and risk appetite. The poten tial impact, likelihood and preparedness of climate-related risk is reported regul arly to NatWest Group’s Board Risk Committee and NatWest Group Board. The Chief Risk Off icer shares accountability with the CEO under the Senior Managers & Certification Regi me for identifying and managing the financial risks a rising from climate change. This includes ensuring th at the financial risks from climate change are adequately reflected in risk management frameworks, and that the Group can iden tify, measure, monitor, manage, and report on its exposure to these risks. A Climate Change Executive Stee ring Group is in place at NatWest Group and is responsible f or overseeing the direction of and progress against climate-rela ted commitments, including activities in NWM Group. During 2021 , the Executive Steering Group focused on overseeing the Group Climate Ch ange Programme (GCCP), which wa s tasked with continuing to deliver both the Group-wide climate strategy and the climate- related mandatory change agenda before the activity transitions into business-as-usual operations. T he NatWest Group Climate Centre of Excellence s upports the Executive Steering Group as it supervises strategic implemen tation and delivery, including within NWM Group. Risk appetite NWM Group’s climate ambition is underpinned by activity to reduce the climate impact of its financing activity by a t least 50% by 2030 and to do what is neces sary to achieve alignment with the 2015 Paris Agreement. Work continued in 2021 to integrate climate- related risk into the risk management framework, includin g the development of appropriate risk appetite metrics. In Decembe r 2021, the NatWest Group Board approved the adoption of th ree first- generation climate risk appetite measures into the e nterprise- wide risk management framework, for integration i nto business-as-usual risk management. Risk monitoring and measuremen t NWM Group has focused on developing the capabili ties to use scenario analysis to identify the most material clim ate risks and opportunities for its customers, s eeking to harness insights to inform risk management practic es and maximise the opportunities arising from a transition to a low-carb on economy. Scenario analysis allows NWM Group to test a range of possible future climate pathways and understand the n ature and magnitude of the risks they prese nt. The purpose of scenario analysis is not to forecast the fu ture but to understand and prepare to manage risks that c ould arise. NWM Group participated in NatWes t Group’s submission to the Bank of England’s 2021 CB ES exercise. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 86 Climate risk continued NWM Group regularly considers existing and emerging regulatory requirements related to climate chan ge. It continues to participate in several industry-wide initiatives to develop consistent risk measurement methodologies including the Securities Industry & Financial Markets Associ ation and Asia Securities Industry & Financial Markets Associ ation Sustainable Finance working groups. Operational risk Definition Operational risk is the risk of los s resulting from inadequate or failed internal processes, people and systems, o r external events. It arises from day-to-da y operations and is relevant to every aspect of the business. Sources of risk Operational risk may arise from a failure to manage operations, systems, transactions, and assets appropriately. T his can take the form of human error, an inability to deliver cha nge adequately or on time, the non-availability of technology services, or the loss of customer data. Systems failu re, theft of NatWest Group property, information loss and the impact of natural, or man-made, disasters – as well as the threa t of cyber-attacks – are sources of operation al risk. Operational risk can also arise from a failure to account for ch anges in law or regulations or to take appropriate measures to protect assets. Key developments in 2021  Aligned to the implementation of the enterprise-wi de risk management framework, a new operational risk policy was approved in April 2021. T he new policy sets out the qualitative expectations, guidanc e and standards that stipulate the nature and extent of permissible risk-taking for operational risk.  There was also a continued focus on oper ational resilience to ensure planning, controls and operational activities remained robust and appropriate, with conti nuing attention on the potential operational risks arising fro m changes in working practices.  The security threat and the pote ntial for cyber-attacks on NWM Group and its supply chain continue d to be closely monitored. During 2021, NatWe st Group further invested in its defences in response to the evolving th reat. There was also continued focus on assuring the securi ty of the supply chain.  There was a sustained focus on reducing the risks associated with data use, particularly in terms of assuring data quality. This was aligned to the NatWest Group data strategy, designed to identify and implement en hancements to the effective use of data across NatWest Group. Governance The governance arrangements in place for oper ational risk are aligned to the requirements set out in the Board- approved enterprise-wide risk management fr amework and are consistent with achieving safety , soundness and sustainable risk outcomes. The Operating Committee discusse s operational risk matters relating to the control envi ronment, NWM’s implementation of the enterprise-wide risk man agement framework, risk identification and oversight of retu rn-to- appetite plans. Significant issues are escala ted to the Board Risk Committee. Risk appetite Operational risk appetite supports effec tive management of all operational risks. It expresses the level and types of operational risk NatWest Group is willing to accept to achieve its strategic objectives and business plans. N atWest Group’s operational risk appetite statement encompasses the full range of operational risks faced by its legal entities, businesse s and functions. Mitigation The Control Environment Certification (CEC) pr ocess is a half- yearly self-assessment by the CEOs of NatWes t Markets as well as the senior executives of NatWes t Group’s other principal businesses, functions and legal entities. I t provides a consistent and comparable view on the adequacy an d effectiveness of the internal control environment. CEC covers material risks and the underlying key con trols, including financial, operational and compliance con trols, as well as supporting risk management frameworks. The CEC outcomes are reported to Group Audit Co mmittee and Board Risk Committee. They are also shared with external auditors. The CEC process helps to ensure compliance with the NatWest Group Policy Framework, Sarbanes-O xley 404 requirements concerning internal control over financial reporting, an d certain requirements of the UK Corporate Govern ance Code. Risks are mitigated by applying ke y preventative and detective controls, an integral step in the risk assessment methodology which determines residual risk e xposure. Control owners are accountable for the design, exe cution, performance and maintenance of key controls. Ke y controls are regularly assessed for adequacy and tested for eff ectiveness. The results are monitored and, where a material change in performance is identified, the associated risk is re-evalu ated. Monitoring and measurement Risk and control assessments are use d across all business areas and support functions to identify and assess material operational and conduct risks and key controls. All risks and controls are mapped to NWM Group’s Ris k Directory. Risk assessments are refreshed at least annually t o ensure they remain relevant and capture a ny emerging risks and also ensure risks are reassessed. The process is designed to conf irm that risks are effectively managed in line with risk appet ite. Controls are tested at the appropriate frequency to verify that they remain fit-for-purpose and operate effectively to reduce identified risks. NWM Group uses the standardise d approach to calculate its Pillar 1 operational risk capital requirement. This is b ased on multiplying three years’ average historical g ross income by coefficients set by the regulator based on business line. As part of the wider Internal Capital Ade quacy Assessment Process an operational risk economic capital model is use d to assess Pillar 2A, which is a risk-sensitive add-on to Pillar 1. The model uses historical loss data (internal and external) and forward-looki ng scenario analysis to provide a risk-se nsitive view of NatWest Group’s Pillar 2A capital require ment. Scenario analysis is used to asse ss how severe but plausible operational risks will affect NWM Group. It p rovides a forward- looking basis for evaluating and managing o perational risk exposures. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 87 Operational risk continued Refer to the Capital, liquidity and fu nding risk section for operational risk capital requirement figures. Operational resilience NWM Group manages and monitors operational resilience through its risk and control asse ssment methodology. This is underpinned by setting and monitoring risk indic ators and performance metrics for key busi ness services. Progress continues on the response to regulator expectations o n operational resilience, with invol vement in a number of industry-wide operational resilie nce forums. This enables a more holistic view of the operati onal resilience risk profile and the pace of ongoing innovation and change, bot h internally and externally. Event and loss data management The operational risk event and l oss data management process ensures NatWest Group captures and records operational risk financial and non-financial events that meet defined c riteria. Loss data is used for regulatory and indust ry reporting and is included in capital modelling w hen calculating economic capital for operational risk. The most s erious events are escalated in a simple, standardised process to all senior management, by way of a Group Notifiable Event Proc ess. All financial impacts associated with an operational risk event are re ported in NatWest Group’s Annual Report and Accounts. Model risk Definition Model risk is the potential for adverse consequences a rising from inaccurate financial assessments o r decisions made as a result of incorrect or misused model ou tputs and reports. NWM Group defines a model as a quantitative me thod, system, or approach that applies statistical, economic, fin ancial, accounting, mathematical or data science theories, techniques and assumptions to process input data into quantitative estimates. Sources of risk NWM Group uses a variety of models in the course of its business activities. Examples include the use of model ou tputs to support measuring and assessing risk exposures (includin g credit and market risk), as well as for valuation of posi tions and for calculating regulatory capital and liquidi ty requirements. The models used for stress-testing purposes also pl ay a key role in ensuring NWM Group hol ds sufficient capital, even in stressed market scenarios. Key developments in 2021  A number of model improvements were made to ensure the model portfolio was operating within ap petite. Enhancement work remains a ke y focus.  There was further embedding and enhancemen t of frameworks and governance re lating to model risk. Governance A governance framework is in place to ensure policies and processes relating to models ar e appropriate and effective. Two roles are key to this – Model Risk O wners and Model Risk Officers. Model Risk Owners ar e responsible for model approval and ongoing performance monitoring. Model Ris k Officers, in the second line, are responsible f or oversight, including ensuring that models are independently valida ted prior to use and on an ongoing basis aligned to the model’s risk rati ng. Escalations are made to senior management through the NWM Group Model Risk Committee. T he committee also considers whether a model can be approved for use. Models used for regulatory reporting may additionally require regul atory approval before implementation. Further es calation can also be made to the NatWest Group Model Risk Oversight Committee. Risk appetite Model risk appetite is set in order to limit the level of model risk that NWM Group is willing to acce pt in the course of its business activities. NWM Group has defined limits and t riggers that align with the NatWest Group’s model risk ap petite statement. The first line is responsible for monitoring performance against appetite, reporting on the model population and carrying out any necessary remediation for positions outside appetite. Risk controls Policies and procedures related to the develop ment, validation, approval, implementation and use and ongoing monitoring of models are in place to ensure adequate co ntrol across the lifecycle of an individual model. Validation of m aterial models is conducted by an independent risk function comprised of skilled, well-informed subject matter experts. This is c ompleted for new models or amendments to existing models and as p art of an ongoing periodic programme to asse ss model performance. The frequency of periodic validation is aligned to the risk rating of the model. The independent valid ation focuses on a variety of model features, including mo delling approach, the nature of the assumptions used, the model’s predictive ability and complexity, the data used in the model, its implementation and its compliance with regulation. Monitoring and measurement The level of risk relating to an individual model is asse ssed through a model risk rating that is based on the model’s materiality and validation rating. This appro ach provides the basis for model risk appetite me asures and enables model risk to be robustly monitored and managed across NWM Group. Ongoing performance monitoring is conduc ted by the first line and overseen by the second line to ensure parameter estimates and model constructs remain fit for purpose , model assumptions remain valid and that models are bein g used consistently with their intended purpose. This allows ti mely action to be taken to remediate poor mo del performance and/or any control gaps or weaknesse s. Mitigation Model risk is inherent in the use of models. It is managed by refining or redeveloping models where app ropriate – either due to changes in market condition s, business assumptions or processes – and by applying adjustments to model outputs (either quantitative or based on expert opinion). Enhancements may also be made to the proces s within which the model output is used in order to furthe r limit risk levels. Risk and capital m anageme nt continued NWM Group Annu al Report an d Accounts 202 1 88 Reputational risk Definition Reputational risk is defined as the risk of da mage to stakeholder trust due to negative consequence s arising from internal actions or external events. Sources of risk Reputational risks originate fro m internal actions and external events. The three primary drivers of reputation al risk have been identified as: failure in inte rnal execution; a conflict between NWM Group’s values and the public agenda; and contagion (when NWM Group’s reputation is dama ged by failures in the wider financial sector). Key developments in 2021  Reputation risk registers were introduced at NatWest Group level in order to enhance monit oring of the most material reputational risks.  An updated reputational risk appetite state ment was introduced with a specific focus on public trust.  The correlation between reputational risk and cli mate change issues remained a significant area of f ocus during 2021. Enhancements were made to the Environment al, Social & Ethical risk management framework to mitigate reputational risk arising from exposure to carbon-intensive sectors and to support the trans ition to a lower carbon economy. Governance A reputational risk policy supports reputational risk management across NWM Group. The NWM Reputational Risk Committee reviews relevant issu es at an individual business or entity level, while the NatWest Group Reputati onal Risk Committee – which has delegate d authority from the NatWest Group Executive Risk Committee – opines on cases, issues, sectors and themes that represent a material repu tational risk. The NatWest Group Board Risk Committee ove rsees the identification and reporting of reputational risk. The Na tWest Group Sustainable Banking Committee has a specific focus on environmental, social and ethical issue s. Risk appetite NWM Group manages and articu lates its appetite for reputational risk through a qualitative repu tational risk appetite statement and quantitative measures. NWM Group seeks to identify, measure and manage risk exposures arising from internal actions and external events. This is designed to ensure that stakeholder trust is retained. Howeve r, reputational risk is inherent in NWM Group’s operating envi ronment and public trust is a specific factor in setting reputa tional risk appetite. Monitoring and measurement Relevant internal and external facto rs are monitored through regular reporting to NWM Group Reput ational Risk Committee and escalated, where appropriate, to Na tWest Group’s Reputational Risk Committee, Board Risk Commit tee or Sustainable Banking Committee . Mitigation Standards of conduct are in place across NatWest Group requiring strict adherence to p olicies, procedures and ways of working to ensure business is transacted in a way that meets – or exceeds – stakeholder expectations. External events that could caus e reputational damage are identified and mitigated through NatWest Group’s top and emerging risks process as well as through the N atWest Group and franchise-level risk registers . R ep ort of the dir ec t ors NWM Group Annu al Report an d Accounts 202 1 89 The directors present their report together with the au dited accounts for the year ended 31 December 2021 . Other information incorporated into this rep ort by reference can be found at: Page Financial review 36 Board of directors and secretar y 41 Segmental analysis 117 Share capital and reserves 162 Post balance sheet events 174 Risk factors 179 Group structure NatWest Markets Plc (‘NWM Plc’) is a wholly-owned su bsidiary of NatWest Group plc (‘NWG plc’ or ‘the holdi ng company’). The NatWest Markets Group (‘ NWM Group’) comprises NWM Plc and its subsidiary and associated undertakings. The term ‘NatWest Group’ comprises NWG plc and its su bsidiary and associated undertakings. NWG plc is incorporated in the UK and has its registered office at 36 St Andrew Square, Edinburgh, EH2 2YB. Details of NWM Plc’s principal subsidia ry undertakings and their activities are shown in Note 31 on the accounts. A full list of related undertakings of NWM Plc is shown in Note 34 on the accounts. The financial statements of NatWes t Group plc can be obtained from NatWest Group Legal, Go vernance and Regulatory Affairs, Gogarburn, Edinburgh, EH12 1 HQ, the Registrar of Companies or at natwestgroup.com. Activities NWM Group is engaged principally in providi ng financing, risk management and trading solutions to customers. Results and dividends The loss attributable to the ordinary shareholders of NW M Group for the year ended 31 Dec ember 2021 was £593 million compared with a loss of £328 million fo r the year ended 31 December 2020, as set out in the consolidated income statement on page 105. Total dividends paid to NatWest Group plc during the year amounted to £1 billion. On 17 February 2022, the Board approved an inte rim dividend of £250 million, declared and payable to Na tWest Group plc on 18 February 2022. Employees At 31 December 2021, NWM Group employe d 1,600 people (excluding temporary staff). Details of all rela ted costs are included in Note 3 to the consolidated accoun ts. Corporate Governance statement The Companies (Miscellaneous Re porting) Regulations 2018 introduced new statutory reporting require ments for financial years beginning on or after 1 January 201 9. As a result of these new requirements, the directors of the company are required to provide a statement in the Directors’ report stating which corporate governance code, if any, the co mpany followed during the year; how it applied the code and any pa rt of the code it did not follow. For the fi nancial year ended 31 December 2021, the company has chosen t o report against the Wates Corporate Governance Principles fo r Large Companies (the Wates Principles) and the disclos ures below explain how the company has applied the Wates P rinciples in the context of its corporate governance arrangements. 1. Purpose and leadership Purpose NatWest Group’s purpose is established by the NWG plc Board, promoted across NatWest Group and cascaded to su bsidiaries including NWM Group. Further i nformation on NatWest Group’s purpose can be found in the NatWest Grou p plc 2021 Annual Report and Accounts. Strategy NatWest Group’s strategy is set and approved by the NWG plc Board. The NWM Plc Board (the B oard) reviews and sets the strategic direction of NWM Plc and, as appropriate, the strategies for each of its businesse s within the parameters set by the NWG plc Board. It subsequently oversees the execution of the strategy and holds management to acc ount for its delivery. Culture The NWG plc Board is supporte d in monitoring culture across NatWest Group by the Group Su stainable Banking Committee and the Group Board Risk Committee. NatWes t Group is on a journey towards a generative ris k culture whereby risk is simply part of the way people work and think. Building a healthy culture that e mbodies Our Values is a core priority for NatWest Group. Our Values, which guide the way NatWes t Group identifies the right people to serve customers well, and how to manage, engage and reward colleagues, are at the heart of Our Code (the NatWest Group-wide Code of Conduct). There is regular reporting to the Board on culture, so as to provide appropriate oversight of cul ture matters. More specifically, with regards to risk culture, signific ant progress has been made towards addres sing historical conduct issues, including risk appetite enhancements, increased monitoring of conduct risk, and a new risk appetite me asure for Golden Rule breaches. This supports our ambition to create a positive culture and strengthen ‘good conduct’ outco mes for clients. 2. Board Composition The Board The Board has seven directors comprising; the Chai rman, two executive directors (being the C hief Executive Officer and Chief Financial Officer) and four independent non-executive directors. The size of the Board is considered app ropriate, taking into account the size and scale of NWM Plc’s business. The Chairman The role of Chairman is to lead the Boa rd and ensure its overall effectiveness. This is distinct and separate from that of the Chief Executive Officer who manages the business day-to-day. The Chairman is also a member of the NWG plc Bo ard which provides an appropriate linkage to the wider NatWest Group and ensures alignment and awareness in respec t of NatWest Group-wide matters. Non-Executive Directors The majority of the Board comprises independent no n- executive Directors. Their role is to challenge an d scrutinise the performance of management and to help develop proposals on strategy. They also review the performance of management in meeting agreed goals and objectives and mo nitor the firm’s risk profile. The non-executive directors combine broad business and commercial expertise and bring experience from a wealth of areas including audit, banking, finance, hu man resources, technology, and telecommunications. Report of the direct ors continued NWM Group Annu al Report an d Accounts 202 1 90 The Board periodically undertakes an independence assessment of the non-executive directors. With the exception of the Chairman, who is a member of the NWG plc Board, all non-executive directors are considered to be indepen dent and there are no relationships or circ umstances that are likely to affect their judgment. Induction Training All new directors undergo a formal inductio n programme upon joining the Board which is coordina ted by the Company Secretary and tailored to their individual needs. This includes meetings with other directors, senior executives and business heads. Meetings with the external auditor, leg al counsel and other key stakeholders are arranged as ap propriate. Directors also receive comprehensive gui dance from the Company Secretary on NWM Plc’s corporate govern ance framework and associated policies, including their duties as directors. Continuous Development. Non-executive directors discuss their professional development annually with the Chairman. Directors maintain their knowledge and familiarity with NWM Plc through regular meetings with senior management (including representatives of NatWest Group) and participate in scheduled Board training and other external sessions as appropriate. During 2021, climate and teach-in sessions on the in tegration of NatWest’s purpose-led strategy as well as on Capi tal Markets and Large Corporates was arranged for the directors. Directors may also request individual in-depth briefings from time to time on areas of particular interest. Board Diversity The Board is committed to promoting diversity a nd inclusion in the boardroom and aims to meet industry t argets and recommendations wherever possible. T he Board has agreed a Boardroom Inclusion Policy whic h aims to promote diversity and inclusion in the composition of the Board of Directors and in the nomination and appointment process. T he Policy reflects the values of the wider NatWest Group, its Inclusio n Policy and relevant legal, regulatory or best practice require ments. Committees The responsibilities of the Board are executed, in part, through its committees (namely, the Audit Co mmittee, the Board Risk Committee, the Performance and Remuneration Co mmittee and the Nominations and Governance Com mittee). All matters that the Board has specifically delegated to the se committees are set out in their terms of reference (ToRs). All othe r matters, including responsibility for the day-to-d ay operation of NWM Plc (that are not specifically reserved for the Boa rd or delegated to a committee) are delegated to the NWM Plc Chief Executive Officer (CEO) in accordance with such policies a nd directions as the Board determines appropria te, including the NWM Plc CEO’s role profile. Succession The Board is responsible for ensuring that NWM Plc h as in place succession plans for the Board and senior management so as to maintain an appropriate balance of skills and experience. The NatWest Group Nominations an d Governance Committee is also required to approve all appointments to the Board, reflecting the company’s position as a subsidiary of NatWest Group Board Effectiveness The effectiveness of the Board, including the Chairman, individual directors and Board committees, is asse ssed periodically. The Board considers such asse ssments to play an important role in the identification of areas for fu rther improvement, focus and for strengthening its overall performance. The Company Secretary In fulfilling its role, the Board is supported by the Company Secretary. The Company Secretary is responsible fo r ensuring good information flows between the Board and its com mittees and between senior management and no n-executive directors, as well as facilitating induction and assisting with professional development of non-executive directors, as require d. The directors may also seek independent, professional advice, where necessary, at NWM Plc’s e xpense. 3. Director Responsibilities Policy & Framework NatWest Group has in place a Corporate Gove rnance Framework, including a Corpor ate Governance Policy. All directors of NWM Plc are required to ensure that they are familiar with the Corporate Governance Fra mework and that NWM Plc complies with it. NWM Plc also p roduces and maintains a document called ‘Our Governance’ which sets out the high-level governance frame work for NWM plc at both regional and global levels. The Board has a programme of seven scheduled meetings every year. The Board’s ToRs i nclude a formal schedule of matters specifically reserved for the Bo ard which are reviewed at least annually. Each director has a role p rofile which clearly articulates their responsibilities and accountabilities . Similarly, any additional regulatory responsibilities an d accountabilities where any of the directors undertake a Senio r Manager Function (as defined under the Prudential Re gulation Authority’s and Financial Conduct Authority’s ‘Senior M anager Regimes’) are set out in their St atement of Responsibilities. To support them in the discharge of their duties, all directors receive regular and timely information on all key aspects of the business including financial performance, st rategy, key risks, and market conditions. Conflicts of Interest The Board follows NatWest Group’s guidance rela ting to directors’ conflicts of interest. The Board has the power to au thorise any actual or potential conflicts of interest in accordance with the Companies A ct 2006 and NWM Plc’s Articles of Association. The company maintains a register of directors’ interests and appointments and there is discussion of directors’ conflicts in B oard meetings, as required. During the year, none of the di rectors declared any material interest, directly or indirectly, in any con tract of significance with any company within Nat West Group. All directors were reminded of their obligations i n respect of transacting in NWM Plc securities (Personal Account Dealing) and all directors have confirmed that they have complied with their obligations. Report of the direct ors continued NWM Group Annu al Report an d Accounts 202 1 91 Board Committees In order to provide effective ov ersight and leadership, the Board has established a number of Board committees wit h particular responsibilities: The Audit Committee comprises at least two independen t non-executive directors, one of whom is the Ch airman of the Board Risk Committee. The Committee assists the Board in discharging its responsibilities for monitorin g the integrity of the financial statements. It reviews the accoun ting policies, financial reporting and regulatory compliance p ractices of NWM Plc, its system and standards of internal co ntrols, and monitors the processes for internal audi t and external audit. The Board Risk Committee comprises at least two independent non-executive dire ctors, one of whom is the Chairman of the Audit Committee . The Committee provides oversight and advice to the Board in rel ation to current and potential future risk exposures and futu re risk profile, including determination of risk appetite, the e ffectiveness of the risk management framework and (in conjuncti on with the Audit Committee) internal controls required to manage risk. The Committee also reviews compliance with Na tWest Group Policy Framework and reviews the performance of NWM Plc relative to risk appetite. The Performance and Remuneration Committee (RemCo) comprises at least four independent non-executive directors and assists the NatWest Group Performance and Remuneration Committee with the oversight and im plementation of NatWest Group’s remuneration policy. It also considers and makes recommendations on remuneration ar rangements for senior executives of NWM Plc. The Nominations and Governance Committee comprises the Chairman and at least two other independent non-executi ve directors. It is responsible for a ssisting the Board in the formal selection and appointment of directo rs. It reviews the structure, size and composition of the Board an d membership and chairmanship of Board committe es. 4. Opportunity and risk The role of the Board is to promote the long-term sustainable success of NWM Plc. The Board reviews and approves risk appetite for strategic and material risks in accordance with NatWest Group’s risk appetite framework; monitors performance against risk appetite for NWM Plc; and considers any material risks and approves (as appropriate) recommended actions es calated by the NWM Plc Board Risk Committee. NWM Plc’s risk strategy is informed and sha ped by an understanding of the risk landscape includin g a range of significant risks and uncertainties in the external economic, political and regulatory environments. NWM Plc complies with NatWest G roup’s risk appetite framework, which is approved annually by the NWG plc Boa rd, in line with NatWest Group’s risk appetite sta tements, frameworks and policies. NatWe st Group risk appetite is set in line with overall strategy. NatWest Group operates an integrated risk management framework, which is centred on the embedding of a st rong risk culture. The framework ensures the tools and capability are in place to facilitate sound risk management and decis ion-making across the organisation. NWM Plc also complies with the NatWest Group Policy Framework, the purpose of which is to ensure that NatWest Group establishes and maintains N atWest Group-wide policies that adequately address the material inherent risks it faces in its business activities. Further information on NWM Plc’s risk management f ramework including risk culture, risk governance, risk appetite, risk controls and limits, and risk identification and measurement can be found in the capital and risk management sec tion of this report. 5. Remuneration NatWest Group Remuneration Policy provides a consistent policy across all companies in NatWest Group and ensu res compliance with regulatory req uirements. The policy is aligned with the business strategy, obje ctives, values and long-term interests of the company. The policy s upports a culture where individuals are rewarded for delivering sustained performance in line with risk appetite and fo r demonstrating the right conduct and behaviours. The Performance and Remuneration Committee (RemCo) reviews remuneration for executives of the co mpany and considers reports on the wider workfo rce including annual pay outcomes and diversity information. The RemCo helps to ensure that the remuneration policie s, procedures and practices being applied are appropriate at NWM Plc level. Executive remuneration structures incentivise individu als to deliver sustainable performance based on strategic objectives for NatWest Group and the relevant business a rea. Performance is assessed against a balanced scoreca rd of financial and non-financial measures and va riable pay is subject to deferral as well as malus and cl awback provisions to ensure rewards are justified in the long-term. The approach to performance management provides clarity for employees on how their contribution links to Na tWest Group’s ambition and all employees have goals set ac ross a balanced scorecard of measures. NatWes t Group continues to ensure employees are paid fairly for the work they do and are supported by simple and transparen t pay structures in line with industry best practices. This clarity and certainty on how pay is delivered is also helping to improve employees’ f inancial wellbeing, which is a priority. Employee s are provided with flexibility in terms of how they wish to receive pay to suit their circumstances. Pay is benchmarked agains t the external market so that pay and benefits are competitive. NatWest Group is a fully accredited Livin g Wage Employer in the UK with rates of pay that c ontinue to exceed the Living Wage Foundation Benchmarks. NatWest Group ensures colleague s have a common awareness of the financial and economic f actors affecting its performance through quarterly ‘Results Expl ained’ communications and Workplace Live events with the Group Chief Executive Officer and Chief Financial Officer. Further information on the remuneration policy can be found in the Directors’ remuneration report (DRR) of the NatWest Group plc 2021 Annual Report and Accounts along wi th the steps being taken to build an inclusive and engaged workforce. The DRR also contains details of pay ratios for NatWest Group. Gender and Ethnicity Pay Gap information can be f ound in the Strategic report section of the NatWest Group plc 2021 Annual Report and Accounts. 6. Stakeholder relationships and engagement NWM Plc is committed to managing the wide r social, environmental and economic impacts of its o perations which includes the way it deals with its customers and manages the sustainability of its supply chain . Report of the direct ors continued NWM Group Annu al Report an d Accounts 202 1 92 The Board recognises the importance of engaging with stakeholders and discussions at B oard meetings are focused around the impact that NWM Plc’s activities may have on key stakeholder groups. A new Board reporting style has also been introduced with a specific section focussing on the stakeholder impacts to support decision-making. For further details on the Board’s e ngagement with employees, customers, suppliers and others, and how these stakeholders’ interests have influenced one of the Board’s p rincipal decisions, see page 18 of the Strategic report. Internal control over financial reporting The internal controls over financi al reporting for NWM Group are consistent with those at NatWest Group leve l. NWM Group has designed and assessed the e ffectiveness of its internal control over financial reporting as of 31 Dece mber 2021 based on the criteria set forth by the Committee of Sp onsoring Organizations of the Treadway Commission in t he 2013 publication of ‘Internal Control – Integrated Frame work’. As part of the assessment, management have conside red the additional activities required for its internal co ntrol over financial reporting during the ye ar, such as oversight on controls performed on NWM Group’s behalf, to better reflect the size, scale and overall mate riality of the business profile compared to the NatWest Group framework. Any def iciencies identified are reported to NWM Group Audit C ommittee along with management’s remediation plans Directors’ interests Where directors of NWM Plc ar e also directors of NWG plc, their interests in the shares of the ultimate holding co mpany at 31 December 2021 are shown in the Annu al report on remuneration section of the NatWest Group plc 202 1 Annual Report and Accounts. None of the directors held an interest in the lo an capital of the ultimate holding company or in the sha res or loan capital of NWM Plc or any of its subsidiaries , during the period from 1 January 2021 to 17 February 20 22. Directors' indemnities In terms of section 236 of the Companies Act 200 6 (the ‘Companies Act’), Qualifying Third Party Indemni ty Provisions have been issued by the ultimate holding com pany to its directors, members of NWM Plc’s Executive Commi ttee, individuals authorised by the P RA/FCA and certain directors and/or officers of NatWest Group’s subsidiaries and all t rustees of NatWest Group’s pension scheme. Going concern NWM Plc’s business activities a nd financial position, the factors likely to affect its future development an d performance and its objectives and policies in managing the financi al risks to which it is exposed, and its capital are discuss ed in the Financial review. NWM Plc’s regulatory capital resou rces and significant developments in 2021, and anticipated future develo pments are detailed in the Capital, liquidity and fundi ng sections. These sections also describe NWM Plc’s funding and liquidity p rofile, including changes in key metrics and the build-up of liquidi ty reserves. Having reviewed NWM Plc’s pri ncipal risks, forecasts, projections, the potential impac t of COVID-19 and other relevant evidence, the directors have a reasonable ex pectation that NWM Plc will continue in operational existence for a period of 12 months from the date of this report. Accordingly , the financial statements of NWM Plc have been prepa red on a going concern basis. Political donations During 2021, no political donations were m ade in the UK or EU, nor any political expenditure incurred in the U K or EU. Directors’ disclosure to auditors Each of the directors at the date of approval of this report confirms that: (a) so far as the director is aware, there is no relevant au dit information of which NWM Plc’s auditors are unaware; and (b) the director has taken all the steps that he/she ough t to have taken as a director to make himself/he rself aware of any relevant audit information and to establish tha t NWM Plc’s auditors are aware of that information. This confirmation is given and should be inte rpreted in accordance with the provisions of se ction 418 of the Companies Act. Auditors Ernst & Young LLP (EY LLP) are the auditors and have indicated their willingness to continue in office. A resolutio n to re-appoint EY LLP as NWM Plc’ s auditors will be proposed at the forthcoming NatWest Group Annual Gener al Meeting. By order of the Board Scott Gibson Company Secretary 17 February 2022 NatWest Markets Plc is registered in Scotland No. SC09 0312 St at eme nt of dir ect ors ’ responsib ilities NWM Group Annu al Report an d Accounts 202 1 93 This statement should be read in conjunction wi th the responsibilities of the auditor set ou t in their report on pages 95 to 104. The directors are responsible for the preparati on of the Annual Report and Accounts. T he directors are required to prepare Group financial statements, and as permitted by the Co mpanies Act 20 06 have elected to prepare company financial st atements, for each financial year in accordance with UK adopted Inte rnational Accounting Standards, Interna tional Financial Reporting Standard s (IFRS) as issued by the International Accounting St andards Board and IFRS as adopted Europe an Union. They are responsible f or preparing financial statements that prese nt fairly the financial position, financial performance and cash flows of NWM Group and NWM Plc. In preparing those financial sta tements, the directors are required to:  select suitable accounting policies and then apply them consistently;  make judgments and estimates that are reas onable, relevant and reliable; an d  state whether applicable accounting standa rds have been followed, subject to any material departures disclosed and explai ned in the financial statements.  prepare the financial statements on a going concern basis unless it is inappropriate to presume that the comp any and Group will continue in business The directors are responsible for keeping pro per accounting records which disclose with reasonable accuracy at any time t he financial position of NWM Group and to enable them to e nsure that the Annual Report and Ac counts complies with the Comp anies Act 2006. They are also responsible for safegua rding the assets of NWM Plc and NWM G roup and hence for taking reasonable steps for the prevention and de tection of fraud and other irregularities. Under applicable law and regulations, the directo rs are also responsible for preparing a Strat egic report and Report of the directors, that comply with that law and those regul ations. The directors are responsible for the maintenance and integrity of the corporate and financial information include d on the company’s website. The directors confirm that to the bes t of their knowledge:  the financial statements, prepared in accordance wi th UK adopted International Accounti ng Standards, International Financial Reporting Standards as issued by the International Accou nting Standards Board and I FRS as adopted European Union, give a true and fair view of the assets, liabilities, fin ancial position and profit or loss of N WM Plc and the undertakings included in the consolidation taken as a whole; and  the Strategic report and Report of the directors (incorporating the Financial review) include s a fair review of the development and performance of the business and the positio n of NWM Plc and the undert akings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Frank Dangeard Robert Begbie David King Chairman Chief Executive Officer Chief Financial Officer 17 February 2022 Board of directors Chairman Executive directors Non - executive directors Frank Dangeard Rober t Begbie David King Vivek Ahuja Tamsin Rowe Anne Simpson Sarah Wilkinson Financial statements NWM Group Annual Report and Accounts 2021 94 Page Independent auditor’s report 95 Consolidated income statement 105 Consolidated statement of comprehensive income 105 Balance sheet 106 Statement of changes in equity 107 Cash flow statement 108 Accounting policies 110 Notes to the accounts 1 Net interest income 115 2 Non-interest income 115 3 Operating expenses 116 4 Segmental analysis 117 5 Pensions 119 6 Auditor’s remuneration 123 7 Tax 123 8 Profit/loss dealt with in the accounts of NWM Plc 125 9 Financial instruments - classification 126 10 Financial instruments - valuation 135 11 Financial instruments - maturity analysis 146 12 Trading assets and liabilities 149 13 Derivatives 150 14 Loan impairment provisions 156 15 Other financial assets 158 16 Investment in group undertakings 159 17 Other assets 159 18 Other financial liabilities 159 19 Subordinated liabilities 160 20 Other liabilities 161 21 Share capital and reserves 162 22 Structured entities 163 23 Asset transfers 164 24 Capital resources 165 25 Memorandum items 166 26 Analysis of the net investment in business interests 171 27 Analysis of changes in financing during the year 172 28 Analysis of cash and cash equivalents 172 29 Directors’ and key management remuneration 173 30 Transactions with directors and key management 173 31 Related parties 174 32 Ultimate holding company 174 33 Post balance sheet events 174 34 Related undertakings 175 Independent auditor’s report to the members of NatWest Ma rkets Plc NWM Group Annu al Report an d Accounts 202 1 95 Opinion In our opinion:  The financial statements of NatWes t Markets Plc (the ‘Bank’) and its subsidiaries (toge ther, the ‘Group’) give a true and fair view of the state of the Group’s and of the Bank’s affairs as at 31 December 2021 and of the Group’s loss for the year then ended;  The Group financial statements have been properly prepared in accordance with UK adopted international accoun ting standards and International Financial Reporting St andards (‘IFRS’) as adopted by the Eu ropean Union and IFRS as issued by the International Accounting Standards Board (‘IA SB’);  The Bank’s financial statements have been prope rly prepared in accordance with UK a dopted international accounting standards as applied in accordance with sec tion 408 of the Companies Act 2006 ; and  The financial statements have bee n prepared in accordance with the requiremen ts of the Companies Act 2006 . W e hav e audited the financial statemen ts (see t able below) of the Group and the Bank for the year ended 31 D ecember 2 021 which comprise: Group Bank  Consolidated balance sheet as at 31 December 2021;  Consolidated income statement f or the year then ended;  Consolidated statement of comprehensive inco me for the year then ended;  Consolidated statement of changes i n equity for the year then ended;  Consolidated cash flow statement for the year then ende d;  Accounting Policies;  Related notes 1 to 34 to the financial s tatements; and  Risk and capital management se ction identified as ‘audited’.  Balance sheet as at 31 Decembe r 2021;  Statement of changes in equity for the yea r then ended;  Cash flow statement for the year then ended;  Accounting Policies; and  Related notes 1 to 34 to the financial s tatements. The financial reporting framework that has been applied in their preparation is a pplicable law and UK adopted Interna tional Accounting Standards, and as regard to the gr oup financial st atements , IFRS as adopted b y the European Union and IFRS as issued b y the IA S B, and as r egards the parent c ompany fi nancial statemen ts, as ap plied in acc ordance wi th section 408 o f the Companies Act 2006 . Basis for opinion We conducted our audit in accordance with Inter national Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those sta ndards are further described in the Auditor’s responsibili ties for the audit of the financial statements section of our report. We are in dependent of the Group and Bank in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, i ncluding the FRC’s Ethical Standard as a pplied to listed public interest entitie s, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and approp riate to provide a basis for our opinion. Conclusions relating to going concern In auditing the financial statements, we have c oncluded that the directors’ use of the going c oncern basis of accounting in the preparation of the financial stat ements is appropriate. Our evaluation of the directo rs’ assessment of the Group and Bank’s ability to continue to adopt the going concern basis of accounting included:  In conjunction with our walkthrough of the Group’s fina ncial close process, we confirmed ou r understanding of the director’s going concern assessment proce ss. We engaged with management early to ensure ke y factors were considered in the assessment;  We evaluated the directors’ going concer n assessment which included reviewing their evaluation of long-term business a nd strategic plans on the future capital adequ acy, liquidity and funding positions of the Grou p and Bank. Management also assessed these positions consid ering internal stress tests which included considera tion of top and emerging risks. The Group’s risk profile and risk management prac tices were considered including credit risk, m arket risk, climate risk, compliance and conduct risk, and operational risk;  We further evaluated their assessment by consi dering the Group and Bank’s ability to continu e as a going concern under different scenarios considering the continued econo mic impact of COVID-19. We use d economic specialists in assessing the macroeconomic assumptions in the forecas t through benchmarking to institutional forecasts, HMT consensus and peer comparative economic forecasts; and  We reviewed the Group’s going concern disclosu res included in the Annual Report and Accou nts in order to assess that the disclosures were appropriate and in confo rmity with the reporting standards. Independent a uditor’s report to t he member s of NatWest Market s Plc continue d NWM Group Annu al Report an d Accounts 202 1 96 Based on the work we have performed, we have no t identified any material unce rtainties relating to events or conditi ons that, individually or collectively, may cast significant doub t on the Group and Bank’s ability to continue as a going concern over the twelve months from the date when the financial state ments are authorised for issue. Our r esponsibilities and the responsibilities o f the direct ors with r espect to going concern ar e described in the r elev ant sections of this report. H o we ver , because not all future e v ents or c onditions can be pr edicted, this st atement is not a guarant ee as to the Group ’ s or Bank’ s ability to c ontinue as a going conce rn. An overview of the scope of NatWest Markets Plc and Group audits Tailoring the scope Our assessment of audit risk, our evaluation of m ateriality and our allocation of performance materiality determine our audit scope for each component within the Group. Taken to gether, this enables us to form an opinion on the consolidated financial state ments. We take into account size, risk profile, the org anisation of the Group and effe ctiveness of Group wide controls, changes in the business environment and other factors such as the results from internal audits when asse ssing the level of work to be perfo rmed at each component. In assessing the risk of material misstatemen t to the Group financial statements, and to ensure we had adequate quanti tative coverage of significant accounts in the financial st atements, we identified five components ba sed on size and risk which represe nt the principal reporting legal entities within the Group and the Group’s central functions. Of the five components listed b elow, we performed an audit of the complete financial info rmation of two components (“full s cop e components”) which were sele cted based on their size or risk characteristics. For two co mponents (“specific scope compone nt”), we performed audit procedures on spec ific accounts within those components that we considered had the poten tial for the greatest impact on the significant accounts in the fina ncial statements either because of the si ze of these accounts or their risk profile. We also instructed one location to perfo rm specified procedures over certain as pects of selected accounts. Component Sc ope K ey l ocations Nat W est Mark ets Plc Full Un ited Kingdom, United State s, Indi a and Poland Nat W est Mark ets N. V . Full Un ited Kingdom, India, P oland and the Nether lands Nat W est Mark ets Securities Inc. Specific United State s Nat W est Mark ets Securities Japan Limited Centr al Functions Specified procedur es Specific Japan United Kingdom Centr a l functions compri se EY f unctional component teams f ocused on the audit of specific balances across in sc o pe legal e ntity components. The table below illustrates the coverage obtained f rom the work performed by our audi t teams. We considered total assets, total equity and the total income to verify we had ap propriate overall coverage. Full scope Specific sc ope Specified procedur es Other procedur es T otal T otal assets 90% 9% <1% 1% 100% T otal equity 99% - - 1% 100% T otal income (absolute ) 78% 18% - 4% 100% Other procedur es: consider ed in analytical pr o cedur es. As a result of the continued impact of the COVI D-19 pandemic and resulting lockdown restri ctions for part of the year in countries where full or specific scope audit procedures h ave been performed, we modified ou r audit strategy to allow for the audit to be performed remotely at both the Group and co mponent locations. This approach was suppo rted through remote user access to the Group’s financial systems and t he use of EY software collaboration platforms for the secure and timely delivery of requeste d audit evidence. Involvement with component teams In establishing our overall approach to the Group au dit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by compo nent auditors from other EY glob al network firms operating under our instruction. The primary audit engagement team interacted regul arly with the component audit teams wh ere appropriate throughout the course of the audit, which included holding planni ng meetings, maintaining regular commu nications on the status of the audit, reviewing key working papers and taking respo nsibility for the scope and direction of the audit process. The primary audit te am continued to follow a programme of oversight visi ts that has been designed to ensure that the Senior Statutory Auditor, or another Group audit partner, visits all full scope and specific scope loc ation s. During the current ye ar’s audit cycle, due to continued COVID-19 restrictions, the visits undertaken by t he primary audit team were necessarily vi rtual visits. These visits involved video call meetings with local management and discussions o n the audit approach with the co mponent team and any issue s arising from their work. The primary team inter acted regularly with the component teams and mai ntained a continuous and open di alogue with component teams, as well as holding formal closing mee tings quarterly, to ensure that the primary tea m were fully aware of their progress and results of their procedures. The primary team also reviewed key working pape rs and were responsible for the scope and direction of the audit process. T his, together with the additional procedures at Group level , g ave us appropriate evidence for our opinion on the Group finan cial statements. Independent a uditor’s report to t he member s of NatWest Market s Plc continue d NWM Group Annu al Report an d Accounts 202 1 97 Climate change There has been increasing interest from st akeholders as to how climate change will i mpact companies. The Group has deter mined that the most significant future impacts from climate ch ange on its operations will be from cre dit risk, operational risk, reputational risk, conduct risk and regulatory compliance risk. These are explained in t he Climate Risk section in the Strategic Repor t and in the Climate Risk section within the Ris k and capital management sec tion, which form part of the “Other information”. O ur procedures on these disclosures consisted s olely of considering whether they are mate rially inconsistent with the financial statements o r our knowledge obtained in the course of the audit or othe rwise appear to be materially misstated. As explained in the Accounting Policy note, the G roup makes use of reasonable and suppo rtable information to make accou nting judgments and estimates, including the observable eff ect of the physical and transition risks o f climate change on the current creditworthiness of borrowers, asset values and market indicators, as well as their effe ct on the Group’s competitiveness and profitability. Many of the matters arising will be longe r term in nature, with an inherent level of uncertainty, and have limited eff ect on accounting judgments and estimates f or the current period under the requi rements of UK adopted international accounting standards, IFRS as adopted by the European Union and IFRS as issued by the IASB. In the Accounting Policy no te, explanation of the impact of certain transition and physical risks were provided for the key assumptions and significant judgements a nd estimates. Our audit effort in considering climate change was focused on ensuring that the eff ects of material climate risks as disclosed in the Accounting Policy note have been appropriately refle cted in the asset and liability valu ations and the nature and timing of future cash flows. Details of our proce dures and results on valuation of f inancial instruments with higher risk charac teristics and expected credit loss provisions are included in our key au dit matters below. We also challenged the dir ectors’ considerations of climat e change in their assessment of going concern and associated disclosures. Whilst NatWest Group Plc has stated its co mmitment to the aspirations of the Paris Agreeme nt to achieve net zero emissions by 2050, as stated above the impacts arising will be longer term in nature, and there is a n inherent level of uncertain ty in determining the full future economic impact on the Group’s business model, operational plans and custo mers. Key audit matters K ey audi t matters ar e th ose m atters that, in our prof essional judgment, w er e of most signific ance in our audit of the financial state ments of the curr ent p eriod and include the most signific ant a ssess ed risks o f mater ial misstate ment (whether or not due t o fraud ) that we iden tified. These matt ers included those which had the great est e ffect on the o ver all audit strat egy, the allocat ion of resour ces in the audit and dire cting the effor ts of the engagement tea m. These matters wer e add res sed in the co nte x t of our audit of the financial st a tements as a whole, and in our opi nion ther eon, and we d o not pro vid e a s eparate opinion on these matter s. Independent a uditor’s report to t he member s of NatWest Market s Plc continue d NWM Group Annu al Report an d Accounts 202 1 98 Risk Our response to the risk V a luation of financial ins truments with higher risk char acteris tics including r elated inc ome fr om tr ading activities At 31 December 2021 the company held financial instruments with higher risk characteristics, including (but not limited to) reported level 3 assets of £2.0 billion (2020: £1.7 billion) and level 3 liabilities of £ 0.6 billion (2020: £0.9 billion) whose value is dependent upon unobservable inputs, as reported in note 10 of the financial statements The valuation of those financial i nstruments with higher risk characteristics can include both significant judgement and the risk of inappropriate revenue recognition through incorrect pricing as outlined below. The fair value of these instruments can involve complex valuation models and significant fair value adjustments, both of whi ch may be reliant on inputs where there is limited market observability. Management’s estimates which required significant judgement include:  Complex models : Complex model- dependent valuations of financial instruments, which include interest rate swaps linked to pre-payment be haviour and interest rate and foreign exchange options with exotic features;  Illiquid inputs : Pricing inputs and calibrations for illiquid instruments, including debt securities and loans. Additionally, the valuation of derivative instruments is dependent on discount rates associated with complex collateral arrangements;  Fair value adjustments : The appropriateness and completene ss of fair value adjustments made to derivatives valuations including Funding Valuation Adjustments (FVA), Credit Valuation Adjustments (CVA), and material product and deal specific adjustments o n long dated derivative portfolios; and  The manipulation of revenue re cognition is most likely to arise through t he inappropriate valuation of these instruments given the level of judgment involved. Controls testing : We evaluated the design and oper ating effectiveness of controls relating to financial ins trument valuation and related income st atement measurement including independent price verific a tion, valuation models governance, collateral management, income st atement analysis, and the associated controls over relevant info rmation technology systems. We also observed the Valuation Commit tees where valuation inputs, assumptions and adjustments were discussed and approved. We involved our financial instru ment valuation and modelling specialists to assist us in performing procedures including the following :  Complex models : Testing complex model-dependen t valuations by performing independent revaluation to asse ss the appropriateness of models and the adequacy of assumptions and inputs used by the Group.  Illiquid inputs : Independently re-pricing instrume nts that had been valued using illiquid pricing inputs, using alte rnative pricing sources where available, to evaluate management’s valuation.  Fair value adjustments : Comparing fair v alue adjustment methodologies to current market practice and as sessing the appropriateness and adequ acy of the valuation adjustment framework in light of e merging market practice and changes in the risk profile of th e underlying portfolio; and revaluing a sample of counterparty level FVA and CVA, comparing fundi ng spreads to third party data and independently challenging illiquid CVA i nputs. Throughout our audit procedure s we considered the appropriateness of modelling changes in relation to IBOR transiti on and impact of climate change on the valuation of financial ins truments, particularly in relation to long-d ated illiquid positions. In addition, we asse ssed wheth er ther e we re an y indicators of aggreg ate bias in financial instrument marking a nd methodology assumptions. W e performed back-testing ana lysis o f r ecent tr ade activity and asset disposals to ev alua te the driver s of signific ant differ ences betw een bo ok value and tr ade value and to assess the impact on the fair v alue of similar instr um ents within the portfolio. W e performed an analy sis of significant collater al discr epancies with counter parties to assess the pote ntial impact on the fair value of the underlying (and similar) financial instrume nts. Key observations communicated to the Group Audit Committee We are satisfied that the assum ptions used by management to reflec t the fair value of financial instruments with higher risk characteristics and the recognition of related income is reasonable and in accordance with IF RS. We highlighted the following matters to the Group Audit Committee:  Complex-model dependent valuations were approp riate based on the output of our indepen dent revaluations, analysis of trade activity, assessment of the output of the independent price verification proces s, inspection of collateral disagreemen ts and peer benchmarking;  The fair value estimates of hard-to-price fin ancial instruments appropriately reflected p ricing information available at 31 December 2021; and  Valuation adjustments applied to derivative portfolios for credit, funding and other risks were recorded in accorda nce with the requirements of IFRS considering trade activi ty for positions with common risk charac teristics, analysis of market data and peer benchmarking. Relevant references in the A nnual Report and Accounts Report of the Group Audit Committee Accounting policies Note 10 on the financial stateme nts Independent a uditor’s report to t he member s of NatWest Market s Plc continue d NWM Group Annu al Report an d Accounts 202 1 99 Risk Our response to the risk Provisions for conduct, litigation and regulatory m atters A t 31 Dece mber 2021, the Group has report ed £0.26 billion (2020: £0.33 billion) of pro v isions for c onduct, litigation and other regulator y matters , as detailed in Note 20 of the financial state m ents. Re gulatory scrutin y a nd the co ntinued litigious envir onment give rise t o a high lev el of management judgement in d etermining appropriate pr ovisions and disc losures . Management judgement is nee d ed to determine whether a pr esent obligation e xisted, and a pr ovision s h ould be r ecor d ed as at 31 December 2 021 in acc ordance wi th the accoun ting criteria se t out under IA S 37. Management’s estimates which required significant judgement include:  Assumptions: The selection and use of assumptions in the estimation o f material pro visions. Ther e is a risk of management bias in the deter mination of whether an outflo w in respect of identified material conduc t or legal matters is pr obable and can be estimated r eliably; and  Disclosur e : The assessment of the adequacy of discl osur es of pr o vision for contingent liabilities giv en the underlying estimation unce rtainty in the pro v isions. Controls testing: W e evaluat ed the design and opera ting effect ive ness of k ey controls o ver the identificati on, estimation, monitor ing and disc losure of pro v isions considering t he potential for managemen t ov erride of controls . The controls t este d included those d esigned and operate d by mana gement to identify and monitor clai ms, and t o ensure the c ompletenes s and accur acy o f data used t o estimate pro v isions . Ex amination of r egula tory and legal corr espond ence : W e examined rele van t regulator y and legal corr espondence to assess dev elopments in certain matters . For m atters which w ere settled during the per iod, we compar ed the actual outflow s with the p ro vision that had been r ecor ded and c onsidered whether further risk e xisted. Inquiry of legal counse l : For le gal matters t hat we identified as having a hig her lik elihood of material misst atem ent, ‘significan t legal matters ’ , we rec eived confirmations fr om the Group ’ s e xternal legal coun sel to assist us in ev aluat ing the exis tence of an obligation and in asse ssing management ’ s estimate o f the outflow at y ear-end. W e also co n ducted inquiries with inte rnal legal counsel in respec t of the e xistence of an y legal obligations and r elated pr ovisions. W e performed proce dures t o identify unr ecorded pr ovisions t o deter mine if there we re an y cases not considered in the pro v ision by assessing ag ainst e xternal legal confirmations , discussing with internal counse l and analy sing legal costs. T esting of assumptions : For the pro visions related to signific a nt legal matters we underst oo d and asses sed the pr ovisioning methodology. W e teste d the underlying data and assump tions used in the dete rmination of the pr o visions rec o rded, legal c osts, and the timing of se ttlement. W e conside red the accu racy of management ’ s historic al estimates b y comparing the actual settlement to the pro v ision and consider ed p eer bank settlement in simil ar case s where appropriate. W e assesse d management ’ s conclusion by ev a luating the underlying information used i n estimating the pro v isions including the consider ation of alter nate sour ces. Disclosur e : W e evaluated t he disclosur es of contingent liabilities and provisio n s for litigation and other r egulatory pro visions to assess whether they c o mplied with accountin g standar ds . Key observations communicated to the Group Audit Committee W e are sa tisfied that the pro visions for conduct, litiga tion and other re gulatory matters ar e r easonable and rec ognised in accor da nce with IFRS. W e concur with the lev el of disclosur e in the financial state ments. W e did not identify any mater ial unrec orded pr o visions. Relevant references in the A nnual Report and Accounts Report of the Group Audit Committee Accounting policies Notes 20 and 25 to the financial statements Independent a uditor’s report to t he member s of NatWest Market s Plc continue d NWM Group Annu al Report an d Accounts 202 1 100 Risk Our response to the risk Expected Credit L osses (‘ECL ’) pr o visions under IFRS 9 A t 31 Dece mber 2021 the Group report ed total gross loans of £9.3 billion (2020: £10.3 billion) and £84 million of e xpected cr edit loss pro v isions under IFRS 9 (2020 : £194 million) as detailed in note 14 of the financial stat ements. Management ’ s judgements and estimates ar e especially subjectiv e due to significant unc ertainty ass o ciated with the assumptions used. Uncert ainty related with the path to rec overy fr om COVID-19 a nd the impact of climate change w a s consider ed in our risk assess ment. Aspects with increased complexity in respect of the timing and measurement of ECL include:  Staging : Allo cation of a ssets to stage 1, 2, or 3 using criter ia in accor da nce with IFRS 9;  Model estimations : Acc ounting interpr etations, m odelling assumptions and data used t o build and run the Probability o f Default (‘PD’), L oss Given De fault (‘LGD ’) and Exposure at Def a ult (‘EAD’) models that calculate t he ECL;  Economic sc enarios : Inputs, assumptions and weigh tings use d to estimate the impact of multiple economic sce narios particularly those impacted b y C O VID-19 including any c hange to sce narios requir ed t hroug h 31 Dec ember 2021; and  Individual pro visions : Measur ement of individually assessed pro visions including the assessment of multiple scenario s considering the impact of C OVID- 19 on e xit stra tegies and time t o collect. Controls testing : We evaluated the design and operating ef fectiveness of controls across the processes relevant to ECL, including the judgements and estimates note d, involving specialists to assist us in performing our procedu res where appropriate. These included, among others, controls over:  the allocation of assets into stage s including management’s monitoring of stage effectiveness;  model governance including m onitoring and model validation;  data accuracy and completeness;  credit monitoring;  multiple economic scenarios;  individual provisions; and  production of journal entries and disclosures. In evaluating the governance process , we observed the Group Provisions Com mittee and Metrics Oversight Committ ee meetings where the inputs, assumptions a nd adjustments to the ECL were di scussed and approved. Overall assessment : We performed an overall asses sment of the ECL provision levels by stage to determine if they were reason able by considering the overall credit quali ty of the Group’s portfolio, risk profile, credit risk m anagement practices and the impact of COVID-19 and climate change on customers. Staging : We evaluated the criteria used to allocate a financial asset to stage 1, 2 o r 3 in accordance with IFRS 9. We recalculated the assets i n stage 1, 2 and 3, and asses sed if they were allocated to the appropriate stage and pe rformed sensitivity analysis to assess the impact of different criteria on the ECL. To test credit monito ring, which drives the probability of default e stimates used in the staging calculation, we recalculated the risk ratings for a sample of perfo rming loans, focussing our testing on high risk industries. We also assess ed whether the credit reviews performed by management appropriately cons idered risk factors by considering independent publicly available information. Model estimations : We performe d a risk assessment on all models used in the calculation of ECL to select a sample of models t o test. We involved modelling specialists to assist us to test thi s sample of ECL models by testing the assumptions, inputs and formulae used. This included a combinati on of assessing the appropriatenes s of model design and formulae, alternative mo delling techniques, recalculating the P D, LGD and EAD, and model implementation. We also consi dered the results of the intern al model validation results. To evaluate data quality, we a greed a sample of ECL calculation data points to source s ystems, including balance shee t date data used to run the models and historic loss data to monitor models. We also tested the ECL d ata points from the calculation engine through to the general ledger and disclosures. Economic scenarios : We involve d EY economic specialists to assist us to evaluate the base case and alternative economic scenarios, includi ng evaluating probability weights and considered contrary evidence by comparing these to other sce narios from a variety of external sources. This assessment included the latest developments related to COVID-19 as at 31 December 20 21. We assessed whether forecasted macroecono mic variables were appropriate, such as G DP, unemployment rate and interest rates. With the support of our EY modelling s pecialists we assessed the correlation and the overall impact of the macroeconomic factors to the ECL. Individual provisions : We recalcu lated and challenged the scenarios, assump tions and cash flows for a sample of individual p rovisions including the alternative scena rios and evaluating probability weights assigned. T he sample was based on a num ber of factors, including higher risk sectors and materiality. Disclosure : We tested the data flows us ed to populate the disclosures and assess ed the adequacy of disclosures for compliance with the accounting standards and regula tory considerations. Key observations communicated to the Group Audit Committee We are satisfied that provisions for the impairment of loans we re reasonable and rec o gnised i n accor dance with IFRS 9. We highlighted the following matters to the Group Audit Co mmittee:  Our testing on the staging criteria did not iden tify material differences and overall, we conclu ded that the stage allocation at 31 December 2021 was reasonable;  Our testing of models and mod el assumptions did not highlight material diffe rences; and  Our testing of individually asses sed impairments did not highlight any materi al differences Relevant references in the A nnual Report and Accounts Report of the Group Audit Committee Credit Risk section of the Risk a nd capital management section Accounting policies Note 14 to the financial statements Independent a uditor’s report to t he member s of NatWest Market s Plc continue d NWM Group Annu al Report an d Accounts 202 1 101 Risk Our response to the risk IT systems and controls impacting financi al reporting The IT environment is complex and pervasive to the operations of the Group due to the large volume of transactions processed in numerous locations on a daily basis with extensive reliance on automated controls. This risk is also impacte d by the greater dependency on third-parties, increasing use of cloud platforms, decommissioning of legacy systems, and migration to new systems. Appropriate IT controls are required to ensure that applications process data as expected and that changes are made in an appropriate manner. Such controls contribute to mitigating the risk of potential fraud or errors as a result of changes to applic ations and data. Controls testing : We evaluated the design and oper ating effectiveness of IT general controls over the applications, operating sy stems and databases that are relevant to financial reporting. During our planning and test of design phases, we performed procedures to de termine whether changes in restrictions in different global locations as a result of the on going COVID-19 pandemic had caused material changes in IT processes or con trols. We tested user access by assess ing the controls in place for in-scope applications, in particular those pertaining to the a ddition and periodic recertification of users’ access. We tested ch ange management controls in relation to amendments to applic ations. We tested IT application and controls over data interfaces between applica tions. As part of our user access testing, we assesse d the core access management processes. We tested controls ove r approvals, user entitlement reviews, and managements approval process over role combina tions. For relevant external cloud and sys tem migrations completed in 2021 , we performed procedures to evalu ate the governance structure and key controls in place to manage the key risks associated with these mi grations. Where control deficiencies wer e identified, we tested remediation activities performed by management and compens ating controls in place and assessed what additional testing procedu res were necessary to mitigate any residu al risk. Key observations communicated to the Group Audit Committee We are satisfied that IT controls impacting financi al reporting are designed and ope rating effectively. The following matters were reported to the Group Audit Committee:  Where control issues were noted in relation to access management, these were re mediated by 31 December 2021 or mitigated by compensating con trols. We performed additional testing in response to deficiencies identified, where required. Independent a uditor’s report to t he member s of NatWest Market s Plc continue d NWM Group Annu al Report an d Accounts 202 1 102 Our application o f materiality W e apply the conc ept of materi ality in planning and performing the audit, in e v aluating the effe ct of identified misst a tements on the audit and in forming our audit opinion. Materiality The magnitude o f an omission or misst atement that , individually or in the aggr e gat e, could reas onably be e xpected t o influence the economic decisions o f the users of the financial st atement s. Mat er ialit y provid es a basis for d et ermining the nat ure and e xtent o f our audit proc edures . We determined materiality for the Group and the Bank to be £73 million (2020: £ 91 million), which is 1% (2020: 1%) of shareholder’s equity of the Bank. Per formance materiality The application o f mat er ialit y at the individual ac count or balanc e lev el. It is se t at an amount t o r educe t o an appr opriately lo w lev el the probabilit y that the aggregat e of uncorr ect e d and unde tect ed misst at ement s e xc eeds material it y. On the basis of our risk assessments, t ogether with our asses sment of the Gr oup ’ s ov er all control en vironment, our judgement w as that performance mater iality w as 50% (2020: 50%) of our planning materiality, n amely £36 million (2020 : £46 million). W e hav e set performance materiali ty at this per centage (which is at the lo west end of t he acce ptable r ange o f our audit methodology) based on various c on siderations i ncluding the past history of miss tatem ents, the ef fective ness of the c ontrol e nvir onment and other f actors affecting the entity and its fina ncial reporting. A udit work at co mponent locations for the purpose of obtaini ng audit co ver age ov er significant financial statement ac counts is undertak en based on a per centage of total perfor mance mate riality. The performanc e mater iality set for each c omponent is based on the relativ e scale and risk of the c omponent to the Grou p as a whole and our asse ssment of the ris k of misstate m ent at that component. In the curr ent year , the range o f performance mat eriality allo cate d to co mponents was betw een £15.5 million and £36 million (2020: £8 million and £46 million). Re porting threshold An amount below which id entified misst atement s are consider ed as being clearly trivial. W e agreed with the Group Audit C ommittee th at we w o uld report to the m all uncorr ected audit differenc es in e xcess o f £4 million (2020: £4 million), which is set at 5% of planning mater iality, as wel l as differe nces belo w t hat threshold that, in our view, w arranted reporting on qualita tive gr o unds. W e ev a luate an y uncorr ected misstate ments against both the quantitativ e measur es of materiality discusse d abov e and in light of other rele vant qualitative consider at ions in for ming our opinion. Other information The other information c omprises the infor mation included in the Ann ual Re port and A cc ounts (including the Str ategic R eport, Financial R evie w, Repor t of the dir ectors , State ment of dir ector s ’ res ponsibilities, Risk F actors and Forw ard-looking state m ents and Non-IFRS financi al measures ) other than the financial st atements and our audit or’ s report ther eon. The directors ar e re sponsible for the other information co ntained within the a nnual report. Our opinion on the financial st atements does not co ver the other infor mation and, e xc ept to t he e xtent otherwise e xplicitly stat ed in this report, w e do not e x press a ny form of assur ance c onclusion ther eon. Our responsibility is to read the other infor mation and, in doing so, consider whet her the other information is materially inconsistent with the financial statements or ou r knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent materi al misstatements, we are required to determine whether this gives rise to a material misstatement in the fin ancial statements themselves . If, based on the work we have performed, we conclude that there is a material misstatement of the other info rmation, we are required to report tha t fact. We have nothing to report in th is regard. Opinions on other matters pr escribed by the Companies A ct 2006 In our opinion, based on the w ork under tak en in the cours e of the audit:  the information give n in the Str a tegic r eport and the Re port of the dir ectors for the financial y ear for which the financial state ments are pr epa red is c o nsist ent with the financial st ateme nts; and  the Strategic r eport and the Report of the directors hav e been pr epared in accord ance with applicable legal requirements. Independent a uditor’s report to t he member s of NatWest Market s Plc continue d NWM Group Annu al Report an d Accounts 202 1 103 Matters o n which we are required t o re port by e xc epti on In the light of the kno w ledge and underst and ing of t he Group a nd the Bank and its en viron ment obtained in the c ourse o f t he audit, we hav e not identified material misst atements in the Strate gic r eport or the Re port of the direct ors. We have nothing to report in respect of the followi ng matters in relation to which the Compa nies Act 2006 requires us to report to you if, in our opinion:  adequate acc ounting re cor ds ha ve not been kept b y the Gr oup and the Bank, or r eturns adequate for our audit ha ve not been rec eived from br anches not visi ted b y us; or  the Group ’ s and Bank’ s financial state ment s ar e not in agr eement with the ac counting r ecor ds and returns; or  cert ain disclosures o f dire ctors ’ remuneration specifie d by la w a re not made; or  we hav e not rec eived all the information and explanations we require fo r our audit. Re sponsi bilities of dir ecto rs As explained more fully in the Statemen t of directors’ responsibilities, the directors a re responsible for the preparation of th e financial statements and for being satisfied that they give a true and fair view, and for such in ternal control as the directors determine is necessary to enable the preparation of f inancial statements that are free fro m material misstatement, whether due to fraud or error. In preparing the financial statements, the di rectors are responsible for assessing the Group and Bank’s a bility to continue as a going concern, disclosing, as applicable, matte rs related to going concern and using the goi ng concern basis of accounting unless the directors either intend to liquidate the Group or Bank or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the fi nancial statements Our objectiv es are t o obtain r easonable assur a nce about whether the financi al state m ents as a whole are fre e fro m material misstatemen t, whether due to f raud or er ror , and to issue an auditor’ s repor t that includes our opinion. R easonable assur ance is a high lev el of assur an ce bu t is not a guar antee that an audit co nducted in ac cor dance with IS As (UK) will alway s detect a mater ial misstatemen t when it e xists. Misstate ments can arise from fr a ud or err or and are co n sidere d material if , individually or in the aggr egate, the y could reaso n ably be e xpected to influenc e the economic decisions of users tak en on the basis of these financial state ments. Explanation as to what ext ent the audit was co nsidered capable of detec ting irregularities, including fr aud Irregularities , in cluding fr aud, ar e instances o f non-compliance with law s a nd r egulations . W e design procedur es in line with our responsibilities , outlined abov e, to detect irre gularities, inclu ding frau d. The risk o f not detecting a material misstatemen t due to fraud is hi gher than the risk o f not detecting one r esulting from err or, as fr aud may in volv e deliberate conce alment by, f or e xa mple, forger y or intentional misr epre sent ations, or thr ough collusio n. The e xtent to which our pr ocedur es are capable of dete cting irre gularities, including fr a ud is detailed belo w. Ho wev er, the primary r esponsibility for the pre vention and dete ction of fr aud re sts with both those cha rged with go vernance of the Group , the Bank and management.  W e obtained an underst an ding o f the legal and regul atory fr amew orks that are applicable t o the Grou p and determined th at the most signific ant are the r egulations, licenc e conditions and supervisory r equirements of the Prudential R egulation A uthority (PRA), the Financial Co nduct A uthority (FCA) and the C ompanies Act 20 06.  W e understood how the Group i s complying with thos e fr a mew orks by making inquiries of management, in ternal audit and those responsible f or legal and c ompliance matter s. W e also re viewe d corr espondence betw ee n the Group and r egulatory bodies; re view ed minutes of the B oard and Risk C ommittees ; and gained an unders tanding of the Group ’ s go ve rnance fra mew ork.  W e assessed the sus ceptibility o f the G roup ’ s financial statemen ts to materi al misstat ement, including ho w fr aud might occur b y considering the con trols est ablished to address r isks identified to pre vent or detect fr a ud. W e also identified the risk s of fraud in our k ey audit m atters as descr ibed abov e. Other areas of risk that w e identified included manual o verride o f controls , unauthorised tr ading and the appr opriateness o f sourc es used when performing confirmation testing on accounts such as cash, loans and securities .  Based on this unders tanding w e designed our audit procedure s to identify non-c ompliance with such la ws and re gulations. O ur procedur es in volved inquiries of legal counsel, e xecutiv e management and internal audit. W e also te sted c ontrols a nd performed proce dures t o respond to the fr aud risks as iden tified in our k ey au dit matters . Thes e procedur es wer e performed by both the primary t eam and component teams wi th ov ersight from the primary t eam.  The Group oper ates in the banking indus try which is a highly r egulated en v iron ment. As such, the Senior Statutory Auditor consider ed the e xperience and e xpertise of the engagement team to ensur e that the team had the appr opriate c om petence and capabilities, in volving specialists wher e appropriat e. Independent a uditor’s report to t he member s of NatWest Market s Plc continue d NWM Group Annu al Report an d Accounts 202 1 104 A further description of our responsibilities fo r the audit of the financial statements is loc ated on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. T his description forms part of our a uditor’s report. Other matters we are required to address  Follo wing the rec ommendation from the N atW est Holdings Audit Co mmittee w e were appointed by the Group at its annual general meeting on 4 M ay 2 016 to audit the financial state ments of the Gr oup and the Bank fo r the ye ar ended 31 Dec ember 2016 and subsequent financial periods. The period of t otal uninterr upted engagement includi ng previ ous re new a ls and reappointments is six ye ars, co ve ring periods from our appointment thr ough 31 Dece mber 2021.  The non-audit servic es pr ohibited b y the FRC ’ s Ethical Standar d were not pr ovided to the Gr oup or Bank and w e r emain independent of the Group and Bank in conducting the audit. Our responsibility is to obtain reasonable assurance for our opinion whether the presentation of the Annual Report and Accounts in this reporting package complies with the RTS on ESEF. Our procedures, taking into account Alert 43 of the NBA (the Netherlands Institute of Chartered Accountants), included amongst others - obtaining an understanding of the entity’s financial reporting process, including the preparation of the reporting package - obtaining the reporting package and performing validations to determine whether the reporting package containing the Inline XBRL instance and the XBRL extension taxonomy files has been presented in accordance with the technical specifications as included in the RTS on ESEF - examining the information related to the consolidated financial statements in the reporting package to determine whether all required mark-ups have been applied and whether these are in accordance with the RTS on ESEF. Use of our r ep ort This re port is made solely to the Gr o up ’ s and the Bank’ s members, as a body, in acc o rdanc e wit h Chapter 3 o f P art 16 of the Companies Act 2006. Our audit wor k has been undertak en so that we might state t o the Gr oup ’ s and the Bank’ s members those matters w e are requir ed to s tate t o them in an auditor’ s r eport and for no other purpose. T o the fullest exte nt permitted b y law , w e do not accept or assume res ponsibility to an yone other than the Group and the Bank and the Gr oup ’ s and the Bank’ s members as a body, for our audit work, for this r eport, or for the opinions we ha ve formed.  The audit opinion is consis tent with the additional report to the Group Audi t Commi ttee. European Single Electronic Reporting Format The Group has prepared the Annual Report and Accounts in the European single electronic reporting format (ESEF). The requirements for this format are set out in the Commission Delegated Regulation (EU) 2019/815 with regard to regulatory technical standards on the specification of a single electronic reporting format (hereinafter: the RTS on ESEF). In our opinion, the presentation of the Annual Report and Accounts, prepared in the XHTML format, including the partially marked-up consolidated financial statements, as included in the reporting package by the Group, complies in all material respects with the RTS on ESEF. Management is responsible for presenting the Annual Report and Accounts, including the financial statements, in accordance with RTS on ESEF, whereby management combines the various components into a single reporting package. Manprit Dos anjh (Senior Statut ory Auditor ) for and on behalf of Erns t & Y oung LLP, St at utory Auditor London, United Kingdom 02 March 2022 Consolidate d income st atement f or the year e nded 31 Decemb er 2021 NWM Group Annu al Report an d Accounts 202 1 105 2021 2020 Note £m £m Interest receivable 343 531 Interest payable (335) (591) Net interest income 1 8 (60) Fees and commissions receivable 262 386 Fees and commissions payable (104) (287) Income from trading activities 263 1,088 Other operating income (28) 31 Non-interest income 2 393 1,218 Total income 401 1,158 Staff costs (498) (670) Premises and equipment (110) (107) Other administrative expenses (522) (629) Depreciation and amortisation (20) (25) Operating expenses 3 (1,150) (1,431) Loss before impairment releases/(losses ) (749) (273) Impairment releases/(losses) 14 35 (42) Operating loss before tax (714) (315) Tax credit/(charge) 7 223 (12) Loss for the year (491) (327) Attributable to: Ordinary shareholders (593) (328) Paid-in equity holders 63 68 Non - controlling interests 39 (67) (491) (327) C onsolidat e d st at ement of c o mpr eh ensiv e income f or the year ended 31 December 20 21 2021 2020 £m £ m Loss for the year (491) (327) Items that do not qualify for rec lassification Remeasurement of retirement benefit schemes 36 (21) (Loss) on fair value of credit in f inancial liabilities designated as at fair value th rough profit or loss (FVTPL) due to own credit risk (29) (52) FVOCI financial assets 2 (210) Tax (10) 42 (1) (241) Items that do qualify for reclassif ication FVOCI financial assets (2) 2 Cash flow hedges (206) 92 Currency translation (124) 62 Tax 45 (28) (287) 128 Other comprehensive loss after tax (288) (113) Total comprehensive loss for the year (779) (440) Attributable to: Ordinary shareholders (885) (459) Paid - in equity holders 63 68 Non-controlling interests 43 (49) (779) (440) The accompanying notes on pages 11 5 to 177, the accounting policies on pages 11 0 to 114 and the audited sections of the Financial review and Risk and capital man agement on pages 37 to 88 form an in tegral part of these financial statemen ts. Balance shee t as at 31 Dec em ber 2021 NWM Group Annu al Report an d Accounts 202 1 106 NWM Group NWM Plc 2021 2020 2021 2020 Note £m £m £m £m Assets Cash and balances at central banks 9 16,645 15,771 12,294 11,736 Trading assets 12 59,101 68,689 41,222 52,169 Derivatives 13 105,550 165,619 103,042 164,104 Settlement balances 9 2,139 2,296 795 1,084 Loans to banks - amortised cost 9 962 1,003 712 701 Loans to customers - amortised cost 9 7,471 8,444 6,810 7,477 Amounts due from holding company and fe llow subsidiaries 9 1,479 1,587 6,723 7,606 Other financial assets 15 8,786 9,041 7,743 8,043 Investment in group undertakings 16 — — 2,481 2,600 Other assets 17 878 688 732 562 Total assets 203,011 273,138 182,554 256,082 Liabilities Bank deposits 9 1,808 1,808 1,808 1,762 Customer deposits 9 2,268 2,618 1,510 1,469 Amounts due to holding company and fellow subsi diaries 9 6,126 8,134 10,978 16,189 Settlement balances 9 2,068 2,248 1,028 604 Trading liabilities 12 64,482 72,252 47,119 56,916 Derivatives 13 98,497 157,332 95,096 153,754 Other financial liabilities 18 19,255 18,170 16,877 15,370 Other liabilities 20 1,055 1,234 789 866 Total liabilities 195,559 263,796 175,205 246,930 Owners’ equity 21 7,455 9,388 7,349 9,152 Non-controlling interests (3) (46) — — Total equity 7,452 9,342 7,349 9,152 Total liabilities and equity 203,011 273,138 182,554 256,082 Owners’ equity of NWM Plc as at 31 December 202 1 includes the loss for the year of £527 mi llion (2020 loss - £212 million). The accompanying notes on pages 11 5 to 177, the accounting policies on pages 11 0 to 114 and the audited sections of the Financial review and Risk and capital man agement on pages 37 to 88 form an in tegral part of these financial statemen ts. The accounts were approved by the Board of di rectors on 17 February 2022 and signed on it s behalf by: Frank Dangeard Robert Begbie Da vid King NatWest Markets Plc Chairman Chief Executive Officer Chief Fina ncial Office r Registration No. SC090312 St at eme nt of changes in equ it y f or the y e ar end ed 31 Dec em b er 2021 NWM Group Annu al Report an d Accounts 202 1 107 NWM Group NWM Plc 2021 2020 2021 2020 £m £m £m £m Called-up share capital - at 1 January and 31 December 400 400 400 400 Share premium - at 1 January 1,759 1,759 1,759 1,759 Redemption of preference shar es 187 — 187 — At 31 December 1,946 1,759 1,946 1,759 Paid-in equity - at 1 January and 31 December 904 904 904 904 FVOCI reserve - at 1 January 34 (134) 14 (149) Unrealised (losses)/gains (1) (221) 3 (221) Realised losses (1) 1 389 2 385 Tax (1) — (1) (1) At 31 December 33 34 18 14 Cash flow hedging reserve - at 1 January 201 137 201 137 Amount recognised in equity (207) 18 (208) 18 Amount transferred from equity to earnings 1 74 1 74 Tax 52 (28) 52 (28) At 31 December 47 201 46 201 Foreign exchange reserve - at 1 January 121 77 (192) (168) Retranslation of net assets (158) 98 (27) (29) Foreign currency gains/(losses) on hedges of net asse ts 20 (31) 1 — Tax (6) — — — Recycled to profit or loss on disposal of businesse s 10 (23) — 5 At 31 December (13) 121 (218) (192) Retained earnings - at 1 January 5,969 6,764 6,066 6,748 Loss attributable to ordinary shareholders and o ther equity holders (530) (260) (527) (212) Ordinary dividends paid (1,000) — (1,000) — Paid-in equity dividends paid (63) (68) (63) (68) Redemption of preference shar es (188) — (188) Realised losses on FVOCI equity shares (1) - gross — (376) (2) (373) - tax — 35 — 35 Remeasurement of retirement benefit schemes - gross 36 (21) 35 (21) - tax (13) (1) (13) (1) Changes in fair value of credit in fi nancial liabilities designated at FVTPL - gross (29) (52) (11) (30) - tax 3 8 3 8 Share based payments (2) (47) (42) (47) (42) Distribution — (40) — — Capital contribution — 22 — 22 At 31 December 4,138 5,969 4,253 6,066 Owners’ equity at 31 December 7,455 9,388 7,349 9,152 Non - controlling interests - at 1 January (46) 3 — — Currency translation adjustments and othe r movements 4 18 — — Profit/(loss) attributable to non-controlling i nterests 39 (67) — — At 31 December (3) (46) — — Total equity at 31 December 7,452 9,342 7,349 9,152 Attributable to: Ordinary shareholders 6,551 8,484 6,445 8,248 Paid-in equity holders 904 904 904 904 Non-controlling interests (3) (46) — — 7,452 9,342 7,349 9,152 (1) During 2020 NWM Plc sold its entire equity holding in Saudi British Ban k (SABB) leading to a realised loss of £337 million after tax which was recognised through other comprehensive income and reclassified to retained earnings. (2) Share-based payments includes a tax credit of £4 million. The accompanying notes on pages 11 5 to 177, the accounting policies on pages 11 0 to 114 and the audited sections of the Financial review and Risk and capital man agement on pages 37 to 88 form an in tegral part of these financial statemen ts. C ash flow s t at ement f o r the y e ar en ded 31 Dec em b er 2021 NWM Group Annu al Report an d Accounts 202 1 108 NWM Group NWM Plc 2021 2020 2021 2020 Note £m £m £m £m Cash flows from operating activities Operating loss before tax (714) (315) (702) (205) Adjustments for: Impairment (releases)/losses (35) 42 (36) 17 Amortisation of discounts and premiums of othe r financial assets 4 17 4 16 Depreciation and amortisation 20 25 9 11 Write - down of investments in subsidiaries — — 95 347 Change in fair value taken to profit or loss of ot her financial asse ts 80 (43) 80 (43) Change in fair value taken to profit or loss on o ther financial liabilities and subordinated liabilities (180) 132 (147) 80 Elimination of foreign exchange diff erences 738 (841) 529 (713) Other non-cash items (1) 99 5 69 Income receivable on other financial asse ts (130) (198) (146) (216) Loss on sale of other financial assets 2 13 — 12 Dividends receivable from subsi diaries — — (65) (529) Profit on sale of subsidiaries and associa tes — (64) — — Loss on sale of other assets and net assets/li abilities — 3 5 3 Interest payable on MRELs and subordina ted liabilities 204 329 166 307 Loss on sale of MRELs and subordinated liabilities 26 16 26 16 Charges and release on provisions (7) 106 43 33 Defined benefit pension schemes 4 10 4 5 Net cash flows from trading act ivities 11 (669) (130) (790) Decrease in trading assets 7,664 4,127 8,117 1,601 Decrease/(increase) in derivative assets 59,861 (16,905) 60,854 (16,628) Decrease in settlement balance asse ts 157 2,043 289 2,269 Increase in net loans to banks (122) (137) (122) (125) Decrease/(increase) in net loans to customers 1,003 (152) 688 (599) Decrease)/(increase) in amounts due from holding com pany and subsidiaries 351 (179) 1,366 (307) Decrease in other financial asse ts 41 212 37 203 (Increase)/decrease in other asse ts (10) 40 (14) 37 (Decrease)/increase in bank deposits — (281) 46 (276) (Decrease)/increase in customers deposits (350) (1,085) 41 (778) (Decrease)/increase in amounts due to holding co mpany and fellow subsidiaries (394) 40 (3,597) (464) (Decrease)/increase in settlement balance li abilities (180) (1,774) 424 (2,044) (Decrease)/increase in trading liabilities (7,771) (1,584) (9,797) 3,340 (Decrease)/increase in derivatives liabilities (58,835) 13,190 (58,658) 11,364 Increase/(decrease) in other financial li abilities 1,199 (297) 1,597 (2,057) Decrease in other liabilities (154) (506) (141) (323) Changes in operating assets and liabili ties 2,460 (3,248) 1,130 (4,787) Income taxes received/(paid) 28 (73) 55 (12) Net cash flows from operating activi ties (1) 2,499 (3,990) 1,055 (5,589) For notes to this table refer to the f ollowing page. Cash flow statement for the year ended 31 D ecember 2021 continued NWM Group Annu al Report an d Accounts 202 1 109 NWM Group NWM Plc 2021 2020 2021 2020 Note £m £m £m £m Cash flows from investing activities Sale and maturity of other financial assets 4,523 10,735 3,842 10,354 Purchase of other financial assets (4,617) (8,020) (3,822) (7,337) Income received on other financial assets 130 198 146 216 Net movement in business interests 26 4 358 4 269 Dividends received from subsidiaries — — 65 529 Sale of property, plant and equipment 1 2 (4) 2 Purchase of property, plant and equipmen t (1) (2) — (1) Net cash flows from investing activities 40 3,271 231 4,032 Cash flows from financing activities Movement in MRELs (1,234) (191) (1,234) (191) Movement in subordinated liabilities (378) (548) (339) (515) Dividends paid (1,063) (68) (1,063) (68) Capital contribution — 22 — 22 Net cash flows from financing activities (2,675) (785) (2,636) (752) Effects of exchange rate on cas h & cash equivalents (994) 841 (721) 636 Net decrease in cash and cash equivalents (1,130) (663) (2,071) (1,673) Cash and cash equivalents at 1 January 26,380 27,043 21,285 22,958 Cash and cash equivalents at 31 December 28 25,250 26,380 19,214 21,285 (1) NWM Group includes interest received of £419 million (2020 - £671 million) and interest paid of £330 million (2020 - £632 million), and NWM Plc includes interest received of £ 438 million (2020 - £693 million) and interest paid of £353 million (2020 - £635 million). The accompanying notes on pages 11 5 to 177, the accounting policies on pages 11 0 to 114 and the audited sections of the Financial review and Risk and capital man agement on pages 37 to 88 form an in tegral part of these financial statemen ts. Accounting policies NWM Group Annu al Report an d Accounts 202 1 110 1. Presentation of financial statements NatWest Markets Plc (NWM Plc) is incorporated in the U K and registered in Scotland. The financial statemen ts are presented in the functional currency, pounds sterlin g. NWM Plc consolidated financial statements inco rporate the results of NWM Plc and the enti ties it controls. Control arises when NWM Plc has the power t o direct the activities of an entity so as to affect the return from the entity. Cont rol is assessed by reference to our ability to enfo rce our will on the other entity, typically through voting rights. On acquisition of a subsidiary, its identifiable assets, lia bilities and contingent liabilities are included in the consolid ated financial statements at their fai r value. A subsidiary is included in the consolidated financial statements f rom the date it is controlled by NWM Group until the date NWM Group ceases to control it through a sale or a significant change in circumstances. Changes in NWM Group’s interest in a subsidiary that do not result in NWM Group ceasing to con trol that subsidiary are accounted for as equity t ransactions. The consolidated financial statements are p repared under consistent accounting policies. Transactions and balances betwee n Group companies are eliminated in the consolidated financial statemen ts to show only those transactions and balances e xternal to the NWM Group. The audited financial statements are set out on pages 10 5 to 177 and the audited sections of the Risk an d capital management on pages 42 to 88. T he directors have prepared the financial statements on a going conce rn basis after assessing the principal risks, forecasts, projecti ons and other relevant evidence over the twelve mon ths from the date the financial statements are approved (see the Repo rt of the directors, page 89) and in acco rdance with UK adopted International Accounting Standards (IAS), In ternational Financial Reporting Standards ( IFRS) as issued by the International Accounting Standards Board (IASB) and IFRS as adopted by the European Union. The significant accoun ting policies and related judgments are set out below. Except for certain financial instruments as described in Accounting policies 8 and 11, t he financial statements are presented on a historical cost basis. Accounting policy changes effective 1 January 202 1. The IASB amended IFRS 16 Leases with “COVI D-19 amendments on lease modifications – A mendments to IFRS 16 – Leases (IFRS 16)” The eff ect of the amendment on NWM Group’s financial statements is i mmaterial. 2. Revenue recognition Interest income and expense are recognised in the income statement using the effective interest rate method for: all financial instruments measured at amortised cost, debt instruments measured as fair value th rough other comprehensive income and the ef fective part of any related accounting hedging instrument s. Negative interest on financial assets is presented in interest payable and neg ative interest on financial liabilities is presented in interest receiva ble. Other interest relating to financial instruments measu red at fair value is recognised as part of the movement in f air value and is reported in income from trading activities or other ope rating income as relevant. Fees in respect of services are recognised as the right to consideration accrues through the performance of e ach distinct service obligation to the customer. The arrange ments are generally contractual and the cost of providing the s ervice is incurred as the service is rendered. The price is usually f ixed and always determinable. 3. Held for sale and Disposal group An asset or disposal group (assets and liabilities ) is classified as held for sale if NWM Group will recover its carryin g amount principally through a sale transaction rathe r than through continuing use. These are measured at the lower of its c arrying amount or fair value less cost to s ell unless scoped out of IFRS 5 in which case the existing measurement p rovisions of IFRS apply. 4. Staff costs Employee costs, such as salaries, paid absence s, and other benefits are recognised over the period in which the employees provide the related services to NWM Group. Employe es may receive variable compensation in cash, in defe rred cash or debt instruments of NWM Group or in ordinary sha res of NatWest Group plc. NWM Group operates a number of share-based compensation schemes (which NWM Group employees are eligible to) under which it grants awards of NatWest Group plc shares and share options to its employees. Such aw ards are subject to vesting conditions. Variable compensation that is se ttled in cash or debt instruments is charged to the income statemen t on a straight- line basis over the period during which services are provided, taking account of forfeiture an d clawback criteria. The value of employee services received in exchange fo r NatWest Group plc shares and share options is recognised as an expense o ver the vesting period , subject to deferral. clawback an d forfeiture criteria with a corresponding increase in equity. The fai r value of the instruments granted is based on ma rket prices at the grant date. Defined contribution pension scheme A scheme where NatWest Grou p pays fixed contributions and there is no legal or constructive obligation to pay furthe r contributions or benefits. Contributions are recognised in the income statement as employee service costs acc rue. Defined benefit pension scheme A scheme that defines the ben efit an employee will receive on retirement and is dependent on one or more f actors such as age, salary, and years of service . The net of the recognisable scheme assets and obligations is reported on the balance sheet in other assets or other liabilities. T he defined benefit obligation is measured on an actuarial bas is. The charge to the income statement for pension costs (m ainly the service cost and the net interest on the net defined benefit asset or liability) is recognised in operating expenses . Actuarial gains and losses (i.e. gains and/or losses on re- measuring the net defined ben efit asset or liability due to changes in actuarial measurement assumptions) a re recognised in other comprehensive income in full in the pe riod in which they arise, and not subject to re cycling to the income statement. The difference betwe en scheme assets and scheme liabilities, the net defined benefit asset or liability, is reco gnised on the balance sheet if the crite ria the asset celling test are met. This requires the net define d benefit surplus to be limited to the present value of any economic benefits av ailable to NWM Group in the form of refunds fr om the plan or reduced contributions to it. NWM Group will recognise a liability where a minimu m funding requirement exists for any of its def ined benefit pension schemes. This reflects agreed minimum funding and the availability of a net surplus as d etermined as described above. When estimating the liability for minimum fundi ng requirements NWM Group only include contributions that are subst antively or contractually agreed and do not include disc retionary features, including dividend-linked contri butions. Accounting polici es continued NWM Group Annu al Report an d Accounts 202 1 111 5. Foreign currencies Foreign exchange differences arising on the set tlement of foreign currency transactions and from the transla tion of monetary assets and liabilities are reported in income fr om trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign ope rations. Non-monetary items denominated in foreign currencies that are stated at fair value are translated into the fu nctional currency at the foreign exchange rates ruling at the d ates the values are determined. Translation differences are recog nised in the income statement except for differences arisi ng on non- monetary financial assets classif ied as fair value through other comprehensive income. Income and expenses of foreign subsidia ries and branches are translated into sterling at avera ge exchange rates unless these do not approximate the foreign e xchange rates ruling at the dates of the transactions. Foreign exchange differences a rising on the translation of a foreign operation are recognised in other comprehensive income. The amount accumulated in equity is reclassified from equity to the income st atement on disposal of a foreign operation. 6. Provisions and contingent liabilities NWM Group recognises a provis ion for a present obligation resulting from a past event when it is more likely than not that it will be required to pay to settle the obligation and the amount of the obligation can be estimated reliably. Provision is made for restructuri ng costs, including the costs of redundancy, when NWM Group has a co nstructive obligation. An obligation exists when NWM Group has a det ailed formal plan for the restructuring and h as raised a valid expectation in those affected either by starting to implemen t the plan or by announcing its main features. NWM Group recognises any one rous cost of the present obligation under a contract as a provision. An onerous cost is the unavoidable cost of meeting its contractu al obligations that exceed the expected economic benefits. When NW M Group intends to vacate a leasehold property o r right of use asset, the asset would be tested for impairment and a provisi on may be recognised for the ancillary contractual occupa ncy costs, such as rates. Contingent liabilities are possible obligations arising f rom past events, whose existence will be confirmed only by uncertain future events, or present obligations arising from pas t events that are not recognised because e ither an outflow of economic benefits is not probable, or the amount of the obligation cannot be reliably measured. Continge nt liabilities are not recognised but information about them is d isclosed unless the possibility of any outflow of economic benefits in settle ment is remote. 7. Tax Tax encompassing current tax and deferred tax is recognised the income statement except w hen taxable items are recognised in other comprehensive income or equity. T ax consequences arising from servicing financial inst ruments classified as equity are recogni sed in the income statement in line with IAS 12. Current tax is tax payable or re coverable in respect of the taxable profit or loss for the year arisin g in the income statement, other comprehensive income or equity. P rovision is made for current tax at rates enacted, or subs tantively enacted, at the balance sheet date. Deferred tax is the tax expected to be payable or recoverable in respect of temporary difference s between the carrying amount of an asset or liability for accountin g purposes and the carrying amount for tax purposes. Defe rred tax liabilities are generally recognised for all taxable temporary diff erences and deferred tax assets are recogni sed to the extent their recovery is probable. Deferred tax is not recognised on temporary differences that arise from initial recognition of an asset or a liability in a transaction (other than a busines s combination) that at the time of the transaction affects neither accounting nor taxa ble profit or loss. Deferred tax is calculat ed using tax rates expected to apply in the periods when the a ssets will be realised or the liabilities settled, based on tax rates and la ws enacted, or substantively enacted, at the b alance sheet date. Deferred tax assets and liabilities are offse t where NWM Group has a legally enforceable right t o offset and where they relate to income taxes levied by the same taxation au thority either on an individual NatWest Group company or o n NatWest Group companies in the same tax group that intend, in future periods, to settle current tax liabilities and assets on a net basis o r on a gross basis simultaneously. Accounting for taxes is judgmental and c arries a degree of uncertainty because tax law is subject to inter pretation, which might be questioned by the rele vant tax authority. NWM Group recognises the most likely curre nt and deferred tax liability or asset, assessed for uncertainty us ing consistent judgments and estimates. Current and deferre d tax assets are only recognised where their recovery is deemed probable, an d current and deferred tax liabilities are reco gnised at the amount that represents the best estimate of the probable outcome having regard to their acceptance by the tax authorities . 8. Financial instruments Financial instruments are meas ured at fair value on initial recognition on the balance sheet. Monetary financial assets are classifie d into one of the following subsequent measurement categories (subject to busi ness model assessment and review of contractual cash flow for the purposes of sole payments of p rincipal and interest where applicable):  amortised cost measured at cost using the effective interest rate method, less any impairment allow ance;  fair value through other comprehensive income (FVOCI ) measured at fair value, using the e ffective interest rate method and changes in fair valu e through other comprehensive income;  mandatory fair value through profit or loss (MFVTPL) measured at fair value and cha nges in fair value reported in the income statement; or  designated at fair value through profit or loss (DFV) measured at fair value and cha nges in fair value reported in the income statement. Classification by business model refle cts how NWM Group manages its financial assets to generate cash flows. A busi ness model assessment helps to asce rtain the measurement approach depending on whethe r cash flows result from holding financial assets to collect the contractual cash f lows, from selling those financial assets, or both. Accounting polici es continued NWM Group Annu al Report an d Accounts 202 1 112 Business model assessment of asse ts is made at portfolio level, being the level at which they are managed to achie ve a predefined business objective. T his is expected to result in the most consistent classification of assets because it aligns wi th the stated objectives for the portfolio, its risk management, manager’s remuneration and the ability to monit or sales of assets from a portfolio. The contractual terms of a financial asset; any leverage features; prepayment and exte nsion terms; and triggers that might reset the effective rate of interest; are considered in determining whether cash flows are solely payments of principal and interest. Certain financial assets may be designa ted at fair value through profit or loss (DFV) upon initial recognition if s uch designation eliminates, or significantly reduces , accounting mismatch . Equity shares are measured at fair value throug h profit or loss unless specifically ele cted as at fair value through other comprehensive income (FVOCI). Upon disposal, the cumulative gains or losses in fair value through other comprehensive income reserve are recycled to the income statement for monetary asse ts and non-monetary assets (equity shares) the cumulative gains o r losses are transferred directly to retained e arnings. Regular way purchases of financ ial assets classified as amortised cost are recognised on the set tlement date; all other regular way transactions in fin ancial assets are recognised on the trade date. Financial liabilities are classified into one of following measurement categories:  amortised cost measured at cost using the ef fective interest rate method;  held for trading measured at fair value and c hanges in fair value reported in income statement; or  designated at fair value through profit or loss measured at fair value and changes in fair value repo rted in the income statement except changes in fair value attributable to the credit risk component recognis ed in other comprehensive income when no accounting mismatch occurs. 9. Impairment: expected credit losses (ECL) At each balance sheet date eac h financial asset or portfolio of financial assets measured at amortised cost or at fair value through other comprehensive income, issued fi nancial guarantee and loan commitment (other than those cl assified as held for trading) is assessed for impair ment. Any change in impairment is reported in the income statemen t. Loss allowances are forward-looking , based on 12-month ECL where there has not been a significant increase in c redit risk rating, otherwise allowances are based on lifetime expected losses. ECL are a probability-weighted e stimate of credit losses. The probability is determined by the risk of def ault which is applied to the cash flow estimates. In the absence of a change in credit rating, allowances are recognised when there is a reduction in the net present value of expected cash flows. Following a significant increase in credit risk, ECL a re adjusted from 12 months to lifetime. This will lead to a higher impai rment charge. Judgment is exercised as follows:  Models – in certain low default portfolios, Base l parameter estimates are also applied for IFRS 9.  Non-modelled portfolios - use a standardised capital requirement under Basel II. Under IFRS 9, they have bespoke treatments for the identification of signific ant increase in credit risk. Benchmark PDs, EADs and LGDs are reviewed annually for appropri ateness. The ECL calculation is based on expected future cash flows, which is typically applied at a portfolio level.  Multiple economic scenarios (MES) – the centr al, or base, scenario is most critical to the ECL calcula tion, independent of the method used to generate a range of alternative outcomes and their probabilities .  Significant increase in credit risk - IFRS 9 requi res that at each reporting date, an entity s hall assess whether the credit risk on an account has increased significa ntly since initial recognition. Part of this asse ssment requires a comparison to be made between the current lifetime PD (i.e. the current probability of default over the remaining lifetime) with the equivalent lifetime PD as determined at the d ate of initial recognition. On restructuring where a financial asset is no t derecognised, the revised cash flows are used in re-estimating the credit loss. Where restructuring causes derecognition of the o riginal financial asset, the fair value of the replacement asset is used as the closing cash flow of the original asset. Where, in the course of the orde rly realisation of a loan, it is exchanged for equity shares or property, the exch ange is accounted for as the sale of the loan and the acquisition of equity securities or investment property. Where NWM Group ’s acquired interest is in equity shares, relevant polices for control, associates and joint ventures apply. Impaired financial assets are written off and the refore derecognised from the balance shee t when NWM Group concludes that there is no longer any realistic prospect of recovery of part, or all, of the loan. For fin ancial assets that are individually assessed for impairment, the timing of the write-off is determined on a case-by-cas e basis. Such financial assets are reviewed regularly and write -off will be prompted by bankruptcy, insolvency, re-neg otiation, and similar events. Business loans are generally written off wi thin five years. 10. Financial guarantee contracts Under a financial guarantee contract, NWM Group, in return for a fee, undertakes to meet a customer’s obligatio ns under the terms of a debt instrument if th e customer fails to do so. A financial guarantee is recognised as a liability; ini tially at fair value and, if not designated as at fair value through profit or loss, subsequently at the higher of its initi al value less cumulative amortisation and any provision under the contract measured in accordance with ECL Acc ounting policy. Amortisation is calculated to recognise fee s receivable in profit or loss over the period of the guarantee. 11. Derecognition A financial asset is derecognised (removed f rom the balance sheet) when the contractual right to receive cash flows f rom the asset has expired or when it has been transfer red and the transfer qualifies for derecognition. Conve rsely, an asset is not derecognised in a contract under which N WM Group retains substantially all the risks and rewards of owne rship. A financial liability is removed from the balance s heet when the obligation is paid, or is cancelled, or expires. Cance llation includes the issuance of a substitute inst rument on substantially different terms. Accounting polici es continued NWM Group Annu al Report an d Accounts 202 1 113 12. Netting Financial assets and financial li abilities are offset, and the net amount presented on the balance sheet when, and only when, NWM Group currently has a legally e nforceable right to set off the recognised amounts and it intends eithe r to settle on a net basis or to realise the asset and settle the liabili ty simultaneously. NWM Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financi al liabilities, but where it does not intend to settle the amounts net or simultaneously, the assets and liabilities conce rned are presented separately on the ba lance sheet. 13. Capital instruments NWM Group classifies a financial instrumen t that it issues as a liability if it is a contractual obligation to deliver c ash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable ter ms and as equity if it evidences a residual interest in the assets of NWM Group after the deduction of liabilities. Increment al costs and related tax that are directly attributable to an equity transaction are deducted from equity. The consideration for any ordin ary shares of NWM Plc purchased by NWM Group (known as treasu ry shares or own shares held) is deducted from equity. On the c ancellation of treasury shares their nominal v alue is removed from equity and any excess of consideration over nominal value is treated in accordance with the capital maintenance p rovisions of the Companies Act 2006. On the sale or re-issue of treasu ry shares the consideration received and related tax are cre dited to equity, net of any directly attributable incremental costs. 14. Derivatives and hedging Derivatives are reported on the balance she et at fair value. NWM Group uses derivatives as part of its trading activities or to manage its own risk such as i nterest rate, foreign exchange, or credit risk. Not all derivative s used to manage risk are in hedge accounting relationships (an IFRS method to reduce accounting mismatch from changes in the fai r value of derivatives reported in the income statement. Gains and losses arising from changes in the fai r value of derivatives that are not in hedge relationships are reco gnised in the income statement in Income f rom trading activities except for gains and losses on those d erivatives that are managed together with financial instruments designated a t fair value; these gains and losses are included in Othe r operating income. Hedge accounting NWM Group enters into three types of hedge accounting relationships (see later). Hedge accounting relationships are designated and documented at inception in line with t he requirements of IAS 39 Financi al instruments – Recognition and Measurement . The documentat ion identifies the hedged item, the hedging instrument and details of the risk that is being hedged and the way in which eff ectiveness will be assessed at inception and during the period of the hedge Fair value hedge - the gain or loss on the hedging i nstrument and the hedged item attributable to the hedged risk is recognised in the income statement. Where the hedged item is measured at amortised cost, the balance sheet amount of the hedged item is also adjusted. Cash flow hedge - the effective portion of the design ated hedge relationship is recognised in other comprehensive inco me and the ineffective portion in the in come statement. When the hedged item (forecasted cash flows) results in the recognition of a financial asset or financial liability, the cumul ative gain or loss is reclassified from equity to the income s tatement in the same periods in which the hedged forecas ted cash flows affect the income statement. Hedge of net investment in a foreign operation - In the hedge of a net investment in a foreign operation, the effective portion of the designated hedge relationship is recognise d in other comprehensive income. Any ine ffective portion is recognised in profit or loss. Non-derivative financial li abilities as well as derivatives may be designated as a hedging instrument in a net investment hedge. Discontinuation of hedge accounting - Hedge accounting is discontinued if the hedge no longer mee ts the criteria for hedge accounting i.e. the hedge is not highly effective in offsetting changes in fair value or cash flows attribut able to the hedged risk, consistent with the documented risk manage ment strategy; the hedging instrument expires or is sol d, terminated or exercised; or if hedge designation is revoked. For fair value hedging any cumulative adjust ment is amortised to the income statement over t he life of the hedged item. Where the hedge item is no longer on the balance sheet the adjustment to the hedged item is reported in the income statement. For cash flow hedging the cum ulative unrealised gain or loss is reclassified from equity to the income statemen t when the hedged cash flows occur or, if the forecast transac tion results in the recognition of a financial asset or financial liability, when the hedged forecast cash flows affec t the income statement. Where a forecast transaction is no longer expected to occu r, the cumulative unrealised gain or loss is reclassified fro m equity to the income statement immediately. For net investment hedging on disposal or partial disposal of a foreign operation, the amount accumulated in equi ty is reclassified from equity to the income statemen t. 15. Investment in Group undertakings NWM Plc’s investments in its Group undertakings (subsidi aries) are stated at cost less any impairment. Critical accounting policies and key sources of estimation uncertainty The reported results of NWM Group are sensitive to the accounting policies, assumptions and esti mates that underlie the preparation of its financial s tatements. The accounting standards used in the preparati on of the financial statements (see presentation of financial statemen ts above) require the directors, in preparing NWM Gr oup's financial statements, to select suitable accounting policies , apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of accounting guid ance, standards used in the preparation of the fi nancial statements require the directors to develop and apply an accounting policy that results in relevant and reliable i nformation in the light of the requirements and guidance in IFRS de aling with similar and related issues and the IASB's ’Conceptual F ramework for Financial Reporting’. Accounting polici es continued NWM Group Annu al Report an d Accounts 202 1 114 The judgments and assumptions involved in NWM Group's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are noted below. The use of estimates, assumptions o r models that differ from those adopted by NWM Group would affect its reported results. Estimation unce rtainty continues to be affected by the COVID-19 pandemic. The COVID-19 pandemic continued to cause significant economic and soci al disruption during 2021. Key financial estimates are b ased on management's latest five-year revenue an d cost forecasts. Measurement of deferred tax a nd expected credit losses are highly sensitive to reasonably pos sible changes in those anticipated conditions. Other reasonably possible assum ptions about the future include a prolonged fina ncial effect of the COVID-19 pandemic on the economy of the UK and o ther countries or greater economic e ffect as countries and companies implement plans to counter cli mate risks. How Climate risk affects our accounting judgments and estimates NWM Group makes use of reasonable and suppor table information to make accounting judg ments and estimates. This includes information about the observable ef fects of the physical and transition risks of c limate change on the current creditworthiness of borrowers, asset values and market indicators. It also includes the eff ect on NWM Group’s competitiveness and profitability. Many of the effe cts arising from climate change will be longer term in nature, with an inherent level of uncertainty, and have limited effe ct on accounting judgments and estimates for the current period. Some physical and transition risk s can manifest in the shorter term. The following items represe nt the most significant effects:  The classification of financial instruments linked to clim ate, or other sustainability indicators: consideration is given t o whether the effect of climate related terms preven t the instrument cashflows being sole ly payments of principal and interest.  The measurement of expected credit loss considers the ability of borrowers to make pay ments as they fall due. Future cashflows are discounte d, so long dated cashflows are less likely to affect current expectations on credi t loss. NWM Group’s assessment of se ctor specific risks, and whether additional adjustments are required, inclu de expectations on the ability of those sectors to meet their financing needs in the market. Changes in c redit stewardship and credit risk appetite that s tem from climate considerations, such as oil and gas, will directly affect our positions .  The assessment of asset impairment and deferred tax are based upon value in use. This represents the value of f uture cashflows and uses the NWM Group’s five-yea r forecast and the expectation of long term economic growth beyond this period. The five-year forecast takes account of management’s current expectations on co mpetitiveness and profitability, including near term effects on cli mate transition risk. The long term growth rate refle cts external indicators which will include market expectations o n climate risk. NWM Group did not consider any additional adjustments to this indicator.  The use of market indicators as i nputs to fair value is assumed to include current information an d knowledge regarding the effect of climate risk. Changes in judgments and assumptions could result in a material adjustment to those es timates in the next reporting periods. Consideration of this source of e stimation uncertainty has been set out in the notes below (as applic able). Critical accounting policy Note Deferred tax 7 Fair value - financial instruments 10 Loan impairment provisions 14 Provisions for liabilities and charges 20 Future accounting developments International Financial Reporting Standards Effective 1 January 2022  Onerous Contracts – Cost of Fulf illing a Contract (Amendments to IAS 37);  Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16);  Reference to Conceptual Framework (A mendments to IFRS 3); and  Fees in the “10 per cent” test for Derecognition of Financial Liabilities (Amendments to IFRS 9 ). Other new standards and amendments that are effective for annual periods beginning after 1 January 20 23, with earlier application permitted, are set out below. Effective 1 January 2023  IFRS 17 Insurance Contracts (Amend ments to IFRS 17 Insurance Contracts);  Classification of Liabilities as Current or Non-cu rrent (Amendments to IAS 1);  Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendmen ts to IAS 12);  Definition of Accounting Estimates (Amendments to IAS 8) and  Disclosure of Accounting Policie s (Amendments to IAS 1 and IFRS Practice Statement 2). NWM Group is assessing the effect of adopting these s tandards and amendments on its financial statemen ts but does not expect the effect to be material. N ot es t o the f inancial st a t ements NWM Group Annu al Report an d Accounts 202 1 115 1 Net interest income 2021 2020 £m £ m Loans to banks - amortised cost 39 86 Loans to customers - amortised cost 207 277 Amounts due from holding company and fe llow subsidiaries 14 — Other financial assets 83 168 Interest receivable 343 531 Balances with banks 64 81 Customer deposits 7 34 Amounts due to holding company and fellow subsi diaries 169 282 Other financial liabilities 95 194 Interest payable 335 591 Net interest income 8 (60) Interest income on financial instruments measured at amortised cost and debt instruments cl assified as FVOCI is measured u sing the effective interest rate which allocates the in terest income or interest expense over the expected life of the asset or liabili ty at the rate that exactly discounts all estimated future cash flo ws to equal the instru ment's initial carrying amount. Calculati on of the effective interest rate takes into account fees payable or receivable that are an integral part of the instrument's yield, p remiums or discounts on acquisition or issue, early redemption fe es and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows. For accounting policy information se e Accounting policies note 2. 2 Non-interest income 2021 2020 £m £m Net fees and commissions 158 99 Income from trading activities Foreign exchange 191 425 Interest rate (17) 648 Credit 83 3 Changes in fair value of own de bt attributable to own credit risk - debt securities in issue and d erivative liabilities 6 (24) Equities and other — 36 263 1,088 Other operating income Loss on redemption of own debt (26) (16) Operating lease and other rental income 2 2 Changes in fair value of financial assets and liabilities des ignated at fair value through profit or loss (1) (8) (54) Hedge ineffectiveness (10) (5) Profit/(loss) on disposal of amortised cost assets 10 (2) Loss on disposal of fair value th rough other comprehensive inc ome assets (1) (13) Dividend income 4 29 Profit/(loss) on disposal of subsidiaries and associates — 64 Other income (2) 1 26 (28) 31 Total 393 1,218 (1) Including related derivatives. (2) Includes income from activities other than banking. For accounting policy information se e Accounting policies note 2. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 116 3 Operating expenses 2021 2020 £m £m Wages, salaries and other staff c osts 358 476 Temporary and contract costs 12 17 Social security costs 36 54 Bonus awards 72 93 Pension costs 20 30 - defined benefit schemes (see Note 5) 4 10 - defined contribution schemes 16 20 Staff costs 498 670 Premises and equipment 110 107 Depreciation and amortisation 20 25 Other administrative expenses (1,2) 522 629 Administrative expenses 652 761 1,150 1,431 (1) Includes recharges from other NatWest Group ent ities, mainly NWB Plc which provides the majority of shared services (including technology) and operational processes. (2) Includes litigation and other regulatory costs. Further details are p rovided in Note 20. For accounting policy information se e Accounting policies note 4. The average number of persons e mployed, rounded to the nearest hundred, in continuing ope rations during the year, excluding temporary staff, was 1,900 (202 0 – 3,600). The number of persons employed by NWM G roup in continuing operations at 31 December 2021, excluding temporary staff, was as follows: 2021 2020 UK 1,000 1,100 USA 300 300 India — 100 Poland — 300 Rest of the World 300 300 Total (1) 1,600 2,100 (1) During the year, as part of the transformation programme, the front office and support functions ope rating models were reorganised to focus on NatWest Group’s customers and some roles have been transferred from NWM Group t o NatWest Holdings Limited. Bonus awards The following tables analyse NWM Group's bonus awards. 2021 2020 Change £m £ m % Non-deferred cash awards (1) 3 4 (25) Deferred cash awards 52 39 33 Deferred share awards 22 47 (53) Total deferred bonus awards 74 86 (14) Total bonus awards (2) 77 90 (14) 2021 2020 Reconciliation of bonus awards to income statement charge £m £ m Bonuses awarded 77 90 Less: deferral of charge for amounts a warded for current year (30) (38) Income statement charge for amoun ts awarded in current year 47 52 Add: current year charge for amounts deferred f rom prior years 36 45 Less: forfeiture of amounts deferred from prior years (11) (4) Income statement charge for amoun ts deferred from prior years 25 41 Income statement charge for bonus aw ards (2) 72 93 (1) Non-deferred cash awards are limited to £2,000 for a ll employees. (2) Excludes other performance related compensat ion. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 117 4 Segmental analysis Reportable operating segments The reportable operating segments are as follows: NatWest Markets offers its customers global market access, providing them with trading, risk management and financing solutions through its trading hubs in London, Ams terdam, Singapore and Stamford and sales off ices across key locations in the UK, EU, US and Asia. Central items & other includes corporate functions and other activity not managed in the Nat West Markets segment. In 2021 and 2020, this substantially comprised of litig ation and conduct costs. NatWest Central items Markets & other Total 2021 £m £m £m Interest receivable 343 — 343 Interest payable (335) — (335) Net fees and commissions 158 — 158 Other non-interest income 243 ( 8) 235 Total income 409 ( 8) 401 Depreciation and amortisation (20) — (20) Other operating expenses (1,137) 7 (1,130) Impairment release 35 — 35 Operating loss (713) ( 1) (714) 2020 Interest receivable 529 2 531 Interest payable (591) — (591) Net fees and commissions 99 — 99 Other non - interest income 1,081 38 1,119 Total income 1,118 40 1,158 Depreciation and amortisation (25) — ( 25) Other operating expenses (1,292) (114) (1,406) Impairment losses (40) (2) ( 42) Operating loss (239) ( 76) (315) Total revenue (1 ) 2021 2020 Central Central NatWest items NatWest items Markets & other Total Markets & other Total £m £m £m £m £m £m Total 848 (8) 840 1,995 41 2,036 (1) Total revenue comprises interest receivable, fees and commissions receivable, income from trad ing activities and other operating income. 31 December 31 December 2021 2020 Analysis of net fees and commissions £m £m Fees and commissions receivable - Lending and financing 74 86 - Brokerage 41 93 - Underwriting fees 127 183 - Other 20 24 Total 262 386 Fees and commissions payable (104) (287) Net fees and commissions 158 99 2021 2020 Central Central NatWest items NatWest items Markets & other Total Markets & other Total Total assets and liabilities £m £m £m £m £m £m Assets 203,010 1 203,011 273,124 14 273,138 Liabilities 195,560 (1) 195,559 263,773 23 263,796 Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 118 4 Segmental analysis continu ed Geographical segments The geographical analysis in the tables below has been co mpiled on the basis of location of of fice where the transactions are recorded. UK USA Europe RoW Total 2021 £m £m £m £m £m Total revenue 594 91 132 23 840 Interest receivable 262 20 56 5 343 Interest payable (269) (2) ( 62) (2) (335) Fees and commissions receivable 168 17 77 — 262 Fees and commissions payable (236) 11 79 42 (104) Income from trading activities 190 53 2 18 263 Other operating income (27) 2 (3) — (28) Total income 88 101 149 63 401 Operating (loss)/profit before tax (802) 48 39 1 (714) Total assets 158,100 21,823 20,668 2,420 203,011 Total liabilities 158,137 23,330 12,820 1,272 195,559 Contingent liabilities and commitments 6,482 — 5,450 18 11,950 2020 Total revenue 1,405 211 291 129 2,036 Interest receivable 418 — 95 18 531 Interest payable (488) — (103) — (591) Fees and commissions receivable 29 63 191 103 386 Fees and commissions payable (208) (31) ( 42) (6) (287) Income from trading activities 923 170 (15) 10 1,088 Other operating income 35 (22) 20 (2) 31 Total income 709 180 146 123 1,158 Operating (loss)/profit before tax (313) (84) 35 47 (315) Total assets 225,345 25,452 20,108 2,233 273,138 Total liabilities 223,405 26,942 12,332 1,117 263,796 Contingent liabilities and commitments 6,768 — 6,299 — 13,067 Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 119 5 Pensions Defined contribution schemes NWM Group sponsors a number of defined con tribution pension schemes in different territories, which new employee s are offered the opportunity to join. Defined benefit schemes NWM Group sponsors a number of pension sche mes in the UK and overseas, including the AA and NatWest Markets (NWM) sections of the NatWest Group Pension Fund whic h operate under UK trust law and are managed and administered on behalf of their members in accordance with the terms of the trust deed, the scheme rules and UK legislation. Pension fund trustees are appointed to operate eac h fund and ensure benefits are paid in accordance with the sche me rules and national law. The trustees are the legal owner of a scheme’s assets, and have a duty to act in the best in terests of all scheme members. The schemes generally provide a pension of one-si xtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years and a re contributory for current members. These have been close d to new entrants for over ten years, although current members continue to buil d up additional pension benefits, currently subject to 2% maximum annual salary inflation, while they remain employed by NW M Group. The corporate trustee is NatWest Pension Trus tee Limited (the Trustee), a wholly owned subsidiary of NWB Plc. T he Board of the Trustee comprises four member trus tee directors selected from eligible active staff, deferr ed and pensioner members who apply and six appointed by Nat West Group. Under UK legislation, a defined benefit pensi on scheme is required to meet the statutory funding objec tive of having sufficient and appropriate assets to cover its liabilities ( the pensions that have been promised to members). Investment strategy The assets of the AA section, which is typical of othe r group schemes, represent 78% of all p lan assets at 31 December 2021 (2020 – 77% of plan assets) and are invested as shown below. The AA and NWM sections employ both physical and derivative instruments to achieve a desired asset class expos ure and to reduce the schemes’ interest rate, inflation and currency risk. This means that the net funding positions a re considerably less sensitive to changes in market conditions than the value of the assets or liabilities in isolation. In particular, the Trustee hedges movements in interest rates and inflation. Swaps have been executed at prevailing market rates and within standard market bid/offer spreads with a num ber of counterparty banks, including NWB Plc. 2021 2020 Major classes of plan assets as a percentage of total pl an assets Quoted Unquoted Tota l Quoted Unquoted Total of the AA sectio n % % % % % % Equities 2.4 0.6 3.0 2.1 1.1 3.2 Index linked bonds 40.8 — 40.8 39.0 — 39.0 Government bonds 4.3 — 4.3 5.2 — 5.2 Corporate and other bonds 15.5 10.1 25.6 20.0 11.0 31.0 Real estate — 2.0 2.0 — 1.9 1.9 Derivatives — 6.5 6.5 — 5.8 5.8 Cash and other assets — 17.8 17.8 — 13.9 13.9 63.0 37.0 100.0 66.3 33.7 100.0 Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 120 5 Pensions continued The schemes do not invest dire ctly in NWM Group but can have exposure to NWM Group. The trustees are responsible f or ensuring that indirect investments in NWM G roup do not exceed the 5% regulato ry limit. AA section All schemes (3) Present Present value Net value Asset Net Fair of defined pension Fair of defined ceiling/ pension value of benefit (asset)/ value of benefit minimum (asset)/ plan assets obligation (1) liability plan assets obligation (1) funding (2) liability Changes in value of net pension (asset)/li ability £m £ m £m £m £ m £m £m At 1 January 2020 1,088 825 (263) 1,419 1,116 95 ( 208) Currency translation and other adjustments — — — — (9) — (9) Income statement 22 18 (4) 27 36 1 10 Statement of comprehensive income 96 107 11 114 148 (13) 21 Contributions by employer 2 — (2) 11 — — (11) Contributions by plan participants and other scheme members Benefits paid (44) (44) — (68) (68) — — Transfers to/from fellow subsidiaries — — — — (4) — (4) At 1 January 2021 1,164 906 (258) 1,503 1,219 83 ( 201) Currency translation and other adjustments (1) — 1 ( 11) (13) 2 — Income statement Net interest expense 16 12 (4) 21 19 1 (1) Current service cost — 1 1 — 5 — 5 16 13 (3) 21 24 1 4 Statement of comprehensive income Return on plan assets excluding recognised inte rest income 21 — (21) 18 — — (18) Experience gains and losses — 12 12 — 16 — 16 Effect of changes in actuarial financial assumptions — (28) (28) — (35) — (35) Effect of changes in demographic assumptions — — — — 7 — 7 Asset ceiling adjustments — — — — — (6) ( 6) 21 (16) (37) 18 ( 12) (6) (36) Contributions by employer 1 — (1) 7 — — (7) Benefits paid (48) (48) — (65) (65) — — Transfers to/from fellow subsidiaries — — — — — — — At 31 December 2021 1,153 855 (298) 1,473 1,153 80 ( 240) (1) Defined benefit obligations are subject to annual va luation by independent actuaries. (2) In recognising the net surplus or deficit of a pension s cheme, the funded status of each scheme is adjusted to reflect any minimum funding requirement imposed on the sponsor and any ceiling on the amount that the sponsor has an unconditiona l right to recover from a scheme. (3) Includes the NWM Section which has a net pension asset of nil at 31 December 2021 (2020: net pension asset of nil). This scheme has plan assets of £287 million, a defined benefit obligation of £208 million and an asset ceiling of £8 0 million (2020: £308 million, £225 million and £83 million respectively). (4) NWM Group expects to make contributions to the AA s ection of £2.2 million and to the NWM section of £4.5 million in 2022. All schemes 2021 2020 Amounts recognised on the balance sheet £m £m Fund assets at fair value 1,473 1,503 Present value of fund liabilities 1,153 1,219 Funded status 320 284 Asset ceiling/minimum funding 80 83 240 201 2021 2020 Net pension asset/(liability) com prises £m £ m Net assets of schemes in surplu s (included in Other assets, Note 1 7) 306 264 Net liabilities of schemes in deficit (included in Othe r liabilities, Note 20) (66) (63) 240 201 Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 121 5 Pensions continued Funding and contributions by NWM Group In the UK, the trustees of defined benefit pension sc hemes are required to perform funding valu ations at least every three years. The trustees and the sponsoring com pany, with the support of the Scheme Actuary, agree the assum ptions used to value the liabilities and determi ne future funding requirements. The funding assumptions incor porate a margin for prudence over and above the expected cost of providing the bene fits promised to members, taking into accou nt the sponsor’s covenant and the investment st rategy of the scheme. Similar arrangements apply in the other territories w here NWM Group sponsors defined benefit pension schemes. The triennial funding valuation of the AA and NWM sections as at 31 December 2020 was completed during 2021. T his determined the funding level to be 1 08% and 111% respectively, based on pension liabilities of £1 ,071 million and £267 million. No further deficit contributions are due. The key assumptions used to determine the fundin g liabilities were the discount rate, which is determined base d on a gilt yield curve plus 0.4% per annu m, and mortality assumptions, which result in life expectancies of 28 .3/30.1 years for males/females who are currently age 60 and 30.2/31.8 years from age 60 for males/females who are cur rently aged 40. Accounting assumptions Placing a value on NWM Group’s define d benefit pension schemes’ liabilities requires NWM Group’s man agement to make a number of assumptions, with the support of independent actuaries. The ultimate cost of the def ined benefit obligations depends upon actu al future events and the assumptions made are unlikely to be exactly borne out in practice, meaning the final cost may be hi gher or lower than expected. The most significant assumptions use d for the AA section are shown below: Principal IAS 19 a ctuarial assumptions 2021 2020 % % Discount rate 1.8 1.4 Inflation assumption (RPI) 3.3 2.9 Rate of increase in salaries 1.8 1.8 Rate of increase in deferred pensions 2.9 2.2 Rate of increase in pensions in paymen t 2.9 2.8 Lump sum conversion rate at re tirement 18 18 Longevity at age 60: years years Current pensioners Males 27.9 28.2 Females 29.7 29.8 Future pensioners, currently aged 40 Males 29.5 29.5 Females 31.1 31.5 Discount rate The IAS 19 valuation uses a single discount rate s et by reference to the yield on a baske t of ‘high quality’ sterling corporate bonds. Significant judgment is required when se tting the criteria for bonds to be included in the baske t of bonds that determines the discount rate used in the IAS 19 valuations. The criteria include issue size, quality of pricing and the exclusion of outliers. Judgment is also required in determining the sha pe of the yield curve at long durations: a constant credit spread rela tive to gilts is assumed. Sensitivity to the main assu mptions is presented below. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 122 5 Pensions continued The table below shows how th e present value of the net pension asset of t he AA section would change if the key assump tions used were changed independently. In practice t he variables have a degree of cor relation and do not move completely in isola tion. (Decrease)/ (Decrease)/ Increase in increase in increase in net pension value of value of (obligations)/ assets liabilities assets 2021 £m £m £m 0.25% increase in interest rates/discount rate (55) (35) (20) 0.25% increase in inflation 44 25 19 0.25% increase in credit spreads — (35) 35 Longevity increase of one year — 37 (37) 0.25% additional rate of increase in pensions in payment — 32 (32) Increase in equity values of 10% (1) 4 — 4 2020 0.25% increase in interest rates/discount rate (55) (47) (8) 0.25% increase in inflation 52 31 21 0.25% increase in credit spreads — (47) 47 Longevity increase of one year — 43 (43) 0.25% additional rate of increase in pensions in payment — 36 (36) Increase in equity values of 10% (1) 4 — 4 (1) Includes both quoted and private equity. The funded status is most sensitive to move ments in credit spreads and longevity. The table b elow shows the combined chan ge in the funded status of the AA section as a result of larger movements in these assumptions, assuming no changes in other assumptions. Change in life expecta ncies -2 years -1 years No change +1 year +2 years 2021 £m £m £m £m £ m Change in credit spreads +50 bps 135 102 7 0 37 (4) No change 75 37 — (37) (76) -50 bps 4 (39) (82) (127) (172) 2020 Change in credit spreads +50 bps 159 124 8 8 52 15 No change 83 42 — (43) (86) -50 bps (2) (50) (99) (149) (201) The defined benefit obligation i s attributable to the different classes of A A section members in the following propor tions: 2021 2020 Membership category % % Active members 0.2 2.8 Deferred members 56.2 64.1 Pensioners and dependants 43.6 33.1 100.0 100.0 The experience history of the AA s ection is shown below: 2021 2020 History of defined benefit schemes £m £ m Fair value of plan assets 1,153 1,164 Present value of plan obligations 855 906 Net surplus 298 258 Experience gains/(losses) on plan liabilities (12) 10 Experience gains/(losses) on plan assets 21 96 Actual return on plan assets 37 118 Actual return on plan assets 3.2% 10.8% Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 123 6 Auditor’s remuneration Amounts payable to the NWM Group’s audito rs for statutory audit and other services are set out below: 2021 2020 £m £m Fees payable for: - the audit of the NWM Group’s annual accoun ts 6.4 6.6 - the audit of NWM Plc’s subsidiaries 2.9 3.0 - audit-related assurance service s 0.6 0.6 Total audit and audit-related as surance services fees 9.9 10.2 Corporate finance services 0.3 0.1 Total other services 0.3 0.1 Fees payable to the auditor for non-audit service s are disclosed in the consolidated fin ancial statements of NatWest Group pl c. 7 Tax 2021 2020 £m £ m Current tax Credit/(charge) for the year 171 (92) Over/(under) provision in respect of prior yea rs 1 (36) 172 (128) Deferred tax Credit for the year 17 150 UK tax rate change impact (1) (21) (22) Net increase/(decrease) in the car rying value of deferred tax assets in respect of UK and Netherlands losses 39 (22) Over provision in respect of prior years (2) 16 10 Tax credit/(charge) for the year 223 (12) (1) It was announced in the UK Government’s budget on 3 March 2021 that the main UK corporation tax rate will increase f rom 19% to 25% from 1 April 2023. This legislative change was enacted on 10 June 2021. (2) Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities and adjustments to provisions in respect of uncertain tax positions. The actual tax credit differs from the expected tax c redit, computed by applying the standa rd rate of UK corporation tax of 19% (2020 – 19%), as follows: 2021 2020 £m £ m Expected tax credit 136 60 Losses and temporary differen ces in year where no deferred tax asset recognised (18) (1) Foreign profits taxed at other rates (5) (12) Items not allowed for tax: - losses on disposal and write-downs — (2) - UK bank levy (3) (6) - regulatory and legal actions (1) (20) - other disallowable items (7) (18) Non-taxable items 12 15 Unrecognised losses brought forward and utilised 8 12 (Decrease)/increase in the carrying value of defer red tax assets in respect of: - UK losses (9) (22) - Netherlands losses 48 — Banking surcharge 54 20 Tax on paid-in equity 12 10 UK tax rate change impact (21) (22) Adjustments in respect of prior ye ars 17 (26) Actual tax credit/(charge) 223 (12) For accounting policy information se e Accounting policies note 7. Judgment: tax contin gencies NWM Group’s corporate income tax credit and its provisions for corporate income taxes necessarily involve a significant degree of estimation and judgment. The tax treatment of some transactions is uncertain and tax computations are yet to be agreed wi th the tax authorities in a number of jurisdictions. N WM Group recognises anticipated tax liabilities based on all available e vidence and, where appropriate, in the light of external advice. Any dif ference between the final outco me and the amounts provided will af fect current and deferred corporate income tax cha rges in the period when the matter is resolved. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 124 7 Tax continued Deferred tax NWM Group NWM Plc 2021 2020 2021 2020 £m £m £m £m Deferred tax asset (included in Other assets, Note 1 7) (48) (2) — (2) Deferred tax liability (included i n Other liabilities, Note 20) 374 417 352 380 Net deferred tax liability 326 415 352 378 Net deferred tax liability/(asset) comprised: NWM Group T ax Accelerated losses capital Expense Financial carried Pension allowances provisions instruments forward Other Tota l £m £m £m £m £m £m £m At 1 January 2020 72 399 (39) 132 (75) 11 500 Acquisitions and disposals of su bsidiaries — 3 1 — — — 4 Charge/(credit) to income statement: 1 (142) 15 (4) 13 1 (116) Charge/(credit) to other compre hensive income 6 — — 30 — (8) 28 Currency translation and other adjustments — — — — — (1) (1) At 31 December 2020 79 260 (23) 158 (62) 3 415 Charge/(credit) to income statement 1 (1) (2) (5) (43) (1) (51) Charge/(credit) to other compre hensive income 18 — (4) (53) — — (39) Currency translation and other adjustments — — — — 1 — 1 At 31 December 2021 98 259 (29) 100 (104) 2 326 NWM Plc Tax Accelerated losses capital Expense Financial carried Pension a llowances provisions instruments forward Other Tota l £m £m £m £m £m £m £m At 1 January 2020 73 388 ( 39) 117 (75) (2) 462 Acquisitions and disposals of su bsidiaries — 3 — — — — 3 (Credit)/charge to income statement — (144) 16 (5) 13 6 (114) Charge/(credit) to other compre hensive income 6 (1) — 30 — (7) 28 Currency translation and other adjustments — — — — — (1) (1) At 31 December 2020 79 246 ( 23) 142 (62) (4) 378 Charge/(credit) to income statement 1 4 (2) 2 6 2 13 Charge/(credit) to other compre hensive income 18 — (4) (53) — — (39) At 31 December 2021 98 250 ( 29) 91 (56) (2) 352 Deferred tax assets in respect of unus ed tax losses are recognised if the losse s can be used to offset probable future taxable profits after taking into account the ex pected reversal of other temporary diffe rences. Recognised deferred tax assets in respec t of tax losses are analysed below. 2021 2020 £m £ m UK tax losses carried forward - NWM Plc 56 62 Total 56 62 Overseas tax losses carried for ward - NWM N.V. 48 — 104 62 Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 125 7 Tax continued Critical accounting policy: Deferred tax The deferred tax liability of £374 million at 31 Decembe r 2021 (2020 – liability of £417 million) includes a defe rred tax asset on losses of £56 million. The def erred tax asset recognised on UK and overseas tax losses is recognised to the exten t that it is probable that there will be future taxable profits to recover it. Judgment - NWM Group has considered the carrying value of deferred tax assets and manage ment considers that sufficient taxable profits will be generated in future yea rs to recover the remaining deferred tax asset. Estimate – These estimates ar e partly based on forecast performance beyond the horizon for management’s det ailed plans. They have regard to inhe rent uncertainties, such as climate change and the impact of C OVID. The deferred tax asset in NWM Plc is supported by way of future reversin g taxable temporary differences on which deferred tax liabilities are recognised at 31 December 2 021. UK tax losses Under UK tax rules, tax losses can be carrie d forward indefinitely. As the recognised tax losses in NWM Plc arose prior to 1 April 2015, credit in future periods is given ag ainst 25% of profits at the main rate of UK corporation tax, excluding the Banking Surcharge 8% rate introduced by The Finance (No. 2) Act 2015. It was announced in the UK Government’s budget o n 3 March 2021 that the main UK corpora tion tax rate will increase from 19% to 25% from 1 April 2023. T his legislative change was enacted on 10 June 2021 . NWM Group’s closing deferred tax assets and liabilities have therefore been recalcul ated taking into account this change of rat e and the applicable period the deferred tax assets and liabilities are expected to crystallise. As a result, the net deferred tax liability pos ition in NWM Group has increased by £25 million, w ith a £21 million tax charge included in the income stateme nt (refer to reconciling item above), and a £4 million tax charge included in other comprehensive income. It was subsequently announced in the UK Govern ment’s budget on 27 October 2021 that the U K banking surcharge will decrease from 8% to 3% from 1 April 2023 . This legislative change was substantively enacted on 2 Feb ruary 2022. Had this rate reduction been substantively e nacted as at the balance sheet date, the estimate d rate change impact would not have been material. NWM Plc - NWM Plc expects th at the balance of recognised deferred tax asset at 31 December 202 1 of £56 million (2020 - £62 million) in respect of tax losse s amounting to £254 million will be recovered by the end of 2 027. The movement in the current financial year reflects a £1 3 million decrease in the carrying value of the deferred tax asset, offse t by a £7 million increase due to the UK tax rate change imp act. Of the losses remaining, £5,311 million have not been recognised in the deferred tax balance at 31 Dec ember 2021; such losses will be available to offset 25% of future taxable profits in excess of those forecast in the closing defe rred tax asset. Overseas tax losses NWM N.V. – A deferred tax asset of £48 million has been recognised in respect of previously unrecognised tax losses and credits of £187 million of total tax losses and credi ts of £2,785 million carried forward at 31 Dece mber 2021. NWM N.V. Group expects the deferred tax asset to be utilised against future taxable profits by the end of 202 6. NWM N.V. Group’s Dutch fiscal unit has reported taxable profits in the period since the adoption of the new business model and repurposing of NWM N.V.’s banking license in 2019. In addition, NatWes t Group strategic review of NWM Group has been la rgely completed in 2021, which has removed material uncertainties around t he future business of NWM N.V.. As a result, NWM N.V. Group now considers it to be probable, based on its 5 ye ar budget forecast, that future taxable profit will be available agains t which the tax losses and tax credits can be partially utilised. NWM N.V. Group’s evaluation o f alternative assumptions revealed that the recognition of the deferred tax asset is hi ghly sensitive to the significant assumptions used in t he assessment and therefore subject to high estimation unce rtainty. Due to the uncertainty associated with the underlying fo recast of probable taxable income, the final outcome of the utilis ation of the deferred tax asset may vary si gnificantly. This can lead to a material increase or decrease of the deferred tax assets depending on the result of the s trategic decisions made in 2021 and to be made in future periods. Unrecognised deferred tax Deferred tax assets of £3,340 million (2020 - £3,078 million) have not been recognised in res pect of tax losses and other deductible temporary difference s carried forward of £12,125 million (2020 - £12,171 million) in jurisdicti ons where doubt exists over the availability of future tax able profits. Of these losses and other deductible temporary diffe rences, £77 million expire within five years and £4,288 million thereafter. The balance of tax losses and other deductible temporary differences carried forward has no expiry date. There are no unrecognised def erred tax liabilities in respect of retained earnings of overseas subsidia ries and held-over gains on the incorporation of certain overseas branche s. 8 Profit/(loss) dealt with in the accounts of NWM Plc As permitted by section 408(3) of the Companies Act 200 6, no income statement for NWM Plc has been presented as a primary financial statement. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 126 9 Financial instruments - classification The following tables analyse NWM Group’s financial assets and liabilities in accordance with the c ategories of financial instruments in IFRS 9. NWM Group Amortised Other MFVTPL FVOCI cost as sets Tot al £m £m £m £m £m Assets Cash and balances at central banks 16,645 16,645 Trading assets 59,101 59,101 Derivatives (1) 105,550 105,550 Settlement balances 2,139 2,139 Loans to banks - amortised cost (2) 962 962 Loans to customers - amortised cost 7,471 7,471 Amounts due from holding company and fe llow subsidiaries 649 — 731 99 1,479 Other financial assets 80 5,590 3,116 8,786 Other assets 878 878 31 December 2021 165,380 5,590 31,064 977 203,011 Cash and balances at central banks 15,771 15,771 Trading assets 68,689 68,689 Derivatives (1) 165,619 165,619 Settlement balances 2,296 2,296 Loans to banks - amortised cost (2) 1,003 1,003 Loans to customers - amortised cost 8,444 8,444 Amounts due from holding company and fe llow subsidiaries 766 — 754 67 1,587 Other financial assets 166 6,300 2,575 9,041 Other assets 688 688 31 December 2020 235,240 6,300 30,843 755 273,138 NWM Group Held - for - Amortised Other trading DFV cost liabilities Total £m £m £m £m £m Liabilities Bank deposits (3) 1,808 1,808 Customer deposits 2,268 2,268 Amounts due to holding company and fellow subsi diaries 348 — 5,607 171 6,126 Settlement balances 2,068 2,068 Trading liabilities 64,482 64,482 Derivatives (1) 98,497 98,497 Other financial liabilities 2,374 16,881 19,255 Other liabilities 57 998 1,055 31 December 2021 163,327 2,374 28,689 1,169 195,559 Bank deposits (3) 1,808 1,808 Customer deposits 2,618 2,618 Amounts due to holding company and fellow subsi diaries 636 — 7,240 258 8,134 Settlement balances 2,248 2,248 Trading liabilities 72,252 72,252 Derivatives (1) 157,332 157,332 Other financial liabilities 3,196 14,974 18,170 Other liabilities 81 1,153 1,234 31 December 2020 230,220 3,196 28,969 1,411 2 63,796 (1) Includes net hedging derivative assets of £132 million (2020 - £267 million) and net hedging derivative liabilities of £119 million (2020 - £107 million). (2) Includes items in the course of collection from other banks of £38 million (2020 - £119 milli on). (3) Includes items in the course of transmission to other banks of £28 mill ion (2020 - £10 million). Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 127 9 Financial instruments – classification continued Judgment: classification of financial assets Classification of financial assets be tween amortised cost and fair value through other co mprehensive income requires a degr ee of judgment in respect of business models a nd contractual cashflows.  The business model criteria is as sessed at a portfolio level to determine whether assets are cl a ssified as held to collect or hel d to collect and sell. Information t hat is considered in determining the applic able business model includes the portfolio’s policie s and objectives, how the performance and risks of the p ortfolio are managed, evaluated and reported to management; and the frequency, volume and timing of s ales in prior periods, sales expectation for future periods, and the reasons for sales.  The contractual cash flow characteris tics of financial assets are asses sed with reference to whether the cash flows rep resent solely payments of principle and interest. A le vel of judgment is made in assessing terms t hat could change the contrac tual cash flows so that it would not meet the co ndition for solely payments of principle a nd interest, including contingent and leverage features, non-recours e arrangements and features that could m odify the time value of money. For accounting policy information se e Accounting policies notes 8, 1 1, 12 and 14. Amounts due from/to holding c ompany and fellow subsidiaries are as below: NWM Group 2021 2020 Holding Fellow Holding Fellow company subsidiaries Total company subsidiaries Total £m £m £m £m £m £m Assets Trading assets 252 397 649 542 224 766 Loans to banks - amortised cost — 612 612 — 624 624 Loans to customers - amortised cost 113 6 119 112 18 130 Other assets — 99 99 — 67 67 Amounts due from holding company and fe llow subsidiaries 365 1,114 1,479 654 933 1,587 Derivatives (1) 407 529 936 594 774 1,368 Liabilities Bank deposits - amortised cost — 120 120 — 145 145 Customer deposits - amortised cos t — 155 155 — 144 144 Trading liabilities — 348 348 — 636 636 Other financial liabilities - subo rdinated liabilities 1,464 — 1,464 1,753 — 1,753 MREL instruments issued to NatWest Grou p plc 3,858 — 3,858 5,181 — 5,181 Other liabilities — 181 181 — 275 275 Amounts due to holding company and fellow subsi diaries 5,322 804 6,126 6,934 1,200 8,134 Derivatives (1) 658 339 997 1,120 425 1,545 (1) Intercompany derivatives are included within d erivative classification on the balance sheet. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 128 9 Financial instruments - classification continued The following tables show the bank’s fin ancial assets and financial liabilities in accordance wi th the categories of financial instruments in IFRS 9. NWM Plc Amortised Other MFVTPL FVO CI cost assets Total £m £m £m £m £m Assets Cash and balances at central banks 12,294 12,294 Trading assets 41,222 41,222 Derivatives (1) 103,042 103,042 Settlement balances 795 795 Loans to banks - amortised cost (2) 712 712 Loans to customers - amortised cost 6,810 6,810 Amounts due from holding company and fe llow subsidiaries 2,965 3,646 112 6,723 Other financial assets 79 4,650 3,014 7,743 Investment in group undertakings 2,481 2,481 Other assets 732 732 31 December 2021 147,308 4,650 27,271 3,325 182,554 Cash and balances at central banks 11,736 11,736 Trading assets 52,169 52,169 Derivatives (1) 164,104 164,104 Settlement balances 1,084 1,084 Loans to banks - amortised cost (2) 701 701 Loans to customers - amortised cost 7,477 7,477 Amounts due from holding company and fe llow subsidiaries 3,459 3,970 177 7,606 Other financial assets 161 5,347 2,535 8,043 Investment in group undertakings 2,600 2,600 Other assets 562 562 31 December 2020 219,893 5,347 27,503 3,339 256,082 NWM Plc Held - for - Amortised Other trading DFV cost liabilities Total £m £m £m £m £m Liabilities Bank deposits (3) 1,808 1,808 Customer deposits 1,510 1,510 Amounts due to holding company and fellow subsi diaries 3,335 7,471 172 10,978 Settlement balances 1,028 1,028 Trading liabilities 47,119 47,119 Derivatives (1) 95,096 95,096 Other financial liabilities 1,321 15,556 16,877 Other liabilities 15 774 789 31 December 2021 145,550 1,321 27,388 946 175,205 Bank deposits (3) 1,762 1,762 Customer deposits 1,469 1,469 Amounts due to holding company and fellow subsi diaries 5,375 10,393 421 16,189 Settlement balances 604 604 Trading liabilities 56,916 56,916 Derivatives (1) 153,754 153,754 Other financial liabilities 1,792 13,578 15,370 Other liabilities 24 842 866 31 December 2020 216,045 1,792 27,830 1,263 246,930 (1) Includes net hedging derivative assets of £132 million (2020 - £266 million) and net hedging derivative liabilities of £119 million (2020 - £107 million). (2) Includes items in the course of collection from other banks of £23 million (2020 - £118 milli on). (3) Includes items in the course of transmission to other banks of £28 mill ion (2020 - £11 million). Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 129 9 Financial instruments - classification continued Amounts due from/to holding c ompany and fellow subsidiaries are as below: NWM Plc 2021 2020 Holding Fellow Holding Fe llow company subsidiaries Subsidiaries Total company subsidiaries Subsidiaries Total £m £m £m £m £m £m £m £m Assets Trading assets 252 397 2 ,316 2,965 542 224 2,693 3,459 Loans to banks - amortised cost — 480 998 1,478 — 519 1,024 1,543 Loans to customers - amortised cost — 5 1,121 1,126 — 5 1,487 1,492 Settlement balances — — 546 546 — — 222 222 Other financial assets — — 496 496 — — 713 713 Other assets — 87 25 112 — 32 145 177 Amounts due from holding company and fe llow subsidiaries 252 969 5 ,502 6,723 542 780 6,284 7,606 Derivatives (1) 407 529 1 ,845 2,781 594 774 2,056 3,424 Liabilities Bank deposits - amortised cost — 119 51 170 — 132 240 372 Customer deposits - amortised cos t — 151 1,421 1,572 — 144 2,098 2,242 Trading liabilities — 348 2,987 3,335 — 636 4,739 5,375 Settlement balances — — 397 397 — — 830 830 Other financial liabilities - subo rdinated liabilities 1,464 — — 1,464 1,753 — — 1,753 MREL instruments issued to NatWest Grou p plc 3,858 — — 3,858 5,181 — — 5,181 Other liabilities — 169 13 182 — 270 166 436 Amounts due to holding company and fellow subsi diaries 5,322 787 4 ,869 10,978 6,934 1,182 8,073 16,189 Derivatives (1) 658 339 2 ,240 3,237 1,120 425 2,782 4,327 (1) Intercompany derivatives are included within d erivative classification on the balance sheet. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 130 9 Financial instruments - classification continued Interest rate benchmark reform The NatWest Group IBOR programme su ccessfully delivered the conversion of the vast majority of the IBOR exposures to risk free rates (RFR) in advance of the ce ssation date. This encompasses loans, deposits, capi tal instruments and derivatives, which have been converted using fallback provisions, switch p rovisions or as part of market-wide con version events in the case of deriv atives subject to clearing. These instruments will conver t at the first repricing date post cess ation. The total amount of exposure for NWM G roup at 31 December 2021 subject to above conver sion provisions is £1,904 million of assets, £425 million of liabilities, £72 6 million of loan commitments and £460.8 billion of derivative notionals. T he exposure for NWM Plc at 31 December 2021 subject to above conversio n provisions is £1,91 2 million of assets, £916 million of liabilities, £720 million of loan commitments and £456.4 billion of deri vative notionals. Despite the significant conversion le vels achieved, certain instruments remain in discussion with customers and counterparties to achieve consensual conversion. If consensual conversion is not achieved thes e instruments will default to synthetic LIBOR in li ne with relevant legislation. The level of exposures without explicit o r agreed conversion provisions as of 31 December 2021 is as follows: NWM Group Rates subject t o IBOR reform GBP LIBOR USD IBOR (1 ) Other IBOR Total 2021 £m £m £m £m Trading assets 62 90 — 152 Loans to banks - amortised cost — 11 — 11 Loans to customers - amortised cost 36 1,390 — 1,426 Other financial assets 120 730 — 850 Bank deposits — 37 — 37 Customer deposits — — — — Trading liabilities 31 166 — 197 Other financial liabilities — 56 33 89 Subordinated liabilities — — — — Amounts due to holding company and fellow subsi diaries — 2,700 — 2,700 Loan commitments (3) 133 1,506 — 1,639 Derivatives notional (£bn) 3.6 1,141.0 — 1,144.6 For the notes to this table refer to page 132 . At 31 December 2021 NWM Group held certain cu rrency swaps with both legs subject to IBO R r eform, for which only the GBP LIBOR leg has an explicit or agreed conve rsion provisions as of 31 Dece mber 2021, but not the entire contract. These include currency swaps of GBP LIBOR of £8 .4 billion, USD IBOR £7.9 billion and Other IBOR £0 .5 billion; currency swaps of USD IBOR of £117.1 billion, GBP LIBOR £91.9 billion and Other IBOR £25.2 billion; currency s waps of EUR LIBOR of £0.1 billion and GBP LIBOR £0.1 billion; currency swaps of O ther IBOR of £0.4 billion and USD IBOR £0.4 billion. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 131 9 Financial instruments - classification continued NWM Group Rates subject to IBOR reform GBP LIBOR USD IBOR (1) EURIBOR (2) Other IBOR Total 2020 £m £m £m £m £m Trading assets 75 60 348 1 484 Loans to banks - amortised cost — — — — — Loans to customers - amortised cost 1,017 1,266 566 6 2,855 Other financial assets 1,504 266 304 — 2,074 Bank deposits — 367 — 107 474 Customer deposits — — — 4 4 Trading liabilities 54 414 269 2 739 Other financial liabilities — 361 314 88 763 Subordinated liabilities — — 268 — 268 Amounts due to holding company and fellow subsi diaries — 3,890 2,823 — 6,713 Loan commitments (3) 1,163 1,811 5,253 — 8,227 Derivatives notional (£bn) 1,309.0 1,359.9 2,345.3 288.9 5,303.1 For the notes to this table refer to page 132 . At 31 December 2020 NWM Group held currency swa ps with corresponding legs subject to IBOR reform of GBP LIBOR of £5.2 billion, USD IBOR £2.0 billion, EURIBO R £2.9 billion and Other IBO R £0.3 billion. Currency swaps of USD IBOR of £23 1.7 billion, GBP LIBOR £98.5 billion, EURIBOR £ 85.8 billion and Other IBOR £47.4 billion. Currency swaps of EURIBOR of £ 5.1 billion with GBP LIBOR £2.3 billion, USD IBOR £1.8 billion and Other IBOR £1.0 billion. Currency swaps of Other IBOR of £2.2 billion, EURIBOR £0.7 billion, USD IBOR £1.2 billion and Other IBO R £0.3 billion. Additionally, NWM Group held basis swaps for GBP LIBOR of £97 billion, USD IBO R of £81 billion, EURIBOR of £49 billion and Other IBOR of £10 billion. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 132 9 Financial instruments - classification continued NWM Plc Rates subject t o IBOR reform GBP LIBOR USD IBOR (1 ) Other IBOR Total 2021 £m £m £m £m Trading assets 62 87 — 149 Loans to banks - amortised cost — 11 — 11 Loans to customers - amortised cost 36 1,287 — 1,323 Other financial assets 120 730 — 850 Amounts due from holding company and fe llow subsidiaries — — — — Bank deposits — 37 — 37 Customer deposits — — — — Trading liabilities 31 166 — 197 Other financial liabilities — 56 33 89 Subordinated liabilities — — — — Amounts due to holding company and fellow subsi diaries — 2,700 — 2,700 Loan commitments (3) 28 1,448 — 1,476 Derivatives notional (£bn) 3.5 1,140.9 — 1,144.4 At 31 December 2021 NWM Plc held certain cu rrency swaps with both legs subject to IBO R reform, for which only the GBP LIB OR leg has an explicit or agreed conversion provisions as of 31 December 2021, but not t he entire contract. These include cur rency swaps of GBP LIBOR of £8.6 billion, US D IBOR of £8.0 billion and Other IBOR of £0.6 billion; c urrency swaps of USD IBOR of £117.2 billion, GBP LIBOR of £91.9 billion and Other IBOR of £25.3 billion; currency swaps of EURIBOR of £0.2 billion with GBP LIBO R of £0.2 billion; currency swaps of O ther IBOR of £0.3 billion with USD IBOR of £0.3 billion. NWM Plc Rates subject to IBOR reform GBP LIBOR USD IBOR (1) EURIBOR (2) Other IBOR Total 2020 £m £m £m £m £m Trading assets 75 58 348 1 482 Loans to banks - amortised cost — — — — — Loans to customers - amortised cost 903 1,130 185 — 2,218 Other financial assets 1,504 266 254 — 2,024 Amounts due from holding company and fe llow subsidiaries — — 1,107 477 1,584 Bank deposits — 367 — 107 474 Customer deposits — — — 4 4 Trading liabilities 54 409 269 2 733 Other financial liabilities — 361 314 88 763 Subordinated liabilities — — 268 — 268 Amounts due to holding company and fellow subsi diaries 499 3,890 2,823 528 7,740 Loan commitments (3) 1,071 1,690 469 — 3,230 Derivatives notional (£bn) 1,035.0 1,359.2 1,707.9 195.8 4,297.9 (1) In 2021 the FCA declared that USD IBOR will be n on-representative post 30 June 2023; at the time of publishing NWM Plc’s Annual Report & Accounts, this date was expected to be 31 December 2021. (2) In 2021 management concluded that EU IBOR is not expected to be significantly reformed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. 31 December 2020 data includes EURIBOR exposure as subject to reform. (3) Certain loan commitments are multi-currency facilities. Wh ere these are fully undrawn, they are allocated to the principal currency of the facility. Where the facilities are partly drawn, the remaining loan commitment is a lloc ated to the currency with the larg est drawn amount. At 31 December 2020 NWM Plc held currency s waps with corresponding legs subjec t to IBOR reform of GBP LIBOR of £5.2 bi llion, USD IBOR of £2.0 billion, EURIBOR of £ 2.9 billion and Other IBOR of £0.3 billion. Currency sw aps of USD IBOR of £231.9 billion, GBP LIBOR of £98.6 billion, EURIBOR of £ 85.8 billion and Other IBOR of £47 .4 billion. Currency swaps of EURIBOR of £5.1 billion and GBP LIBOR of £2.3 billion, USD IBOR of £1.8 billion and Other IBOR of £1 billion. Currency swaps of Other IBOR of £2 .2 billion, EURIBOR of £0.7 billion, USD IBOR of £ 1.2 billion and Other IBOR of £0.3 billon. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 133 9 Financial instruments - classification continued Additionally, NWM Plc held basis swaps for GBP LIBOR of £79.3 billion, USD IBOR of £8 0.6 billion, EURIBOR of £39.2 billion and Other IBOR of £9.7 billion. AT1 Issuances NWM Plc has issued certain capital instruments (AT 1) under which reset clauses are linked to IBOR rates subject to refor m. Where under the contractual terms of the inst rument the coupon subject to IBOR rates and are sho wn in Note 21. As part of its capital management activities NWM Plc has acquired an equity instrument ($250 million EURIBOR) issu ed by its subsidiary. EURIBOR has been reformed however this instru ment has been reported within the scope of the IBOR reform in 2020 in invest ment in group undertakings. Financial instruments – financial assets and liabiliti es that can be o ffset The tables below present information on financi al assets and liabilities that are offse t on the balance sheet under IFRS or subject to enforceable master netting agre ements together with financial collateral received or given. NWM Group Instruments which can be offset Potential to offset not recognised by IFRS Net amount after the Effect of effect of master netting Instruments netting agreements and outside IFRS Balance and similar Cash and related netting Balance Gross offset sheet agreements collatera l Sec urities collateral agreements sheet total 2021 £m £m £m £m £m £m £m £m £m Derivative assets 104,691 — 104,691 (84,226) (15,282) (2,428) 2,755 859 105,550 Derivative liabilities 97,733 — 97,733 (84,226) (10,304) (1,070) 2,133 764 98,497 Net position 6,958 — 6,958 — (4,978) (1,358) 622 95 7,053 Trading reverse repos 44,529 (24,422) 20,107 (900) — (19,136) 71 635 20,742 Trading repos 42,664 (24,422) 18,242 (900) — (17,341) 1 1,147 19,389 Net position 1,865 — 1,865 — — (1,795) 70 (512) 1,353 Non trading reverse repos 332 — 332 — — (331) 1 15 347 Non trading repos 522 — 522 — — (522) — — 522 Net position (190) — (190) — — 191 1 15 (175) 2020 Derivative assets 164,766 — 164,766 ( 135,711) (20,174 ) (5,053) 3,828 853 165,619 Derivative liabilities 156,754 — 156,754 ( 135,711) (15,523 ) (2,487) 3,033 578 157,332 Net position 8,012 — 8,012 — (4,651 ) (2,566) 795 275 8,287 Trading reverse repos 43,907 (24,866) 19,041 (929) — (18,039) 73 363 19,404 Trading repos 42,202 (24,866) 17,336 (929) — (16,407) — 1,700 19,036 Net position 1,705 — 1,705 — — (1,632) 73 (1,337) 368 Non trading reverse repos 1,899 — 1,899 — — (1,899) — — 1,899 Non trading repos 200 — 200 — — (200) — — 200 Net position 1,699 — 1,699 — — (1,699) — — 1,699 Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 134 9 Financial instruments - classification continued NWM Plc Instruments which can be offset Potential to offset not recognised by IFRS Net amount after the Effect of effect of master netting Instruments netting agreements and outside IFRS Balance and similar Cash and related netting Balance Gross offset sheet ag reements collateral Securities co llateral agreements sheet total 2021 £m £m £m £m £m £m £m £m £m Derivative assets 106,616 (4,361) 102,255 (83,716) (14,121) (1,979) 2,439 787 103,042 Derivative liabilities 100,191 (5,751) 94,440 (83,716) ( 8,069) (764) 1,891 656 95,096 Net position (1) 6,425 1,390 7,815 — (6,052) (1,215) 548 131 7,946 Trading reverse repos 21,970 (13,071) 8,899 (580) — (8,319) — 347 9,246 Trading repos 16,865 (13,071) 3,794 (580) — (3,214) — 1,146 4,940 Net position 5,105 — 5,105 — — (5,105) — (799) 4,306 Non trading reverse repos 332 — 332 — — (331) 1 15 347 Non trading repos 522 — 522 — — (522) — — 522 Net position (190) — (190) — — 191 1 15 (175) 2020 Derivative assets 167,067 (3,801) 163,266 (135,490) (19,291) (5,003) 3,482 838 164,104 Derivative liabilities 159,329 (6,186) 153,143 (135,490) (13,284) (1,641) 2,728 611 153,754 Net position (1) 7,738 2,385 10,123 — (6,007 ) (3,362) 754 227 10,350 Trading reverse repos 24,951 (13,972) 10,979 (604) — ( 10,373) 2 92 11,071 Trading repos 18,200 (13,972) 4 ,228 (604) — (3,624) — 1,700 5,928 Net position 6,751 — 6,751 — — (6,749) 2 (1,608) 5,143 Non trading reverse repos 1,898 — 1,898 — — (1,898) — — 1,898 Non trading repos 200 — 200 — — (200) — — 200 Net position 1,698 — 1,698 — — (1,698) — — 1,698 (1) The net IFRS offset balance of £1,390 million (2020 - £2,385 million) relates t o variation margin netting reflected on other balance sheet lines. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 135 10 Financial instruments - valuation Critical accounting policy: Fair val ue - financial instruments Financial instruments classified as mand atory fair value through profit or loss; held-for-trading; des ignated fair value through profit or loss and fair v alue through other comprehensive income are rec ognised in the financial statements at fair value. All derivatives are measured at fair value. Fair value is the price that would be received to sel l an asset or paid to transfer a liability in an orderly transaction between market participants at the mea surement date. A fair value measurement considers the characteris tics of the asset or liability and the assumptions that a market partici pant would consider when pricing the asse t or liability. NWM Group manages some portfolios of fin ancial assets and financial liabilities based on its net exposu re to either market or credit risk. In these cases, the fair value is derived from the net risk exposure of that portfolio with por tfolio level adjustments applied to incorporate bid-offer s preads, counterparty credit risk, and funding costs (see ‘Valuation Adjust ments’). Where the market for a financial instrumen t is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estim ation, the extent of which depends on the instrument’s co mplexity and the availability of market-based data. The complexity and uncertainty in the financial instrumen t’s fair value is categorised using the fair value hierarchy. For accounting policy information se e Accounting policies notes 8 and 14. Page Financial instrument s Critical accounting policy: Fair value 135 Valuation Fair value hierarchy (D) 136 Valuation techniques (D) 13 6 Inputs to valuation models (D) 136 Valuation control (D) 137 Key areas of judgment (D) 137 Tables of assets and liabilities split by fair value hierarchy level (T) 138 Valuation adjustments Table of fair value adjustments made (T) 140 Funding valuation adjustments (FVA) (D) 140 Credit valuation adjustments (CVA) (D) 140 Bid-offer (D) 1 40 Product and deal specific (D) 140 Own credit (D) 140 Level 3 additional information Level 3 ranges of unobservable i nputs (D) 141 Table of level 3 instruments, valuation techniques and inputs (T) 141 Level 3 sensitivities (D) 143 Alternative assumptions (D) 143 Other considerations (D) 143 Table of high and low range of fair value of level 3 assets and liabilities (T) 143 Movement in Level 3 assets and liabilities over the reporting period (D) 144 Table of the movement in level 3 assets and liabilities 144 Fair value of financial instruments me asured at amortised cost Table showing the fair value of financial instruments measured at amortised cost on the balance s heet (T) 145 (D) = Descripti ve; (T) = Table Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 136 10 Financial instruments – valuation continued Fair value hierarchy Financial instruments carried at f air value have been classified under the fair value hierarchy. The classification ranges from level 1 to level 3, with more expert judgment and price uncertainty for those classified at level 3. The determination of an instrument’s level ca nnot be made at a global product level as a single product type c an be in more than one level. For example, a si ngle name corporate credit default swap could be in level 2 or level 3 dependi ng on the level of market activity for the re ferenced entity . Level 1 – instruments valued usi ng unadjusted quoted prices in active and liquid markets, for id entical financial instruments. Examples include government bonds, listed e quity shares and certain exchange-traded derivatives. Level 2 - instruments valued usi ng valuation techniques that have observable inputs. Observable inputs a re those that are readily available with limited adjus tments required. Examples include most government agency securities, investment-grade corporate bonds, certain mortgage products - includin g CLOs, most bank loans, repos and rev erse repos, state and municipal obligations, most notes issued, ce rtain money market securities, loan commitments and most OT C derivatives. Level 3 - instruments valued usi ng a valuation technique where at least one input which could have a significan t effect on the instrument’s valuation, is not base d on observable market data. Examples include non-derivativ e instruments which trade infrequently, certain syndicated and comme rcial mortgage loans, private equity, and derivatives with unobserv able model inputs. Valuation techniques NWM Group derives the fair value of its instruments differently depending on whether the instrument is a non-mo delled or a modelled product. Non-modelled products are valued directly from a price input, typically on a position-by-position basis. Examples inclu de equities and most debt securities . Non-modelled products can fall into any fair value levelling hierarchy depending on the obs ervable market activity, liquidity, and assessment of val uation uncertainty of the instruments. The assessment of fair value and the classification of the instrument to a fair value level is subject to the valuation controls discussed in the Valuation control sectio n. Modelled products valued using a pricing model range in complexity from comparatively vanilla products such as interest rate swaps and options (e.g. inte rest rate caps and floors) through to more complex derivatives (e.g. bal ance guarantee swaps). For modelled products the fair value is derived using the model and the appropriate model inputs or parameters, as opposed from a cash price equivalent. M odel inputs are taken either directly or indirectly from available data, where so me inputs are also modelled. Fair value classification of modelled instruments is eithe r level 2 or level 3, depending on the product/ model combination, the observability and quality of input paramete rs and other factors. All these must be assessed to c lassify a position. The modelled product is assigned to the lowest fair value hierarc hy level of any significant input used in that valuation. Most derivative instruments, for example vanilla interest rate swaps, foreign exchange swaps and liquid single n ame credit derivatives, are classified as level 2 . This is because they are vanilla products valued using standard m arket models and with observable inputs. Level 2 prod ucts range from vanilla to more complex products, where more complex pro ducts remain classified as level 2 due to the materiality of any un observable inputs. Inputs to valuation models When using valuation techniques, the fair value can be significantly affected by the choice of valuation model and underlying assumptions. Factors considered include the cashflow amounts and timing of those cash flows, and application of appropriate discount rates, incorpor ating both funding and credit risk. Values between and beyond available data points are obtained by int erpolation and extrapolation. The principal inputs to these valuation techniques are as follows: Bond prices - quoted prices are gene rally available for government bonds, certain corporate securities, and some mortgage-related products. Credit spreads - these express the return require d over a benchmark rate or index to compensate for the referenced credit risk. Where available, thes e are derived from the price of credit default swaps or other cr edit-based instruments, such as debt securities. When direct price s are not available; credit spreads are determined with reference to available prices of entities with similar characteris tics. Interest rates - these are principally based on in terest rate swap prices referencing benchmark interest rates. Be nchmark rates include Interbank Offered Rates (IBOR) and the Overnight Index Swap (OIS) rate, including SONIA (Sterlin g Overnight Interbank Average Rate). Other quoted interest rates may also be used from both the bond, and futures marke ts. Foreign currency exchange rates - there are obser vable prices both for spot and forward contracts and futures in the world's major currencies. Equity and equity index prices - quoted prices a re generally readily available for equity share s listed on the world's major stock exchanges and for major indices on such sha res. Price volatilities and correlations - volatility is a measure of the tendency of a price to change with time. Correlation measures the degree which two or more prices or va riables are observed to move together. Variables that move in the s ame direction show positive correlation; those that m ove in opposite directions are negatively correl ated. Prepayment rates - rates used to reflect how fast a pool of assets prepay. The fair value of a financial instrument that can be prepaid by the issuer or borrower diff ers from that of an instrument that cannot be prepaid. When valui ng prepayable instruments, the value of this pre payment option is considered. Recovery rates/loss given defa ult - these are used as an input to valuation models and reserv es for asset-backed securities and other credit products as an indicator of se verity of losses on default. Recovery rates are prima rily sourced from market data providers, the value of the underlying collate ral, or inferred from observable credit spreads. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 137 10 Financial instruments – valuation continued Valuation control NWM Group's control environment for the dete rmination of the fair value of financial instruments includes for malised procedures for the review and validation of fair values. T his review is performed by an independent price verification (IPV) team. IPV is a key element of the control envi ronment. Valuations are first performed by the business which entered in to the transaction. These valuations are then reviewed by the IPV team, independent of those trading the financi al instruments, in light of available pricing evidence . Independent pricing data is collated from a range of sou rces. Each source is reviewed for quality and the independen t data applied in the IPV processes using a formalise d input quality hierarchy. Consensus services are one sou rce of independent data and encompass interest rate, currency, credi t, and bond markets, providing comprehensive coverage of vanilla products and a wide selection of exotic products. Where measurement differences are identified through the IPV process these are grouped by the quality hierarchy of the independent data. If the size of the difference exce eds defined thresholds, an adjustment is made to bring the valu ation to within the independently calcul ated fair value range. IPV takes place at least monthly, for all fair value f inancial instruments. The IPV control inclu des formalised reporting and escalation of any valuation differences in breach of established thresholds. The quality and completeness of the information gathered in the IPV process gives an indication as to the liquidi ty and valuation uncertainty of an inst rument and forms part of the information considered when de termining fair value hierarchy classifications. Initial fair value level classification of a fin ancial instrument is carried out by the IPV team. These initial classifications are subject to senior management review. P articular attention is paid to instruments transferring fro m one level to another, new instrument classes or products, instruments where the transaction price is significantly diff erent from the fair value and instruments where valuation uncertain ty is high. Valuation Committees are made u p of valuation specialists and senior business representatives f rom various functions and oversee pricing, reserving and valuations issues. T hese committees meet monthly to review an d ratify any methodology changes. The Executive Valuation Com mittee meets quarterly to address key material an d subjective valuation issues, to review items escalated by Valuation Committees and to discuss other relevant indust ry matters. The Group model risk policy se ts the policy for model documentation, testing and review. Governa nce of the model risk policy is carried out by the Group model risk oversight committee, which comprises model risk owners and independent model experts. All models are required to be independently validated in accordance with the Model Ris k Policy. Key areas of judgment Over the years the business ha s simplified, with most products classified as level 1 or 2 of the fair value hier archy. However, the diverse range of products h istorically traded by NWM Group means some products remain classifi ed as level 3. Level 3 indicates a significant level of pricing uncertainty, where expert judgment is used. As su ch, extra disclosures are required in respect of level 3 instruments. In general, the degree of expert judgment used and hence valuation uncertainty depends on the degree of liquidity of an instrument or input. Where markets are liquid, little judgmen t is required. However, when the information regarding the liquidity in a particular market is not clear, a judgment may need to be made. For example, for an equity traded on an exchange, daily v olumes of trading can be seen, but for an over the counte r (OTC) derivative, assessing the liquidity of the market with no central exchange is more challenging. A key related matter is where a market moves fr om liquid to illiquid or vice versa. Where this movement is conside r ed temporary, the fair value level is not changed. For example, if there is little market trading in a product on a repo rting date but at the previous reporting date and during the in tervening period the market has been liquid. In this case, the instrument will continue to be classified at the same level in the hierarchy. This is to provide consistency so that transfe rs between levels are driven by genuine changes in market liquidity and do not reflect short term or seasonal e ffects. Material movements between levels are reviewed quarterly by the B usiness and IPV. The breadth and depth of the IPV data allows fo r a rules-based quality assessment to be made of market activity, liquidity, and pricing uncertainty, which assists with the process of alloc ation to an appropriate level. Where s uitable independent pricing information is not readily available, the quality assess ment will result in the instrument being ass essed as level 3. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 138 10 Financial instruments – valuation continued The table below shows the asse ts and liabilities held by NWM Group split by fair value hier archy level. Le vel 1 are considered the most liquid instruments, and level 3 the most illiquid, valued using expert judgmen t and hence carry the most significant price uncertainty. NWM Group 2021 2020 Level 1 Level 2 Level 3 T otal Level 1 Level 2 L evel 3 Total £m £m £m £m £m £m £m £m Assets Trading assets Loans — 33,425 721 34,146 — 39,249 225 39,474 Securities 19,563 5,371 21 24,955 21,535 7,599 81 29,215 Derivatives — 104,484 1,066 105,550 — 164,296 1,323 165,619 Amounts due from holding company and fellow subsidiaries — 649 — 649 — 766 — 766 Other financial assets Loans — 19 118 137 — 21 71 92 Securities 4,507 988 38 5,533 5,107 1,247 20 6,374 Total financial assets held at fair value 24,070 144,936 1,964 170,970 26,642 213,178 1,720 241,540 As a % of total fair value assets 14% 85% 1% 11% 88% 1% Liabilities Amounts due to holding company and fellow subsidiaries — 348 — 348 — 636 — 636 Trading liabilities Deposits — 38,542 2 38,544 — 44,058 7 44,065 Debt securities in issue — 974 — 974 — 1,408 — 1,408 Short positions 20,508 4,455 1 24,964 19,045 7,734 — 26,779 Derivatives — 97,883 614 98,497 — 156,384 948 157,332 Other financial liabilities Deposits — 568 — 568 — 796 — 796 Debt securities in issue — 1,103 — 1,103 — 1,607 — 1,607 Subordinated liabilities — 703 — 703 — 793 — 793 Total financial liabilities held at fair value 20,508 144,576 617 165,701 19,045 213,416 955 233,416 As a % of total fair value liabilities 12% 88% 0% 8% 92% 0% Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 139 10 Financial instruments – valuation continued NWM Plc 2021 2020 Level 1 Level 2 Level 3 T otal Level 1 Level 2 L evel 3 Total £m £m £m £m £m £m £m £m Assets Trading assets Loans — 19,115 652 19,767 — 27,749 208 27,957 Securities 16,272 5,165 18 21,455 16,640 7,494 78 24,212 Derivatives — 102,052 990 103,042 — 162,878 1,226 164,104 Amounts due from holding company and fellow subsidiaries — 2,965 — 2,965 — 3,459 — 3,459 Other financial assets Loans — 19 118 137 — 21 71 92 Securities 3,942 614 36 4,592 4,709 694 13 5,416 Total financial assets held at fair value 20,214 129,930 1,814 151,958 21,349 202,295 1,596 225,240 As a % of total fair value assets 13% 86% 1% 9% 90% 1% Liabilities Amounts due to holding company and fellow subsidiaries — 3,335 — 3,335 — 5,375 — 5,375 Trading liabilities Deposits — 22,856 2 22,858 — 29,988 7 29,995 Debt securities in issue — 974 — 974 — 1,408 — 1,408 Short positions 18,908 4,378 1 23,287 17,955 7,558 — 25,513 Derivatives — 94,513 583 95,096 — 152,839 915 153,754 Other financial liabilities Deposits — 75 — 75 — — — — Debt securities in issue — 875 — 875 — 1,372 — 1,372 Subordinated liabilities — 371 — 371 — 420 — 420 Total financial liabilities held at fair value 18,908 127,377 586 146,871 17,955 198,960 922 217,837 As a % of total fair value liabilities 13% 87% 0% 8% 92% 0% (1) Transfers between levels are deemed to have occurred at t he beginning of the quarter in which the instrument was transferred. (2) For an analysis of debt securities held at mandatory fair value through prof it or loss by issuer as well as ratings and derivatives, by type and contract, refer to Risk and capital management – Credit risk. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 140 10 Financial instruments – valuation continued Valuation adjustments When valuing financial instruments in the tradin g book, adjustments are made to mid-market valua tions to cover bid- offer spread, funding and credit risk. These adjust ments are presented in the table below: NWM Group 2021 £m 2020 £m Funding – FVA 59 121 Credit – CVA 389 388 Bid – Offer 81 122 Product and deal specific 120 172 649 803 NWM Plc 2021 £m 2020 £m Funding – FVA 75 140 Credit – CVA 283 275 Bid – Offer 79 118 Product and deal specific 120 172 557 705 There was a reallocation of FVA to CVA during the period following an update to the risk manageme nt of certain exposures. The net decrease across CVA an d FVA was driven by reduced exposures, due to increases in interest rates and trade exit activity. The reduction in bid-off er and product deal specific reserves followed reduced risk due to trade exi t activity and LIBOR cessation. Funding valuation adjustments (FVA) FVA represents an estimate of the adjustmen t that a market participant would make to incorporate funding cos ts and benefits that arise in relation to derivative exposures. FVA is calculated as a portfolio level adjustment and can result i n either a funding charge (positive) or funding benefit ( negative). Funding levels are applied to estimated poten tial future exposures. For uncollateralised derivatives, the e xposure reflects the future valuation of the deriv ative. For collateralised derivatives, the exposure reflects the difference bet ween the future valuation of the derivativ e and the level of collateral posted. Credit valuation adjustments (CVA) CVA represents an estimate of the adjustment to fair value that is made to incorporate the counterparty credit risk inherent in derivative exposures. CVA is actively manage d by a credit and market risk hedging process, and the refore movements in CVA are partially offset by trading revenue on the hedges. The CVA is calculated on a portfolio basis refle cting an estimate of the amount a third party would cha rge to assume the credit risk. Collateral held under a credit support agreemen t is factored into the CVA calculation. In such cases where NWM Group holds collateral against counterparty exposu res, CVA is held to the extent that residual risk remains. Bid-offer Fair value positions are required to be marked to e xit, represented by bid (long positions) or offer (short pos itions) levels. Non-derivative positions are typically marked directly to bid or offer prices. However de rivative exposures are adjusted to exit levels by taking bid-offer reserves calculated on a portfolio basis. The bid-offer approach is b ased on current market spreads and standard market bucketing of risk. Bid-offer spreads vary by maturity and risk type to ref lect different spreads in the market. For positions where there is no observable quote, the bid-offer spreads are wi dened in comparison to proxies to reflect reduced li quidity or observability. Netting is applied on a portfolio basis to refle ct the value at which NWM Group believes it could exit the net risk of the portfolio, rather than the sum of exit costs for each of the portfolio’s individual trades. This i s applied where the asset and liability positions are managed as a portfolio for risk an d reporting purposes. Product and deal specific On initial recognition of financial assets and lia bilities valued using valuation techniques which have a significant dependence on information othe r than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in the income statement ove r the life of the transaction; when market data becomes observable; o r when the transaction matures or is close d out as appropriate. On 31 December 2021, net gains of £7 1 million (2020 - £63 million) were carried forward. During the y ear, net gains of £103 million (2020 - £75 million) were deferr ed and £94 million (2020 - £100 million) were recognised in the i ncome statement. Where system generated valuations do not accur ately recover market prices, manual valuation adjustmen ts are applied either at a position or portfolio level. Manual adjustmen ts are subject to the scrutiny of independent c ontrol teams and are subject to monthly review by senior management. Own Credit NWM Group considers the effec t of its own credit standing when valuing financial liabilities recorded a t fair value. Own credit spread adjustments are made when valuing issued deb t held at fair value, including issue d structured notes. An own credit adjustment is applied to positions where it is believed that counterparties would consi der NWM Group’s creditworthiness when pricing trades. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 141 10 Financial instruments – valuation continued Level 3 additional information For illiquid assets and liabilities, classifie d as level 3, additional information is provide d on the valuation techniques used a nd price sensitivity of the products to those inputs. This is to en able the reader to gauge the level of un certainty that arises from positions with significant unobservable in puts or modelling parameters. Level 3 ranges of unobservable inputs The table below provides additional information on level 3 ins t ruments and inputs. This shows the valuation techni que used for the fair value calculation, the unob servable input or inputs and input range. NWM Group 2021 2020 Financial instrument Valuation technique Unobservable inputs Units Low High Low High Trading assets and Other financi al assets Loans Price-based Price % — 106 — 105 Discount cash flow Credit spreads bps 40 102 69 119 Discount cash flow Discount margin bps 46 55 49 57 Debt securities Price-based Price % — 240 — 232 Equity Shares Price-based Price GBP — 30,378 — 27,737 Price % — 7 88 112 Net asset valuation Fund NAV % 80 120 80 120 Derivative assets and liabilities Credit derivatives Credit d erivative pricing Credit spreads bps 6 635 2 500 Option pricing Correlation % ( 15) 95 (50) 95 Volatility % 30 108 27 80 Upfront points % — 100 — 100 Recovery rate % — 60 10 40 Interest rate & FX Option pricin g Correlation % (50) 100 (50) 100 derivatives Volatility % 17 77 17 60 Constant prepayment rate % 2 16 2 18 Mean reversion % — 92 — 92 Basis volatility bps 8 18 15 21 Inflation volatility % 1 2 1 2 Inflation rate % 2 3 1 2 Equity derivatives Option pricing Correlation % — — (53) 87 (1) Valuation: for private equity investments, values may b e estimated by looking at past prices of similar stocks and from valuation statements where valuations are usually derived from earnings measures such as EBITDA or net asset value (NAV). Similarly for equity or b ond fund investments, prices may be estimated from valuation or credit statements using NAV or similar measures. (2) NWM Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 142 10 Financial instruments – valuation continued NWM Plc 2021 2020 Financial instrument Valuation technique Unobservable inputs Units Low High Low High Trading assets and Other financi al assets Loans Price-based Price % — 106 — 105 Discount cash flow Credit spreads bps 40 102 69 119 Discount cash flow Discount margin bps 46 55 49 57 Debt securities Price-based Price % — 240 — 232 Equity Shares Price-based Price GBP — 4,793 — 4,897 Price % — 7 — 80 Net asset valuation Fund NAV % 80 120 80 120 Derivative assets and liabilities Credit derivatives Credit d erivative pricing Credit spreads bps 6 635 2 500 Option pricing Correlation % (15) (95) (50) 95 Volatility % 30 108 2 7 80 Upfront points % — 100 — 100 Recovery rate % — 60 10 40 Interest rate & FX Option pricin g Correlation % (50) 100 (50) 100 derivatives Volatility % 17 77 17 60 Constant prepayment rate % 2 16 2 18 Mean reversion % — 92 — 92 Basis volatility bps 8 18 15 21 Inflation volatility % 1 2 1 2 Inflation rate % 2 3 1 2 Equity derivatives Option pricing Correlation % — — (53) 87 (1) Valuation: for private equity investments, values may b e estimated by looking at past prices of similar stocks and from valuation statements where valuations are usually derived from earnings measures such as EBITDA or net asset value (NAV). Similarly for equity or b ond fund investments, prices may be estimated from valuation or credit statements using NAV or similar measures. (2) NWM Plc does not have any material liabilities measured at fair va lue that are issued with an inseparable third party credit enhancement. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 143 10 Financial instruments – valuation continued Level 3 sensitivities The level 3 sensitivities presente d below are calculated at a trade or low-level portfolio basi s rather than an overall portfolio basis. As individual sensitivities are aggregated with no reflection of the correlated natu re between instruments, the overall portfolio sensitivity may not be accurately reflected. For example, some portfolios may be negatively cor related to others, where a downwards movement in one asse t would produce an upwards movement in another. However, due to the additive presentation of the above figures this co rrelation impact cannot be displayed. As such, the actual poten tial downside sensitivity of the total portfolio may be le ss than the non-correlated sum of the additive figures as shown in the below table. Alternative assumptions Reasonably plausible alternative assumptions of unobservable inputs are determined based on a specif ied target level of certainty of 90%. Alternative assumptions are determined wi th reference to all available evidence including consideration of the followin g: quality of independent pricing information conside ring consistency between different s ources, variation over time, perceived tradability or otherwise of available quotes; consensus service dispersion ranges; volume of trading activity and market bias (e.g. one-way inventory); day 1 profit or loss arising on new trades; number and nature of market participants; market conditions; modelling consistency in the market; size and nature of risk; length of holdin g of position; and market intelligence. Other considerations Whilst certain inputs used to ca lculate CVA, FVA and own credit adjustments are not base d on observable market data, the uncertainty of these inputs i s not considered to have a significant effect on the net valuation of the related derivative portfolios and issued debt. As such, the fair value levelling of the derivative po rtfolios and issued debt is not determined by CVA, FVA or own credit inputs. In addition, any fair value s ensitivity driven by these inputs is not included in the level 3 s ensitivities presented. The table below shows the high and low range of fair value of the level 3 assets an d liabilities. This range incorporates the range of fair value inputs as described in the p revious table. NWM Group 2021 2020 Level 3 Favourab le Unf avourable Level 3 Favourable Unfavourable £m £ m £m £m £m £m Assets Trading assets Loans 721 10 (10) 225 10 — Securities 21 — — 81 — — Derivatives 1,066 90 (110) 1,323 120 (100) Other financial assets Loans 118 10 (10) 71 10 (10) Securities 38 — — 20 — — 1,964 110 (130) 1,720 140 (110) Liabilities Trading liabilities Deposits 2 — — 7 — — Short positions 1 — — — — — Derivatives 614 30 (30) 948 50 (40) Other financial liabilities - debt sec urities in issue — — — — — — 617 30 (30) 955 50 (40) NWM Plc 2021 2020 Level 3 Favourab le Unf avourable Level 3 Favourable Unfavourable £m £ m £m £m £m £m Assets Trading assets Loans 652 10 (10) 208 10 — Securities 18 — — 78 — — Derivatives 990 80 (110) 1,226 100 (90) Other financial assets Loans 118 10 (10) 71 10 (10) Securities 36 — — 13 — — 1,814 100 (130) 1,596 120 (100) Liabilities Trading liabilities Deposits 2 — — 7 — — Short positions 1 — — — — — Derivatives 583 30 (30) 915 50 (40) Other financial liabilities - debt sec urities in issue — — — — — — 586 30 (30) 922 50 (40) Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 144 10 Financial instruments – valuation continued Movement in Level 3 assets and liabilities over the re porting period The following table shows the movement in level 3 asse ts and liabilities in the year. NWM Group 2021 2020 Trading Other finan cial Total T otal Trad ingOther financial Total Tot al assets (2) assets (3) assets liabilities assets (2) assets (3) assets liabilities £m £m £m £ m £m £m £m £m At 1 January 1,629 91 1,720 955 2,415 88 2,503 1,389 Amounts recorded in the income statement (1) (184) (28) (212) ( 117) 192 (14) 178 (68) Amounts recorded in the statement of co mprehensive income — 11 11 — — 2 2 — Level 3 transfers in 125 — 125 20 165 — 165 188 Level 3 transfers out (104) — (104) (168) (139) (3) (142) ( 368) Purchases/originations (4) 966 449 1,415 305 441 259 700 128 Settlements/other decreases (48) (363) (411) (28) (293) (153) (446) (59) Sales (574) (4) (578) ( 347) (1,154) (88) (1,242) (256) Foreign exchange and other (2) — (2) (3) 2 — 2 1 At 31 December 1,808 156 1,964 617 1,629 91 1,720 955 Amounts recorded in the income statement in respect of balances held at year end: - unrealised (184) (28) (212) ( 117) 194 (15) 179 (69) NWM Plc 2021 2020 Trading Other finan cial Total T otal Trad ingOther financial Total Tot al assets (2) assets (3) assets liabilities assets (2) assets (3) assets liabilities £m £m £m £ m £m £m £m £m At 1 January 1,512 84 1,596 922 2,239 76 2,315 1,361 Amounts recorded in the income statement (1) (189) (23) (212) ( 111) 257 (15) 242 (71) Amounts recorded in the statement of co mprehensive income — 12 12 — — 5 5 — Level 3 transfers in 119 — 119 20 165 — 165 187 Level 3 transfers out (102) — (102) (162) (135) — (135) (362) Purchases/originations (4) 912 412 1,324 280 365 106 471 115 Settlements/other decreases (38) (328) (366) (26) (229) — (229) (59) Sales (554) (3) (557) ( 337) (1,150) (88) (1,238) (248) Foreign exchange and other — — — — — — — (1) At 31 December 1,660 154 1,814 586 1,512 84 1,596 922 Amounts recorded in the income statement in respect of balances held at year end: - unrealised (189) (23) (212) ( 111) 257 (14) 243 (72) (1) For NWM Group, net losses on trading assets and liabilities of £67 million (2020 – £260 milli on gains) were recorded in income from trading activities. Net losses on other instruments of £28 million (2020 - £14 million losses) were recorded in other operating income and interest income as appropriate. For NWM Plc, net losses on trading assets and liabilities of £78 million (2020 – £328 million gains) were recorded in income from trading activities. Net losses on other instruments of £ 23 million (2020 - £15 million losses) were recorded in other operating income and interest income as appropriate. (2) Trading assets comprise assets held at fair value in t rading portfolios. (3) (4) Other financial assets comprise fair value through ot her comprehensive income, designated as at fair value through profit or loss and other fa ir value through profit or loss. Movement in the period includes new loan originations classified as HT C&S under IFRS 9 and fair valued through other comprehe nsive income. 2021 purchases include a new leveraged finance loan of £450 million. As a result of its composition and illiquid nature, pricing is based on unobservable inputs and the judgment of valuation experts. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 145 10 Financial instruments – valuation continued Fair value of financial instruments measured at amortised cost on the balance sheet The following table shows the carrying value an d fair value of financial instrumen ts measured at amortised cost on the b alance sheet: NWM Group NWM Plc Items where Items where fair value Fair value fair value Fair value approximates Carrying Fair hierarchy level approximates Carrying Fair hierarchy level carrying value value value Level 2 Level 3 carrying value value value Level 2 Level 3 2021 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn Financial assets Cash and balances at central banks 16.6 12.3 Settlement balances 2.1 0.8 Loans to banks 0.1 0.9 0.9 0.4 0.5 — 0.7 0.7 0.3 0.4 Loans to customers 7.5 7.5 0.4 7.1 6.8 6.8 0.3 6.5 Amounts due from holding company and fellow subsidiaries 0.7 0.7 — 0.7 — 3.6 3.6 — 3.6 Other financial assets - securities 3.1 3.1 — 3.1 3.0 3.0 — 3.0 2020 Financial assets Cash and balances at central banks 15.8 11.7 Settlement balances 2.3 1.1 Loans to banks 0.1 0.9 0.9 0.3 0.6 0.1 0.6 0.6 0.1 0.5 Loans to customers 8.4 8.4 1.9 6.5 7.5 7.4 1.9 5.5 Amounts due from holding company and fellow subsidiaries 0.8 0.8 — 0.8 0.2 3.7 3.7 — 3.7 Other financial assets - securities 2.6 2.6 — 2.6 2.5 2.6 — 2.6 NWM Group NWM Plc Items where Items where fair value Fair value fair value Fair value approximates Carrying Fair hierarchy level approximates Carrying Fair hierarchy level carrying value value value Level 2 Level 3 carrying value value value Level 2 Level 3 2021 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn Financial liabilities Bank deposits 1.8 1.8 — 1.8 1.8 1.8 — 1.8 Customer deposits — 2.2 2.2 — 2.2 — 1.5 1.5 — 1.5 Amounts due to holding company and fellow subsidiaries — 5.6 5.7 5.4 0.3 0.1 7.4 7.5 5.4 2.1 Settlement balances 2.1 1.0 Other financial liabilities Debt securities in issue 16.6 16.8 13.9 2.9 15.5 15.7 13.2 2.5 Subordinated liabilities 0.3 0.4 0.4 — — — — — 2020 Financial liabilities Bank deposits 1.8 1.8 — 1.8 1.8 1.8 — 1.8 Customer deposits 0.1 2.5 2.6 — 2.6 — 1.5 1.4 — 1.4 Amounts due to holding company and fellow subsidiaries 0.1 7.1 7.2 7.1 0.1 0.9 9.5 9.6 7.1 2.5 Settlement balances 2.2 0.6 Other financial liabilities Debt securities in issue 14.7 15.0 9.4 5.6 13.5 13.8 8.6 5.2 Subordinated liabilities 0.3 0.4 0.4 — 0.1 0.1 0.1 — The assumptions and methodol ogies underlying the calculation of fair values of financial instru ments at the balance sheet date are as follows: Short-term financial instruments For certain short-term financial instruments: c ash and balances at central banks, items in the course of colle ction from other banks, settlement balances, items in the c ourse of transmission to other banks, customer dema nd deposits and notes in circulation, carrying value is de emed a reasonable approximation of fair value. Loans to banks and customers In estimating the fair value of net loans to custo mers and banks measured at amortised cost, NWM Group’s loans are segregated into appropriate portfolios reflecting the characteristics of the constituent loans. Two p rincipal methods are used to estimate fair value: (a) Contractual cash flows are discounted using a market discount rate that incorporates the cur rent spread for the borrower or where this is not obse rvable, the spread for borrowers of a similar credit standing. This met hod is used for portfolios where counterpar ties have external ratings: institutional and corporate lend ing. (b) Expected cash flows (unadjusted for c redit losses) are discounted at the current offer rate for the same or simil ar products. Debt securities and subordinated liabili ties Most debt securities are valued using quoted prices in active markets or from quoted prices of similar financi al instruments in active markets. Fair values of the remaining po pulation are determined using market standard valu ation techniques, such as discounted cash flows, adjusting for own credi t spreads where appropriate. Bank and customer deposits Fair values of deposits are estima ted using discounted cash flow valuation techniques. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 146 11 Financial instruments - maturity analy sis Remaining maturity The following table shows the r esidual maturity of financial instruments, based on c ontractual date of maturity: NWM Group 2021 2020 Less than More than Total Less than More than Total 12 months 12 months 12 months 12 months £m £m £m £m £m £m Assets Cash and balances at central banks 16,645 — 16,645 15,771 — 15,771 Trading assets 40,206 18,895 59,101 41,736 26,953 68,689 Derivatives 34,423 71,127 105,550 46,232 119,387 165,619 Settlement balances 2,139 — 2,139 2,296 — 2,296 Loans to banks - amortised cost 714 248 962 891 112 1,003 Loans to customers - amortised cost 3,707 3,764 7,471 4,535 3,909 8,444 Amounts due from holding company and fe llow subsidiaries (1) 705 675 1,380 1,295 225 1,520 Other financial assets 3,848 4,938 8,786 3,152 5,889 9,041 Liabilities Bank deposits 1,244 564 1,808 1,294 514 1,808 Customer deposits 2,161 107 2,268 2,526 92 2,618 Amounts due to holding company and fellow subsi diaries (2) 1,571 4,384 5,955 942 6,934 7,876 Settlement balances 2,068 — 2,068 2,248 — 2,248 Trading liabilities 41,548 22,934 64,482 45,033 27,219 72,252 Derivatives 34,606 63,891 98,497 47,138 110,194 157,332 Other financial liabilities 8,715 10,540 19,255 8,310 9,860 18,170 Lease liabilities 13 40 53 21 50 71 NWM Plc 2021 2020 Less than More than Less than More than 12 months 12 months Total 12 months 12 months Total £m £m £m £m £m £m Assets Cash and balances at central banks 12,294 — 12,294 11,736 — 11,736 Trading assets 22,355 18,867 41,222 29,985 22,184 52,169 Derivatives 34,259 68,783 103,042 46,739 117,365 164,104 Settlement balances 795 — 795 1,084 — 1,084 Loans to banks - amortised cost 464 248 712 589 112 701 Loans to customers - amortised cost 3,641 3,169 6,810 4,440 3,037 7,477 Amounts due from holding company and fe llow subsidiaries (1) 3,862 2,749 6,611 4,720 2,709 7,429 Other financial assets 3,092 4,651 7,743 2,632 5,411 8,043 Liabilities Bank deposits 1,244 564 1,808 1,248 514 1,762 Customer deposits 1,448 62 1,510 1,406 63 1,469 Amounts due to holding company and fellow subsi diaries (2) 5,407 5,399 10,806 6,714 9,054 15,768 Settlement balances 1,028 — 1,028 604 — 604 Trading liabilities 24,204 22,915 47,119 30,794 26,122 56,916 Derivatives 34,547 60,549 95,096 47,670 106,084 153,754 Other financial liabilities 7,109 9,768 16,877 6,513 8,857 15,370 Lease liabilities 7 3 10 10 6 16 (1) Amounts due from holding company and fellow subsidiaries relating to non-financial instrum ents of £9 9 million (2020 – £67 million) for NWM Group and £112 million (2020 - £177 million) for NWM Plc have been excluded f rom the tables. (2) Amounts due to holding company and fellow subsidiaries relating t o non-financial instruments of £171 millio n (2020 - £258 million) for NWM Group and £172 million (2020 - £421 million) for NWM Plc have been excluded f rom the tables. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 147 11 Financial instruments - maturity analy sis continued Assets and liabilities by contractual cash flows up to 20 years The tables below show the contractual undiscoun ted cash flows receivable and payable, up to a period of 20 y ears, including future receipts and payments of interest of financial assets and liabilities by contractual maturity. The balances in the following tables do not agree directly with the consolida ted balance sheet, as the tables include all cash flows rel ating to principal and future coupon payments, p resented on an undiscounted basis. The tables have been prepared on the f ollowing basis: Financial assets have been reflected in the time b and of the latest date on which they could be repaid, unless e arlier repayment can be demanded by NWM G roup. Financial liabilities are included at the earliest date on which the counterparty can require repay ment, regardless of whether or not such early repayment results in a pe nalty. If repayment is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the asse t is included in the time band that contains the latest date on which it can be repaid, regardless of early repayment. The liability is included in the time band that contains the earlie st possible date on which the conditions could be fulfilled, without consi dering the probability of the conditions being met. For example, if a s tructured note is automatically prepaid when an equity index excee ds a certain level, the cash outflow will be included in the less than three months’ period whatever the level of the index at the year end. The settlement date of debt secu rities in issue, issued by certain securitisation vehicles consolid ated by NWM Group depends on when cash flows are received from the securitise d assets. Where these assets are prepayable, the timing of t he cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date. As t he repayments of assets and liabilities are linked, the repayment of assets in securitisations is shown on the earliest date that the asset can be prepaid, as this is the basis use d for liabilities. The principal amounts of financial liabilities th at are repayable after 20 years or where the counterparty has no righ t to repayment of the principal, are excluded from the ta ble along with interest payments after 20 years. The maturity of guarantees and com mitments is based on the earliest possible date they would be drawn in o rder to evaluate NWM Group’s liquidity position. MFVTPL assets of £165 billion (202 0 - £235 billion) for NWM Group, £147 billion (2020 - £22 0 billion) for NWM Plc, HFT liabilities of £163 billion (2020 - £23 0 billion) for NWM Group and £145 billion (2020 - £216 billion) for NWM Plc have been excluded from the following tables. NWM Group 0 - 3 months 3 - 12 months 1 - 3 years 3 - 5 years 5 - 10 years 10 - 20 years 2021 £m £m £m £m £m £m Assets by contractual maturity up to 20 ye ars Cash and balances at central banks 16,645 — — — — — Derivatives held for hedging 60 7 63 1 3 — Settlement balances 2,139 — — — — — Loans to banks - amortised cost 691 23 12 — — — Loans to customers - amortised cost 1,689 2,094 2,830 660 327 70 Amounts due from holding company and fe llow subsidiaries (1) 459 3 24 7 14 100 Other financial assets (2) 1,872 1,986 2,885 335 560 732 Finance lease 2 8 9 4 12 24 23,557 4,121 5,823 1,007 916 926 2021 Liabilities by contractual maturity up to 20 ye ars Bank deposits 825 421 566 — — — Customer deposits 1,279 876 36 69 1 19 Amounts due to holding company and fellow subsi diaries (3) 1,057 166 3,743 — 195 — Settlement balances 2,068 — — — — — Derivatives held for hedging — 10 93 26 — — Other financial liabilities 2,948 5,541 5,405 4,368 345 546 Lease liabilities 4 10 12 9 18 — 8,181 7,024 9,855 4,472 559 565 Guarantees and commitments notional amoun t Guarantees (4) 595 — — — — — Commitments (5) 9,921 — — — — — 10,516 — — — — — For notes to the above table ref er to page 149. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 148 11 Financial instruments - maturity analy sis continued NWM Group 0-3 months 3-12 months 1- 3 years 3-5 years 5-10 years 10- 20 years 2020 £m £ m £m £m £m £m Assets by contractual maturity up to 20 ye ars Cash and balances at central b anks 15,771 — — — — — Derivatives held for hedging 52 44 137 27 6 — Settlement balances 2,296 — — — — — Loans to banks - amortised cost 876 16 — — 1 110 Loans to customers - amortised cost 1,476 3,139 2,541 872 262 126 Amounts due from holding company and fe llow subsidiaries (1) 528 1 23 1 4 85 Other financial assets (2) 1,439 2,004 2,871 908 882 525 Finance lease 2 7 8 6 13 46 22,440 5,211 5,580 1,814 1,168 892 2020 Liabilities by contractual maturity up to 20 ye ars Bank deposits 458 819 498 37 — — Customer deposits 1,664 863 84 1 1 20 Amounts due to holding company and fellow subsi diaries (3) 103 204 5,181 889 204 — Settlement balances 2,248 — — — — — Derivatives held for hedging — (1) 92 11 — — Other financial liabilities 2,419 5,931 5,371 3,371 463 195 Other liabilities- notes in circulation 4 15 21 8 21 2 Lease liabilities 6,896 7,831 11,247 4,317 689 217 Guarantees and commitments notional amoun t Guarantees (4) 638 — — — — — Commitments (5) 11,348 — — — — — 11,986 — — — — — NWM Plc 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2021 £m £m £m £m £m £m Assets by contractual maturity up to 20 ye ars Cash and balances at central banks 12,294 — — — — — Derivatives held for hedging 60 7 63 1 3 — Settlement balances 795 — — — — — Loans to banks - amortised cost 452 12 11 — — — Loans to customers - amortised cost 1,630 2,087 2,478 454 323 70 Amounts due from holding company and fe llow subsidiaries (1) 1,396 72 1,327 549 222 80 Other financial assets (2) 1,790 1,556 2,640 247 530 696 Finance lease 1 4 — — — — 18,418 3,738 6,519 1,251 1,078 846 2021 Liabilities by contractual maturity up to 20 ye ars Bank deposits 825 421 566 — — — Customer deposits 826 619 11 55 1 3 Amounts due to holding company and fellow subsi diaries (3) 2,367 197 4,047 — 416 — Settlement balances 1,028 — — — — — Derivatives held for hedging — 10 93 26 — — Other financial liabilities 2,522 4,365 5,291 4,364 189 148 Lease liabilities 2 6 2 — — — 7,570 5,618 10,010 4,445 606 151 Guarantees and commitments notional amount Guarantees (4) 197 — — — — — Commitments (5) 6,152 — — — — — 6,349 — — — — — For notes to the above table ref er to the following page. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 149 11 Financial instruments - maturity analy sis continued NWM Plc 0-3 months 3-12 months 1-3 years 3- 5 years 5-10 years 10 -20 years 2020 £m £ m £m £m £m £m Assets by contractual maturity up to 20 ye ars Cash and balances at central banks 11,736 — — — — — Derivatives held for hedging 52 44 137 27 6 — Settlement balances 1,084 — — — — — Loans to banks - amortised cost 574 16 — — 1 110 Loans to customers - amortised cost 1,412 3,090 2,091 483 256 127 Amounts due from holding company and fe llow subsidiaries (1) 1,029 738 1,209 689 220 85 Other financial assets (2) 1,429 1,490 2,723 778 765 498 Finance lease 1 4 5 — — — 17,317 5,382 6,165 1,977 1,248 820 2020 Liabilities by contractual maturity up to 20 ye ars Bank deposits 456 775 498 37 — — Customer deposits 878 529 61 1 1 3 Amounts due to holding company and fellow subsi diaries (3) 1,67 2 365 6,379 889 427 — Settlement balances 604 — — — — — Derivatives held for hedging — (1) 92 11 — — Other financial liabilities 2,086 4,458 5,049 3,276 307 195 Lease liabilities 2 7 7 — — — 5,698 6,133 12,086 4,214 735 198 Guarantees and commitments notional amoun t Guarantees (4) 195 — — — — — Commitments (5) 6,678 — — — — — 6,873 — — — — — (1) Amounts due from holding company and fellow subsidiaries relating to non-financial instrum ents have b een excluded from the tables. (2) Other financial assets excludes equity shares. (3) Amounts due to holding company and fellow subsidiaries relating t o non-financial instruments have been excluded from the tables. (4) NWM Group is only called upon to satisfy a guaran tee when the guaranteed party fails to meet its obligations. NWM Group expects most guarantees it provides to exp ire unused. (5) NWM Group has given commitments to provide funds t o customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty. NWM Group does not expect all facilities to be drawn, and some may laps e before drawdown. 12 Trading assets and liabili ties Trading assets and liabilities comprise asse ts and liabilities held at fair value in trading portfol ios. NWM Group NWM Plc 2021 2020 2021 2020 Assets £m £m £m £m Loans Reverse repos 20,742 19,404 9,246 11,071 Collateral given 11,990 18,459 9,332 15,389 Other loans 1,414 1,611 1,189 1,497 Total loans 34,146 39,474 19,767 27,957 Securities Central and local government - UK 6,919 4,184 6,919 4,184 - US 3,329 5,149 145 498 - Other 10,929 16,436 10,929 16,390 Financial institutions and Cor porate 3,778 3,446 3,462 3,140 Total securities 24,955 29,215 21,455 24,212 Total 59,101 68,689 41,222 52,169 Liabilities Deposits Repos 19,389 19,036 4,940 5,928 Collateral received 17,619 23,226 16,386 22,267 Other deposits 1,536 1,803 1,532 1,800 Total deposits 38,544 44,065 22,858 29,995 Debt securities in issue 974 1,408 974 1,408 Short positions 24,964 26,779 23,287 25,513 Total 64,482 72,252 47,119 56,916 For accounting policy information se e Accounting policies note 8. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 150 13 Derivatives NWM Group uses derivatives as part of its trading activities or to manage its own risk such as interest rate, foreign excha nge, or credit risk. NWM Group 2021 2020 Notional Assets Liabilities Notional A ssets Liabilities £bn £m £m £bn £m £ m Exchange rate contracts 3,162 38,546 39,275 3,331 52,524 54,863 Interest rate contracts 8,601 66,850 58,879 10,412 112,926 102,073 Credit derivatives 14 154 343 15 161 388 Equity and commodity contracts — — — 1 8 8 105,550 98,497 165,619 157,332 NWM Plc 2021 2020 Notional Assets Liabilities Notional Assets Liabilities £bn £m £m £ bn £m £m Exchange rate contracts 3,169 38,692 39,427 3,362 53,182 55,514 Interest rate contracts 7,383 64,196 55,335 8,606 110,753 97,850 Credit derivatives 14 154 334 15 161 382 Equity and commodity contracts — — — 1 8 8 103,042 95,096 164,104 153,754 For accounting policy information se e Accounting policies 8 and 14. Refer to Note 9 for amounts due from/to fellow NatWest Group subsidiaries. NWM Group applies hedge accounting to reduce the accounting mismatch caused in the income statement by u sing derivatives to hedge the following risks: inte rest rate, foreign exchange and net investment in foreign operations. NWM Group’s interest rate hedging relates to the management of NWM Group’s non-trading structural interest rate risk, caused by the mismatch between fixed interest rates and floating interest rates on its financial ins truments. NWM Group manages this risk within approved limits. Re sidual risk positions are hedged with derivatives, principally interest rate sw aps. Suitable larger fixed rate financial instruments a re subject to fair value hedging; the remaining exposure, where possible, is hedged by derivatives designated as cash flow hedges. Cash flow hedges of interest rate risk relate to exposu res to the variability in future interest payments and receipts due to the movement of benchmark interest rates on fo recast transactions and on financial assets and financial lia bilities. This variability in cash flows is hedged by interest rate swaps, whic h convert variable cash flows into fixed. For these cash flow hed ge relationships, the hedged items are actual and fo recast variable interest rate cash flows arising f rom financial assets and financial liabilities with interest rates linked to the relev ant benchmark rates, most notably LIBO R, EURIBOR, SONIA and the Bank of England Official Bank Rate. The v ariability in cash flows due to movements in the relevant benchmark rate is hedged; this risk component is identified using the risk management systems of NWM Group and e ncompasses the majority of cash flow variability risk. Fair value hedges of interest rate risk invol ve interest rate swaps transforming the fixed interest rate risk in fin ancial assets and financial liabilities to floating. The hedged risk is the risk of changes in the hedged item’s fair value att ributable to changes in the benchmark interest rate risk component of the hedged item. The significant benchmarks identified as risk co mponents are LIBOR, EURIBOR and SONIA. The se risk components are identified using the risk management systems of NW M Group and encompass the majority of the hedged item’s fai r value risk. NWM Group hedges the exchange rate risk of i ts net investment in foreign currency denominated operations with cur rency borrowings and forward foreign exchange c ontracts. NWM Group reviews the value of the investmen ts’ net assets, executing hedges where appropriate to reduce t he sensitivity of capital ratios to foreign exchange rate movement. Hedge accounting relationships will be designated whe re required. Exchange rate risk also arises in NWM Grou p where payments are denominated in currencies other than the fu nctional currency. Residual risk positions are hedged wit h forward foreign exchange contracts, fixing the exc hange rate the payments will be settled in. The derivatives are documented as cash flow hedges. For all cash flow hedging and fair value hedge relationships NWM Group determines that there is an adequa te level of offsetting between the hedged item and hed ging instrument at inception and on an ongoing basis. This is achieved by comparing movements in the fair value of the ex pected highly probable forecast interest cash f lows/fair value of the hedged item attributable to the hedged risk with movements i n the fair value of the expected changes in cash flows fr om the hedging interest rate swap. Hedge effectiveness is asse ssed on a cumulative basis over a time period management determines to be appropriate. NWM Group use s either the actual ratio between the hedged item and hedging inst rument(s) or one that minimises hedge ineffectiveness to establish the he dge ratio for hedge accounting. Hedge ineffe ctiveness is measured and recognised in the income statement as it arises. IBOR reform - NWM Group in the y ear continued to apply, for relationships directly affected b y interest rate benchmark reform, Interest Rate Benchmark Reform Amen dments to IAS 39 and IFRS 7 issued September 20 19 (“Phase 1 relief”) and Interest Rate Benchmark Refor m – Phase 2 Amendments to IAS 39 and IFRS 7 issued August 202 0 (“Phase 2 relief”). Significant transitions in the year we re the GBP, JPY and CHF derivatives subject to cash flow and fair v alue hedging transitioned as part of the Liquidity Cle aring House ‘big bang’ conversion in December 2021. The swaps were restructured to reprice off the appropriate risk free rate from the nex t repricing date post 31 December 2021 plus a spread adjustmen t. All impacted hedge accounting relationships ha d their designations updated to reflect this transition. USD cash flow and fair value he dges of interest rate risk that mature past 30 June 2023 continue to be directly affected by interest rate benchmark reform. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 151 13 Derivatives continued Included in the table below are derivatives held for hedging as follows: NWM Group 2021 2020 Changes in fa ir Changes in fair value used for value used for hedge hedge Notional Assets L iabilities ineffectiveness (1) Notiona l Assets Liabilities ineffect iveness (1) £bn £m £m £m £bn £m £m £m Fair value hedging - interest rate contracts 15.9 179 156 (173) 14.8 392 170 42 Cash flow hedging - interest rate contracts 4.8 36 59 (188) 5.6 288 — 61 - exchange rate contracts 1.1 1 109 1 1.2 1 107 ( 3) Net investment hedging - exchange rate contracts 0.3 6 — — — — — — 22.1 222 324 (360) 21.6 681 277 100 Clearing house settlements (90) (205) (414) (170) 132 119 267 107 NWM Plc 2021 2020 Changes in fa ir Changes in fair value used for value used for hedge hedge Notional Assets Liabilities ineffectiveness (1) Notiona l Assets Liabilities ineffectiveness (1) £bn £m £m £m £bn £m £m £m Fair value hedging Interest rate contracts 15.8 174 156 (170) 14.7 383 170 39 Cash flow hedging Interest rate contracts 4.8 36 59 (188) 5.6 288 — 61 Exchange rate contracts 1.1 1 109 1 1.2 1 107 (3) Net investment hedging Exchange rate contracts 0.3 6 — — — — — — 22.0 217 324 (357) 21.5 672 277 97 Clearing house settlements (85) (205) (406) (170) 132 119 266 107 (1) The change in fair value per hedge ineffectiveness includes instruments that were derecognised in the year. The notional of hedging instruments fo r NWM Group affected by interest rate benchmark reform is as follows: 2021 2020 £bn £bn Fair value hedging - EURIBOR (1) — 6.8 - GBP LIBOR — 0.3 - USD LIBOR (2) 3.9 7.2 - Other currency LIBOR — 1.0 Cash flow hedging - EURIBOR (1) — 0.1 - GBP LIBOR — 5.1 - USD LIBOR (2) 0.9 0.9 (1) In 2021 management concluded that EURIBOR is not expected to be significantly ref ormed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. (2) In 2021 the FCA declared that USD LIBOR will be non- representative post 30 June 2023; at the time of preparing the 2020 disclosures this date was expected to be 31 December 2021. (3) The notional of hedging instruments for NWM plc affected b y interest rate benchmark reform were as above (2020: Fair value hedging £0.1 billion notional less). (4) The notional of £1 billion cross currency derivative contracts in cash flow hedge relationships will convert to repricing using the relevant risk-free rate at the first repricing date post cessation. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 152 13 Derivatives continued The following table shows the period in which notional of the hedging contract ends: NWM Group 0 - 3 months 3 - 12 months 1 - 3 years 3 - 5 years 5 - 10 years 10 - 20 years 20+ years Total 2021 £bn £bn £bn £bn £bn £bn £bn £bn Fair value hedging Hedging assets - interest rate risk 0.1 0.7 2.1 0.2 — 0.1 0.1 3.3 Hedging liabilities - interest rate risk 1.5 1.6 5.5 2.8 1.0 0.2 — 12.6 Cash flow hedging Hedging assets - interest rate risk 0.4 0.5 1.0 1.6 1.3 — — 4.8 Average fixed interest rate (%) 2.64 0.26 0.95 0.87 0.66 — — 0.91 Hedging liabilities - exchange rate risk — — 0.9 0.2 — — — 1.1 Net investment hedging Exchange rate risk 0.3 — — — — — — 0.3 2020 Fair value hedging Hedging assets - interest rate risk — 0.5 2.0 0.3 — 0.1 0.2 3.1 Hedging liabilities - interest rate risk — 0.3 8.0 2.7 0.7 — — 11.7 Cash flow hedging Hedging assets - interest rate risk 0.5 0.2 1.5 2.5 0.9 — — 5.6 Average fixed interest rate (%) 2.11 3.31 2.27 1.55 0.90 — — 1.75 Hedging assets - exchange rate risk — — 0.1 — — — — 0.1 Hedging liabilities - exchange rate risk — — 0.9 0.2 — — — 1.1 Net investment hedging Exchange rate risk — — — — — — — — NWM Plc 0 - 3 months 3 - 12 months 1 - 3 years 3 - 5 years 5 - 10 years 10 - 20 years 20+ years Total 2021 £bn £bn £bn £bn £bn £bn £bn £bn Fair value hedging Hedging assets - interest rate risk 0.1 0.7 2.1 0.2 — 0.1 0.1 3.3 Hedging liabilities - interest rate risk 1.5 1.6 5.4 2.8 1.0 0.2 — 12.5 Cash flow hedging Hedging assets - interest rate risk 0.4 0.5 1.0 1.6 1.3 — — 4.8 Average fixed interest rate (%) 2.64 0.26 0.95 0.87 0.66 — — 0.91 Hedging liabilities - exchange rate risk — — 0.9 0.2 — — — 1.1 Net investment hedging Exchange rate risk 0.3 — — — — — — 0.3 2020 Fair value hedging Hedging assets - interest rate risk — 0.5 2.0 0.3 — 0.1 0.2 3.1 Hedging liabilities - interest rate risk — 0.3 7.9 2.7 0.7 — — 11.6 Cash flow hedging Hedging assets - interest rate risk 0.5 0.2 1.5 2.5 0.9 — — 5.6 Average fixed interest rate (%) 2.11 3.31 2.27 1.55 0.90 — — 1.75 Hedging assets - exchange rate risk — — 0.1 — — — — 0.1 Hedging liabilities - exchange rate risk — — 0.9 0.2 — — — 1.1 Net investment hedging Exchange rate risk — — — — — — — — For cash flow hedging of exchange rate risk, the a verage foreign exchange rates applic able across the relationships were USD/GBP 1.22 (2020: 1 .22), JPY/GBP 132.93 (2020: 132.93), JPY/EUR: n/a (2020: 12 0.21) and CNH/GBP 8.74 (2020 : n/a) for the main currencies hedged. For net investment hedging of e xchange risk, the average foreign exchange r ates applicable were AED/USD 3.67 (20 20: n/a) and USD/GBP 1.32 (2020: n/a) for the main cur rencies hedged. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 153 13 Derivatives continued The table below analyses assets and liabilities includi ng intercompany, subject to hedging de rivatives: 2021 2020 Impact Change in Impact Change in Carrying on fair value Carrying on fair value value (CV) hedged used as a value (CV) hedged used as a of hedged items basis to of hedged items basis to assets and included determine assets and included determine liabilities in CV ineffectiveness (1) liabilities in CV ineffectiveness (1) NWM Group £m £m £m £m £m £m Fair value hedging – interest rate Loans to banks and customers - amortised cost 33 — — 33 — — Other financial assets - securities 3,353 92 (61) 3,165 152 89 Total 3,386 92 (61) 3,198 152 89 Other financial liabilities - debt securities in issue 14,604 55 231 13,245 322 (139) Subordinated liabilities 102 2 3 104 5 (3) Total 14,706 57 234 13,349 327 (142) Cash flow hedge – interest rate Loans to banks and customers - amortised cost 4,648 172 5,068 (50) Other financial assets - securities 159 6 571 (5) Total 4,807 178 5,639 (55) Cash flow hedge – exchange r ate Loans to banks and customers - amortised cost 21 — 112 1 Other financial assets - securities 2 — 30 — Total 23 — 142 1 Other financial liabilities - debt securities in issue 1,036 (1) 1,036 2 Total 1,036 (1) 1,036 2 NWM Plc Fair value hedging – interest rate Loans to banks and customers - amortised cost 33 — — 33 — — Other financial assets - securities 3,353 92 (61) 3,165 152 89 Total 3,386 92 (61) 3,198 152 89 Other financial liabilities - debt securities in issue 14,604 55 231 13,245 322 (139) Total 14,604 55 231 13,245 322 (139) Cash flow hedge – interest rate Loans to banks and customers - amortised cost 4,648 172 5,068 (50) Other financial assets - securities 159 6 571 (5) Total 4,807 178 5,639 (55) Cash flow hedge – exchange r ate Loans to banks and customers - amortised cost 21 — 112 1 Other financial assets - securities 2 — 30 — Total 23 — 142 1 Other financial liabilities - debt securities in issue 1,036 (1) 1,036 2 Total 1,036 (1) 1,036 2 (1) The change in fair value per hedge ineffectiveness includes instruments that were derecognised in the year. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 154 13 Derivatives continued The following risk exposures for NWM Group will be affected by interest rate benchma rk reform (notional, hedge adjustment): 2021 2020 Hedged Hedged Notional adjustment Notional a djustment £bn £m £bn £m Fair value hedging - EURIBOR (1) — — 6.8 (85) - GBP LIBOR — — 0.3 (8) - USD LIBOR (2) 4.1 7 7.2 (89) - Other currency LIBOR — — 1.0 — Cash flow hedging - EURIBOR (1) — — 0.1 3 - GBP LIBOR — — 2.5 (30) - USD LIBOR (2) 0.9 (16) 0.9 (51) - BOE base rate (3) — — 2.6 (126) (1) In 2021 management concluded that EURIBOR is not expected to be significantly ref ormed further and therefore any uncertainty due to interest benchmark rate reform for EURIBOR has ended. (2) In 2021 the FCA declared that USD LIBOR will be non- representative post 30 June 2023; at the time of preparing the 2020 disclosures this date was expected to be 31 December 2021. (3) Hedge relationships subject to reform are those whe re either the hedged item or the hedging instrument is subject to the IBOR reform. (4) The above risk exposures for NWM Plc were the sa me as above (2020: Fair value hedging £0.1 billion notional and £5 million Hedged adjustment less). (5) Notional of £150 million GBP LIBOR hedged items will convert to repricing off SONIA at the first repricing date post cessation in NWM Plc. The following table shows a pre -tax analysis of the cash flow hedge reserve and foreign exc hange hedge reserve: NWM Group 2021 2020 Cash flow Foreign exchange Cash flow Foreign exchange hedge reserve hedge reserve hedge reserve hedge reserve £m £m £m £m Continuing Interest rate risk (37) — 229 — Foreign exchange risk (4) 8 (4) 4 De-designated Interest rate risk 111 — 52 — Foreign exchange risk — (141) — (150) Total 70 (133) 277 (146) NWM Plc 2021 2020 Cash flow Foreign excha nge Cash flow Foreign exchange hedge reserve hedge reserve hedge reserve hedge reserve £m £m £m £m Continuing Interest rate risk (37) — 229 — Foreign exchange risk (4) 1 (4) — De - designated Interest rate risk 111 — 52 — Foreign exchange risk — 33 — 33 Total 70 34 277 33 Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 155 13 Derivatives continued NWM Group 2021 2020 Foreign Foreign Cash flow exchange Cash flow exchange hedge reserve hedge reserve hedge reserve hedge reserve £m £m £m £m Amount recognised in equity Interest rate risk (207) — 18 — Foreign exchange risk — 20 — (31) Total (207) 20 18 (31) Amount transferred from equity to earnings Interest rate risk to net interest income 1 — 73 — Interest rate risk to non-interest inco me — — — — Foreign exchange risk to net interest inco me — — 1 — Foreign exchange risk to non-interest income — — — 1 Foreign exchange risk to operating expenses — — — — Total 1 — 74 1 NWM Plc 2021 2020 Foreign Foreign Cash flow exchange Cash flow exchange hedge reserve hedge reserve hedge reserve hedge reserve £m £m £m £m Amount recognised in equity Interest rate risk (208) — 18 — Foreign exchange risk — 1 — — Total (208) 1 18 — Amount transferred from equity to earnings Interest rate risk to net interest income 1 — 73 — Interest rate risk to non-interest inco me — — — — Foreign exchange risk to net interest inco me — — 1 — Foreign exchange risk to non-interest income — — — — Foreign exchange risk to operating expenses — — — — Total 1 — 74 — Hedge ineffectiveness recognised in othe r operating income in continuing operations co mprised: NWM Group 2021 2020 £m £m Fair value hedging Gains/(losses) on the hedged items attributable to the hed ged risk 173 (53) (Losses)/gains on the hedging instruments (173) 42 Fair value hedging ineffectiveness — (11) Cash flow hedging Interest rate risk (10) 6 Cash flow hedging ineffectiveness (10) 6 Total (10) (5) The main sources of ineffectiveness for interest rate risk hedge accounting relationships a re:  The effect of the counterparty credit risk on the fair value of the interest rate swap which is not reflected in the fair value of the hedged item attributable to the change in inte rest rate (fair value hedge);  Differences in the repricing basis between the hedging i nstrument and hedged cash flows (cas h flow hedge); and  Upfront present values on the hedging derivative s where hedge accounting relationships ha ve been designated after the tr ade date (cash flow hedge and fair value hedge). Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 156 14 Loan impairment provisions Loan exposure and impairment metri cs The table below summarises loans and rel ated credit impairment measures within the scope of ECL framework. NWM Group NWM Plc 31 December 31 December 31 December 31 December 2021 2020 2021 2020 £m £m £m £m Loans - amortised cost - Stage 1 8,301 7,799 7,444 6,819 - Stage 2 147 1,566 104 1,253 - Stage 3 99 171 61 99 Of which: individual 91 162 53 90 Of which: collective 8 9 8 9 - Inter-Group 731 755 2,605 3,039 Total 9,278 10,291 10,214 11,210 ECL provisions (1) - Stage 1 6 12 6 11 - Stage 2 3 49 2 12 - Stage 3 75 132 36 65 Of which: individual 68 124 29 57 Of which: collective 7 8 7 8 - Inter-Group — 1 1 5 Total 84 194 45 93 ECL provision coverage (2) - Stage 1 (%) 0.07 0.15 0.08 0.16 - Stage 2 (%) 2.04 3.13 1.92 0.96 - Stage 3 (%) 75.76 77.19 59.02 65.66 - Inter-Group (%) — 0.13 0.04 0.16 Total 0.98 2.02 0.58 1.08 Impairment (releases)/losses ECL (release)/charge - Stage 1 (14) (2) (11) 1 - Stage 2 (11) 55 — 16 - Stage 3 (9) (12) (11) (13) Of which: individual (6) (3) (8) (4) Of which: collective (3) (9) (3) (9) - Third party (34) 41 (22) 4 - Inter-Group (1) 1 (1) 13 Total (35) 42 (23) 17 Amounts written off 67 11 13 6 Of which: individual 43 11 10 6 (1) NWM Group’s intercompany assets were classified as Stage 1. The ECL for these loans was £0.2 million at 31 December 2021. (2) ECL provisions coverage is calculated as total ECL provisions divided by t hird party loans – amortised cost and FVOCI. (3) The table shows gross loans only and excludes amounts that are outside th e scope of the ECL framework. Refer to page 76 for Financial instruments within the scope of the IFRS 9 ECL framework for further details. Other financial a ssets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £16.6 billion (2020 – £15.8 billion) and debt securities of £8.4 billion (2020 – £8.7 billion). Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 157 14 Loan impairment provisions continu ed Credit risk enhancement and mi tigation For information on Credit risk enhance ment and mitigation held as security, refer to Risk and capital managemen t – Credit risk enhancement and mitigation section. Critical accounting policy: Loan impairmen t provisions Accounting policies note 9 sets out how the ex pected loss approach is applied. At 31 December 2021 , customer loan impairment provisions amounted to £84 million (202 0 - £194 million). A loan is impaired whe n there is objective evidence that the cash flows will not occur in the manner expected when the loan was advanced. Such evidence includes, chan ges in the credit rating of a borrower, the failure to make p ayments in accordance with the loan agree ment, significant reduction in the value of any security, breach of limits o r covenants, and observable data about relevant macroeconomic measures. The impairment loss is the difference between the carrying value of the loan and the present value of e stimated future cash flows at the loan's original effective inte rest rate. The measurement of credit impairment unde r the IFRS expected loss model depends on management’s assessment of any potential deterioration in the cr editworthiness of the borrower, its modelling of expected performance and the ap plication of economic forecasts. All three elements require judgments that are potentially significant to the estimate of impair ment losses. For further information and sen sitivity analysis, refer to Risk and capital management – Measurement unce rtainty and ECL sensitivity analysis section. IFRS 9 ECL model design prin ciples Refer to Credit risk – IFRS 9 ECL model design pri nciples section for further details. Approach for multiple economic scenarios (MES) The base scenario plays a greater part in the calculation of ECL than the approach to MES. Refer to Credit risk – Economic loss drivers – Probability weightings of s cenarios section for further details. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 158 15 Other financial assets NWM Group Debt securities Central and local government Other Equity UK US Other debt Total shares Loans Total 2021 £m £m £m £m £m £m £m £m Mandatory fair value through profit or loss — — — 1 1 1 78 80 Fair value through other comprehensive income 360 3,357 884 794 5,395 136 59 5,590 Amortised cost — — — 3,116 3,116 — — 3,116 Total 360 3,357 884 3,911 8,512 137 137 8,786 2020 Mandatory fair value through profit or loss — — — 84 84 5 77 166 Fair value through other comprehensive income 212 3,372 1,691 891 6,166 119 15 6,300 Amortised cost — — — 2,575 2,575 — — 2,575 Total 212 3,372 1,691 3,550 8,825 124 92 9,041 NWM Plc Debt securities Central and local government Other Equity UK US Other debt Total shares L oans Total 2021 £m £m £m £m £m £m £m £m Mandatory fair value through profit or loss — — — 1 1 — 78 79 Fair value through other comprehensive income 86 3,209 794 459 4,548 43 59 4,650 Amortised cost — — — 3,014 3,014 — — 3,014 Total 86 3,209 794 3,474 7,563 43 137 7,743 2020 Mandatory fair value through profit or loss — — — 84 84 — 77 161 Fair value through other comprehensive income 108 3,298 1,497 376 5,279 53 15 5,347 Amortised cost — — — 2,535 2,535 — — 2,535 Total 108 3,298 1,497 2,995 7,898 53 92 8,043 During 2020 NWM Group dispose d of SABB shares valued at £383 million, and a dividend of £15 million was received in the ye ar. Dividends on FVOCI equity shares include £4 million (2020: £5 million) in relation to the equity holding in OTC Derivative Limit ed. For accounting policy information se e Accounting policies note 8. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 159 16 Investments in group undertakings Investments in group undertakings a re carried at cost less impairment losses. Move ments during the year were as follows: NWM Plc 2021 2020 £m £ m At 1 January 2,600 2,905 Currency translation and other adjustments (20) 42 Additional investments in Group undertakings (4) — Disposals — (97) Impairment of investments (1) (95) (250) At 31 December 2,481 2,600 (1) Net of impairment reversals. The 2021 impairment charge consists primarily of im pairment of NatWest Markets plc’s in vestments in RBS Asia Financial Se rvices Limited and RBS Holdings NV. T he impairment of investments in 2020 was related mainly to RB S Netherlands Holdings BV. £4 million additional investment was driven by f air value hedge designations on existing US D denominated investments. The 20 20 disposal was due to the liquidation of RB S Bank (Polska) S.A. in August 202 0. NatWest Markets plc’s subsidiaries are assessed for potential impairment of investment b ased on NAV. Fair value measureme nt for this purpose was categorised a s Level 3 of the fair value hierarchy. The principal subsidiary undertakings of the com pany are shown below. Their capital consist s of ordinary shares and additi onal Tier 1 notes which are unlisted. A ll of these subsidiaries are included in NWM Group’s consoli dated financial statements and have an accounting reference date of 3 1 December. Nature of business Country of incorporation and principal area of operation Group interest NatWest Markets Securities Inc. Broker dealer US 100% NatWest Markets N.V. Banking Netherlands 100% For accounting policy information se e Accounting policies note 15. Full information on all related undertakings is inclu ded in Note 3 4. 17 Other assets NWM Group NWM Plc 2021 2020 2021 2020 £m £m £m £m Property, plant and equipment 66 106 13 19 Pension schemes in net surplus (Note 5) 306 264 306 264 Assets of disposal groups 20 — — — Accrued income 34 25 27 19 Tax recoverable 332 221 330 207 Deferred tax (Note 7) 48 2 — 2 Other assets 72 70 56 51 Total 878 688 732 562 18 Other financial liabilities NWM Group NWM Plc 2021 2020 2021 2020 £m £m £m £m Customer deposits - designated as at fair value t hrough profit or loss 568 796 75 — Debt securities in issue - designated as at fair value through profit or loss 1,103 1,607 875 1,372 - amortised cost 16,621 14,662 15,512 13,482 Subordinated liabilities - designated as at fair value through profit o r loss 703 793 371 420 - amortised cost 260 312 44 96 Total 19,255 18,170 16,877 15,370 For accounting policy information se e Accounting policies notes 8 and 13. Notes to the fin ancial state ments continue d NWM Group Annu al Report an d Accounts 202 1 160 19 Subordinated liabilities NWM Group NWM Plc 2021 2020 2021 2020 £m £m £m £m Dated loan capital 919 1,009 371 420 Undated loan capital 44 96 44 96 Total 963 1,105 415 516 (1) Excludes amounts due to holding company and fellow subsidiaries of £1,464 million (2020 – £1 ,753 million) for both NWM Group and NWM Plc which are analysed in the tables below. The following tables analyse NWM Plc third p arty subordinated liabilities: Capital 2021 2020 Dated loan capital treatment £m £m €300 million floating rate notes 2022 (3) Tier 2 252 268 €145.6 million floating rate notes 20 23 (3) Tier 2 119 152 Total 371 420 (1) In the event of certain changes in tax laws, dat ed loan capital issues may be redeemed in whole, but not in part, at the option of the issuer, at the principal amount thereof plus accrued interest, subject to prior regulatory approva l. (2) Except as stated above, claims in respect of NWM Plc’s dated loan capital a re subordinated to the claims of other creditors. None of NWM Plc’s dated loan capital is secured. (3) Interest on all floating rate subordinated notes is calculated by reference to market rates. Capital 2021 2020 Undated loan capital treatment £m £m £31 million 7.38% notes (not cal lable) Tier 2 1 31 £21 million 6.20% notes (callable March 2022) Tier 2 22 23 £16 million 5.63% (callable Sept ember 2026) Tier 2 20 22 £19 million 5.63% notes (callable June 2 032) Tier 2 1 20 Total 44 96 (1) The Company can satisfy interest payment obligations by iss uing ordinary shares to appointed Trustees to enable them, on selling these shares, to settle the interest payment. (2) Except as stated above, claims in respect of NWM Plc’s undated loan capital a re subordinated to the claims of other creditors. None of NWM Plc’s undated loan capital is secured. (3) In the event of certain changes in tax laws, undat ed loan capital issues may be redeemed in whole, but not in part, at the option of NWM Plc, at the principal amount thereof plus accrued interest, subject to prior regulatory approva l. Capital 2021 2020 Third party redemptions in the period (values as at date of transaction) treatment £m £m US$125.6 million floating rate notes 202 0 Tier 2 — 97 €15 million 6.00% notes 2020 Tier 2 — 11 €145.6 million floating rate dated notes 202 3 (partial redemption) Tier 2 20 — £31 million 7.38% notes (partial redemption) Tier 2 29 — £19 million 5.63% notes (partial redemption) Tier 2 20 — Total 69 108 (1) There were no third party issuances in 2021 or 2020. The following tables analyse intercompany subo rdinated liabilities: NWM Group and Bank 2021 2020 £m £m Dated loan capital 1,019 1,093 Undated loan capital 445 440 Preference shares — 220 Total 1,464 1,753 Capital 2021 2020 Dated loan capital treatment £m £m €950 million 3.26% (redeemable Marc h 2024) Tier 2 823 889 US$250 million subordinated notes 202 9 Tier 2 196 204 1,019 1,093 Undated loan capital US$600 million floating rate perpetual notes (call able every 5 years from 201 3) Tier 2 445 440 Preference shares US$300 million 7.25% Series H (callable anyti me) Tier 1 — 220 Redemptions in the period (values as at date of transaction) US$389 million 6.10% notes 2023 Tier 2 — 285 US$300 million 7.25% series H (callable anytime) Tier 1 220 — 220 285 Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 161 20 Other liabilities NWM Group NWM Plc 2021 2020 2021 2020 £m £m £m £m Lease liabilities 53 71 10 16 Provisions for liabilities and charges 342 448 220 238 Retirement benefit liabilities (No te 5) 66 63 57 54 Accruals 123 108 92 79 Deferred income 22 25 16 16 Current tax 11 54 2 16 Deferred tax (Note 7) 374 417 352 380 Other liabilities 64 48 40 67 1,055 1,234 789 866 NWM Group Litigation and other regulatory Other (1) Total Provisions for liabilities and charges £m £m £m At 1 January 2021 334 114 448 Currency translation and other movements — (13) (13) Charge to income statement 38 39 77 Releases to income statement (72) (12) (84) Provisions utilised (38) (48) (86) At 31 December 2021 262 80 342 NWM Plc Litigation and other regulatory Other (1) Total Provisions for liabilities and charges £m £m £m At 1 January 2021 158 80 238 Currency translation and other movements — (10) (10) Charge to income statement 29 23 52 Releases to income statement (2) (7) (9) Provisions utilised (19) (32) (51) At 31 December 2021 166 54 220 (1) Materially comprises provisions relating to restructuring costs. For accounting policy information se e Accounting policies note 6. Critical accounting policy: Provisi ons for liabilities The key judgment is involved in determining whet her a present obligation exists. There is ofte n a high degree of uncertainty and judgment is based on the specific facts and circu mstances relating to individual events in dete r mining whether there is a prese nt obligation. Judgment is also involved in esti mation of the probability, timing and amount of a ny outflows. Where NWM Group can look to another party such as an insurer to pay some or all of the expenditure requi red to settle a provision, any reimbu rsement is recognised when, and only whe n, it is virtually certain that it will be received. Estimates - Provisions are liabilities of uncertain timin g or amount and are recognised when there is a present obligation as a result of a past event, the outflow of e conomic benefit is probable and the outflow c an be estimated reliably. Any difference betw een the final outcome and the amounts provided will aff ect the reported results in the period w hen the matter is resolved.  Litigation and other regulatory: NWM G roup is engaged in various legal proceedings, b oth in the UK and in overseas jurisdictions, including the US. For fu rther information in relation to legal proceedings and discussion of the associated uncertainties, refer to Note 25.  Other provisions: These materially c omprise provisions for onerous contracts a nd restructuring costs. Onerous co ntract provisions comprise an estimate of the costs involve d in fulfilling the terms and condi tions of contracts net of any expected benefits to be received. Redundancy and restructu ring provisions comprise the estimated cost of restructuring, including redundancy costs where an obligation exists. Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 162 21 Share capital and reserves Number of shares 2021 2020 2021 2020 Allotted, called up and fully pai d £m £m 000s 000s Ordinary shares of £1 400 400 399,517 399,517 Non-cumulative preference shares of US$0.0 1 — — — 12,000 Ordinary shares No ordinary shares were issued during 2021 or 2020. In 2021, NWM plc paid ordinary dividends of £1 billio n (2020 – Nil). Paid-in equity Comprises equity instruments i ssued by NWM Plc other than those legally constituted as sha res. Additional Tier 1 instruments iss ued by NWM Plc having the legal form of debt are classified as equity under IFRS. The coupons on these instruments are non-cumulative and payable at NWM Plc’s discretion. 2021 20 20 £m £m Additional Tier 1 instruments US$950 million 7.9604% instru ments callable August 2025 749 155 749 US$200 million 5.540% instrum ents callable Au gust 2025 155 904 904 Capital recognised for regulatory purposes canno t be redeemed without Prudential Regulation Autho rity consent. This includes ordinary shares, preference shares and addition al Tier 1 instruments. On 30 September 2021, NWM Plc redeemed all 12 ,000,000 Non-cumulative preference shares of US$0.0 1 in issue, following approval from the Board of Directors and the Prudential Regulation Authority . Reserves NWM Plc optimises capital efficie ncy by maintaining reserves in subsidiaries, including regulated e ntities. Certain preference shares and subordinated debt are also included within regulatory capital. The remittance of rese rves to the parent or the redemption of shares or subordinated capit al by regulated entities may be subject to maintaining the capi tal resources required by the relevant regulator. For accounting policy information se e Accounting policies note 13. Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 163 22 Structured entities A structured entity (SE) is an e ntity that has been designed such that voting or similar rights are not the dominan t factor in deciding who controls the entity , for example when any voting rights relate to administrative tasks only and the relevant activities are directed by mean s of contractual arrangements. SEs are usually established for a specific, limited pur pose, they do not carry out a business or trade and typically h ave no employees. They take a variety of le gal forms - trusts, partnerships and companies - and fulfil m any different functions. As well as being a key e lement of securitisations, SEs are also used in fund managem ent activities to segregate custodial duties from the fund manageme nt advice. Consolidated structured entities Securitisations In a securitisation, assets, or interests in a pool of asse ts, are transferred generally to an SE which then is sues liabilities to third party investors. The majority of se curitisations are supported through liquidity facilities or other c redit enhancements. The NWM Group arranges securitis ations to facilitate client transactions an d undertakes own-asset securitisations to sell or to fund portfolios of f inancial assets. NWM Group also acts as an underwriter an d depositor in securitisation transactions in bo th client and proprietary transactions. NWM Group’s involvement i n client securitisations takes a number of forms. It may : sponsor or administer a securitisation programme; provide liquidity facili ties or programme-wide credit enhancement; and purch ase securities issued by the vehicle. Covered debt programme NWM Group has assigned cert ain loans to customers and othe r debt instruments to bankruptcy remote limite d liability partnerships to provide security for issues of debt securities by NWM Group. NWM Group retains all of the risks and rewards of these assets and continues to r ecognise them. The partnerships are consolidated by the NWM Group and the related covered debt included within other financial lia bilities. At 31 December 2021, £698 million (2020 - £1,064 million) of lo ans and other debt instruments provided security for £626 million (20 20 – £1,085 million) debt securities in issue and other bor rowing by NWM Plc and NWM Group. Lending of own issued securities NWM Plc has issued, retained, and lent debt se curities under securities lending arrangements . Under standard terms in the UK and US markets, the recipient h as an unrestricted right to sell or re-pledge collateral, subje ct to returning equivalent securities on maturity of the transaction. NWM Plc retains all of the risks and rewards of own is sued liabilities lent under such arrangements and does not recognise the m. At 31 December 2021, £1,494 million (2020 - £1 ,893 million) of secured own issued liabilities have been retained and le nt under securities lending arrangements. At 31 Dece mber 2021, £1,564 million (2020 - £2,029 million) of loans and other debt instruments provided security for secured own issued liabili ties that have been retained and lent under securities lending arr angements. Unconsolidated structured entitie s NWM Group’s interests in unconsolidated st ructured entities are analysed below. 2021 2020 Asset backed Investment Asset backed Investment securitisation funds securitisation funds vehicles and oth er Total vehicles a nd other Total £m £m £m £m £m £m Trading assets and derivatives Trading assets 490 117 607 319 46 365 Derivative assets 251 18 269 441 16 457 Derivative liabilities (170) ( 1) (171) (319) (21) (340) Total 571 134 705 441 41 482 Non trading assets Loans to customers 1,680 24 1,704 1,376 145 1,521 Other financial assets 2,681 379 3,060 2,409 170 2,579 Total 4,361 403 4,764 3,785 315 4,100 Liquidity facilities/loan commitments 1,402 73 1,475 1,481 132 1,613 Maximum exposure 6,334 610 6,944 5,707 488 6,195 Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 164 23 Asset transfers Transfers that do not qualify for derecognition NWM Group enters into securiti es financing, reverse repurchase and total return agreements in accordance with normal market practice which includes the provision of additional collateral if necessary . Under standard terms in the UK and US markets, the recipient h as an unrestricted right to sell or repledge collateral, subject to returning e quivalent securities on maturity of the transaction. Securities sold under repurchase transactions and transactions with the substance of securities repurc hase agreements are not derecognised if the NWM Group retains substan tially all the risks and rewards of ownership. T he fair value (and carrying value) of securities transferred under such transac tions included on the balance sheet, are set out below. All of these securities could be sold or repledged by the holde r. For accounting policy information se e Accounting policies note 11. NWM Group NWM Plc 2021 2020 2021 2020 The following assets have failed derecognition (1) £m £ m £m £ m Trading assets 13,084 20,526 9,034 12,614 Other financial assets 677 104 552 104 13,761 20,630 9,586 12,718 (1) Associated liabilities were £13,706 million for the NWM Group (2020 - £20,541 million) and £ 9,523 million for NWM Plc (2020 - £12,660 million). Assets pledged as collateral NWM Group pledges collateral with its counterparties in respect of derivative liabilities and bank and stock borrowings. NWM Group NWM Plc 2021 2020 2021 2020 Assets pledged against liabilitie s £m £m £m £ m Trading assets 23,544 28,426 20,886 26,067 Other financial assets (1) 1,252 2,557 601 1,453 24,796 30,983 21,487 27,520 (1) Includes pledges for stock borrowing. The following table analyses as sets that have been transferred but have failed the derecognition rules under IFRS 9 and ther efore continue to be recognised on NWM Plc’s balance sheet. 2021 2020 Asset type £m £m Loans and other debt instrume nts - covered debt programme (1) 698 746 Loans and other debt instrume nts - own issued retained lent se curities (2) 1,564 2,029 (1) The associated liabilities for covered debt programme were £ 626 milli on (2020 - £8 57 million). (2) The associated own issued securities that were retained and lent under securities lending arrangements were £1,494 million (2020 - £1,893 million). Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 165 24 Capital resources Regulatory capital for NWM Plc legal enti ty is assessed against minimum require ments that are set out under the Capital Requirements Regulation. Transitional arrangemen ts on the phasing in of end-point capi tal resources are set by the PRA. The capital resources under the PRA transitional basis for NWM Plc are se t out below. 2021 2020 Shareholders’ equity £m £m Shareholders’ equity 7,349 9,152 Other equity instruments (904) (904) 6,445 8,248 Regulatory adjustments and deductions Own credit 47 43 Defined benefit pension fund adjustment (202) (174) Cash flow hedging reserve (46) (201) Prudential valuation adjustments (227) (251) Expected losses less impairments (11) (1) Instruments of financial sector entities where the institution has a significant investment (1,685) (1,624) Adjustments under IFRS 9 transitional arrangements 1 7 Foreseeable ordinary dividends (250) (500) (2,373) (2,701) CET1 capital 4,072 5,547 Additional Tier 1 (AT1) capital Qualifying instruments and related sh are premium 904 904 Qualifying instruments and related sh are premium subject to phase out — 219 904 1,123 Tier 1 deductions Instruments of financial sector entities where the institution has a significant investment (221) (237) Tier 1 capital 4,755 6,433 Qualifying Tier 2 capital Qualifying instruments and related sh are premium 1,490 1,704 Tier 2 deductions Instruments of financial sector entities where the institution has a significant investment (401) (406) Other regulatory adjustments 26 22 (375) (384) Tier 2 capital 1,115 1,320 Total regulatory capital 5,870 7,753 In the management of capital re sources, NWM Plc is governed by NatWest Group's policy to maintain a strong c apital base and to utilise it efficiently throughout its activities to op timise the return to shareholders while maintaining a prudent relationship between the capital base and the un derlying risks of the business. In carrying out this policy, Na tWest Group has regard to the supervisory requirements of the PRA. The P RA uses capital ratios as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resou rces with its risk-weighted assets (the assets and off-balance sheet exposures are weighted to refle ct the inherent credit and other risks); by international agreement, the Pillar 1 capi tal ratios, excluding capital buffers, should be not less than 8 % with a Common Equity Tier 1 component of not les s than 4.5%. NWM Plc has complied with the PRA’s capital requiremen ts throughout the year. NWM Plc is also subje ct to a Pillar 2 requirement. Subsidiaries and sub-groups wi thin NWM Group, principally banking entities, are subject to various individual regulatory capital requirements in the UK and overseas. Fu rthermore, the payment of dividends by subsidiaries and the abili ty of members of NatWest Group to lend money to othe r members of NatWest Group is subject to restrictions such as local regulatory or legal requirements , the availability of reserves and financial and operating per formance. Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 166 25 Memorandum items Contingent liabilities and commitments The amounts shown in the table below are intended only to provide an indication of the volu me of business outstanding at 3 1 December 2021. Although the NWM Group is exposed to credit risk in the event of a custome r’s failure to meet its obligations , the amounts shown do not, and are not intended to, provide any indication of NW M Group’s expectation of future losses. For accounting policy information se e Accounting policies note 6. NWM Group NWM Plc 2021 2020 2021 2020 £m £ m £m £ m Contingent liabilities and commitments Guarantees and assets pledged as collateral security 595 638 197 195 Other contingent liabilities 110 137 109 136 Standby facilities, credit lines and other co mmitments 11,245 12,292 7,363 7,534 11,950 13,067 7,669 7,865 (1) In the normal course of business, NWM Plc guarante es specified third party liabilities of certain subsidiaries; it also gives undertakings that individual subsidiaries will fulfil their obligations to third parties under contractual or ot her arrangements which are excluded from the table above. Banking commitments and contingent obligations, whic h have been entered into on behalf of customers and fo r which there are corresponding obligations from customers, are no t included in assets and liabilities. NWM Group’s maximum exposure to credit loss, in the event of its obligation c rystallising and all counterclaims, collateral or security proving valuele ss, is represented by the contractual nominal amoun t of these instruments included in the table above. These commitments and contingent obligations are subject to NWM G roup’s normal credit approval processes. Guarantees - NWM Group gives guarantee s on behalf of customers. A financial guarantee represents an irrevocable undertaking that NWM Group will meet a customer’s specified obligations to a third party if the cus tomer fails to do so. The maximum amount that NWM G roup could be required to pay under a guarantee is its principal amount as in the t able above. NWM Group expects most guarantees it provides to ex pire unused. Other contingent liabilities - the se include standby letters of credit, supporting customer debt issues and contin gent liabilities relating to customer trading activities su ch as those arising from performance and customs bonds, w arranties and indemnities. Standby facilities and credit line s - under a loan commitment NWM Group agrees to make funds available to a customer in the future. Loan commitments, which are usu ally for a specified term may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include com mercial standby facilities and credit lines, liquidit y facilities to commercial paper conduits and unutilised overdraft facilities. Other commitments - these include documen tary credits, which are commercial letters of credit providing for p ayment by NWM Group to a named beneficiary against prese ntation of specified documents, forward asset purchases, forward deposi ts placed and undrawn note issuance and revolving underw riting facilities, and other short-term trade rel ated transactions. Risk-sharing arrangements During 2019 NWM Plc and NWM N.V. established limi ted risk- sharing arrangements that facilitated the s mooth provision of services to NatWest Markets’ c ustomers. The arrangements include:  The provision of a funded guarantee of up to £1.0 billion by NWM Plc to NWM N.V. that limits NWM N.V.’s ex posure to large individual customer credits to 10% of NWM N.V.’s capital. Funding is provided by NWM Plc deposits pl aced with NWM N.V. of not less than the guaranteed amount. At 31 December 2021, the deposit s amounted to £0.8 billion and the guarantee fees in the y ear were £5.5 million.  The provision of funded and unfunded guarantees by NWM Plc in respect of NWM N.V.’s Legacy po rtfolio. At 31 December 2021 the exposure at default covered by the guarantees was approximately £0 .2 billion (of which £37 million was cash collateralised). Fees of £ 6.6 million in relation to the guarantees were recognised in the yea r. Indemnity deed  In April 2019, NWM Plc and NWB Plc e ntered into a cross indemnity agreement for losses incurred within the entities in relation to business transferred to or fro m the ring- fenced bank under the NatWest Group’s structural re- organisation. Under the agreement, N WM Plc is indemnified by NWB Plc against losses relating to the NWB Plc transferring businesses and ring-fenced bank obligati ons and NWB Plc is indemnified by NWM Plc against losses relating to NWM Plc transferring businesse s and non ring- fenced bank obligations with eff ect from the relevant transfer date. Contractual obligations for future expenditure not provided for in the accounts The following table shows contractual obligations fo r future expenditure not provided for in th e accounts at the year end. NWM Group NWM Group 2021 2020 £m £ m Contracts to purchase goods or services (1) 4 5 4 5 (1) Of which due within 1 year: £2 million (2020 - £3 million). Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 167 25 Memorandum items continued Litigation and regulatory matters NWM Plc and its subsidiary and associated u ndertakings (NWM Group) are party to legal proce edings and involved in regulatory matters, including as the subject of investi gations and other regulatory and governmental ac tion (Matters) in the United Kingdom (UK), the United States (US), the European Union (EU) and other jurisdictions. NWM Group recognises a provis ion for a liability in relation to these Matters when it is probable that an outflo w of economic benefits will be required to settle an obligation resul ting from past events, and a reliable estimate can be made of the amount of the obligation. In many of these Matters, it is n ot possible to determine whether any loss is probable, or to estimate reli ably the amount of any loss, either as a direct consequence of the relev ant proceedings and regulatory matters or as a result of adverse impacts or restrictions on NWM Group’s reputation, businesses and operations. Numerous legal and factual issue s may need to be resolved, including through potentially leng thy discovery and document production exercises and deter mination of important factual matters, and by addressing novel or unset tled legal questions relevant to the proceedings in question, before a liability can reasonably be estima ted for any claim. NWM Group cannot predict if, how, or when such claims will be resolved o r what the eventual settlement, damages, fine, penal ty or other relief, if any, may be, particularly for claims that are a t an early stage in their development or where clai mants seek substantial or indeterminate damages. There are situations where NW M Group may pursue an approach that in some instances le ads to a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implic ations of continuing to contest liability, or in order to take account of the risks inherent in defending claims or regulato ry matters, even for those Matters for which NWM Group believes it has credible defences and should prevail on the merits. The unce rtainties inherent in all such Matters affect the amount a nd timing of any potential outflows for both Matters with respect to which provisions have been established and other contingen t liabilities. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedin gs and regulatory matters as a class of contingent liabilities . The future outflow of resources in respect of any Matter may ultimately prove to be substantially greater th an or less than the aggregate provision that NWM G roup has recognised. Where (and as far as) liability cannot be re asonably estimated, no provision has been recognised. NWM G roup expects that in future periods, additional provis ions, settlement amounts and customer redress payments will be nece ssary, in amounts that are expected to be substantial in some inst ances. Please refer to Note 20 for information on ma terial provisions. We have provided information below on the procedural history of certain Matters, where we be lieve appropriate, to aid the understanding of the Matter. For a discussion of certain risks associated with NWM Group’s litigation and regulatory matters, s ee the Risk factor relating to legal, regulatory and governmental actio ns and investigations set out on page 198. Litigation Residential mortgage-backed securities (RMBS) litigation in the US NatWest Markets Securities Inc. (NWMSI) and cer tain affiliates continue to defend RMBS-relate d claims in the US in which the plaintiff, the Federal Deposit Insurance Co rporation (FDIC), alleges that certain disclosures made in connecti on with the relevant offerings of RMBS contained materi ally false or misleading statements and/or omissions reg arding the underwriting standards pursuant to which the mortgage loans underlying the RMBS were issued. In Q4 2021, N WMSI settled RMBS claims by the State of New Mexico for an amount that was covered by an existing provision. In addition, NWMSI previously agreed to settle a purported RMB S class action entitled New Jersey Carpenters Health Fun d v. Novastar Mortgage Inc. et al. for US$55.3 million. This was paid into escrow pending court approval of the se ttlement, which was granted in March 2019, but whic h remains the subject of an appeal by a class member who does not want to participate in the settlement. London Interbank Offered Rate (LIBOR) and other rates litigation NWM Plc and certain other members of NatWes t Group, including NatWest Group plc, are defendants in a number of class actions and individual claims pendin g in the United States District Court for the Southern District of New Yo rk (SDNY) with respect to the setting of LI BOR and certain other benchmark interest rates. The complaints allege th at the NWM Group defendants and other panel banks violate d various federal laws, including the US c ommodities and antitrust laws, and state statutory and common law, as well as con tracts, by manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means. Several class actions relating to USD LIBO R, as well as more than two dozen non-class actions concernin g USD LIBOR, are part of a co-ordinated proceeding in the SDNY. In December 2021, the United States Court of Appeals for the Second Ci rcuit (US Court of Appeals), reversing a Dece mber 2016 decision of the SDNY, held that plaintiffs in these cases have adequately asserted the court’s personal jurisdiction ove r NWM Plc and other non-US banks, including with respec t to antitrust class action claims on behalf of over-the-counter plain tiffs and exchange-based purchaser plaintiffs. In the same decision, the appellate court affirmed the SD NY’s prior decision that plaintiffs who purchased LIBOR-based in struments from third parties (as opposed to the defendants) lack antitrust standin g to pursue such claims. The appellate court remanded these m atters to the SDNY for further proceedings in light of its rulings. A separate appeal concerning th e SDNY’s dismissal of a fraud class action on behalf of lender plaintiffs remains pendin g in the US Court of Appeals. In March 2020, NWM Group defendants finalised a settlement resolving the class ac tion on behalf of bondholder plaintiffs (those who held bon ds issued by non- defendants on which interest was paid from 20 07 to 2010 at a rate expressly tied to USD LIBOR). The amount of the settlement (which was covered by an existing provision) has been paid into escr ow pending court approval of the settlement. The non-class claims filed in th e SDNY include claims that the FDIC is asserting on behalf of certain failed US banks. In July 2017, the FDIC, on behalf of 39 of those failed US banks, commenced substantially similar claims against NWM Plc, NatWest Group plc and others in the Hi gh Court of Justice of England and Wales. The action alleges collu sion with regard to the setting of USD LIBOR and that the defendants b reached UK and European competition law, as well as asserting com mon law claims of fraud under US law. T he defendant banks consented to a request by the FDIC for discontinuance of the claim in respect of 20 failed US banks, leaving 19 failed US banks as claimants. The UK pr oceedings are at the disclosure stage. Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 168 25 Memorandum items continued Litigation and regulatory matters In addition, there are two class actions rela ting to JPY LIBOR and Euroyen TIBOR. The first class action, which rela tes to Euroyen TIBOR futures contracts, was dismisse d by the SDNY in September 2020 on jurisdictional and other grounds, and the plaintiffs have commenced an appeal to the US Court of Appeals. The second class action, which rela tes to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR, was dismissed by the SDNY in relation to NWM Plc and other NWM Group companies in Septe mber 2021. That dismissal may be the subject of a future appeal. In addition to the above, five other class ac tion complaints were filed against NWM Group defendants in the SDNY, each relating to a different reference rate. In February 2017 , the SDNY dismissed the case relating to Euribor for lack of perso nal jurisdiction and in August 2019, the S DNY dismissed the case relating to Pound Sterling for various reasons. Plain tiffs’ appeals in both cases remain pe nding. In July 2019, the SDNY dismissed the case relating to the Singapo re Interbank Offered Rate and Singapore Swap Offer Rate (‘S IBOR / SOR’) but in March 2021, the US Court of Appeals reve rsed the SDNY’s decision, such that the case has returned to the SDNY, where it is the subject of a further motion to dismiss. In the class action relating to the Australian Bank B ill Swap Reference Rate, the SDNY in February 2020 declined to dismiss the amended complaint as against NWM Plc and certain other defendants, but dismissed it as to other members of N WM Group (including NatWest Group plc). The claims against non-dis missed defendants (including NWM Plc) are now p roceeding in discovery. In June 2021, NWM Plc and the plain tiffs in the Swiss Franc LIBOR class action finalis ed a settlement resolving that case. The amount of the settlement (which was covered by an existing provision) has been paid into escr ow pending court approval of the settlement. NWM Plc is also named as a def endant in a motion to certify a class action relating to LIBOR in the Tel Aviv Dis trict Court in Israel. NWM Plc filed a motion for cancellatio n of service outside the jurisdiction, which was g ranted in July 2020. The claimants appealed that decision and in Nove mber 2020 the appeal was refused and the claim dismissed by the Appellate Court. The claim could in futur e be recommenced depending on the outcome of an appeal to Israel’s Supre me Court in respect of dismissal of the substantive case agains t banks that had a presence in Israel. In January 2019, a class action antitrust complaint was filed in the SDNY alleging that the defendants (USD ICE LIBOR p anel banks and affiliates) have conspired to supp ress USD ICE LIBOR from 2014 to the present by submitti ng incorrect information to ICE about their borrowing costs. The def endants include NatWest Group plc, NWM Plc, NWMSI and NWB Plc. The defendants made a motion to dismiss this case, w hich was granted by the court in March 20 20. One plaintiff sought to appeal the dismissal, but on 14 February 202 2, the US Court of Appeals dismissed the appeal b ecause that plaintiff lacks standing to maintain the appeal. In August 2020, a complaint was f iled in the United States District Court for the Northern District of California by several United States consumer borrowers against the USD IC E LIBOR panel banks and their affiliates, alleging that the normal process of setting USD ICE LIBO R amounts to illegal price- fixing, and also that banks in the United States have ille gally agreed to use LIBOR as a component of price in variable consumer loans. The NatWest Group defendants a re NatWest Group plc, NWM Plc, NWMSI and NWB Plc. The pl aintiffs seek damages and to prevent the enf orcement of LIBOR-based instruments through injunction. Defe ndants have filed a motion to dismiss, which remains pending. FX litigation NWM Plc, NWMSI and/or NatWe st Group plc are defendants in several cases relating to NWM Plc’s foreign exc hange (FX) business. In 2015, NWM Plc pai d US$255 million to settle the consolidated antitrust class acti on filed in the SDNY on behalf of persons who entered into over-the-counte r FX transactions with defendants or who traded FX inst ruments on exchanges. In 2018, some members of the settlement class who opted out of that class action settlement filed their own non-class complaint in the SDNY asserting antitrust claims a gainst NWM Plc, NWMSI and other banks. Those opt-out claims are proceeding in discovery. In April 2019, some of the sam e claimants in the opt-out case described above, as well as othe rs, served proceedings (which are ongoing) in the High Court of Ju stice of England and Wales, asserting competition claims ag ainst NWM Plc and several other banks. The claim was transferred from the High Court of Justice of England and Wales in December 2021 an d registered in the Competition Appeal Trib unal in January 2022. An FX-related class action, on behalf of ‘consu mers and end- user businesses’, is proceeding in the SDNY against N WM Plc and others. Plaintiffs have filed a motion fo r class certification, which defendants are opposing . In May 2019, a cartel class action was filed in the Fede ral Court of Australia against NWM Plc and four other ba nks on behalf of persons who bought or sold currency through FX spots o r forwards between 1 January 200 8 and 15 October 2013 with a total transaction value exceeding AUD $0.5 millio n. The claimant has alleged that the banks, including NWM Plc, contravened Australian competition law by sh aring information, coordinating conduct, widening s preads and manipulating FX rates for certain currency pairs during this period. Nat West Group plc and NWMSI have been named in the action as ‘o ther cartel participants’, but are not respondents. The claim was served in June 2019 and, after a number of interlocu tory pleading disputes, NWM Plc is preparing its defence . In July and December 2019, two se parate applications seeking opt-out collective proceedings orders we re filed in the UK Competition Appeal Tribunal against NatWes t Group plc, NWM Plc and other banks. Both appli cations have been brought on behalf of persons who, between 18 December 2007 and 31 January 2013, entered into a re levant FX spot or outright forward transaction in the EEA with a relevant fin ancial institution or on an electronic communica tions network. A hearing to determine class certif ication and which of the applications should be permitted to represent the class took place in July 2021 and judgment is awaited. In November 2020, proceedings were iss ued in the High Court of Justice of England and Wales against NWM Plc by a cl aimant who sought an account of profits and/or da mages in respect of alleged historical FX trading misc onduct. The claim was served on NWM Plc in March 2021 and discontinued in December 2021. Two motions to certify FX-relat ed class actions were filed in the Tel Aviv District Court in Israel i n September and October 2018, and were subsequently consolidated into one motion. The consolidated motion to certify, which n ames The Royal Bank of Scotland plc (now NWM Plc) and several other banks as defendants, was served on NW M Plc in May 2020. NWM Plc has filed a motion challenging the pe rmission to serve the consolidated motion outside the Israeli juris diction, which remains pending. Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 169 25 Memorandum items continued Litigation and regulatory matters In December 2021, a claim was issued in the Netherlands against NatWest Group plc, NWM Plc and NWM N. V. by Stichting FX Claims, seeking a declar ation from the court that anti-competitive FX market conduct descri bed in decisions of the European Commission of 16 May 2 019 is unlawful, along with unspecified damages. The c laimant has indicated that it may seek to amend its claim to also refer to the Dece mber 2021 decision by the EC (described below under “F oreign exchange related investigations” ). A hearing is scheduled for June 2022. Certain other foreign exchange transaction related claims have been or may be threatened. NWM Group cannot p redict whether all or any of these claims will be pu rsued. Government securities antitrust litigation NWMSI and certain other US broke r-dealers are defendants in a consolidated antitrust class ac tion pending in the SDNY on behalf of persons who transacte d in US Treasury securities or derivatives based on such instruments, including futu res and options. The plaintiffs allege that defendants rig ged the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to inc rease the prices at which they sold such se curities to plaintiffs. The complaint was dismissed in Ma rch 2021. Plaintiffs have filed an amended complaint, which defe ndants are again seeking to have dismissed. Class action antitrust claims commenced in Ma rch 2019 are pending in the SDNY against NWM Plc, NW MSI and other banks in respect of Euro-denominated bonds issued by European central banks (EGBs). The complaint alleges a co nspiracy among dealers of EGBs to widen the bid-ask spreads they quoted to customers, thereby increasing the prices customers paid for the EGBs or decreasing the p rices at which customers sold the bonds. The class consists of those wh o purchased or sold EGBs in the US between 20 07 and 2012. The defe ndants filed a motion to dismiss this m atter, which was granted by the court in respect of NWM Plc and NWMSI in July 2 020. Plaintiffs have filed an amended complai nt which defendants are seeking to have dismissed. Swaps antitrust litigation NWM Plc, NWMSI and NatWest Group plc, as well as a number of other interest rate swap dealers, are defe ndants in several cases pending in the SDNY alleging violations of the U S antitrust laws in the market for interest rate swaps. There is a consolidated class action complaint on behalf of persons who entered into interest rate swaps with the defendants, as well as non-class action claims by thre e swap execution facilities (TeraExchange, Javelin, and trueEx). The pl aintiffs allege that the swap execution facilities would have s uccessfully established exchange-like trading of interest rate sw aps if the defendants had not unlawfully conspired to p revent that from happening through boycotts and other means. Disco very in these cases is complete, and the plaintiffs’ motion for class certification remains pending. In June 2021, a class action antitrust complaint w as filed against a number of credit default swap dealers in Ne w Mexico federal court on behalf of persons who, fr om 2005 onwards, settled credit default swaps in the United States by reference to the ISDA credit default swap auction protocol. The com plaint alleges that the defendants conspired to manipul ate that benchmark through various means in violation of t he antitrust laws and the Commodity Exch ange Act. The defendants include several NatWest Group companies, includin g NatWest Group plc. Defendants are seeking dismiss al. Odd lot corporate bond trading antitrust litigation In October 2021, the SDNY gra nted defendants’ motion to dismiss the class action antitrust com plaint alleging that, from August 2006 onwards various sec urities dealers, including NWMSI, conspired artificially to widen sp reads for odd lots of corporate bonds bought or sold in the United Sta tes secondary market and to boycott electronic trading platfor ms that would have allegedly promoted pricing compe tition in the market for such bonds. Plaintiffs have com menced an appeal of the dismissal. Spoofing litigation In December 2021, three substantially s imilar class actions complaints were filed in federal court in the United S tates against NWM Plc and NWMSI alle ging Commodity Exchange Act and common law unjust enrichment clai ms arising from manipulative trading known as spoofing. The complaints refer to NWM Plc’s December 2021 spoofing-rela ted guilty plea (described below under “US inv estigations relating to fixed- income securities”) and purport to asser t claims on behalf of those who transacted in US Treasury se curities and futures and options on US Treasury securities between 20 08 and 2018. The three complaints are pending in the United St ates District Court for the Northern District of Illinois. Madoff NWM N.V. is a defendant in two actions f iled by the trustee for the bankruptcy estates of Bernard L. Mad off and Bernard L. Madoff Investment Securities L LC, in bankruptcy court in New York, which together seek to clawback more than U S$298 million that NWM N.V. allegedly received fro m certain Madoff feeder funds and certain swap counterpa rties. The claims were previously dismissed, but as a re sult of an August 2021 decision by the US Court of Appeals, the y will now proceed in the bankruptcy court subject to NWM N.V.’s legal and factu al defences. Interest rate hedging products and similar litigation NWM Group continues to deal with a small number of active litigation claims in the UK relating to the allege d mis-selling of interest rate hedging products. Separately, NWM Plc is defending claims file d in France by two French local authorities relating to structu red interest rate swaps. NWM N.V. is also a defendant in one of the clai ms. The plaintiffs allege, among other things, that the sw aps are void for being illegal transactions, th at they were mis-sold, and that information / advisory duties were breached. B oth claims have been remitted from the Supreme Court to the Court of Appeal. EUA trading litigation NWM Plc was a named defendant in civil p roceedings before the High Court of Justice of England an d Wales brought in 2015 by ten companies (all in liquidation) (the ‘Li quidated Companies’) and their respective l iquidators (together, ‘the Claimants’). The Liquidated Companies previously t raded in European Union Allowances (E UAs) in 2009 and were alleged to be VAT defaulting traders within (or otherwise connected to) EUA supply chains of which N WM Plc was a party. In March 2020, the court held that NWM Plc and Mercuria Energy Europe Trading Limited (‘Mercuria’) were lia ble for dishonestly assisting and knowingly being a party to fraudulent trading during a seven busines s day period in 2009. Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 170 25 Memorandum items continued Litigation and regulatory matters In October 2020, the High Court quantified tot al damages against NWM Plc and Mercuria at £45 million plus interest and costs, and permitted the defendants to appeal to the Court of Appeal. In May 2021 the Court of A ppeal set aside the High Court’s judgment and ordered that a retrial t ake place before a different High Court judge. The claimants have soug ht permission from the Supreme Court to appeal. The Cou rt of Appeal also dismissed an appeal by Mercu ria against the finding by the High Court that N WM Plc and Mercuria were both vicariously liable. Mercuria has sought pe rmission from the Supreme Court to appeal that decision. US Anti-Terrorism Act litigation NWM N.V. and certain other financial institu tions are defendants in several actions filed by a number of US nationals (or their estates, survivors, or he irs), most of whom are or were US military personnel, who were killed or injured in attacks in Iraq between 2003 and 2011. NWM Plc is also a defendant in some of these cases. According to the plaintiffs’ allegations, the def endants are liable for damages arising from the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to Hezbollah and the Iraqi te rror cells that committed the attacks, in violation of the US Anti-Ter rorism Act, by agreeing to engage in ‘stripping’ of transac tions initiated by the Iranian banks so that the I ranian nexus to the transactions would not be detected. The first of these actions was filed in the United S tates District Court for the Eastern District of New York in Nove mber 2014. In September 2019, the district court dismissed t he case, finding that the claims were def icient for several reasons, including lack of sufficient allegations as to the alleged conspiracy and causation. The plaintiff s are appealing the decision to the US Court of Appeals. Another action, filed i n the SDNY in 2017, was dismissed in March 2019 on similar grounds, but remains subject to appeal to the US Cou rt of Appeals. Other follow-on actions that are subst antially similar to the two that have now been dismisse d are pending in the same courts. Securities underwriting litigation NWMSI is an underwriter defen dant in securities class actions in the US in which plaintiffs gene rally allege that an issuer of public securities, as well as the underwriters of the sec urities (including NWMSI), are liable to purchasers for misrepresentations and omissions made i n connection with the offering of such securities. 1MDB litigation A claim for a material sum has been issued, but not served, recently in Malaysia by 1MDB against Cout ts & Co Ltd for alleged losses in connection wit h the 1MDB fund. Coutts & Co Ltd is a company registered in Switzerland and is in wind-down following the announced sale of its business asse ts in 2015. Regulatory matters (including investigations) NWM Group’s financial condition can be affected by the actions of various governmental and regulatory au thorities in the UK, the US, the EU and elsewhere. NWM Group companies ha ve engaged, and will continue to engage, in discussions wi th relevant governmental and reg ulatory authorities, including in the UK, the US, the EU and elsewhere, on an ongoing and regular basis, and in response to infor mal and formal inquiries or investigations, regarding operational, sys tems and control evaluations and issues including those related to compliance with applicable laws and regulations, includi ng consumer protection, investment advice, business conduct, competition/anti-trust, VAT recovery, anti-bribe ry, anti-money laundering and sanctions regime s. NWM Group companies have be en providing information regarding a variety of matters, including, fo r example, offering of securities, the setting of benchmark rates and related derivatives trading, conduct in the foreign e xchange market, product mis-selling and various issue s relating to the issuance, underwriting, and sales and trading of fixed-i ncome securities, including structured products and government securi ties, some of which have resulted, and oth ers of which may result, in investigations or proceedings. Any matters discussed or identif ied during such discussions and inquiries may result in, among other things, further inquiry or investigation, other action bein g taken by governmental and regulatory authorities, increased costs being i ncurred by NWM Group, remediation of systems and controls, public or private censure, restriction of NWM Group’s business acti vities and/or fines. Any of the events or circumstances mentioned in this paragraph or below could have a m aterial adverse effect on NWM Group, its business, authorisations and licence s, reputation, results of operations or the price of securities issu ed by it, or lead to material additional provisions being taken. NWM Group is co-operating fully with the matters described below. US investigations relating to fixed-income securities In December 2021, NWM Plc pl ed guilty in the United States District Court for the District of Connecticut to one cou nt of wire fraud and one count of secu rities fraud in connection with historical spoofing conduct by former empl oyees in US Treasuries markets between January 2008 and May 20 14 and, separately, during approximately three months in 2018. The 2018 trading occurred duri ng the term of a non- prosecution agreement (NPA) be tween NWMSI and the United States Attorney's Office for the District of Conne cticut (USAO CT), under which non-prosecution was co nditioned on NWMSI and affiliated companies not en gaging in criminal conduct during the term of the NPA. The relevant t rading in 2018 was conducted by two NWM traders in Singapore an d breached that NPA. The plea agreement reached with the US Dep artment of Justice and the USAO CT resolves both the spoofing conduct and the breach of the NPA. Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 171 25 Memorandum items continued Litigation and regulatory matters As required by the resolution a nd sentence imposed by the court, NWM Plc is subject to a three-year period of probation and has paid a US$25.2 million criminal fine, a pproximately US$2.8 million in criminal forfeiture and app roximately US$6.8 million in restitution out of exist ing provisions. The plea agreement also imposes an ind ependent corporate monitor. In addition, NWM Plc has committed to co mpliance programme reviews and improvements and agreed to reporting and co- operation obligations. Other material adverse collateral consequence s may occur as a result of this matter, as furthe r described in the Risk factor relating to legal, regulatory and governmental actions and investigations set out on page 198. Foreign exchange related investigations In recent years, NWM Plc paid significant penal ties to resolve investigations into its FX business by the FCA, the Commodity Futures Trading Commission, the US Dep artment of Justice, the Board of Governors of the Fede ral Reserve System, the European Commission (EC) and others. In Decembe r 2021, the EC announced that a settlement had been re ached with NatWest Group plc, NWM Plc and other banks in relation to its investigation into past breaches of competition law regarding spot foreign exchange trading. NatWest Group plc and NWM Plc were fined EUR 32.5 million in total relating t o conduct that took place between 2011 and 201 2. The fine was covered by existing provisions. This concludes the EC’s investigations into NatWest Group’s past spot foreign exchange trading activity. FCA investigation into NatWest Group’s compliance with the Money Laundering Regulations 2007 Following an FCA investigation, commenced in 201 7, into potential breaches of the UK Money Laundering Regul ations 2007 (‘MLR 2007 ’), NWB Plc pled guilty in October 2021 to three offences under regulation 45 (1) of the MLR 2007 for failure to comply with regulation 8(1) between 7 Nove mber 2013 and 23 June 201 6, and regulations 8(3) and 14(1) between 8 November 2012 and 23 June 20 16. These regulations required the firm to determine, conduct and demons trate risk sensitive due diligence and ongoing monit oring of its relationships with its customers f or the purposes of preventing money laundering. The offences relate to operational weaknesses between 2012 and 2 016, during which period NWB Plc did not adequately monitor the accoun ts of a UK incorporated customer. In December 2021, NWB Plc w as fined £264.8 million, incurred a confiscation order and w as ordered to pay costs. This was met by NWB Plc fro m existing provisions, with a small additional provisio n taken in Q4 2021. Systematic Anti-Money Laundering Programme assessment In December 2018, the FCA commenced a Systematic A nti- Money Laundering Programme assessment of NatWest Group. In August 2019, the FCA instru cted NatWest Group to appoint a Skilled Person under section 166 of the Financial Services and Markets Act 2000 to provide assurance on financi al crime governance arrangements in relation to two financial c rime change programmes. The Skilled Person’s final re port was received in January 2022. 26 Analysis of the net investment in business interests NWM Group NWM Plc 2021 2020 2021 2020 £m £m £m £m Net assets sold — 288 — 274 Loss on disposal of net assets — (5) — (5) Sale of subsidiaries and associates 4 32 4 — Profit on sale of subsidiaries — 43 — — Net inflow of cash in respect of disposals 4 358 4 269 Net inflow of cash 4 358 4 269 Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 172 27 Analysis of changes in finan cing during the year NWM Group Share capita l, share premium and paid in equity Subordinated liabilities MREL 2021 2020 2021 2020 2021 2020 £m £m £m £m £m £m At 1 January 3,063 3,063 2,858 3,156 5,181 5,120 Redemption of subordinated liabilities (316) (409) Interest on subordinated liabilities (62) (139) Maturity/redemption of MRELs (1,082) Interest on MRELs (152) (191) Net cash outflow from financing — — (378) (548) (1,234) (191) Effects of foreign exchange — — (78) 31 (115) (6) Changes in fair value of subordinated liabili ties and MRELs (61) 65 (119) 67 Loss on sale of subordinated liabilities and MRELs — 16 — — Interest on subordinated liabilities and MRELs 60 138 144 191 Loss on redemption of own debt — — 26 — — — Redemption of preference shar es 187 — — — — — At 31 December 3,250 3,063 2,427 2,858 3,857 5,181 NWM Plc Share capita l, share premium and paid in equity Subordinated liabilities MREL 2021 2020 2021 2020 2021 2020 £m £m £m £m £m £m At 1 January 3,063 3,063 2,269 2,610 5,181 5,120 Redemption of subordinated liabilities (315) (398) Interest on subordinated liabilities (24) (117) Maturity/redemption of MRELs (1,082) — Interest on MRELs (152) (191) Net cash outflow from financing — — (339) (515) (1,234) (191) Effects of foreign exchange — — (71) 29 (115) (6) Changes in fair value of subordinated liabili ties and MRELs (28) 13 (119) 67 Loss on sale of subordinated liabilities and MRELs — 16 — — Interest on subordinated liabilities and MRELs 22 116 144 191 Loss on redemption of own debt — — 26 — — — Redemption of preference shar es 187 — — — — — At 31 December 3,250 3,063 1,879 2,269 3,857 5,181 28 Analysis of cash and cash equivalents In the cash flow statement, cash and cash equiv alents comprises cash, loans to banks and treasury bills with an o riginal maturity of less than three months that are readily conve rtible to known amounts of cash and subject to insignificant risk of change in value. NWM Group NWM Plc 2021 2020 2021 2020 £m £ m £m £m At 1 January - cash 15,771 12,729 11,736 9,953 - cash equivalents 10,609 14,314 9,549 13,005 26,380 27,043 21,285 22,958 Net decrease in cash and cash equivalents (1,130) (663) (2,071) (1,673) At 31 December 25,250 26,380 19,214 21,285 Comprising: Cash and balances at central banks 16,645 15,771 12,294 11,736 Trading assets 7,130 9,055 4,711 7,540 Other financial assets 16 173 16 173 Net loans to banks including int ragroup balances (1) 1,459 1,381 2,193 1,836 Cash and cash equivalents 25,250 26,380 19,214 21,285 (1) NWM Group includes cash collateral posted with bank counterparties in respect of derivative liabilities of £4,286 million (2020 - £7,427 million), and NWM Plc includes cash collateral posted with bank counterparties in respect of derivative liabilities of £3,561 million (2020 - £6,974 million). Certain members of NatWest Group are required by law or regulation to m aintain balances with the central banks in the jurisdictions in which they operate. Natwest M arkets N.V. had mandatory rese rve deposits with De Nederlandsche Bank N.V of €60 million (2020 - €81 million). Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 173 29 Directors' and key management remuneration 2021 2020 Directors' remuneration £000 £000 Non-executive directors emoluments 394 368 Chairman and executive directors emoluments 2,268 1,877 2,662 2,245 Amounts receivable under LTIP s, share option and other plans 271 269 Total 2,933 2,514 The total emoluments and amounts receivable under long-term incentive plans and share op tion plans of the highest paid director were £1,662,000 (2020 - £1,428,000). No directors accrued benefits under defined bene fit schemes or defined contribution sche mes during 2021 and 2020 . The executive directors may pa rticipate in NatWest Group’s long-te rm incentive plans, executive share option and sha resave schemes. Where directors of the B ank are also directors of NatWest Group, details of thei r share interests can be found in the 2021 Annual Report and Accounts of the NatWest Group, in line with regulations applying to Nat West Group as a premium listed company. Compensation of key managemen t The aggregate remuneration of directors and o ther members of key management duri ng the year was as follows: 2021 2020 £000 £000 Short term benefits 15,245 16,922 Post employment benefits 595 278 Share based payments 703 2,789 16,543 19,989 30 Transactions with directors and key management At 31 December 2021, amount s outstanding in relation to transactions, arrangemen ts and agreements entered in to by authorised institutions in NatWest Group, as defined in UK legislation, were £4 93,712 in respect of loans to one director of the co mpany at any time during the financial period (2020 - £59,894). For the purposes of IAS 24 Related pa rty disclosures, key management co mprises directors of the company and mem bers of the Executive Committee. Amounts in the table belo w are attributed to each person at thei r highest level of NatWest Group key management. 2021 2020 £000 £000 Loans to customers - amortised cost 494 60 Customer deposits 1,743 765 Key management has banking relationships with N atWest Group entities which are ente red into in the normal course of busine ss and on substantially the same terms, including in terest rates and security, as for comp arable transactions with other persons of a similar standing or, where applicable, with other em ployees. These transactions did not i nvolve more than the normal risk of repayment or present other unfavourable fea tures. Key management had no reportable transactions or balances with the ho lding company. Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 174 31 Related parties UK Government The UK government through HM Treasury is the u ltimate controlling party of NatWest Gr oup plc. The UK Government’s shareholding is managed by UK Gove rnment Investments Limited, a company wholly own ed by the UK Government. As a result the UK government and UK Government cont rolled bodies are related parties of the Group. At 31 December 2021, HM Treasury’s holding in N atWest Group’s ordinary shares was 52.9 6%. NWM Group enters into transactions with many of t hese bodies. Transactions include the payment of: taxes principally UK corporation tax (refer to Note 7 ) and value added tax; national insurance contributions; local autho rity rates; and regulatory fees and levy; toget her with banking transactions such as loans and deposits unde rtaken in the normal course of banker-customer relationships. Bank of England facilities NWM Group may participate in a number of schemes o perated by the Bank of England in the normal course of busine ss. Members of NWM Group that a re UK authorised institutions are required to maintain non-interest bearing (cash ratio) deposits with the Bank of England amou nting to 0.406% of their average eligible liabilities in excess of £6 00 million. They also have access to Bank of England reserve accounts: ste rling current accounts that earn interest at the B ank of England base rate. Other related parties (a) In their roles as providers of finance, NWM Group companies provide development and other type s of capital support to businesses. These investments are made in the normal course of business. In some instances , the investment may extend to ownership or con trol over 20% or more of the voting rights of the investee company. (b) In accordance with IAS 24, transactions or balances between NWM Group entities that have been eli minated on consolidation are not reported. (c) NWM Group is recharged from other NatWes t Group entities, mainly NWB Plc which provides the majority of shared services (including technology) and oper ational processes. (d) The captions in the primary financial statements of the parent company include amounts attributable to subsidiaries. These amounts have bee n disclosed in aggregate in the relevant notes to the financial statements. Other net income/(expenses) represents the s hare of post- tax results of associates and joint ventures, p rofit (or loss) on disposal of subsidiaries, associates and join t ventures, and gains on acquisitions. The table below discloses transactions be tween NWM Group and fellow subsidiaries of NatWest Group. 2021 2020 £m £m Interest receivable 14 — Interest payable (169) (282) Fees and commissions receivable 16 13 Fees and commissions payable (1) (4) Other administrative expenses (33) (13) (173) (286) NWM N.V. loan purchases via NWM Plc In Q4 2021 NWM N.V. started purchasing loans on to the banking book as part of a larger initi ative to increase its risk and po rtfolio diversity. NWM N.V. has identified a list of lo ans it wishes to purchase which NWM Plc has purc hased from market participants on behalf of NWM N.V.. NWM N.V. subseque ntly purchased the loans at the same price f or which NWM Plc had purchased them for and paid a fee to NWM Plc in re spect of each loan purchased. As at 31 Decembe r 2021, loans of €24 million have moved onto NWM N.V. balance sheet. 32 Ultimate holding company NWM Group’s ultimate holding company is NatWest G roup plc which is incorporated in the Un ited Kingdom and registered in Scotland. As at 31 December 2021, NatWest Group plc he ads the largest group in which NWM Gr oup is consolidated. Copies of the consolidated accounts may be obtained from Leg al, Governance & Re gulatory Affairs, NatWest Group plc, Gogarburn, PO B o x 1000, Edinburgh EH12 1HQ, the Registrar of Companies or at natwestgroup.com. Following placing and open offe rs by NatWest Group plc in December 2008 and April 200 9, the UK Government, through HM Treasury, currently holds 52.96% of the issued o rdinary share capital of the holding com pany and was therefore the NWM Group’s ultimate controlling party. 33 Post balance sheet events On 17 February 2022, the NWM Plc B oard approved an interim dividend of £250 million, or £0.625 per share, to be declared and payable to NatWest Group plc on 18 February 202 2. There has been no adjustment to the 31 D ecember 2021 statutory financial statements. For regulatory reporting purposes, a £250 million foresee able dividend deduction has been applied to the y ear-end regulatory capital position. Other than as disclosed in the accounts, there h ave been no other significant eve nts between 31 December 2021 and the date of approval of these accounts whic h would require a change to or additional disclosure. Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 175 34 Related undertakings Legal entities and activities at 31 December 2021 In accordance with the Companies Act 2006, NWM Plc’s related undertakin gs and the accounting treatment for each are listed below. All undertakings are wholly-owned by NWM Plc o r subsidiaries of NWM Plc and are co nsolidated by reason of contractual control (Section 1162(2) CA 200 6), unless otherwise indicated. NWM Group interest refers t o ordinary shares of equal values and voting rights unless further ana lysis is provided in the notes. Ac tivities are classified in accordance with Annex I to the Ca pital Requirements Directive (“CRD IV”) and the definitions in A r ticle 4 of the Capital Requirements Re gulation. The following table details active related undertakin gs incorporated in the UK which are 100% owned by NWM Group and fully consolidated for accounting purposes Regulatory Entity name Activity treat ment Notes 280 Bishopsgate Finance Ltd INV FC (1) Care Homes 1 Lt d B F FC (1) Care Homes 2 Lt d B F FC (1) Care Homes 3 Lt d B F FC (1) Care Homes Hol dings Ltd BF FC (1) Churchill Manag ement Ltd BF FC (1) Desertlands En tertainment Ltd BF FC (1) Distant Planet P roductions Lt d BF FC (1) Lombard Corpor ate Finance (6) Ltd BF FC (1) Lombard Corpor ate Finance (7) Ltd BF FC (1) Lombard Corpor ate Finance (11) Ltd BF FC (1) Lombard Corpor ate Finance (15) Ltd BF FC (1) Nanny McPhee Productions L td BF FC (1) NatWest Mark ets Secretarial Se rvices Ltd SC FC (1) NatWest Mark ets Secured Fun ding LLP BF FC (9) P of A Produc tions Ltd BF FC (1) Patalex Product ions Ltd BF FC (1) Patalex V Produ ctions Ltd BF FC (1) Price Productio ns Ltd BF FC (1) Priority Sites Inv estments Ltd BF DE (1) Priority Sites L td INV DE ( 1) Entity name Activity Regulatory Notes treatment Property Ventur e Partners Ltd INV FC (2) R.B. Equipment L easing Ltd BF FC (1) R.B. Leasing (Ap ril) Ltd BF FC (1) R.B. Leasing Co mpany Ltd BF FC (2) R.B.S. Special Investments Ltd BF FC (1) RB Investment s 3 Ltd OTH FC (1) RBOS (UK) Ltd BF FC (1) RBS Manage ment Services (UK ) Ltd SC FC (1) RBS Mezzanin e Ltd BF FC (2) RBS Property De velopments L td I NV FC (2) RBS Property V entures Inves tments Ltd BF FC (2) RBSM Capital Lt d BF FC (2) RBSSAF (12) L td BF FC (1) RoboScot Equity Ltd BF FC (2) Royal Bank Inv estments Ltd BF FC (2) Royal Bank Ve ntures Investme nts Ltd BF FC (2) West Register (Ho tels Number 3) Ltd INV DE (2) West Register (Pro perty Invest ments) Ltd BF DE (2) West Register (Re alisations) L td INV DE (2) Winchcombe Fi nance Ltd BF FC (1) The following table details active related undertakin gs incorporated outside the UK which are 100% owned by NWM Group and fully consolidated for accounting purposes Regulatory Entity name Activity treatment Notes AA Merchant S ervices B.V. BF FC ( 6) Alcover A.G. BF DE (23) Alternative Inv estment Fund B. V. BF FC (6) Candlelight Acqu isition LLC BF FC (3) Coutts & Co Lt d CI FC ( 22) Coutts General Pa rtner (Cayma n) V Ltd BF FC (19) Financial Asset S ecurities Cor p. BF FC ( 3) KEB Investor s, L.P. BF FC (15) NatWest Mark ets Group Hol dings Corporat ion BF FC (3) NatWest Mark ets N.V. CI FC ( 6) NatWest Mark ets Securities In c. INV FC (3) NatWest Mark ets Securities Japan Ltd INV FC (7) R.B. Leasing B DA One Ltd BF FC ( 25) Random Proper ties Acquisition Co rp. III INV FC (3) RBS Acceptance Inc. BF FC (3) Regulatory Entity name Activity treatment Notes RBS Americas P roperty Corp. SC FC (3) RBS Asia Finan cial Services Lt d BF FC (7) RBS Assessoria Ltd SC FC (12) RBS Commerci al Funding Inc. BF FC (3) RBS Employme nt (Guernsey) Ltd SC FC (21) RBS Financial P roducts Inc. BF FC (3) RBS Group (Aus tralia) Pty Ltd BF FC (10) RBS Holdings I II (Australia) Pty Ltd BF FC (10) RBS Holdings N. V. BF FC (6) RBS Holdings USA Inc. BF FC (3) RBS Hollandsch e N.V. BF FC (6) RBS Investment s (Ireland) Ltd BF FC (4) RBS Netherlan ds Holdings B. V. BF FC (6) RBS Nominees ( Ireland) Ltd BF FC (4) RBS Nominees (N etherlands) B.V. BF FC (6) The following table details active related undertakin gs incorporated in the UK where NWM Group ownership is less than 100% Activity Accounting Regulatory Group Notes Entity name treatment treatment % Higher Broug hton (GP) Ltd BF AHC PC 41 (18) Higher Broug hton Partnershi p LP BF AHC DE 41 (16) Accounting Regulatory Group Entity name Activity treatment treatment % Notes NatWest Mark ets Secured Funding (LM) Lt d BF FC PC 20 (9) RBS Sempra Co mmodities LLP BF FC FC 51 (2) Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 176 34 Related undertakings continued The following table details active related undertakin gs incorporated outside the UK where NWM Group ownership i s less than 100% Accounting Regulatory Group Entity name Activity treatment treatment % Notes Eris Finance S. R.L. BF IA PC 45 (14) German Public S ector Finance B.V. BF EAJV PC 50 (17) Herge Holding B.V. BF IA PC 63 (24) Lunar Funding V III Ltd BF FC FC 0 (5) Lunar Luxembour g SA BF FC DE 0 (26) Lunar Luxembour g Series 2019- 04 BF FC DE 0 (26) Lunar Luxembour g Series 2019- 05 BF FC DE 0 (26) Accounting Regulatory Group Entity name Activity treatment treatment % Notes Lunar Luxembour g Series 2020- 01 BF FC DE 0 (26) Lunar Luxembour g Series 2020- 02 BF FC DE 0 (26) Maja Finance S .R.L. BF FC FC 98 (14) Natwest Secur ed Funding DAC BF FC FC 0 (13) Sempra Energy Trading LLC BF FC FC 51 (3) Thames Asse t Global Securitization No .1 Inc. BF FC FC 0 (11) The following table details related undertakin gs that are not active (actively being dissolved) Accounting Regulatory Group Entity name treatment treatment % Notes Lombard Corpor ate Finance (13) Ltd FC FC 100 (1) Morar ICC Insu rance Ltd FC DE 100 (20) Accounting Regulatory Group Entity name treatment treatment % Notes RBSSAF (6) Lt d FC FC 100 (1) West Register Hotels (Holding s) Ltd FC FC 100 (2) The following table details related undertakin gs that are dormant Accounting Regulatory Group Entity name treatment treatment % Notes Buchanan Hol dings Ltd FC FC 100 (1) Marigold Nomin ees Ltd FC FC 100 (1) Mulcaster Stre et Nominees L td FC FC 100 (8) N.C. Head Offic e Nominees Lt d FC FC 100 (2) Accounting Regulatory Group Entity name treatment treatment % Notes Project & Expo rt Finance (No minees) Ltd FC FC 100 (1) RBOS Nominee s Ltd FC FC 100 (1) Sixty Seven No minees Ltd FC FC 100 (1) The Royal Ban k of Scotland ( 1727) Ltd FC FC 100 (2) The following table details the overseas branches of NWM Group Subsidiary Geographic location Coutts & Co Lt d Switzerland France, Germ any, Italy Republic of Ireland, Spai n, Sweden NatWest Mark ets N.V. United Kingdom Subsidiary Geographic location Germany, Hong Kong, Japan, S ingapore NatWest Mark ets Plc Turkey, Unite d Arab Emirates Notes to the fin ancial state ments continue d NWM Gr oup Annual Report and Accou nts 202 1 177 34 Related undertakings continued Key: BF Banking and fi nancial institut ion CI Credit ins titution INV Investment (shar es or prope rty) holding com pany SC Service compa ny TR Trustee OTH Other DE Deconsolida ted FC Full consolida tion PC Pro-rata consoli dation AHC Asso ciate held at co st EAJV Equity accounting – join t venture IA Investment a ccounting NC Not consolidate d Notes Registered add resses Country of incor poration (1) 250 Bishopsgate, Lo ndon, EC2M 4AA UK (2) RBS Gogarburn, 1 75 Glasgow Ro ad, Edinbur gh, EH12 1HQ UK (3) 251, Little Falls Drive, Wilmin gton, DE, 1980 8 USA (4) Ulster Bank He ad Office, Bloc k B Central P ark, Leopardsto wn, Dublin 18, D 18 N153 RoI (5) Grand Pavilio n Commercial C entre, 802 West B ay Road, P.O. Box 31119 Cayma n Islands (6) Claude Debu ssylaan 94, Amst erdam, 1082 MD Netherlands (7) Level 54, Hope well Centre, 183 Qu een' s Road East Hong Ko ng (8) Royal Bank Hou se, 71 Bath St reet, St Helier, JE4 8PJ Jersey (9) 1 Bartholomew L ane London EC 2N 2AX UK (10) Ashurst L26, 181 William Stre et, Melbou rne, VIC, 3000 Australia (11) 114 West 47th St reet, New Yo rk, 10036 USA (12) 254, 13th Floor, Rua Boa Vista, Sao Paulo, 01014-907 Brazil (13) 5 Harbourmast er Place, Dublin 1, D01 E 7E8 RoI (14) Via Vittorio Alfi eri 1, Conegli ano TV, IT -TN 31015 Italy (15) Clarendon Hou se, Two Chur ch Street, Suite 104, Reid Str eet, Hamilton, HM 11 Bermuda (16) Cornwall Buil dings, 45-51 N ewhall Street, Birmingham, West Midlan ds, B3 3QR UK (17) De entree 99 -197, 1101HE Amsterdam Zui doost Netherlands (18) Inpartnership Lt d, 35 St Paul' s Square, Birmin gham, West M idlands, B3 1QX UK (19) c/o Maples Co rporate Service s Ltd, PO Box 309, 121 So uth Church Str eet, George Tow n, Grand Cay man, KY1-1 104 Cayman I slands (20) PO Box 384, T he Albany, Sout h Esplanade, St P eter Port, G Y1 4NF Guernsey (21) Regency Court, Glategny Espla nade, St Pe ter Port, GY1 3AP Guernsey (22) Schuetzengass se 4, CH-8001 Zurich Switzerland (23) Tirolerweg 8, Zu g, CH- 6300 Switzerland (24) Verlengde Poo lseweg 16, Br eda, 4818 CL Netherlands (25) Victoria Place, 5 th Floor, 31 Vi ctoria Street, H amilton, HM 1 0 Bermuda (26) 46A Avenue J.F. K ennedy 1855 Luxembourg Non-IFRS m easures NWM Gr oup Annual Report and Accou nts 202 1 178 NWM Group prepares its financial statemen ts in accordance generally accepted accountin g principles (GAAP). This documen t contains a number of adjusted or alternati ve performance measures, also known as non-GAAP or non-IFRS performance measures. These measures are adjusted fo r certain items which management believe are not representative of the un derlying performance of the business and which distort period -on-period comparison. These non-IFRS financial measures are not mea sures within the scope of IFRS and ar e not a substitute for IFRS measures. The se measures include:  Management analysis of the operating expenses sho ws strategic costs and litigation and cond uct costs in separate lines on pages 38. These amounts are included in staff, pre mises and equipment and other administ rative expenses in the statutory analysis. The use of the other e xpenses performance measure i n non-statutory analysis aims to remove mo re volatile items within strategic costs and litigation and conduct cos ts.  Funded assets are defined as total assets less derivative assets. This measure allows review of balance s heet trends exclusive of the volatility associated with derivative fai r values.  Management view of income by busines s before revenue share and excluding own credi t adjustments and asset disposals/strategic risk reduction. This measure is used t o show underlying income generatio n in NWM excluding the impact of disposal losses and own credit adjust ments.  Revenue share refers to income gene rated by NatWest Markets products from custome rs that have their primary relationshi p with other NatWest Group segments, a proportion of whic h is shared between NatWest Mark ets and those segments.  Asset disposals/strategic risk reduction includes the costs of ex iting positions, which includes changes in c arrying value to align to the expected exit valuation, and the impac t of risk reduction transactions entered into as part of the optimisation of the entity’s capital usage, following the st rategic announcements of 14 February 2020.  Own credit adjustments are applied to positions where i t is believed that the counte rparties would consider NWM Group’s creditworthiness when pricing trades. The fai r value of certain issued debt securities, inclu ding structured notes, is adjusted to reflect the changes in own credit spreads and the resulting gain or loss recognised in incom e. Operating expenses analysis Non-statutory analysis Year ended 31 December 2021 31 December 2020 Litigation Other Statutory Litigation Other Statutory Strategic and conduct operating operating Strategic and conduct operating operating Operating expenses costs costs expenses expenses costs costs expenses expenses Staff expenses 135 — 363 498 121 — 549 670 Premises and equipment 40 — 70 110 19 — 88 107 Other administrative expenses 72 (17) 467 522 51 134 444 629 Depreciation and amortisation 1 — 19 20 — — 25 25 Total 248 (17) 919 1,150 191 134 1,106 1,431 Risk Factors NWM Gr oup Annual Report and Accou nts 202 1 179 Principal Risks and Uncertainties Set out below are certain risk factors that could adversely affect NWM Group’s future results, its financial cond ition and prospects and cause them to be materially different from what i s forecast or expected, and directly or indirectly impact the value of its securitie s in issue. These risk factors are broadly categorised and should be read in conjunction with other sections of this annual report, including the forward- looking statements section, the strategic report and the risk and capital management section. They should not be regarded as a complete and comprehensive statement on its own of all potential risks and uncertainties facing NWM Group. The COVID-19 pa ndemic may exacerbate any of the risks described below. Economic and political risk The impact of the COVID-19 pandemic and related uncerta inties continue to affect the UK, global economies and financial markets and NWM Grou p’s customers, as well as its competitive environment, which may continue t o have an adverse effect on NWM Group. In many countries, including the U K (NWM Group’s most significant market), the COVID-19 pandemic has, at times, resulted in the imposition of strict social distancing measures, restrictions on non- essential activities and travel quarantines, in an attempt to slow the spread and reduce the impact of the COVID-19 pandemic. Despite widespread COVID-19 vaccination within the geographical regions in which NWM Group o perates, the proliferation of COVID-19 variants continues to affect the UK and global economies. Further waves of inf ection or the spread of new strains may resu lt in renewed restrictions in affected countries and regions. As a result, significant uncertainties remain as to how long the impact of the COVID-19 pandemic will last, and how it will continue to affect the global economy. In response to the COVID-19 pandemic, central banks, governments, regulators and legislatures in the UK and e lsewhere have offered unprecedented levels of support and various schemes to assist impacted businesses and individuals. This has included forms of financial assistance and legal and regulatory initiative s. Many of these support schemes have now been curtailed. However, uncertainty remains as to the impact of the ending or tapering of these schemes and the repayment of the loans involved on customers, the economic environmen t and NWM Group. Moreover, it is unclear as to how any further measures, s uch as rising interest rates and inflation, may affect NWM Group’s business and performance. The COVID-19 pandemic has prompted many changes that may prove to be permanent shifts in customer be haviour and economic activity, such as changes in spending patterns and significantly more people working from home. The se changes may have long-lasting impacts on asset prices, the economic environment and its customers’ financial needs. Uncertainties relating to the COVID-19 pandemic has made reliance o n analytical models, planning and forecasting for NWM Group more complex, and may result in uncertainty impacting the risk profile of NWM Group and/or that of the wider bankin g industry. The medium and long-term implications of the COVID-19 pandemic for NWM Group customers, and the UK and global economies and financial markets remain uncertain. Any of the above may have a negative impact on NWM Group. NWM Group faces continued econ omic and political risks and uncertainty in the UK and global markets. The value of NWM Group’s financial instruments may be materially affected by market risk, including as a res ult of market fluctuations. Market volatility, illiquid market conditions and di sruptions in the credit markets may mak e it extremely difficult to value certain of NWM Group’s financial instruments, particularly during periods of market displacement. This could cause a decline in the value of NWM Group’s financial instruments. This may have an adverse effect on NWM Group’s results of operations in future periods, or cause inaccurate carrying values for ce rtain financial instruments. Similarly, NWM Group trades a considerable amoun t of financial instruments (including derivatives) and volatile market conditions could result in a signifi cant decline in NWM Group’s net trading income or result in a trading los s. In addition, financial markets are susceptible to severe events evi denced by rapid depreciation in asset values, which may be accompanied by a reduction in asset liquidity. Unde r these extreme conditions, hedging and other risk management strategies may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions, market participants are particularly exposed to trading strategies employed by many market partic ipants simultaneously and on a large scale, increasing NWM Group’s count erparty risk. NWM Group’s risk management and monitoring processes seek to quantify and mitigate NWM Group’s exposure to extreme market moves. Howeve r, severe market events have historically bee n difficult to predict and NWM Group could realise significant losses if extreme market events were to occur. The outlook for the global economy over the medium-term remains uncertain due to a number of factors including: the COVID-19 pandemic, societal inequalities and changes, trade barriers and the increased possibility and/or continuation of trade wars, widespread political instability (including as a result of populism and nationalism, which may lead to protectionist policies, state and privately sponsored cyber and terroris t acts or threats, efforts to destabilis e regimes or armed conflict), changes in inflation and interest rates (including negative interest rates), supply chain disruption, climate, environmental, social and other sustainability-related risks and global regional variations in the impact and responses to these factors. These conditions could be worsened by a number of factors including macro- economic deterioration, increased instability in the global financial sy stem and concerns relating to further financial shocks or contagion (for example, due to economic concerns in emerging markets), market volatility or fluctuations in the value of the pound sterling, new o r extended economic sanctions, volatility in commodity prices or concerns regarding sovereign debt. This may be compounded by the changing demographics of the populations in the markets that NWM Group serves, increasing inequalities, or rapid change to the economic environment due to the adoption of technology and artificial intelligence. Any of the above developments could adversely impact NWM Group directly (for example, as a result of credit losses) or indirectly (for example, by impacting global economic growth and financial markets and NWM Group’s clients and their banking needs). In addition, NWM Group is exp osed to risks arising out of geopolitical events or political developments, such as exchange controls, and other measures taken by sovereign governments that may hinder economic or financial activity levels. Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 180 Furthermore, unfavourable political, military or diplomatic events, inclu ding secession movements or the exit of othe r member states from the EU, armed conflict, pandemics and widespread public health crises (including the c urrent COVID-19 pandemic and any future epidemics or pandemics), state and privately sponsored cyber and terroris t acts or threats, and the responses to them by governments and markets, could negatively affect the busi ness and performance of NWM Group, including as a result of the indirect effect on regional or global trade and/or NWM Gr oup’s customers. NatWest Group faces political uncertainty in Scotland as a result of a poss ible second Scottish independence referendum. Independence may impact NWM Group since NatWest Group plc and other NatWest Group entiti es (including NWM Plc) are incorporated in Scotland. Any changes to Scotl and’s relationship with the UK or the EU would impact the environment in which NatWest Group and its subsidiaries operate, and may require furthe r changes to NatWest Group (including NWM Group’s structure), indepe ndently or in conjunction with other mandatory or strategic structural and organisational changes which, any of which could adversely impact NWM Group. Any of the above may have a negative effect on NWM Group. Continuing uncertaint y regarding the effects and exten t of the UK’s post Brexit divergence from EU laws and regulation, and NWM Group’s post Brexit EU operating model m ay continue to adversely affect NWM Group and its operating environm ent. The UK ceased to be a member of the EU and the European Economic Area (‘EEA’) on 31 January 2020 (‘B rexit’) and the 2020 EU-UK Trade and Cooperation Agreement (‘TCA’) ended the transition period on 31 December 2020. T he TCA provides for free trade between the UK and EU with zero tariffs and quotas on all goods that comply with the appropriate rules of origin, with minimal coverage. However, for financial services, UK-incorporated financi al services providers no longer have EU passporting rights and there is no mutual recognition regime. Financial se rvices may largely be subject to individual equivalence decisions by relevant regulators. A number of temporary equivalence decisions have been made that cover certain services offered by NWM Group. The EU’s equivalence regime does not cover most lending and deposit taking, and determinations in respect of third countries have not, to date, covered the provision of most investment services. In addition, equivalence determinations do not guarantee permanent access rights and can be withdrawn with short notice. T he TCA is accompanied by a Joint Declaration on financial services , which sets out an intention for the EU and UK to cooperate on matters of financial regulation and to agree a Memorandum of Understanding, which has yet to be signed. In late 2021 the European Commission proposed draft legis lation that would require non-EU firms to establish a branch or subsidiary in the EU before providing “banking se rvices” in the EU. If these proposals become law all “banking services” will be licensable activities in each EU member state and member states will not be permitted to offer bilateral permissions to financial institutions outside the EU allowing them to provide “banking services” i n the EU. Uncertainty remains as to whet her “banking services” will also include investment products. Furthermore, failure to extend existing equivalence determinations, exemptions an d derogations in relation to regulations such as margin and clearing re gulations or capital regulations, may hav e a negative impact on customer engagement and/or may significantly negatively impact the operating model and business operations of NW M Group. NatWest Group continues to ev aluate its post Brexit EU operating model, making adaptations as necessary. NatWest Group also co ntinues to assess where NatWest Group com panies can ob tain bilateral regulatory permissions to facilitate intragroup transactions and/or to permit busi ness to conti nue from its UK entities, transferring what cannot be continued to be rendered from the UK to an EEA subsidiary or branch, w here permitted. Where these regulatory permissions are temporary or are withdrawn, a different approach may need to be taken or may result in a change in operating model or some business being ceased. Not all NatWest Group entities have applied for bilateral regulatory permissions and instead intend to move EEA business to an EEA licensed subsidiary or branch. T here is a risk that these EEA licenses may not be granted or may be withdrawn, and where these permissions are not obtained, further changes to NatWest Group’s operating model may be required or some business may need to be ceased. In addition, failure to obtain required regulatory permissions or licences in one part of NatWest Group may impact other parts of NatWes t Group adversely. Certain permissions are required in order to maintain the ability to clear euro payments. Other permissions, including the ability to have two intermediate EU parent undertakings, would allow NatWest Group to continue to serve EEA customers from both the ring-fenced and non-ring-fenced banking entitie s. As described in ‘ NWM Group has been in a period of significant structural and other change, including as a result of NatWest Group’s purpose-led strategy (i ncluding the NWM Refocusing) and may continue to be subject to significant struct ural and other change ’, NWM Group expects that NatWest Group’s Transfer Business will be transferred from the ring-fenced subgroup of NatWest Group to NWM Group. Transferring business to an EEA based subsidiary is a complex exercise and involves legal, regulatory and execution risks, and could result in a loss of business and/or customers or greater than expected costs. The changes to NatWest Group’s and NWM Group’s operating model have been costly and further changes to its business operations, product offering an d customer engagement could result in further costs and operating co mplexity. Any of the above could, in turn, negatively impact NWM Group. The long-term effects of Brexit and the uncertainty regarding NWM Gr oup’s EU operating model may have a ne gative impact on NWM Group’s busines s. These may be exacerbated by wider global macro-economic trends and events, particularly COVID-19 pandemic related uncertainties, which may significantly impact NWM Group and its customers and counterparties who are themselves dependent on trading with the EU or personnel from the EU. They may exacerbate the global macro-ec onomic impacts on the UK, the Republic of Ireland (‘ROI’) and the rest of the EU/EEA. Significant uncertainties remain as to the extent to which EU/EEA laws will diverge from UK law (including bank regulation), whether and what equivalence determinations will be made by the various regulators, whether the propose d EEA licensed subsidiary is granted a banking licence, whether banking services will be harmonised across the EEA and, therefore, what the respective legal and regulatory arrangements will be, under which NWM Group and its subsidiaries will operate. This divergence could lead to further market fragmentation. These risks and uncertainties may require costly changes to NWM Group’s EU operating model. The legal and political uncertainty, and any actions taken as a result of this uncertainty, as well as the approach taken by regulators and new or amende d rules, could have a significant adverse impact on NWM Group’s busines ses, non-UK operations and/or legal entity structure, including attendant operating, compliance and costs, level of Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 181 impairments, capital requirements, changes to intragroup arrangements, increased complexity, regulatory environment and tax implications and as a result may adversely impact NWM Group’s profitability, competitive position, business model and product off ering. Changes in interest rates ha ve affected and will continue to affect NWM Group’s business and results. NWM Group is affected by intere st rate risk. Monetary policy has been accommodative in recent years including initiatives implemented by the Bank of England and HM Treasury, such as the Term Funding Scheme with additional incentives for SMEs (‘TFSME’), which have helped to support demand at a time of pronounced fiscal tightening and balance sheet repair. However, ma rket expectations are currently that benchmark interest rates such as UK base rate, could begin to rise furthe r and faster than had been anticipated previously and that this could be accompanied by other measures to reverse accommodative policy, such as quantitative tightening. While increases in medium term swap rates may support the yield of NWM Group’s equity structural hedge, s harp rises could have macroeconomic ef fects that lead to adverse outcomes for the business or customers. For example, they could lead to generally weaker than expected growth, or even contr acting GDP, reduced business confide nce and higher levels of unemployment or underemployment, all of which could have an adverse effect on NWM Group’s business, results of operations and outlook. Conversely, decreases in interest rates and/or continued sustained low, zero or negative interest rates would be expected to put pressure on N WM Group’s interest income and pr ofitability. Unexpected moves in interest rates will also affect valuations of assets and liabilities that are recognised at fair value on the balance sheet. Changes in these valuations may be adverse. Un expected movements in spreads between ke y benchmark rates could have adverse impacts and also adversely affect NWM Group’s financial position. Finally, changes in interest rates and inflation may adversely affect the income from NWM Group’s dealing activity. Changes in foreign currency ex change rates may affect NWM Gr oup’s results and financial position. Decisions of major central banks (including the Bank of England, the European Central Bank and the US Federal Reserve) and political o r market events which are outside NWM Group’s control, may lead to sharp and sudden variations in foreign exchange rates. As part of NatWest Group’s strategy, NWM Group is now the markets business for NatWest Group, and is enga ged principally in offering risk management, trading solutions and debt financing to financial institutions and UK and European corporate customers. NWM Group entities issue instruments in foreign currencies that assist in meeting their respective capital and/or MREL requirements. In addition, NWM Plc has exposure to foreign exchange movements from the provision of foreign currency products to its clients and particularly to euro movements via its subsidiary, NWM NV, USD via it s subsidiary NWMSI in addition to further investments in other currencies in overseas operations. In its day-to-day operations, NWM Group maintains policies and procedures designed to manage the impact of exposures to fluctuations in currency rates. Nevertheless, changes in curre ncy rates, particularly in the sterling-US dollar and euro-sterling exchange rates, c an adversely affect the value of assets, liabilities (including the total am ount of MREL-eligible instruments), foreign exchange dealing activity, income and expenses, RWAs and hence the reported earnings and financial condition of NWM Group. HM Treasury (or UKGI on its behalf) could exercise a significant degree o f influence over NatWest Group and NWM Group is controlled by NatWest Group. In its March 2021 Budget, the UK Government announced its intention to continue the process of privatisation of NatWest Group plc and to carry out a programme of sales of NatWest Group plc ordinary shares with the obj ective of selling all of its remaining shares in NatWest Group plc by 2025-2026. A s a result of a directed buyback of NatWest Group plc shares by NatWest Group plc from UK Government Investments Limited (‘UKGI’) in March 2021, sales of NatWest Group plc shares by UKGI by accelerated bookbuild in May 2021 and purchases made under NatWest Group plc’s on-market buyback program announced in July 2021, as at 11 February 2022, the UK Government held 50.94% of the issued share capital with voting rights of NatWest Group plc. In addition to the £750 million on-market buyback announced on 18 February 2022, NatWest Group may participate in further directed or on-market buybacks in the future. The timing, extent and continuation of UKGI’s sell-dow ns is uncertain, which could result in a prolonged period of increased price volatility on NatWest Group plc’ s ordinary shares. HM Treasury has indicated that it intends to respect the commercial decisions of NatWest Group and that NatWest Group entities (including NWM Group) will continue to have its own independent board of directors and management team determining their own str ategy. However, for as long as HM Tr easury remains NatWest Group plc’s, as the largest single shareholder, and UKGI (as manager of HM Treasury’s shareholding) could exercise a significant degree of influence over the election of directo rs and appointment of senior management, NatWest Group’s (includi ng NW M Group’s) capital stra tegy, dividend policy, remuneration policy or the c onduct of NatWest Group’s operations, amongst others. HM Treasury or UKGI’s app roach depends on government policy, which could change, including as a result of a general election. The manner in which HM Treasury or UKGI exercises HM Treasury’s rights as the largest single shareholder of NatWest Group could give rise to conflicts between the interests of HM Treasury and the interests of other shareholders, including as a result of a change in government policy. The exertion of such influence over NatWest Group could in turn have an adverse effect on the governance or bu siness strategy of NWM Group. In addition, NWM Plc is a wholly owned subsidiary of NatWest Group pl c, and NatWest Group plc therefore c ontrols NWM Group’s board of directors, corporate policies and strategic directio n. The interests of NatWest Group plc as an equity holder and as NWM Group’s parent may differ from the interests of NWM Group or of potential inve stors in NWM Group’s securities. Strategic risk NWM Group has been in a per iod of significant structura l and other change, including as a result of NatWest Group’s purpose-led strategy (including the NWM Refocusing) and may continue to be subject to significant structural and other change. In February 2020, NatWest Gro up announced its ‘purpose-led strategy’, which is focused on becoming a purpose-led business designed to champion potential, and to help individuals, families and businesses to thrive. This strategy has require d, and continues to require, changes i n NWM Group’s business, including an increased focus on serving NatWest Group’s corporate and institutional customer base. To date, NWM Group has implemented this strategy through its ‘NWM Refocusing’ initiative by simplifying its operating model and technology platform, as well as reducing its cost base and capital requirements. The implementation of the NWM Refocusing Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 182 has been a complex process and although substantial progress has been made, the risk remains that this strategy may not result in the contemplated business outcome. On 27 January 2022, NatWest Group announced that, in order to further support its customers’ growth ambitions and deliver on the next phase of its strategy, it is evolving its Commercial, NatWest Markets and RBS Inter national businesses to form a single franchise to best support its customers across the full non-personal customer lifecycle. T he transition is expected to begin over the coming months and be effe ctive from July 2022. Any of the above may result in material execution, commercial and operational (including compliance with the UK ring-fencing regime) ris ks for NWM Group and NWM Group may continue to be subject to significant structural and other change. As part of the NWM Refocusing, NWM Group has directed resources t o emphasising and growing product capability in the areas of impor tance to NatWest Group’s corporate and institutional customers, includin g the Fixed Income and Capital Markets businesses, and has refocused i ts Rates business to best serve its core customers. As a result of focusing further on NatWest Group core corporate customers, NWM Group’s pros pects are becoming further dependent on the success and strategy of NatWest Group. In addition, to improve efficie ncies and best serve customers, including in light of Brexit planning, NWM Group expects that certain assets, liabilities, transac tions and activities of NatWest Group (including NatWest Group’s We stern European corporate portfolio, principally including term funding and revolving credit facilities) (the ‘Transfer Busines s’), will be transferred from the rin g-fenced subgroup of NatWest Group to NWM Group on a rolling basis, subjec t to certain regulatory and custome r requirements. The timing and quantum of such transfers remains uncertain and NWM Group can give no assurance as t o the full impact of such transactions on its go-forward results of operations. A s a result, NWM Group’s business, results of operations and outlook could be adversely affected. NWM Group’s ability to serve its customers may be diminished by the changed business strategy as a result of the NWM Refocusing. In addition, customer reactions to the changed nature of NWM Group’s business model may be more adverse than expected and previously anticipated revenue and profitability levels (including, fo r example, in relation to income from the Rates business) may not be achieved in the timescale envisaged or at all. An adverse macroeconomic environment, including due to the COVID-19 pandemic, heightened inflation and rising interest rates, continued political and regulatory uncertainty, market volatility and/or strong market competition may also pose significant challenges to the achie vement of the anticipated targets and g oals of the NWM Refocusing. As part of the NWM Refocusing, NWM Group has accepted a number of financial, capital and operational targets and expectations, which entail further reductions to its wider cost base . In addition to requiring cost reductions within NWM Group, this could affe ct the cost and scope of NatWest Group’s provision of services to NWM Group, which individually or collectively may impact NWM Group’s competitive position and its ability to meet its other targets. The financial, operational and capital targets and expectations envisaged by the NWM Refocusing may not b e met or maintained in the timeframes expected or at all. In addition, targets and expectations for NWM Group are based on management plans, projections and models, and are subject to a number of key assumptions and judgments, any of which may prove to be inaccurate. The significant scale and scope of the changes implemented (and those that remain to be implemented) as a result of the NWM Refocusing may continue to entail operational, IT system, culture, conduct, business and financial risks to NWM Group. The NWM Refocusing requires NWM Group to meet cost reduction t argets, including through head-count re ductions and redirecting investment fro m certain business areas to others, which could affect NWM Group’s long-term prospects, product offering or competitive position and its ability to meet its other targets and commitments. A significant proportion of the cost savings are dependent on simpl ification of the IT systems and therefore may not be realised in full if IT capabilitie s are not delivered in line with assumptions. T hese risks are expected to continue to last fo r at least the medium term. The NWM Refocusing is expected to result in, and the refocused NWM Group continues to face, increased pe ople risk through the loss of key staff, the recalibration of roles and loss of institutional knowledge. This, combined with the prolonged COVID-19 pandemic, continues to impact NWM Group’s culture and morale. The remaining p arts of the NWM Refocusing and other structural changes may continue to be resource-intensive and disruptive, and may divert management resources. In addition, the scale of changes that have been concurrently implemented require the implementation and application of robust governance and controls frameworks and robust IT syste ms. There is a risk that NWM Grou p may not be successful in maintaining such governance and control frameworks and IT systems. Moreover, whether the NWM Refocusing and further structural changes are successful will depend on how the NWM resulting business is perceived by NWM Group’s custome rs, regulators, rating agencies, stake holders and the wider market, how it impacts its business, and NWM Group’s ability to retain employees required to deli ver its go-forward strategic priorities. NWM Group has implemented a sha red services model and entered into revenue share agreements with some entities within NatWest Group’s ring-fenced sub- group (including NatWest Bank Plc, T he Royal Bank of Scotland Plc and Ulster Bank Ireland DAC). NWM Group therefore relies directly or indirec tly on NatWest Group entities to provide services to itself and its clients. A failure of NWM Group to receive these services (on a cost-effective basis or at all) may result in operational risk. See, ‘ Operational risks (including reli ance on third party suppliers and outsourcing of certain activities) are inherent i n NWM Group’s businesses ’. The changed nature of NWM Group’s business may also adversely affect the credit rating assigned to NWM Plc and certain of its subsidiaries (including NWM NV) or any of their respective debt securities, which could adversely affect the availability and cost of funding for NWM Group and negatively impact NWM Group’s liquidity position. Each of the risks identified in this risk factor, individually or collectively could adversely impact NWM Group’s products and services offering or office locations, reputation with customers or busines s model and adversely impact NWM Group’s ability to deliver its strategy and the anticipated benefits thereof and meet its targets and guidance. Any of the above could in turn have a material adverse effect on NWM Group’s business , results of operations and outlook. While NWM Group has made substantial progress in implementing the NWM Refocusing, aspects of the NWM Refocusing and other structural changes that are still to be implemented entail further execution, commercial, operational and other risks. As a result, there is a risk that the NWM Re focusing and other structural change m ay not be successful, or that the business resulting Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 183 from the NWM Refocussing and other structural changes may not be a viable, competitive or profitable busines s. Trends relating to the COVID-19 pandemic may adversely affect NWM Group’s strategy and impair its ability to meet its tar gets and strategic objectives. The trajectory of the COVID-19 pandemic’s impact on the UK a nd global economy and NWM Group remain uncertain. If trends relating to t he COVID-19 pandemic negatively impact the UK and global economy, NWM Group may be unable to meet its financial, capital and operational targets and expectations. Whilst NWM Group, as part of N atWest Group, remains committed to its c ost reduction targets, achieving the planned reductions in an environment affe cted by the COVID-19 pandemic may be more challenging and may require additional savings to be made in a manner that may increase certain operational risks and could impact productivity and competitiveness within NWM Group and which may have an adverse effe ct on NWM Group. It is uncertain as to how the broader macroeconomic business envir onment and societal norms may be impacted by the COVID-19 pandemic, causing significant wider societal changes. For example, one of the most notable e ffects of the COVID-19 pandemic has been its disproportionate impact on the most vulnerable groups of society an d concerns about systemic racial biases and social inequalities. In addition, the COVID-19 pand emic has accelerated existing economic trends that may radically change the way businesses are run and people live their lives. These trends include digitalisation, decarbonisation, automation, e- commerce and agile working, e ach of which has resulted in significant market volatility in asset prices. There is also increased investor, regulatory and customer scrutiny regarding how businesses address these changes and related climate, environmental, s ocial, governance and other sustainability issues including tackling inequality, working conditions, workplace health, safety and wellbeing, diversity and inclusion, data protection and management, workforce management, human rights and supply chain management. Any failure or delay by NWM Group to successfully adapt its business strategy and to establish and maintain effective governance, procedures, systems and controls in response to these changes, and to manage emerging climate, environmental, social and other sustainability-related risks and opportunities, may have a material adverse impact on NWM Group’s reputation, business, results of operations, outlook and the value of NWM Group’s securities. See als o, ‘ — Any failure by NWM Group to impl ement effective and compliant climate chang e resilient systems, controls and procedures could adversely affect NWM Group’s ability to manage climate-relate d risks ’ and ‘ — A failure to adapt NWM Group’s business strategy, governance, procedures, systems and controls t o manage emerging sustainability-related risks and opportunities may have a material adverse effect on NWM G roup, its reputation, business, results of operations and outlook ’. The COVID-19 pandemic may also result in unexpected developments or c hanges in financial markets, the fiscal, tax and regulatory frameworks and cons umer customer and corporate client be haviour, which could intensify competition in the financial services industry. This could negatively impact NWM Group if it is not able to adapt or compete effe ctively. Financial resilience risk NWM Group may not meet the targets it communicate s, generate returns or implement its strategy effectively. As part of NatWest Group’s pur pose-led strategy and the NWM Refocusing, NWM Group has set a number of internal and external financial, capital and operational targets including in respect of: balance sheet and cost reductions, CET1 ratio targets (for NWM Plc and NWM N.V.), MREL targets, leverage ratio targets (fo r NWM Plc and NWM N.V.), targets in relation to local regulation, funding plans and requirements, employee engagement, diversity and incl usion as well as ESG (including climate and sustainable funding and financing targets) and customer satisfaction targets. NWM Group’s ability to meet its targets and to successfully implement its strategy is subject to various internal and external factors and risks. These i nclude but are not limited to, the impa ct of the COVID-19 pandemic, client and staff behaviour and actions, market, regulatory, economic and political factors, developments relating to litigation, governmental actions , investigations and regulatory matters, and operational risks and risks relating to NWM Group’s business model and strategy (including risks associated with climate, environmental, social, governance and other sustainability- related issues) and the NWM Refocus ing. See also, ‘ NWM Group has been in a period of significant structural and other change, including as a result of NatWest Group’s purpose-led strategy (i ncluding the NWM Refocusing) and may continue to be subject to significant struct ural and other change ’. A number of factors, including the economic and other effects of the COVID-19 pandemic, may impact NWM Plc and NWM NV’s ability to m aintain their current CET1 ratio targets, including impairments, the extent of organic capital generation or the reduction of RWAs. NWM Plc may incur disposal losses as part of the process of exiting positions to reduce RWAs. Some of these losses may be recognis ed ahead of the actual disposals and the losses overall may be higher than currently anticipated. NWM Group’s ability to meet its planned reductions in annual costs may vary considerably from year to year. Furthermore, the focus on meeting balance sheet and cost reduction targets may result in limited investment in other areas which could affect NWM Group’s long-term product offering or competitive position and its ability to meet its other targets, including those related to customer satisfaction. In addition, challenging trading conditions may have an adverse impact on NWM Group’s business and may adversely affect its ability to ac hieve its targets and execute its strateg y. There is a risk that NWM Grou p’s strategy may not be successfu lly executed, that it will not meet its targets and expectations, or that it will not be a viable, competitive or profitable banking business. NWM Plc and/or its regulated subsidiaries may not meet th e prudential regulatory requirement s for capital. NWM Group is required by regulators in the UK, the EU and other jurisd ictions in which it undertakes regulated activities to maintain adequate financial resources. Adequate capital provides NWM Group with financial flexibility in the face of turbulence and uncertainty in the global economy and specifically in its core UK operations. NWM Plc’s target CET1 ratio is based on regulatory requirements, intern al modelling and risk appetite (including under stress). NWM NV’s target CET1 ratio is based on expected regulatory requirements, internal modelling and risk appetite (including under stress). As at 31 December 2021, NWM Plc’s solo CET1 ratio was 17.9%. NWM Plc’s current capital strategy is based on the management of RWAs and other capital management initiatives (including the reduction of RWAs and the periodic payment of dividends to NatWes t Group plc, NWM Plc’s parent company). Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 184 Other factors that could influence NWM Plc and NWM NV’s CET1 ratios include , amongst other things (See also, ‘ NWM Group has been in a period of sig nificant structural and other change, including as a result of NatWest Group’s purpose-led strategy (including the NWM Refocusing) and may continue to be subject t o significant structural and other change ’):  a depletion of NWM Plc or NWM NV’s capital resources through losses (which would in turn impact retained earnings) and may result from revenue attrition or increased liabilities, sustained periods of low interest rates, reduced asset values resulting in write-downs or reserve adjustments, impairments, changes in accounting policy, accounting charges or foreign exchange movements;  a change in the quantum of NWM Plc’s or NWM NV’s RWAs, stemming from exceeding targ et RWA levels, the NWM Refocusing, regulatory adjustments (for example, from additional marke t risk backtesting exceptions), foreign exchange movements or a failure in internal controls or procedures to accurately measure and report RWAs. An increase in RWAs would lead to a reduction in the CET1 ratio (and increase the amount of internal MREL required for NWM Plc);  changes in prudential regulatory requirements including the Total Capital Requirement for NWM Plc (as regulated by the Prudential Regulation Authority (‘PRA’)) or NWM NV (as regulated by the De Nederlandsche Bank (‘DNB’)), including Pillar 2 requirements and regulatory buffers as well as any applicable scalars;  further developments of prudential regulation (for example, finalisation of Basel 3 standards), which will impact various areas including the approach to calculating credit risk, market risk, leverage ratio , capital floors and operational risk RWAs, as well as continued regulatory uncertainty on the details thereto;  further losses (including as a result of extreme one-off incidents such as cyberattack, fraud or conduct issues) would deplete capital resources and place downward pressure on the CET1 ratio; or  the timing of planned liquidation, disposal and/or capital releases of capital optimisation activity or legacy entities owned by NWM Plc and NWM NV Management actions taken under a stress scenario may affect, among o ther things, NWM Group’s product o ffering, its credit ratings, its ability to operate its businesses and pursue its current strategies and strategic opportunities, any of which may negatively impact investor confidence and the value of NWM Group’s securities. See als o, ‘— NWM Plc and/or its regulated subsidiaries may not manage their capital, li quidity or funding effectively which could t rigger the execution of certain management actions or recovery options ’ and ‘ NatWest G roup (including NWM Group) may be come subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the write-down or conversion of NWM Group entities’ Eligible Liabilities ’. NWM Group is reliant on acc ess to the capital markets to meet its funding requirements, both directly throu gh wholesale markets, and indirec tly through its parent (NatWest Gro up) for the subscription to its internal capital and MREL. The inability to do so ma y adversely affect NWM Group. NatWest Markets Plc’s funding plan currently anticipates that in 2022 , it will issue £4-5 billion of public benchmark issuance in order to meet its ne ar-term debt refinancing and funding requirements, based on its curre nt and anticipated business activities. NWM Group therefore has significant anticipated funding requirements and is reliant on frequent access to the capital markets for funding, at a cost that can be passed through to its customers. Such access entails execution risk, r egulatory risk, risk of reduced commercial activi ty, risk of loss of market confidenc e in the NWM Group if it cannot finance its activities and risk a ratings downgrade, which could be impeded by a n umber of internal or external factors, including, those referred to above in ‘ NWM G roup faces continued economic and p olitical risks and uncertainty in the UK and global markets ’, ‘ Continuing uncertainty regarding the effects and extent of the UK’s post Brexit divergence from E U laws and regulation, and NWM Group’s post Brexit EU operating model may conti nue to adversely affect NWM Group and its operating environment ’, ‘ Any reduction in the credit rating and/or outlooks assig ned to NatWest Group plc, any of its subsidiaries (including NWM Plc or NWM Group subsidiaries) or any of their respective debt securities could adve rsely affect the availability of funding for NWM Group, reduce NWM Group’s liquidity position and increase the cost of funding ’ and ‘ NWM Group is exposed to the risk of various litigation matters, regul atory and governmental actions and investigat ions as well as remedial undertakings, the outcomes of which are inherently difficult to predict, and which could have an adverse effect on NWM Group ’. In addition, NWM Plc receives capital and funding from NatWest Group pl c. NWM Plc has set target levels for different tiers of capital and for the internal minimum requirements for own funds and eligible liabilities (‘MREL’), as percenta ges of its RWAs. The level of capital and f unding required for NWM Plc to meet its internal targets is therefore a function of the level of RWAs and its leverage exposure in NWM Plc and this may vary over time. NWM Plc’s internal MREL comprises the regulatory value of capital instru ments and loss-absorbing senior funding issu ed by NWM Plc to its parent, NatW est Group plc, in all cases with a residual maturi ty of at least one year. The Bank of England has identified that the preferred resolution strategy for NatWest Group is as a single point of entry. As a result, only NatWest Group plc is able to issue Group MREL eligible liabilities to third- party investors, using the procee ds to fund the internal capital and MREL targets and/or requirements of its operating entities, including NWM Plc. NWM Plc is therefore dependent not only on NatWest Group plc to fund its internal capital targets, but also on NatWes t Group plc’s ability to source appropri ate funding. NWM Plc is also dependent on NatWest Group plc to continue to fund NWM Plc’s internal MREL targets over time and its ability to issue and maintai n sufficient amounts of external MREL liabilities to support this. In turn, NWM Plc is required to fund the internal capital and MREL requirements of its subsidiaries. Any inability of NWM Group to adequately access the capital markets, to manage its balance sheet in line with assumptions in its funding plan s, or to issue internal capital and MREL may adversely affect NWM Group, such that NWM Group may not constitute a viable banking business and/or NWM Plc or NWM NV may fail to meet their respective regulatory capital and/or MREL requirements (at present, NWM NV does not yet have its own MREL requirements) (see also, ‘ The effects of the COVID-19 pandemic could affect NWM Group’s ability to access sources of liquidity and funding, which may result in higher funding costs and failure to comply with regulatory capital, funding and leverage requirements ’). Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 185 NWM Group may not be able to adequately access sources of liqu idity and funding. NWM Group is required to access sources of liquidity and funding through deposits and wholesale funding , including debt capital markets and trading liabilities such as repurchase agreements. As at 31 December 202 1, NWM Group held £4.1 billion in deposits from banks and customers. The level of deposits and wholesale funding may fluctuate due to factors outside NWM Group’s control. These factors include: loss of investor confidence (including in individual NWM Group entities or the UK banking sector or the banking sector as a whole), sustained low or negative interest rates, government support, increasing competitive pressures f or bank funding or the reduction or cessation of deposits and other funding by counterparties, any of which could result in a significant outflow of deposits or reduction in wholesale funding within a short period of time. See also, ‘ NWM Group has significant exposure to counterparty and borrower risk ’. An inability to grow, roll-over, or any material decrease in, NWM Group’s deposits, short-term wholesale funding and short-term liability financing could, particularly if accompanied by one of the other factors described above, materially affect NWM Group’s ability to satisfy its liquidity needs. NWM Group engages from time to time in ‘fee based borrow’ transactions whereby collateral (such as government bonds) is borrowed from count erparties on an unsecured basis in return for a fee. This borrowed collateral may be use d by NWM Group to finance parts of its balance sheet, either in its repo f inancing business, derivatives portfolio or more generally across its balance she et. If such ‘fee based borrow’ transactions a re unwound whilst used to support the financing of parts of NWM Group balance sheet, then unsecured f unding from other sources would be required to replace such financing. There is a risk that NWM Group would be unable to replace such financing on acceptable terms or at all, which could adversely affect its liquidity position and have an adverse effect on NWM Group. In addition, because ‘fee base borrow’ transactions are conducted off-balance sheet (due to the collateral being borrowed) investors may find it more difficult to gauge NWM Group’s creditworthiness, which may be affected if these transactions were to be unwound in a stress scenario. Any lack of or perceived lack of creditworthiness may adversely affect NWM Group. The effects of the COVID-19 pandemic, current economic uncertainties and any significant market volatility, could affect NWM Group’s ability to access s ources of liquidity and funding, which may resu lt in higher funding costs and failure to comply with regulatory capital, fu nding and leverage requirements. As a result, NWM Group and its subsidiaries c ould be required to adapt their funding plans. This could exacerbate funding and liquidity risk, which could have a negative effect on NWM Group. As at 31 December 2021, NWM Group reported a liquidity coverage ratio of 205%. If its liquidity position were to come under stress and if NWM Group is unable to raise funds through deposits or wholesale funding sources on acc eptable terms or at all, its liquidity position could be adversely affected. This wo uld mean that NWM Group might be una ble to: meet deposit withdrawals on d emand or satisfy buy back requests, repay borrowings as they mature, mee t its obligations under committed fin ancing facilities, comply with regulatory funding requirements, undertake certain capital and/or debt management activities, or fund new loans, investments and businesses. NWM Group may ne ed to liquidate unencumbered assets to meet its liabilities, including disposals of assets not previously identified for disposal to reduce its funding commitment s or trigger the execution of certain management actions or recovery options. This could also lead to higher funding costs and/or changes to NWM Group’s funding plans. In a time of reduced liquidity or market stress , NWM Group may be unable to sell some of its assets or may need to sell assets at depressed prices, which in eithe r case could negatively affect NWM Group’s results. NWM Group entities independently manage liquidity risk on a stand-alone basis, including through holding their own liquidity portfolios. They have restricted access to liquidity or funding from other NatWest Group entities. NWM Group entities’ management of their own liquidity portfolios and the structure of capital support are subject to opera tional and execution risk. The effects of the COVID-19 pandemic could affect NWM Group’s ability to access sources of liquidity and funding, which may result in higher funding costs and failure to comply with regulatory capital, funding and leverage requirements. The COVID-19 pandemic has at times caused significant market volatility. Should further market volatility arise from COVID-19 pandemic-related uncertainties and the impact o n capital and RWAs, NWM Group and its subsidiaries may be required to adapt their funding plans in order to satisfy their respective capital and funding requirements, which may have a negative impact on NWM Group. In addition, impairments or other losses as well as increases to capital deductions may result in a decrease to NWM Plc’s capital base, and/or that of its subsidiaries. If NatWest Group Plc is unable to issue securities externally as planned, this may have a negative impact on NWM Plc’s current and forecasted MREL position, particularly if NatWest Group plc is unable to downstream capital and/or fun ding to NWM Plc. Furthermore, significant fluctuation in foreign currency exchange rat es may affect capital deployed in NWM Plc’s foreign subsidiaries, branches and joint arrangements, securities issued by NWM Plc and/or its subsidiaries in foreign currencies or the respective val ues of assets, liabilities, income, RWAs, capital base, expenses and reported earnings. In addition, increased income as a result of higher levels of customer flow activity and balance sheet growth (as a result of increases in corporate deposits and derivative valuations) may not be sustained in the future. Furthermore, market volatility may result in increases to leverage e xposure. Any downgrading to the credit ratings and/or outlooks assigned to NWM Group, its subsidiaries and their respective debt securities as a result of the economic impact of the COVID-19 pandemic could exacerbate funding and liquidity risk, which could have a negative ef fect on NWM Group. NWM Plc and/or its regulated subsidiaries may not manage their capital, liquidity or funding effectively which could trigger the execution of certain mana gement actions or recovery options. Under the EU Bank Recovery a nd Resolution Directives I and II (‘BRRD’), as implemented in the UK, NatWest Group must maintain a recovery plan acceptable to its regulator, such that a breach of NWM Plc’s applicable capital or leverage, li q uidity o r funding requirements would trigge r consideration of NWM Plc’s recovery plan, and in turn may prompt consideration of NatWest Group’s recovery plan. If, under stresse d conditions, the liquidity, capital or leverage ratio were to decline, there are a range of recovery management actions (focused on risk reduction and mitigation) that NWM Plc could undertake that may or may not be sufficient to restore adequate liquidity, capital and leverage ratios. Additional management options relating to existing capital issua nces, asset or business disposals, capital payments and dividends from NWM Plc Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 186 to its parent, could also be unde rtaken to support NWM Plc’s capital and leverage requirements. NatWest Group may also address a shortage of capital in NWM Plc by providing parental support to NWM Plc. NatWest Group’s (and NWM Plc’s) regulator may also request that NWM Group carry out additional capital management actions. The Bank of England has identified single point-of- entry as the preferred resolution strategy for NatWest Group. However, under certain conditions set forth in the BRRD, as the UK resolution authority, the Bank of England also has the power to execute the ‘bail-in’ of certain securities of NWM Group without further action at NatWest Group level. Any capital management actions taken under a stress scenario may affe ct, among other things, NWM Group’s product offering, credit ratings, ability to operate its businesses and pursue its current strategies and strategic opportunities as well as negative ly impacting investor confidence and the value of NWM Group’s securities. See also, ‘— NatWest Group (including NWM Group) may become subject to the application of UK statutory stabil isation or resolution powers which may re sult in, among other actions, the write-down or conversion of NWM Group entities’ Eligible Liabilities ’. In addition, if NWM Plc or NWM NV’s liquidity position were to be adversely affected, this may require unencumbered assets to be liquidated or may result in higher funding costs, which may adversely impact NWM Group’s operating performance. Any reduction in the cre dit rating and/or outlooks assigned to Na tWest Group plc, any of its subsidiar ies (including NWM Plc or NWM Group subsidiaries) or any of their r espective debt securities could adversel y affect the availability of funding for NWM Group, reduce NWM Group’s liquidity position and increase the cost o f funding. Rating agencies regularly review NatWest Group plc, NWM Plc and other NatWest Group entity credit rat ings and outlooks, which could be negative ly affected by a number of factors that can change over time, including: the credit rating agency’s assessment of NWM Group’s strategy and management’s capability; its financial condition including in respect of profitability, asset quality, capital, funding and liquidity; th e level of political support for the industrie s in which NWM Group operates; the implementation of structural reform; the legal and regulatory frameworks applicable to NWM Group’s legal structure; business activities and the rights of its creditors; changes i n rating methodologies; changes in the relative size of the loss-absorbing buffers protecting bondholders and deposito rs; the competitive environment, political and economic conditions in NWM Group’s key markets (including the impact of the COVID-19 pandemic and any further Scottish independence referendum); any reduction of the UK’s sovereign credit rating and ma rket uncertainty. In addition, credit ratings agencie s are increasingly taking into accoun t sustainability-related factors, including climate, environmental, social and governance related risk, as part of the credit ratings analysis, as are investors in their investment decisions. Any reductions in the credit ratings of NatWest Group plc, NWM Plc or of certain other NatWest Group entities, including, in particular, downgr ades below investment grade, or a deterioration in the capital markets’ perception of NWM Group’s financial resilience could significantly aff ect NWM Group’s access to money markets, reduce the size of its deposit base and trigger additional collateral or other requirements in derivatives con tracts and other secured funding arrangements or the need to amend such arrangements, which could adversely affect NWM Group’s (and, in particular, NWM Plc’s) cost of funding and its access to capital markets which could limit the range of counterparties willing to enter into transactions with NWM Group ( and, in particular, with NWM Plc). This could in turn adversely impact NWM Group’s competitive position and threaten its prospects in the short to medium-term. NWM Group operates in marke ts that are highly competitive, with incr easing competitive pressures and techn ology disruption. The markets in which NWM Group operates are highly competitive, and competition may intensify in response to various changes. These include: e volving customer behaviour, technological changes (including digital currencie s, stablecoins and the growth of digital banking, such as from fintech e ntrants), competitor behaviour, new entrants to the market, industry trends resulting in increased disaggregation or un bundling of financial services, the impact of regulatory actions and other factors. Innovations such as biometrics, artificial intelligence, the cloud, blockchain, cryptocurrencies and quantum computing may also rapidly facilitate industry transformation. Increasingly many of the products and services offered by NWM Group are, and will become, more technology intensive. NWM Group’s ability to develop such services (which also comply with applicable and evolving regulati ons) has become increasingly important to retaining and growing NWM Group’s client businesses across its geo graphical footprint. There can be no cert ainty that NWM Group’s innovation strategy (which includes investment in its IT capability intended to improve its core infrastructure and client interfac e capabilities as well as investments and partnerships with third party te chnology providers) will be successful or that it will allow NWM Group to continue to grow such services in the future. In addition, certain of NWM Group’s current or future competitors may be more successful in implementing innovative technologies for delivering products or services to their clients. These competitors may be bette r able to attract and retain clients and key employees, may have better IT sys tems, and may have access to lower cost funding and/or be able to attract deposits or provide investment-banking se rvices on more favourable terms than NWM Group. Although NWM Group invests in new technologies and participates in industry and research-led initiatives aimed at developing new techn ologies, such investments may be insufficient or ineffective, especially given NWM Group’s focus on its cost savin gs targets. This may limit additional investment in areas such as financial innovation and could therefore affect NWM Gr oup’s offering of innovative products or technologies for delivering products or services to clients and its comp etitive position. NWM Group may also fail to identify future opportunities or derive benefits from disruptive technologies in the context of rapid technological innovation, changing customer behaviour and growing regulatory demands. T he development of innovative products depends on NWM Group’s abilit y to produce underlying high quality data, failing which its ability to offer innovative products may be compromised. If NWM Group is unable to offer competitive, attractive and innovative products that are also profitable and timely, it will lose share, incur losse s on some or all of its activities and l ose opportunities for growth. In this context, NWM Group is investing in the automation of certain solutions and interactions within its customer-facing businesses, including through artificial intelligence. Such initiatives may result in operational, reputational and conduct risks if the technology used is de fective, inadequate or is not fully integr ated into NWM Group’s current solutions . There can be no certainty that such initiatives will deliver the expected cost savings and investment in automated proces ses will Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 187 likely also result in increased short-term costs for NWM Group. In addition, NatWest Group’s purpose-led strategy, as well as employee remuneration constraints, may also have an impact on NWM Group’s ability to compete effectively and intensifie d competition from incumbents, challengers and new entrants could affect NWM Group’s ability to p rovide satisfactory returns. Moreover, activist investors have increasingly become engaged and interventionist in recent years, which may pose a threat to NatWest Group’s strategic initiatives. Furthermore, continued consolidation o r technological or other developments in certain sectors of the financial se rvices industry could result in NWM Group’s remaining competitors gaining greater capital and other resources, including the ability to offer a broader range of products and services and geographic diversity, or the emergence of new competitors. Any of the above may negatively affect NWM Group. NWM Group may be adversely af fected if NatWest Group fails to mee t the requirements of regulat ory stress tests. NatWest Group is subject to annual stress tests by its regulator in t he UK and is also subject to stress tests by European regulators with respect to NWM NV and Ulster Bank Ireland DAC. Stress tests are designed to ass ess the resilience of banks to potential adverse economic or financial developments and ensure that they have robust, forward- looking capital planning processes that account for the risks associated with their business profile. If the stress tes ts reveal that a bank’s existing regulatory capital buffers are not sufficient to absorb the impact of the stress, then it is possible that NatWest Group and/or NWM Group may need to take action to strengthen their capital positions. Failure by NatWest Group to me et its quantitative and qualitative requirements of the stress tests set forth by its UK regulators or those elsewhere may result in: NatWest Group’s regulators requiring NatWest Group to generate additional capital, reputational damage, increased supervision and/or regulatory sanctions and/or loss of investor confidenc e. The impact of the COVID-19 pandemic on the credit quality of NWM Gr oup’s counterparties may negatively impact NWM Group. The effects of the COVID-19 pandemic have adversely affected the credit quality of some of NWM Group’s borrowers and other counterparties, and government support schemes may delay the effects of defaults by such counterpartie s. As government support schemes reduce , defaults are expected to rise wi th more customers moving from IFRS 9 Stage 2 to Stage 3. As a result, NWM Group may continue to experience elevated exposure to credit risk and demands on its funding, and the long-term effe cts remain uncertain. If borrowers or counterparties face increasing levels of debt and default or suffer deterioration in credit, this increases impairment charges, write-downs, regulato ry expected loss and impacts credit reserves. An increase in drawings u pon committed credit facilities may also increase NWM Plc’s and/or its subsidiaries’ RWAs. If NWM Gro up experiences losses and a reduction in future profitability, this is likely to affect the recoverable value of fixed assets, including deferred taxes, which may lead to further write-downs. Any of the above may have a negative impact on NWM Group. NWM Group has significant e xposure to counterparty a nd borrower risk. NWM NV, a subsidiary of NWM Plc, has a portfolio of loans and loan commitments to Western European corporate customers. As a result, through the NWM NV business and NWM Group’s other activities, NWM Group has exposu re to many different industries, customers and counterparties, and risks arising from actual or perceived changes in credit quality and the recoverability of monies due from borrowers and other counterparties are inherent in a wide range of NWM Group’s business es. These risks may be concentrated for those businesses for which client income is heavily weighted towards a spe cific geographic region, industry or c lient base. Furthermore, these risks increase due to the expected transfer of NatWest Group’s Transfer Business from its ring- fenced subgroup to NWM Group (see ‘ NWM Group has been in a period of significant structural and other change, including as a result of NatWest G roup’s purpose-led strategy (including the NWM Refocusing) and may continue to be subject to significant structural and other change ’). Credit risk may arise from a va riety of business activities, including, but not limited to: extending credit to clients through various lending commitments; entering into swap or other derivative contracts under which counterparties have obligations to make payme nts to NWM Group (including un-collateralised derivatives); providing short or long- term funding that is secured by physical or financial collateral whose value may at times be insufficient to fully cov er the loan repayment amount; posting margin and/or collateral and other commitments to clearing houses, clearing agencies , exchanges, banks, securities firms an d other financial counterparties; and investing and trading in securitie s and loan pools, whereby the value of these assets may fluctuate based on realised or expected defaults on the underlying obligations or loans. See also, ‘ Risk and capital management — Credit R isk ’. Any negative developments in the activities listed above may negatively impact NWM Group’s clients and credit expos ures, which may, in turn, adversely impact NWM Group’s profitability. The credit quality of NWM Group’s borrowers and other counterparties may be affected by a deterioration in prevailing economic and marke t conditions (including those cause d by the COVID-19 pandemic) and by changes in the legal and regulatory landscape in the UK and countries where NWM Group is exposed to credit risk (including the extent of the UK’s post-Brexit divergence from EU laws and regulation). The se could worsen borrower and counterparty credit quality or impact the enforcement of contractual rights over security, increasing credit risk. Concerns about, or a default by , a financial institution could lead to significant liquidity problems and loss es or defaults by other financial institutions, since the commercial and financial soundness of many financial institutions is closely related and interdependent as a result of credit, trading, clearing and other relationships. Any perceived lack of creditworthiness of a counterparty may lead to market-wide liquidity problems and losses for NWM Group. In addition, the value of collateral may be correlated with the probability of default by the relevant counterparty (‘wrong way risk’), which would increase NWM Group’s potential loss. This systemic risk may also adversely affect financial intermediaries, such as clearing agencies, clea ring houses, banks, securities firms and exchanges with which NWM Group interacts on a daily basis. See also, ‘— NWM Group is reliant on access to the capital markets to meet its funding requirements, both directly thro ugh wholesale markets, and indirectl y through its parent (NatWest Group) for the subscription to its internal capital and MREL. The inability to do so may adversely affect NWM Group ’. As a result of the above, adverse changes in borrower and counte rparty credit risk may cause accelerate d impairment charges under IFRS 9 , increased repurchase demands, higher costs, additional write-downs and losses for NWM Group and an inability to engage in routine funding transactions. NWM Group has applied an inte rnal analysis of multiple economic s cenarios (MES) together with the determi nation of Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 188 specific overlay adjustments to inform its IFRS 9 ECL (Expected Credit L oss). The recognition and measurement of ECL is complex and involves the us e of significant judgment and estimation. This includes the formulation and incorporation of multiple forward-looking economic scenarios into ECL to meet the measurement objective of IFRS 9. T he ECL provision is sensitive to the model inputs and economic assumptions underlying the estimate. See al so, ‘ Risk and Capital Management — Credit Risk ’. The assumptions and judgments use d in the MES and ECL assessment at 31 December 2021 may not prove to be adequate resulting in incremental ECL provisions for the NWM Group. As government support schemes reduce , defaults are expected to rise wi th more ECLs cases moving from Stage 2 to Stage 3. NWM Group is exposed to the financial industry, including sovereign debt securities, banks, financial inter mediation providers (including providing f acilities to financial sponsors and funds, backed by assets or investor commitments) and securitised products (typically senior lending to special purpose vehicles backed by pools of financial asse ts). Due to NWM Group’s exposure to the financial industry, it also has exposure to shadow banking entities (i.e., entities which carry out banking activities outside a regulated framework). NWM Group is requi red to identify and m onitor its exposure to shadow ba nking e ntities, implement and maintain an internal framework for the identification, management, control and mitigation of the risks associated with exposure to shadow banking entities, and ensu re effective reporting and governance in respect of such exposure. If NWM Group is unable to properly identify and monitor its shadow banking exposure, maintain an adequate framework, or ensure effective reporting and governance in respect of shadow banking exposure, this may adversely affect the business , results of operations and outlook of NWM Group. NWM Group could incur losses or be required to maintain higher levels of capital as a result of limitatio ns or failure of various models. Given the complexity of NWM Group’s business, strategy and capital requirements, NWM Group relies on analytical and other models for a wide range of purposes, including to manage its business, assess the value of its assets and its risk exposure, as well as to anticipate capital and funding requirements (including to facilitate NatWest Group’s mandated stre ss testing). In addition, NWM Group utilises models for valuations, credit approvals, calculation of loan impairment charges on an IFRS 9 basis, financial repor ting and for financial crime (criminal activities in the form of money laundering, terrorist financing, bribery and corruption, tax evasion and sanctions as well as fraud risk management (collectively, ‘financial crime’)). NWM Group’s models, and the parameters and assumptions on which they are based, are periodically reviewed and updated to maximise their accuracy. As models analyse scenarios based on assumed inputs and a conceptual approach, model outputs theref ore remain uncertain. Failure of mo dels (including due to errors in model desi gn) or new data inputs (including non- representative data sets), for example, to accurately reflect changes in the micro and macroeconomic environme nt in which NWM Group operates (for example to account for the impact of the COVID- 19 pandemic), to capture risks and exposures at the subsidiary level, and to update for changes to NWM Group’s current business model or operations, or for findings of deficiencies by NatWest Group (and in particular, NWM Group’s) regulators (including as part of NatWest Group’s mandated stress testin g) may render some business lines uneconomic, result in increased capital requirements, may require management action or may subject NWM Group to regulatory sanction. NWM Group may also face adverse consequences as a result of actions based on models that a re poorly developed, implemented or used, models that are based on inaccurate or compromised data or as a result of the modelled outcome being misun derstood, or by such information being u sed for purposes for which it was not de signed. NWM Group’s financial statement s are sensitive to underlying accounting policies, judgments, estimates and assumptions. The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income, expens es, exposures and RWAs. While esti mates, judgments and assumptions tak e into account historical experience and other factors (including market practice and expectations of future events that are believed to be reasonable under the circumstances), actual results may differ due to the inherent uncertainty in making estimates, judgments and assumptions (particularly those involving the u se of complex models). The accounting policies deemed critical to NWM Group’s results and fin ancial position, based upon materiality and significant judgments and estimates, which include loan impairment provisions, are set out in ‘ Critical accounting policies and key sources of estimation uncertainty ’. New ac counting standards and interpretations that have been issued by the International Accounting Standards Board but which have not yet been adopted by NWM Group are discussed in ‘ Future Accounting Developments ’. Changes in accounting standa rds may materially impact NWM Group’s financial results. Changes in accounting standards or guidance by accounting bodies or in the timing of their implementation, whether immediate or foreseeable, could result in NWM Group having to recognis e additional liabilities on its balance sheet, or in further write-downs or impairments to its assets and could also signif icantly impact the financial results, condition and prospects of NWM Group. NWM Group’s trading assets a mounted to £59.1 billion as at 31 December 2021 . The valuation of financial instruments, including derivatives, measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Generally, to establish the fair value of these instruments, NWM Group relies on quoted market prices or, where the market for a financial instrument is no t sufficiently credible, internal valuation models that utilise observable market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such valuation models may not be available or may become unavailable due to prevailing market conditions. In these circumstances, NWM Group’s internal valuation models require NWM Group to make assumptions, judgments and estimates to establish fair value, which are complex and often relate to matters that are inherently uncertain. Any of these factors could require NWM Group to recognise fair value losses which m ay have an adverse effect on NWM Group’s income generation and financial position. NatWest Group (including NWM Gr oup) may become subject to the application of UK statutory st abilisation or resolution powers which may resu lt in, among other act ions, the write-down or conversion of NWM Group en tities’ Eligible Liabilities. HM Treasury, the Bank of Engl and and the PRA and FCA (together, the ‘Authorities’) are granted subst antial powers to resolve and stabilise UK- incorporated financial institutions. Five stabilisation options exist: (i) transfer of all of the business of a relevant entity o r the shares of the relevant entit y to a private sector purchaser; (ii) transfer of all or part of the business of the relevant entity to a ‘bridge bank’ wholly-owned by the Bank of England; (iii) transfer of Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 189 part of the assets, rights or liabilities of the relevant entity to one or more asset management vehicles for management of the transferor’s assets, righ ts or liabilities; (iv) t he write- down, conversion, transfer, modification, or suspe n sion of the relevant entity’s equity, capital instruments and liabilities (‘Eligible Liabilities’); and (v) temporary public ownership of the relevant entity . These tools may be applied to NatWes t Group plc as the parent company or to NWM Group, as an affiliate, where certain conditions are met (such as, whether the firm is failing or likely to fail, or whether it is reasonably likely that action will be taken (outside of resolution) that will result in the firm no longer failing or being likely to fail). Moreover, the re are modified insolvency and administration procedures for relevant entities, and the Authorities have the power to modify or override certain contractual arrangements in certain circumstances and amend the law for the purpose of enabling their powers to be used effectively and may promulgate provisions with retrospective applicability. Similar powers may also be exercised with respect to NWM NV in the Netherlands by the relevant Dutch regulatory authorities. Under the UK Banking Act, the Authorities are generally requir ed to have regard to specified objectives in exercising the powers provided for by the Banking Act. One of the obje ctives (which is required to be balance d as appropriate with the other spe cified objectives) refers to the protection and enhancement of the stability of the financial system of the UK. Mor eover, the ‘no creditor worse off’ safeguard contained in the Banking Act (which provides that creditors’ losses in resolution should not exceed thos e that would have been realised in an insolvency of the relevant instit ution) may not apply in relation to an application of the separate write-down and conversion power relating to capital instruments under the Banking Act, in circumstances where a stabilisation power is not also used; Holders of debt instruments which are subject to the power may, however, have ordinary shares transferred to or issued to them by way of compensation. Uncertainty exists as to how the Authorities may exercise their powers including the determination of actions undertaken in relation to the ordinary shares and other securities of NatWest Group (including NWM Group), which may depend on factors outside of NWM Group’s control. Moreover, the Banking Act provisions remain untested in practice. If NatWest Group is at or is approaching the point of non-viability such that regulatory intervention is require d, there may correspondingly be an adverse effect on the business, results of operations and outlook of NWM Group. NatWest Group is subject to Ba nk of England and PRA oversight in respect of resolution, and NatWest Group cou ld be adversely affected should the Bank of England deem NatWest Grou p’s preparations to be inadequate. NatWest Group is subject to regulatory oversight by the Bank of Engla nd and the PRA, and is required (under the PRA rulebook) to carry out an asses sment of its preparations for resolution, s ubmit a report of the assessment to the PRA, and disclose a summary of this rep ort. The initial report was submitted to the PRA on 30 September 2021 and the B ank of England’s assessment of NatWest Group’s preparations is schedule d to be released on 10 June 2022 although the Bank of England may provide fe edback before then. NatWest Group has dedicated significan t resources towards the preparation of NatWest Group for a potential re solution scenario. However, if the Bank of England assessment identifies a significant gap in NatWest Grou p’s ability to achieve the resolvability outcomes, or reveals that NatWest Group is not adequately prepared to be resolved, or did not have adequate plans in place to meet resolvability requirements which came into effect on 1 January 20 22, NatWest Group may be required to take action to enhance its preparations to be resolvable, resulting in additional cost and the dedication of additional resources. These actions may have an impact on NatWest Group (and NWM Group) as, depending on the Bank of England’s assessment, potential action may include, but is not limited t o, resulting in restrictions on maxi mum individual and aggregate exposures, a requirement to dispose of specifie d assets, a requirement to change le gal or operational structure, a requirement to cease carrying out certain activities and/or maintaining a specified amount of MREL. This may also impact NatWest Group’s (and NWM Group’s) strategic plans and have an adverse effect on the financial position of NWM Group or may result in reputational damage a nd/or loss of investor confidence. Climate and sustainability-relat ed risks NWM Group and its customers fa ce significant climate-related ris ks, including in transitioning to a net z ero economy, which may adversely impact NWM Group. Climate-related risks and uncertainties are continuing to receive increasing regulatory, judicial, political and societal scrutiny. Financial and non-financial risk s from climate change arise through p hysical and transition risks. Furthermor e, NWM Group may also face a variety of climate-related legal risks, both physical and transition, from potential lit igation and conduct liability. See also, ‘ NWM Group may be subject to potential climate, environmental and other sustainability-related litigation, enforcement proceedings, invest igations and conduct risk ’. There are significant uncertaint ies as to the extent and timing of the manifestation of the physical risks of climate change, such as more se vere and frequent extreme weather events, (flooding, subsidence, heat wave s and long-lasting wildfires), rising sea levels, biodiversity loss and resource scarcity. Damage to NWM customers’ properties and operations could disrupt bus iness, impair asset values and negativ ely impact the creditworthiness of customers leading to increased default rates, delinquencies, write-offs and impairment charges in NWM Group’s portfolios. In addition, NWM Group premises and operations, or those of its critical outsourced functions may experience damage or disruption leading t o increased costs and negatively affecting NatWest Group’s business continuity an d reputation. In October 2021, the UK Government published its Net Zero Strategy which sets out how the UK will deliver on its commitment to reach net zero emissions by 2050. The timing, content a nd implementation of the specific policies and proposals remain uncertain. Widespread transition to a net zero economy across all sectors of the economy and markets in which N WM Group operates will be require d to meet the goals of the 2015 Paris Agree ment, the UK’s Net Zero Strategy and the Glasgow Climate Pact of 2021. The impact of the extensive commercial, technological, policy and regulatory changes required to achieve transitio n remains uncertain, but it is expected to be significant and may be disruptive across the global economy and ma rkets, especially if these changes do not occur in an orderly or timely manner or are no t effective in reducing emissions sufficiently. Some sectors such as property, energy (including oil and gas), Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 190 mining, infrastructure, transport (including automotive and aviation) and agriculture are expected to be particularly impacted. The timing and pace of the transition to a net zero economy is also uncertain and may be near term, gradual and orderly or delayed, rapid and disorderly, or the combination of these. Climate-related risks may be drivers of several different risk categories simultaneously and may exacerbate existing risks, including credit risk, operational risk (business continuity), market risk (both traded and non-traded), liquidity and funding risk (for example, net cash outflows or depletion of liquidity buffers). If NWM Group fails, to adapt its busines s and operating model in a timely manner to the climate-related risks and opportunities and changing regulatory and market expectations, or to appropriately identify, measure, manage and mitigate climate change related physical, transition and legal ris ks and opportunities that NWM Group, its customers and value chain face, NWM Group’s reputation, business, operations or value chain and results of op erations and outlook may be impacted adversely. NatWest Group’s purpose-led str ategy includes climate change as one of its three areas of focu s. This is likely to require material chan ges to the business and operating model of NWM Group which entails significant execution risk. In February 2020, NatWest Gro up announced its ambition to become a leading bank on climate in the UK, helping to address the climate challenge by setting itself the challenge to at least halve the climate impact of its f inancing activity by 2030 and intending to do what is necessary to achieve alignment with the 2015 Paris Agreement. In a ddition, in April 2021, NatWest Group by joining the Net Zero Banking Alliance 'Business Ambition to 1.5C', stated its ambition to reach net zero by 2050. Furthermore, as part of its efforts to support the transitio n to a net zero economy, NatWes t Group has also announced its ambitions to phase out of coal for UK and n on UK customers who have UK coal production, coal fired generation and coal re lated infrastructure by 1 October 2024, with a full global phase out by 1 January 2030; to plan to stop financing new customer relationships with corporate cus tomers who explore for, extract or produce coal or operate unabated coal powered plants; and that it would not provide services to existing customers who are increasing coal mining activity by exploring for new coal, developing new coal mines or increasing thermal coal production. To achieve its 2030 and 2050 a mbitions, NatWest Group has also announced other climate ambitions, targets and commitments, and going-forward it m ay also announce other climate ambitions, targets and commitments, including science-based targets to be validated by the Science Based Target Initia tive. Making the changes necessary to achieving these ambitions may materially affect NWM Group’s business and operations and may require significant reductions to its financed emissions and to its exposure to customers that do no t align with a transition to a net zero economy or do not have a credible transition plan. Increases in lending and financing activities may wholly or partially offset some or all of these reductions, which may increase the extent of changes and reductio ns necessary. It is anticipated that achieving these reductions, together with the active management of climate-related risks and other regulatory, policy and market changes, are likely to necessitate material and accelerated changes to NWM Group’s business, operating model and existing exposures (potentially on accelerated timescales and outside of risk appetite) which may have a material adverse effect on NWM Group’s ability to achieve its financial targets and gener ate sustainable returns. NWM Group’s ability to contribute to achieving NatWest Group’s climate- related ambitions, targets and commitments through its own specif ic targets will depend to a large extent on many factors and uncertainties beyond NWM Group’s control. These include the macroeconomic environment, the e xtent and pace of climate change, including the timing and manifestation of physical and transition risks, the effectiveness of actions of governments, legislat ors, regulators, businesses, investors, customers and other stakeholders to adapt and/or mitigate the impact of climate-related risks, changes in customer behaviour and demand, the challenges related with the implementation and integration of adoption policy tools, changes in the available technology for mitigation and adaptation, the availability of accurate, verifiable, reliable, consistent and comparable data. See also, ‘ N atWest Group’s purpose-led strategy includes climate change as one of its three areas of focus. This is likely to require material changes to the business and operating model of NWM Group which entail s significant execution risk ’ and ‘ There are significant challenges in relation to climate-related data due to quality and other limitations, lack of standar disation, consistency and incompleteness which amongst other factors contribute to the significant uncertainties inheren t in accurately modelling the impact of climate-related risks ’. These internal and external factors and uncertainties will make it challenging for NatWest Group to meet its climate ambitions, targets and commitments and for NWM Group to contribute to these and there is a significant risk that all or some of them will not be achieved. Any delay or failure by NWM Group’s to contribute to setting, making pr ogress against or meeting NatWest Gr oup’s climate-related ambitions, targets and commitments through its own specif ic targets may have a material adverse impact on NWM Group, its reputation, business, results of operations, outlook, market and competitive position and m ay increase the climate-related ris ks NWM Group faces. Any failure by NWM Group to implement effective and compliant climate change resilient system s, controls and procedures could adversely affect NWM Group’s a bility to manage climate-relat ed risks. The prudential regulation of climate- related risks is an important driver in how NWM Group develops its ri sk appetite for financing activities or engaging with counterparties that do not align with a transition to a net zero economy or do not have a credible transition plan. Legislative and regulatory authorities are publishing expectations as to how banks should prudently manage and transparently disclose climate-related and environmental risks under prudential rules. In April 2019, the PRA published a supervisory statement (the ‘SS 3 /19’) with particular focus on the manage ment of financial risks from climate cha nge with respect to governance, risk management, scenario analysis and disclosure s. Following the submission of initial plans by UK banks in October 2019, in July 2 020 the PRA issued a ‘Dear CEO’ letter requiring firms to embed fully their approaches to managing climate-related financial risks by the end of 2021 . In response, on 8 October 2020, NatWest Group provided the PRA with an update to its original plan noting that the C OVID- 19 pandemic had disrupted some elements of NatWest Group’s origin al plan and, as a result, the updated plan would require additional operating cycle s reaching into 2022 and beyond to prove embedding. Subsequently the PRA issue d its ‘Climate Change Adaptation Re port’ in October 2021 advising firms of the need to continue to refine and innovate w ays to further integrate the financial risks from climate change within risk man agement Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 191 practices and it restated that by the end of 2021, firms should be able to demonstrate that the expectations s et out in SS3/19 have been implemente d and embedded throughout the firm s’ organisation as fully as possible. In January 2022, NatWest Group provided the PRA with an update on how it has addressed the commitments made in its October 2020 plan, noting the delivery of a 1st generation, largely qualita tive in nature, approach to supervisor y requirements. In June 2021, the Bank of Engla nd launched its 2021 Bie nnial Exploratory Scenario (‘CBES’) to stress test the resilience of the current business models of the largest banks, insurers and the financial system to the physical and transition risks from climate ch ange under three climate scenarios. NatWest Group delivered its CBES submission to the PRA in October 2021. The Bank of England has since announced that the CBES is likely to include a second round over February and March 2022, which is likely to be largely qualitative in natu re. The Bank of England guidance for the CBES confirmed that it is exploratory in nature and not intended to be us ed to set capital requirements. In the aforementioned ‘Climate Change Adaptation Report 2021’, the Bank of England confirmed that over the coming year it will undertake further analysis to explore enhancements to the r egulatory capital frameworks as they relate to climate related financial risk. To suppo rt this work, the Bank of England will put out a ‘Call for Papers’ and host a Research Conference on the interaction between climate change and capital in Q4 2022. Informed by these ste ps and internal analysis, the Bank of England is expected to publish a follow-up repo rt on the use of capital including on the role of any future scenario exercises by the end of 2022. It is therefore likely that in the coming years financial institutions, including NatWest Group (including NW M Group), may be required to hol d additional capital to enhance th eir resilience against systemic and/or institution specific vulnerabilitie s to climate-related financial risks, which could, in turn, negatively impact NWM Group. Any failure of NWM Group to fully and timely embed climate-related risk s into its risk management practices and framework to appropriately identify, measure, manage and mitigate the various climate-related physical and transition risks and apply the appropriate product governance in line with applicable legal and regulatory requirements and expectations, may have a material and adverse impact on NWM Group’s regulatory compliance, prudential capital requirements, liquidity position, reputation, business, results of operations and outlook. There are significant challenges in relation to climate-relat ed data due to quality and other limitations, la ck of standardisation, consistency an d incompleteness which amongst other factors contribute t o the significant uncertainties inherent in acc urately modelling the impact of climate -related risks. Meaningful reporting of climate-related risks and opportunities and their potential impacts and related metrics depend on access to accurate, reliable, consistent and comparable climate- related data from counterparti es or customers. These may not be ge nerally available or, if available, may n ot be accurate, verifiable, reliable, consistent, or comparable. Any failure of NWM Group to incorporate climate-related factors into its counterparty and customer data sourcing and accompanying analytics, or to develop accurate, reliable, consistent and comparable counterparty and cu stomer data, may have a material adve rse impact on NWM Group’s ability to prepare meaningful reporting of cli mate- related risks and opportunities, its regulatory compliance, reputation, business and its competitive pos ition. In the absence of other sources, reporting of financed emissions by financial institutions, including NWM Group, is necessarily based therefore on aggregated information developed by third parties that may be prepared in an inconsistent way using different methodologies, interpretations, or assumptions. Accordingly, our climate- related disclosures use a great er number and level of assumptions and es timates than many of our financial disclosu res. These assumptions and estimate s are highly likely to change over time , and, when coupled with the longer ti me frames used in these climate related disclosures, make any assessment of materiality inherently uncertain . In particular, in the absence of actual emissions monitoring and measurement, emissions estimates are based on industry and other assumptions that may not be accurate for a given counterpa rty or customer. There may also be data gaps, particularly for private co mpanies, that are filled using proxy data, such as sectoral averages, again developed in different ways. As a result, our climate related disclosures may be ame nded, updated or restated in the future as the quality and completeness of our data and methodologies continue to improve. These data quality challenges, gaps and limitations could have a material impact on NWM Group’s ability to mak e effective business decisions about climate risks and opportunities, including risk management decisions, comply with disclosure requirements and our ability to monitor and report our progress in meeting our ambitions, targets and commitments. Significant risks, uncertainties a nd variables are inherent in the asses sment, measurement and mitigation of climate- related risks. These include dat a quality gaps and limitations mentioned above, the pace at which climate science , greenhouse gas accounting standards and various emissions reduction solutions develop. In addition, there is a significant uncertainty about how climate c hange and the transition to a net zero economy will unfold over the coming decades an d affect how and when climate-re lated risks will manifest. These timeframes are considerably longer than NWM Group’s historical strategic, financial, re silience and investment planning horizons. As a result, it is very difficult to predict and model the impact of climate -related risks into precise financial and e conomic outcomes and impacts. Climate-related risks present significant methodological challenges due to their forward-looking nature, the lack and/or quality of historical testing capabilities, lack of standardisation and incomplete ness of emissions and other climate and sub- sector related data and the immature nature of risk measurement and modelling methodologies. The evaluation of climate-related risk exposure and the development of associated potential risk mitigation techniques largely de pend on the choice of climate scenario modelling methodology and the assumptions made which involves a number of risks and uncertainties, for example.  climate scenarios are not predictions of what is likely to happen or what NatWest Group would like to happen, they rather explore the possible implications of different judgments and assumptions by considering a series of scenarios;  climate scenarios do not provid e a comprehensive description of all possible future outcomes;  lack of specialist expertise in banks such that NWM Group needs to rely on third party advice, modelling, and data which is also subject to many limitations and uncertainties;  immaturity of modelling of and data on the impact of climate- related risks on financial assets which will evolve rapidly in the coming y ears;  the number of variables and forward- looking nature of climate scenarios which makes Add it io nal in fo r mat i on Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 192 them challenging to back test and benchmark;  the significant uncertainty as to how the climate will evolve ove r time, how and when g overnme nts, regulators, businesses, investors and customers respond and how those responses impact the economy, asset valuations, land systems, energy systems, technology, policy and wider society;  the assumptions will be continually evolving with more data/information which may affect the baselines for comparability across reporting periods and impact internal and external verification processes; and  the pace of the development of the methodologies across different sectors may be different and therefore it may be challenging to report on the whole balance sheet with regard to emissions. Accordingly, these risks and uncertainties coupled with signific antly longer timeframes make the ou tputs of climate-related risk modelling, including emissions reductions targets an d pathways, inherently more unc ertain than outputs modelled for traditional financial planning cycles based on historical financial information. Capabilities within NWM Group to appropriately assess, model and mana ge climate-related risks and the su itability of the assumptions required to model and manage climate-related risks appropriately are developing. Even when those capabilities are develope d, the high level of uncertainty regarding any assumptions modelled, the highly subjective nature of risk measurement and mitigation techniques, incorrect or inadequate assumptions and judgments and data quality gaps and limitations may lead to inadequate risk management information and frameworks, or ineffective business adaptation or mitigation strategies , which may have a material adverse impact on NWM Group’s regulatory compliance, reputation, business, results of operations and outlook. A failure to adapt NWM Group’s business strategy, governance, procedures, systems and controls to manage emerging sustainability- related risks and opportunities may have a material adverse effect o n NWM Group, its reputation, business, results of operations and out look. Investors, customers, international organisations, regulators and other stakeholders are increasingly focusing on identification, measurement, management and mitigation of ‘sustainability-related’ risks and opportunities such as environme ntal ( including biodiversity and loss of natu ral capital); social (including diversity and inclusion, the living wage, fair taxation and value chains); and governance (including board diversity, ethics, executive compensation and management structure) related risks and opportunities and on long term sustainable value creation. Financial institutions, including NWM Group, are directly and indirectly exposed to multiple types of environmental and biodiversity-related risk through their activities, including risk of default by clients. Additionally, there is a growing need to move from safeguards and interventions that focus on reducing negative impacts on environment and biodiversity towards those that focus on increasing positive impact on environment and biodiversity and nature- based solutions. In 2021, NatWe st Group (including NWM Group) accordingly classified ‘Biodiversity and Nature Loss’ as an emerging risk for NatWest G roup (including NWM Group) within its Risk Management Framework. This is an evolving and complex area which requires collaborative approaches with partners, stakeholders and peers to help measure and mitigate negative i mpacts of financing activities on the environment, biodiversity and n ature as well as supporting the growing sector of nature-based solutions, habitat restoration and biodiversity markets. NatWest Group, including NWM Group, is in the early stages of developing its approach and NatWest Group, including NWM Group, recognises the need for more progress. There is also increased investor, regulatory and customer scruti ny regarding how businesses addre ss social issues, including tackling inequality, working conditions, workplace health, safety and wellbeing, diversity and inclusion, data protection and management, workforce management, human rights and supply chain management which may impact NWM Group’s employees, customers, and their business activities or the communities in which they operate. There is also growing attention on the need for a 'just transition' and “energy justice” – in recognition that the transition to a net zero economy should not disproportionally affect the most disadvantaged members of socie ty. The increased focus on these issues may create reputational and other risks for financial institutions, including NWM Group. In addition to climate-related risks, sustainability-related risks (i) may also adversely affect economic activity, asset pricing and valuations of issu ers’ securities and, in turn, the wider financial system; (ii) may impact economic activities directly (for example through lower corporate profitability or the devaluation of assets) or indire ctly (for example through macro-financial changes); (iii) may also affect the viabili ty or resilience of business models over the medium to longer term, particu larly those business models most vulnerable to sustainability-related risks; (iv) c an trigger further losses stemming directly or indirectly from legal claims (liability risks) and reputational damage as a result of the public, customers, counterparties and/or investors associating the NWM Group or its customers with adverse sustainability- related issues; and (v) intersect with and further complexity and challenge to achieving our purpose-led strategy including climate ambitions, targets and commitments. Together with climate- related risks, these risks may combine to generate even greater adverse e ffects on our business. Furthermore, sustainability-related risks may be drivers of several different risk categories simultaneously and may exacerbate the risks described he rein, including credit risk, operationa l risk (business continuity), market risk (both traded and non-traded), liquidit y and funding risk (for example, net cash outflows or depletion of liquidity buffers). Accordingly, any failure or delay by NWM Group to successfully adapt its business strategy and to establish and maintain effective governance, procedures, systems and controls in response to these issues, and to manage these emerging sustainability-r elated risks and opportunities may have a material adverse impact NWM Group’s reputation, liquidity position, business , results of operations, outlook and the value of NWM Group’s securities. Any reduction in the ESG ratings of NatWest Group (including NWM Gr oup) or NWM Group could have a negat ive impact on NatWest Group’s (including NWM Group) or NWM Group’s reputation and on investors’ risk appetite and customers’ willingness to deal with NatWest Group (incl uding NWM Group) or NWM Group. ESG ratings from agencies and data providers which rate how NatWest Group (including NWM Group) or NWM Group manage environmental, social and governance risks are increasingly influencing investment decisions or being used as a basis to label financial products and services as green or sustainable. ESG ratings are (i) unsolicited; (ii) subjec t to the assessment and interpretation by Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 193 the ESG rating agencies; (iii) provided without warranty; (iv) not a spo nsorship, endorsement, or promotion of N atWest Group (including NWM Group) or NWM Group by the relevant rating agency ; and (v) may depend on many factor s some of which are beyond NatWest Group’s and/or NWM Group’s control (e.g. any change in rating methodology). Any reduction in the ESG ratings of NatWest Group (including NWM Group) could have a negative impact on NW M Group’s reputation and could influence investors’ risk appetite for NWM Group’s and/or its subsidiaries’ securities, particularly ESG securities and could affect a cu stomer’s willingness to deal with NWM Group. Increasing levels of climate, environmental and sustainabil ity- related laws, regulation and oversight may adversely affect NWM Gr oup’s business and expose NWM Group to increased costs of compliance, regulatory sanction a nd reputational damage. There are an increasing number of EU, UK and other regulatory and legislative initiatives to address issues around climate, environmental and sustainability risks and opportunities and to promote the transition to a net zero economy. As a result, an increasing number of laws, regulations, legislative actions are likely to affect the financial sector and the real economy, including proposals, guidance, policy and regulatory initiatives many of which have been introduced or amended recently and are subject to further changes. Many of these initiatives are focuse d on developing standardized definitions for green and sustainable criteria of assets and liabilities, integrating climat e change and sustainability into decision- making and customers access to green and sustainable financial products and services which may have a significant impact on the services provided by NWM Group and its associated credit , market and financial risk profile. They could also impact NWM Group’s recognition of its climate and sustainable funding and financing activity and may adversel y affect NWM Group’s ability to ac hieve its climate strategy and climate and sustainable funding and financing ambitions. In addition, NatWest Group and its subsidiaries are and will be sub ject to increasing entity wide climate-re lated and other non-financial disclosure requirements. pursuant to the recommendations of the Task Force on Climate-related Financial Disclosure (‘TCFD’) and under other regimes . From February 2022, NatWest Group will be required to provide enhanced cli mate- related disclosures consistent with the TCFD recommendations to comply wi th the FCA Policy Statement on the ne w Listing Rules (PS 20/17) that require commercial companies with a UK premium listing – such as NatWe st Group - to make climate related disclos ures, consistent with TCFD, on a ‘comply or explain’ basis. The FCA is proposing to expand this requirement to a wider scope of listed issuers which w ould include NatWest Group’ subsidiaries – including NWM Group - as it moves towards mandatory TCFD reporting across the UK economy by 2025 (See also, ‘ There are significant challenges i n relation to climate-related data due to quality and other limitations, lack of standardisation, consistency and incompleteness which amongst other factors contribute to the signific ant uncertainties inherent in accurately modelling the impact of climate-related risks. ’) In addition, NWM Group’s EU su bsidiaries and branches are and will continue to be subject to an increasing array of the EU/EEA climate and sustainability-related legal and regulatory requirements. These requirements may be used as the basis for UK laws and regulations (such as the UK Green Taxonomy) or regarded by investors and regulators as best practice standards whether or not they apply to UK businesses. Any divergence between UK, EU/EEA and US climate and sustainability-related legal and regulatory requirements may result in NWM Group not meeting investors’ expectations, may increase the cost of doing business and may restrict access of NWM Group’s UK business to the EU/EEA market. NatWest Group (including NWM Group) is also participating in various vol untary carbon reporting and other standa rd setting initiatives for disclosing climate and sustainability-related information, many of which have differing objec tives and methodologies and are at diffe rent stages of development in terms of how they apply to financial institutions. Compliance with these developing and evolving climate and sustainability- related requirements is likely to require NWM Group to implement significant changes to its business models, pro duct and other governance, internal controls over financial reporting, disclosure controls and procedures, modelling capability and risk management sys tems, which may increase the cost of doing business, entail additional chan ge risk and compliance costs. Failure to implement and comply with these legal and regulatory requirements or emerging best practice expec tations may have a material adverse effe ct on NWM Group’s regulatory compliance and may result in regulatory sanction, reputational damage and investor disapproval each of which could have an adverse effect on NWM Group’s business , results of operations and outlook. NWM Group may be subject to potential climate, environment al and other sustainability-related litigat ion, enforcement proceedings, investigations, and conduct risk. Due to increasing new climate and sustainability-related jurisprudence, laws and regulations in the UK and other jurisdictions, growing demand from investors and customers for environmentally sustainable products and services, and regulatory scrutiny, financial institutions, including NWM Group, may through their business activities face increasing litigati on, conduct, enforcement and contrac t liability risks related to climate c hange, environmental degradation and other social, governance and sustain ability- related issues. These risks may arise, for example, from claims pertaining to: (i) failures to meet obligations, targets or commitments relating to or to disclose accurately or provide updates on material clima te and/or sustainability related risk s or otherwise provide appropriate disclosure to investors, customers, counterparties and other stakeholders; (ii) conduct, mis- selling and other customer prote ction type claims; (iii) marketing that portrays products, securities, activities o r policies as producing positive climate, environmental or sustainable outcomes to an extent that may not the case ; (iv) damages claims under various tort theories, including common law public nuisance claims, or negligent mismanagement of physical and/or transition risks; (v) alleged violations of officers’, directors’ and other fiduciaries’ fiduciary duties, for example by financing various carbon-intensive, environmentally harmful or otherwise highly exposed assets, companies, and industries; (vi) changes in unde rstanding of what constitutes positive climate, environmental or sustainable outcomes as a result of developing climate scie nce, leading to discrepancy between curren t product offerings and investor and/or market and/or broader stakeholder expectations; (vi) any weakness es or failures in specific systems or p rocesses associated particularly with climate, environmental or sustainability linke d products, including any failure in timely implementation, onboarding and/or updating of such systems or process es; or (vii) counterparties, collaborators and third parties in NWM Group’s value chain action who act, or fail to act or undertake due diligence or apply appropriate risk management a nd product governance in a manner that Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 194 impacts Natwest Group’s reputation or sustainability credentials. Furthermore, there is a risk that shareholders, campaign groups, customers and special interest groups could seek to take legal action against NWM Group for financing or contributing to climate change and environ mental degradation and for not supporting the principles of “just transition” (i.e . maximising the social benefits of the transition, mitigating the social risks of the transition, empowering those affected by the change, anticipating future shifts to address issues up front and mobilising investments from the public and private sectors). There is a risk that as climate scie nce develops and societal understanding of climate science increases and deepens, courts, regulators and enforcement authorities may apply the then current understandings of climate related matters retrospectively when asse ssing claims about historic conduct or dealings of financial institutions, including NWM Group. These potential litigation, conduct, enforcement and contract liability risks may have a material adverse effe ct on NatWest Group’s ability to achieve its strategy, including its climate ambition, and they could have an adverse effect on NWM Group’s reputation, business , financial results, position and prospects, results of operations and outlook. Operational and IT resilience r isk Operational risks (including reliance on third party suppliers and outso urcing of certain activities) are inherent in NWM Group’s businesses. Operational risk is the risk of los s resulting from inadequate or failed internal processes, procedures, people or systems, or from external events, including legal risks. NWM Group operates in a number of countries, offering a diverse range of products and services supported directly or indirectly by third party suppliers. As a resu lt, operational risks or losses can arise from a number of internal or external factors (including financial crime and fraud), for which there is now greater scrutiny by third parties on NWM Group’s compliance with financial crime requirements; see ‘ NWM Group i s exposed to the risk of various litigati on matters, regulatory and governmental actions and investigations as wel l as remedial undertakings, the outcomes of which are inherently difficult to predict, and which could have an adverse effect on NWM Group ’). These risks are also present when NWM Group relies on third-party suppliers or vendors to provide services to it or its clients, as is increasingly the case as NWM Group outsources certain activities, including with respect to the implementation of new technologies, innovation and responding to regulatory and market changes. Operational risks continue to b e heightened as a result of the NWM Refocusing, NatWest Group’s purpose-led strategy, NWM Group’s current c ost- reduction measures and conditions affecting the financial services i ndustry generally (including the COVID-19 pandemic and other geo-political developments) and in particula r the legal and regulatory uncertainty res ulting therefrom. It is unclear as to how the future ways of working may ev olve, including in respect of how working practices may develop, or how N WM Group will evolve to best serve its customers. Any of the above may place significant pressure on NWM Group’s ability to maintain effective internal controls and governance frameworks. In recent years, NWM Group has materially increased its dependence on NatWest Bank Plc for numerous critical services and operations, including without limitation, property, fin ance, accounting, treasury, risk, regulatory compliance and reporting, human resources, and certain other support and administrative functions. A failu re by NatWest Bank Plc to adequately supply these services may expose NWM Group to critical business failure risk, increased costs and other liabilities. These and any increases in the cost of these se rvices may adversely impact NWM Group’s business, results of operations and outlook. The effective management of operational risks is critical to meeting customer service expectations and retaining and attracting client business. Although NWM Group has implemented risk controls and mitigation actions, with resources and planning having been devoted t o mitigate operational risk, such measures may not be effective in controlling each of the operational risks faced by NWM Group. Ineffective management of such risks could adversely affect NWM Group. NWM Group is subject to increasingly sophisticated and frequent cyberattacks. NWM Group experiences a con stant threat from cyberattacks across the entire NatWest Group (including NWM Group) and against NatWest Gr oup and NWM Group’s supply chain, reinforcing the importance of due diligence of close working relationship with, the third parties on which NWM Group re lies. NWM Group is reliant on technology, against which there is a constantly evolving series of attacks, that are increasing in terms of frequency, sophistication, impact and severity. As cyberattacks evolve and become mo re sophisticated, NWM Group is re quired to continue to invest in additional capability designed to defend against eme rging threats. In 2021, NWM Group a nd its supply chain were subjected to a small number of Distributed Denial of Service (‘DDOS’) and ransomware attacks, which are a pervasive and significant threat to the global financial services indus try. The focus is to manage the impact of the attacks and sustain availability of services for NWM Group’s customers. NWM Group continues to invest significant resources in the development and evolution of cyber security controls that are designed to minimise t he potential effect of such attacks. Hostile attempts are made b y third parties to gain access to, int roduce malware (including ransomware) into and exploit vulnerabilities of NWM Group’s IT systems. NWM Group has information and cyber security c ontrols in place to minimise the impact of any attack, which are subject to review on a continuing basis, but given the nature of the threat, there can be no assurance that such measures will prevent all attacks in the future. See also, ‘ NWM Group’s operations are highly dependent on its complex IT systems (inclu ding those that enable remote working) and any IT failure could adversely affect NWM Grou p’. Any failure in NWM Group’s cybersecurity policies, procedures or controls, may result in significant financial losses, major business disruption, inability to deliver custom er services, or loss of data or ot her sensitive information (including as a result of an outage) and may cause associated reputational damage. Any of the se factors could increase costs (including costs relating to notification of, or compensation for clients and cre dit monitoring), result in regulatory investigations or sanctions being imposed or may affect NWM Group’s ability to retain and attract clients. Regulators in the UK, US, Europe and Asia continue to recognise cybersecurity as an i mportant systemic risk to the financial sec tor and have highlighted the need for financial institutions to improve their monitoring and control of, and resilience (particularly of critical services) to cyberattacks, and to provide timely notification of them, as appropr iate. Additionally, third parties may also fraudulently attempt to induce employees, customers, third party providers or othe r users w ho have access to NWM Group’s system s to disclose sensi tive information in order to gain access to NWM Group’s d ata or that of NWM Group’s clients or employe es. Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 195 Cybersecurity and information s ecurity events can derive from groups or factors such as: internal or external threat actors, human error, fraud or malice on the part of NWM Group’s employee s or third parties, including third par ty providers, or may result from accidental technological failure. NWM Group expects greater regulatory engagement, supervision and enforcement to continue at a high level in relation to its overall resilienc e to withstand IT and related disruption, either through a cyberattack or some other disruptive event. Such increased regulatory engagement, supervision and enforcement is uncertain in relation to the scope, cost, consequence and the pace of change, which could negatively impact NWM Group. Due to NWM Group’s reliance on technology and the increasing sophistication, frequency and impact of cyberattacks, such attacks may adversely impact NWM Group. In accordance with the Data Protection Act 2018 and the European Uni on Withdrawal Act 2018, the Data Protection, Privacy and Electro nic Communications (Amendments Etc.) (EU Exit) Regulations 2019, as ame nded by the Data Protection, Privacy and Electronic Communications (Amendments Etc.) (EU Exit) Regulations 2020 (‘UK Data Protection Framework’) and European Banking Authority (‘EBA’) Guidelines on ICT and Security Risk Management, NWM Group is required to ensure it implements timely appropri ate and effective organisational and technological safeguards against unauthorised or unlawful access to data of NWM Group, its clients and its employees. In order to meet this requirement, NWM Group relies on the effectiveness of its internal policies, controls and p rocedures to prote ct the confidentiality, integrity a nd availability of information held on its IT systems, networks and devices as well as with third parties with whom NWM Group interacts. A failure to monitor and manage data in accordance with the UK Data Protection Framework and EBA requirements of the applicable legislation may result in financial losses, regulatory fines and investigations and associated reputational damage. NWM Group operations and str ategy are highly dependent on the a ccuracy and effective use of data. NWM Group relies on the effective use of accurate data to support, monitor, evaluate, manage and enhance its operations and deliver its strategy. T he availability of current, complete, detailed, accurate and, wherever possible , machine-readable customer segment and sub-sector data, together with appropriate governance and accountability for data, is fast be coming a critical strategic asset, which is subjec t to increased regulatory focus. Failu re to have that d ata or the ineffectiv e use, governance or control of t hat d ata could result in a failure to manage and report important risks and o pportunities or satisfy customers’ expectations including the inability to deliver innovativ e products and services. This could also result in a failure to deliver NWM Group’s strategy and could place NWM Group at a competitive disadvantage by increasing its costs, inhibiting its efforts to reduce costs or its ability to improve its sys tems, controls and processes which c ould result in a failure to deliver NWM Group’s strategy. These data weaknesses and limitations, or the unethical or inappropriate use of data, and/or non- compliance with customer data protection laws could give rise to, for example, conduct and litigation risks and increased risk of operational events, losses or other adverse consequence s due to inappropriate models, systems, processes, decisions or other actions. Any of the above may lead to ke y business processes being negatively impacted by inappropriately managed data, which could lead to material financial, customer and regulatory impacts. NWM Group relies on attract ing, retaining, developing and remunerating diverse senior management and skilled person nel (such as market tra ding specialists), and is required to maintain go od employee relations. NWM Group’s success depends on its ability to attract, retain, through creating an inclusive environment, and de velop and remunerate highly skilled and qualified diverse personnel, incl uding senior management, directors, ma rket trading specialists and key employee s, especially for technology and data focused roles, in a highly compe titive market, in an era of strategic change and under internal cost reducti on pressures. The inability to compensate employe es competitively and/or any reduc tion of compensation as a result of the impact of the NWM Refocusing, the perception that following the Refocusing NWM Group may not be a viable or competitive business, heightened regulatory oversight of banks and the increasing scrutiny of, and (in some cases) restrictions placed upon, employee compensation arrangements (in particular those of banks in receipt of government support such as NatWest Group), negative economic developments or other factors, could have an adverse effe ct on NWM Group’s ability to hire, retain and engage well qualified employees, es pecially at a senior level, which could have an adverse effect on financial position and prospects of NWM Group. This increases the cost of hiring, training and retaining diverse skilled personnel. In addition, certain economic, market and regulatory conditions and political developments may reduce the pool of diverse candidates for key management and non-executive roles, including non- executive directors with the right skills, knowledge and experience, or i ncrease the number of departures of existing employees. Moreover, a failure to foster a diverse and inclusive workforce may have an adverse impact on NWM Group’s employee engagement and the formulation and execution of its s trategy, and could also have a negative e ffect on its reputation with customers, investors and regulators. The NWM Refo cusing has also reduced NWM Group’s ability to engage in succession planning f or critical roles given the recent reduction in headcount. This has placed increased risk on employee turnover within revenue generating areas. Sustained periods of remote working may also negatively affect workf orce morale. Whilst NWM Group has taken measures seeking to maintain t he health, wellbeing and safety of its employe es, these measures may be ineffective. Some of NWM Group’s employe es are represented by employee repres entative bodies, including trade unions and works councils. Engagement with its employees and such bodies is important to N WM Group in maintaining good em ployee relations. Any breakdown of the se relationships could have an adverse effect on NWM Group. NWM Group’s operations are highly dependent on its complex IT systems (including those that enable r emote working) and any IT failure could adversely affect NWM Group. NWM Group’s operations are hi ghly dependent on the ability to proces s a very large number of transactions efficiently and accurately while complying with applicable laws and regulations. The proper functioning of NatWest Group’s (including NWM Group’s) transactional and payment systems, financial crime, fraud systems and controls, risk management, credit analysis and reporting, accounting, customer service and other IT sys tems (some of which are owned and operated by other entities in NatWest Group or third parties), is critical to NWM Group’s operations. Individually or collectively, any critical system failure, material loss of service availability or material breach of data security could cause serious damage to Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 196 NWM Group’s ability to provide services to its clients, which could result in reputational damage, significant compensation costs or regulatory sanctions (including fines resulting from regulatory investigations) or a breach of applicable regulations and could affec t its regulatory approvals, competiti ve position, business and brands, which could undermine its ability to attract and retain customers. This risk is heightened as most of NWM Group’s emplo yees continue to work remotely, as it outsources certain functions and as it continues to innovate and offer new digital solutions to its clients as a result of the trend towards online and digital product offerings (see also ‘ NW M Group’s current policy is that most employees will work remotely majority of the time. This may adversely affect NWM Group’s ability to maintain effectiv e internal controls ’). In 2021, NWM Group continued to make considerable investments to further simplify, upgrade and improve its IT and technology capabilities (including migration of certain services to cloud platforms). As part of the NWM Refocusing, NWM Group also continues to develop and enhance digital se rvices for its customers and seeks to improve its competitive position through enhancing controls and procedures and strengthening the resilience of se rvices including cyber security. Any failure of these investment and rationalisation initiatives to achieve the expected results, due to cost challenges or otherwise, could negatively affec t NWM Group’s operations, its reputation and ability to retain or grow its client business or adversely impact its competitive position, thereby negatively impacting NWM Group. See also, ‘ — NW M Group has been in a period of significant structural and other change, including as a result of NatWest Group’s purpose-led strategy (including the NWM Refocusing) and may continue to be subject t o significant structural and other change ’. Remote working may adverse ly affect NWM Group’s ability to maintain effective internal contr ols. From March 2020 to September 2021, many of NWM Group’s employe es worked exclusively on a remot e basis. Following the lifting of government restrictions, NWM Group will implement a new hybrid working policy whereby many employees may work remotely the majority of the time in the ordinary course of their roles. Remote working arrangements for NWM Group employees continues to place heavy reliance on the IT systems that enable remote working and increased exposure to fraud, conduct, ope rational and other risks and may place additional pressure on NWM Group’s ability to maintain effective internal controls and governance frameworks. Remote working arrangements are also subject to regulatory scrutiny to ensure adequate recording, surveillance and supervision of regulated activiti es, and compliance with regulatory req uirements and expectations, including requirements to: meet threshold conditions fo r regulated activities; ensure the ability to oversee functions (including any outsourced functions); ensure no detriment is caused to customers; and ensure no increased risk of fina ncial crime. See also, ‘ A failure in NWM Group’s risk management framework could adversely affect NWM Group, including its ability to achieve its st rategic objectives ’. Moreover , the IT sys tems that enable remote working interface with third-party systems, and NWM Group could experience service denials or disruptions if such systems exceed capacity or if a third-party system fails or experiences any interruptions, all of which could result in business and customer interruption and relate d reputational damage, significant compensation costs, regulatory sanctions and/or a breach of applicable regulations. See also, ‘ NWM Gr oup’s operations are highly dependent on its complex IT systems (including those that enable remote working) and any IT failure could adversely affect NWM Group ’. Sustained periods of remote working may also negatively affect workplace morale. Whilst NWM Group has taken measures seeking to maintain t he health, wellbeing and safety of its employe es during the COVID-19 pandemic, these measures may be ineffective. Operational difficulties as a result of the COVID-19 pandemic, which may affec t NWM Group’s external stakeholders (including clients), may result in challenges in managing daily cash and liquidity. As a result of remote working, compliance and conduct risk may also be heightened both as a result of internal and external factors. Any of the above could impair NWM Group’s ability to hire, retain and engage well-qualified employees, espec ially at a senior level, which in turn may adversely impact NWM Group’s ability to se rve its clients efficiently, and impact productivity across NWM Group. This could adversely affect NWM Group’s reputation and competitive position and its ability to grow its business. A failure in NWM Group’s risk management fr amework could adversely affect NWM Group, including its ability to achieve its strat egic objectives. Risk management is an integral part of all of NWM Group’s activities and includes the definition and monitoring of NWM Group’s risk appetite and reporting on NWM Group’s risk exposure and the potential impact thereof on N WM Group’s financial condition. Risk management is highly dependent on the use an d effectiveness of internal stress tests and models and ineffective risk management may arise from a wide variety of factors, including lack of transparency or incomplete risk reporting, unidentified conflicts or misaligned incentive s, lack of accountability control and governance, incomplete risk monitoring (including trade surveillance) and failures of systems to properly process all relevant data, risks related to unanticipa ted behaviour or performance in algorithmic trading and management or ins ufficient challenges or assurance processes . Failure to manage risks effe ctively could adversely impact NWM Group’s reputation or its relationship with its regulators, clients, shareholders or other stakeholders. In addition, financial crime risk management is dependent on the use and effectiveness of financial crime assessment, systems and contr ols. Weak or ineffective financial crime proce sses and controls may risk NatWest Group inadvertently facilitating financial crime which may result in regulatory investigation, sanction, litigation and reputational damage. Financial crime continues to evolve, whether through fraud, scams, cyber-attacks or other criminal activity. NatWest Group (and NWM Group) has made and continues to make significant, multi-year inve stments to strengthen and improve its overall financial crime control framework with prevention systems and capabilities . As part of its ongoing programme of investment, there is current and future investment planned to further strengthen financial crime controls over the coming years, including investment in new technologies and capabilities to further enhance customer due diligence , transaction monitoring, sanctions and anti-bribery and corruption systems. NWM Group’s financial crime controls are operated by NatWest Group on behalf of NWM Group. NWM Group’s operations are in herently exposed to conduct risks, which include business decisions, actions or re ward mechanisms that are not responsive to or aligned with NWM Group’s re gulatory obligations, client needs or do not refle ct NWM Group’s customer-focused strategy, ineffective product management, unethical or inappropriate use of data, information asymmetry, implementation and utilisation of new technologies, outsourcing of customer service and product delivery, th e possibility of mis-selling of financial Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 197 products and mishandling of customer complaints. Some of these risks have materialised in the past and ineffe ctive management and oversight of conduct risks may lead to further remediation an d regulatory intervention or enforce ment. NWM Group’s businesses are also exposed to risks from employee misconduct including non-compliance with policies and regulations, ne gligence or fraud (including financial crimes and fraud), any of which could resul t in regulatory fines or sanctions and se rious reputational or financial harm t o NWM Group. These risks may be exacerbate d as most of NWM Group’s employees continue to work remotely, which places additional pressure on NWM Group’s ability to maintain effective internal controls and governance frameworks. NWM Group is seeking to embed a strong risk culture across the organisation and has implemented policies and allocated new resources across all levels of the organisation to manage and mi tigate conduct risk and expects to continue to invest in its risk management framework. However, such efforts may not insu late NWM Group from future instances of misconduct and no assurance can be given that NWM Group’s strategy and control framework will be effe ctive. See also, ‘ NWM Group has been in a period of significant structural and other change, including as a result of NatWest G roup’s purpose-led strategy (including the NWM Refocusing) and may continue to be subject to significant structural and other change ’. Any failure in NWM Group’s risk management framework could negatively affect NWM Group and its financ ial condition through reputational and financial harm and may result in the inability to achieve its strategic objectives for its clients, employees and wider stakeholders. NWM Group’s operations are subject to inherent reputat ional risk. Reputational risk relates to stakeholder and public perceptions of NWM Group arising from an actual or perceived failure to meet stakeholder expec tations, including with respect to the NWM Refocusing and related targets, due to any events, behaviour, action or inaction by NWM Group, its employees or those with whom NWM Group is associated. See also, ‘ NWM Group’s businesses are subject to substantial regulation and oversight, which are constantly evolving and may adversely affect NWM G roup’ . This includes brand damage, which may be detrimental to NWM Group’s busine ss, including its ability to build or s ustain business relationships with clients, and may cause low employee morale, regulatory censure or reduced acces s to, or an increase in the cost of, funding. Reputational risk may arise whenever there is a material lapse in standards of integrity, compliance, customer or operating efficiency and may adversely affect NWM Group’s ability to att ract and retain clients. In particular, NWM Group’s ability to attract and retain clients may be adversely affected by, amon gst others: negative public o p inion resulting from the ac tual or perceived manner in which NWM Group or any other member of NatWest Group conducts or modifies its business activities and operations, media coverage (whether accurate or otherwise), employee misconduct, NWM Group’s financial performance, IT systems failures or cyberattack s, data breaches, financial crime and fraud, the level of direct and indirect government support for NatWest Group plc, or the actual or perceived practices in the banking and financial industry in general, or a wide variety of other factors. Modern technologies, in particul ar online social networks and other broadcast tools that facilitate communication with large audiences in short timeframes and with minimal costs, may also significan tly increase and accelerate the impact of damaging information and allegations. Although NWM Group has implemented a Reputational Risk Policy to improve the identification, assessment and management of customers and clients, transactions, products and issu es, which represent a reputational risk, N WM Group cannot be certain that it will be successful in avoiding damage to its business from reputational risk. Legal, regulatory and conduct risk NWM Group’s businesses are subject to substantial regulation and oversight, which are constant ly evolving and may adversely affect NWM Group. NWM Group is subject to extensi ve laws, regulations, corporate governa nce practice and disclosure requirements, administrative actions and policies in each jurisdiction in which it operates. Many of these have been introduced or amended recently and are subject to further material changes, which may increase compliance and conduct risks, particularly as EU/EEA and UK laws diverge as a result of Brexit. N WM Group expects government and regulatory intervention in the financial service s industry to remain high for the foreseeable future. In recent years, regulators and governments have focused on reforming the prudential regulation of the financial services industry and the mann er in which the business of financial services is conducted. Amongst others, me asures have included: enhanced c apital, liquidity and funding requi rements, implementation of the UK ring-f encing regime, implementation and strengthening of the recovery a nd resolution framework applicable to financial institutions in the UK, the EU and the US, financial industry reforms (including in respect of MiFID II), corporate governance require ments, restrictions on the compensation of senior management and other employees, enhanced data prot ection and IT resilience requirements, financial market infrastructure reforms (including enhanced regulations in respec t of the provision of ‘i n vestment service s and activities’), enhanced regulations in respect of t he provision of ‘inves tment services and activities’, and increased regulatory focus in certain areas, including conduct, consumer pr otection, competition and disputes regimes, anti- money laundering, anti-corruption, anti- bribery, anti-tax evasion, payment systems, sanctions and anti-terrorism laws and regul ations. In addition, there is significant oversight by competition authorities of the jurisdictions in which NWM Gro up operates. The competitive landscape for banks and other financial institu tions in the UK, EU/EEA and the US is rapidly changing. Recent regulatory and legal changes have and may continue to result in new market participants and changed competitive dynamics in certain ke y areas. Competition authorities, including the CMA, are currently also looking a t and focusing more on how they can support competition and innovation in digital markets. Recent regulatory changes, proposed or future developments and heightened leve ls of public and regulatory scrutiny in the UK, the EU and the US have resulted in increased capital, funding and liquidity requirements, changes in the competitive landscape, changes in other regulatory requirements and increased op erating costs, and have impacted, and will continue to impact, product offerings and business models. Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 198 For example, NWM Group is required to ensure operational continuity in resolution; the steps required to ensure such compliance entail significant costs, and also impose significant operational, legal and execution risk. Material consequences could arise should NWM Group be found to be non-compliant with these regulatory requirements. Such changes may also result in an increased number of regulatory investigat ions and proceedings and have increased the risks relating to NWM Group’s ability to comply with the applicable body of rules and regulations in the manner and within the timeframes required. Other areas in which, and examples of where, governmental policies, r egulatory and accounting changes and increased public and regulatory scrutiny could ha ve an adverse impact (some of which could be material) on NWM Group inclu de, but are not limited to:  general changes in governmen t, central bank, regulatory or competition policy, or changes in regulatory regimes that may influence investor decisions in the jurisdictions in which NWM Gro up operates;  rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets;  new or increased regulations relating to customer data protection as well as IT controls and resilience, including the UK Data Protection Framework and the impact of the Court of Justice of the EU (CJEU) decision (known as Schrems II), in which the CJ EU ruled that the Privacy Shield (an EU/US data transfer mechanism) is now invalid, leading to more onerous due diligence requirements for the Group prior to sending personal data of its EU customers and employees to non- EEA countries, including the UK and the US;  the introduction of, and change s to, taxes, levies or fees applicable to NWM Group’s operations, such as the imposition of a financial transaction tax, introduction of global minimum tax rules, changes in the scope and administration of the Bank Levy , changes in tax rates, increases in the bank corporation tax surcharge in the UK, restrictions on the tax deductibility of intere st payments or further restrictions imposed on the treatment of carry-forward tax losses that reduce the value of deferred tax assets and require increased payments of tax;  increased regulatory focus on customer protection (such as the FCA’s consumer duty consultation paper (CP21/13)) in retail or other financial markets;  the potential introduction by the Bank of England of a Central Bank Digital Currency which could result in deposit outflows, higher funding costs, and/or other implications for UK banks including NWM Group; and  regulatory enforcement in the form of PRA imposed financial penalties for failings in banks’ regulatory reporting governance and controls, and regulatory scrutiny following the 2019 PRA “Dear CEO letter” letter regarding PRA’s ongoing focus on: the integrity of regulatory reporting, which the PRA considers has equal standing with financial reporting; the PRA’s thematic reviews of the governance, controls and processes for preparing regulatory returns of selected U K banks, including NatWest Group; the publication of the PRA’s common findings from those reviews in September 2021; and NatWest Group’s programme of improvements to meet PRA expectations. These and other recent regulatory changes, proposed or future developments and heightened leve ls of public and regulatory scrutiny in the UK, the EU and the US have resulted in increased capital, funding and liquidity requirements, changes in the competitive landscape, changes in other regulatory requirements and increased op erating costs, and have impacted, and will continue to impact, product offerings and business models. Any of these developments (including any failure to comply with new rules and regulations) could also have a significant impact on NWM Group’s authorisations and licences, the products and servi ces that NWM Group may offer, its reputation and the value of its assets, NWM Gr oup’s operations or legal entity structu re, and the manner in which NWM Gro up conducts its business. Material consequences could arise should NWM Group be found to be non-compliant with these regulatory requirements. Regulatory developments may also result in an increased number of regulatory investigations and proceedings and have increased the risks relating to NWM Group’s ability to comply with the applicable body of rules and regulations in the manner and within the timeframes required. Changes in laws, rules or regulations, or in their interpretation or enforcement, or the implementation of new laws, rules or regulations, including contradictory or conflicting laws, rules or regulations by key regulators or policymakers in different jurisdictions, or failure by NWM Group to comply with such laws, rules and regulations, may adversely affe ct NWM Group’s business, results of operations and outlook. In addition, uncertainty and insufficient internation al regulatory coordination as enhanced supervisory standards are developed and implemented may adversely aff ect NWM Group’s ability to engage in effe ctive business, capital and risk management planning. NWM Group is exposed to the risk of various litigation matters, re gulatory and governmental actions and investigations as well as remedial undertakings, the outcomes of which are inherently difficult to predict , and which could have an adverse eff ect on NWM Group. NWM Group’s operations are di verse and complex and it operates in legal and regulatory environments that expose it to potentially significant legal proce edings, and civil and criminal regulatory and governmental actions. NWM Group has resolved a number of legal and regulatory actions over the pas t several years but continues to be, and may in the future be, involved in such actions in the US, the UK, Europe and oth er jurisdictions. NWM Group is currently, has re cently been and will likely be involved in a number of significant legal and regulatory actions, including investigations, proceedings and ongoing reviews (both formal and informal) by governmental law enforcement and other agencies and litigation proceedings, relating to, among othe r matters, the offering of securities , conduct in the foreign exchange market, the setting of benchmark rates such as LIBOR and related derivatives trading, the issuance, underwriting, and sales and trading of fixed-income securities (including government securities), product mis-selling, customer mistreatment, anti-money laundering, antitrust, VAT recovery and various other compliance issues. Legal and regulatory actions are subject to many uncertainties, and their outcom es, including the timing, amount of fines, damages or settlements or the form of any settlements, which may be ma terial and in excess of any related provisions, are often difficult to predict, particularly in the early stages of a case or investigation. Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 199 NWM Group’s expectation for r esolution may change and substantial additional provisions and costs may be recognised in respect of any m atter. The resolution of significant investigations include NWM Plc’ s December 2021 spoofing-relate d guilty plea in the United States, which involves a three-year period of probation, an independent corporate monitor, and commitments to compliance programme reviews and improvements and reporting obligations, as well as approximately US$35 million in fines and restitution. For additional information relating to these and other legal and regulatory proceedings and matters to which NWM Group is currently exposed, see ‘ Litigation and regulatory matters ’ at Note 25 to the consolidated ac counts. The recent guilty plea, other recently resolved matters in the United States, and adverse outcomes or resolution of current or future legal or regulatory actions, could increase the risk of greater regulatory and third party scrut iny and could have material collateral consequences for NWM Group’s business and result in restrictions or limi tations on NWM Group’s operations. These may include the effective or actual disqualification from carrying on certain regulated activities and conseq uences resulting from the need to reapply f or various important licences or obtain waivers to conduct certain existing activities of NWM Group, partic ularly but not solely in the US, which may take a significant period of time and the results of which are uncertain. Disqualif ication from carrying on any activities, whether automatically as a result of the resolution of a particular matter or as a resu lt of the failure to obtain such licenc es or waivers could adversely impact NWM Group’s business, in particular in the US. This in turn and/or any fines, settlement payments or penalties could ad versely impact NWM Group’s reported financial results and condition, capital p osition or reputation. Similar consequence s could result from legal or regulatory actions relating to other parts of NatWes t Group. Failure to comply with undertakings made by NWM Group to its regulators, or the conditions of probation resulting from the spoofing-related guilty plea, may result in additional measures or penalties being taken against NWM Group. NWM Group may not effec tively manage the tra nsition of LIBOR and other IBOR rat es to alternative risk- free rates. UK and international regulators are driving the transition from the us e of interbank offer rates (‘IBORs’), including LIBOR, to alternative rates, pri marily risk- free rates (‘RFRs’). As of 31 December 2021, LIBOR, as currently determined, has ceased for all tenors of GBP, JPY, CHF, EUR, and for the 1 week and 2 month tenors for USD. The remaining USD LIBOR tenors, as currently determined, are due to cease after 30 June 2023. The FCA has use d its powers under the UK Benchmarks Reg ulation (‘UK BMR’) to require, for a limited period of time after 31 December 2021, the ongoing publication of the 1, 3, and 6 month GBP and JPY LIBOR tenors using a changed methodology (i.e., ‘Art23A LIBOR’ on a synthetic basis). The UK has passed the Critical Benchmarks (References and Administrators ’ Liability) Act 2021 (‘Critical Benchmarks Act’) which establishes a framework that allows the ongoing use of Art23A LIBO R under certain circumstances w here contracts have not pro-actively transitioned onto alternative ra tes. However, the FCA has been clear that the solutions provided under UK BMR and the Critical Benchmarks Act are not permanent and cannot be guaranteed after the end of 2022 (and for JPY the FCA has confirmed that Art23A LIBOR will no longer be available after the end of 2022). This framework and its lack of permanence may expose NatWest Group, its customers and the financial services industry more widely to various risks, including: (i) the FCA further restricting use of Art23A LIBOR resulting in proactive transition of contracts onto alternative rates and, depending on the notice given for any further restrictions, this transition may need to be completed very quickly; and (ii) mis-match es between positions in cleared derivatives and the exposures they are he dging where those exposures are per mitted to make use of Art23A LIBOR, as the FCA has chosen not to permit the use of Art23A LIBOR for cleared derivatives. Although the formal cessation date for the remaining USD LIBOR tenors (as currently determined) is not until the end of June 2023, US and UK regulators have been clear that this is only to support the rundown of back book USD LIBOR exposures, and that no new contracts should reference these USD LIBO R tenors after 31 December 2021, other than in a very limited range of circumstances. NatWest Group will continue to have ongoing expos ure to the remaining USD LIBOR tenors up until they cease at the end of June 20 23. Natwest Group had significant exposures to IBORs and has actively sought to transition away from these during 202 1, in accordance with regulatory expectations and milestones. Transition measures have included the pro-active development of new products on using alternative rates, primarily but not exclusively RFRs rather than LIBOR, pro- actively restructuring existing L IBOR exposures so that they cease to reference LIBOR and instead ref erence alterative rates and embedding language into contracts that allows for the automatic conversion to alternative rates when LIBOR ceases to be available. The main Central Counterparty Clearing houses (CCPs) conducted mass conversion exercises in December 2021 covering GBP, JPY, CHF and EUR LIBO R cleared derivatives to fully trans ition all outstanding LIBOR exposure to the relevant RFR. Key Natwest Group entities, along with many of their major counterparties, have already a dhered to the ISDA IBOR fall-backs supplement and protocol which establishes a cle ar, industry accepted, contractual process to manage the transition from IBORs to RFRs for non-cleared derivative products. These transition efforts have involved extensive engagement with cus tomers, industry working groups and regulators, to seek deliver transition in a transparent and ec onom ically ap propr iate manne r. Any economic i m pacts will be de pendent on, amongst other things, the establishment of deep and liquid RFR markets, the establishment of clear and consistent market conventions for all replacement products, as well as counterparties’ willingness to ac cept, and transition to, these conventions. Furthermore, certain IBOR obligations may not be able to be pro-active ly changed which could, depending on any over-arching legislative transition frameworks, potentially result i n fundamentally different economic outcomes than originally intended. The uncertainties around the manne r of transition to RFRs, and the ong oing broader acceptance and use of RFRs across the market, expose NWM Group, its clients and the financial service s industry more widely to risks. Examples of these risks may include: (i) legal (including litigation) risks relating to documentation for new and the majority of existing transactions (including, bu t not limited to, changes, lack of changes, unclear contractual provisions, and disputes in respect of these); (ii) financial risks from any changes in valuation of financial instruments linked to impacted IBORs that may impact NWM Group’s performance, including its cost of funds, and its risk management related financi al models; (iii) pricing, interest rate or settlement risks, such as chang es to benchmark rates could impact pricing, interest rate or settlement mechanisms on certain instruments; (iv) operational risks due to the requirement to adapt IT systems, trade reporting infrastructu re and operational processes, as well as ensuring compliance with restrictions on new USD LIBOR usage after December Risk Factors con tinued NWM Gr oup Annual Report and Accou nts 202 1 200 2021; (v) conduct and litigation risks arising from communication regarding the potential impact on customers, and engagement with customers during and after the transition period, or non- acceptance by customers of replacement rates; and (vi) different legislative provisions in different jurisdictions, for example, unlike certain US stat es and the EU, the UK has not provided a cle ar and robust safe harbour to protect against litigation and potential liability arising out of the switch to ‘synthetic LIBOR’. Notwithstanding all efforts to date, un til the transition away from LIBOR onto alternative rates has been fully completed and there is greater experience of how RFRs are adopted across different products and c ustomer groups, it remains difficult to de termine to what extent the changes will affect the NWM Group, or the costs of implementing any relevant remedial action. Uncertainty as to the nature and extent of such potential changes, the take up of alternative reference rates or other reforms, may adversely af fect financial instruments originally referencing LIBOR as the benchmarks. The implementation of any alternative RFRs may be impossible or impracticable under the existing terms of cert ain financial instruments and could have an adverse effect on the value of, return on and trading market for, certain f inancial instruments and on the NWM Group’s profitability. Changes in tax legislation or f ailure to generate future taxa ble profits may impact the recoverability of c ertain deferred tax assets rec ognised by NWM Group. In accordance with the accounting policies set out in the section ‘ Critical accounting policies and key sources of estimation uncertainty ’, NWM Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent it is probable that they will be recovered. The deferred tax assets are quantified on the basis of current tax legislation and accounting standards and are subject to change in respect of the future rates of tax or the rules for computing taxable profits and offsetting allowable losses. Failure to generate sufficient future taxable profits or further change s in tax legislation (including with respect to rates of tax) or accounting standards may reduce the recoverable amount of the recognised tax loss deferred tax assets, amounting to £104 million as at 3 1 December 2021. Changes to the treatment of certain deferred tax assets may impact NWM Group’s capital position. In addition, NWM Group’s interpretation or application of relevant tax laws may differ from those of the relevant tax authorities and provisions are made for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities. The amounts ultimately paid may diff er materially from the amounts pr ovided depending on the ultimate resol ution of such matters. F orwa r d-lo o king st at em ent s NWM Gr oup Annual Report and Accou nts 202 1 201 Cautionary statement regarding forw ard-looking statements Certain sections in this docume nt contain ‘forward-looking statements’ as that term is defined in the United Sta tes Private Securities Litigation Reform Act of 19 95, such as statements that include the words ‘expect’, ‘e stimate’, ‘project’, ‘anticipate’, ‘commit’, ‘believe’, ‘should’, ‘intend’, ‘will’, ‘ plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on t hese expressions. In particular, this document include s forward-looking targets and guidance relating to financial performance measures, suc h as income growth, operating expense , cost reductions, impairment loss rates, balance sheet reduction, including the reduc tion of RWAs, CET1 ratio (and key drivers of the CET1 r atio, including timing, impact and details), Pillar 2 and other regul atory buffer requirements and MREL and non-financial pe rformance measures, such as climate and ESG-related pe rformance ambitions, targets and metrics, including in relation to initiatives to transition to a net zero economy, Climate and Sus tainable Funding and Financing (CSFF) and fin anced emissions. In addition, this document includes forward-looking statements relating, but not limited to: the COVID-19 pandemic and its impact on NWM Group; planned cost re ductions, disposal losses and strategic costs; implementation of NatWest G roup’s, NWM Group’s strategy and other strategic priorities (includin g in relation to investment programmes relating to di gital transformation of their operations and services and ino rganic opportunities); the timing and outcome of litigation and government and regulatory investigations; funding pl ans and credit risk profile; managing its capital position; liquidity ratio; portfolios; net interest margin; and drive rs related thereto; lending and income growth, product share and g rowth in target segments; impairments and write-downs; rest ructuring and remediation costs and charges; NWM Group’s ex posure to political risk, economic assumptions and risk, climate, environmental and sustainability risk, operational risk, conduct risk, financial crime risk, cyber, data and IT risk and credit rating risk and to various types of market risk, including interest rate risk, foreign exchange rate risk and commodity an d equity price risk; customer experience, including our Net Promotor Score (NPS); employee engagement and gender balance in leadership positions. Limitations inherent to forward-looking s tatements These statements are based on current plans, expect ations, estimates, targets and projections, and are subjec t to significant inherent risks, uncertainties and other factors, both e xternal and relating to NatWest Group’s and NWM Group’s st rategy or operations, which may result in NWM G roup being unable to achieve the current plans, expectations, estimates, targets, projections and other anticipat ed outcomes expressed or implied by such forward-looking statements. In addition, certain of these disclosures are dependent on choices relying on key model characteristics and assumptions and a re subject to various limitations, including assumptions and es timates made by management. By their natur e, certain of these disclosures are only estimates and, as a res ult, actual future results, gains or losses could differ materially from those that ha ve been estimated. Accordingly, undue reliance should not be placed on these statements. The forward-looking statements con tained in this document speak only as of the date we make the m and we expressly disclaim any obligation or under taking to update or revise any forward-looking stat ements contained herein, whether to reflect any change in our expecta tions with regard thereto, any change in events, conditions or ci rcumstances on which any such statement is based, or otherwise, excep t to the extent legally required. Important factors that could affect the actual outco me of the forward-looking statements We caution you that a large number of importan t factors could adversely affect our results or our ability to imple ment our strategy, cause us to fail to mee t our targets, predictions, expectations and other anticipated outcomes or affe ct the accuracy of forward-looking statements describe d in this document. These factors include , but are not limited to, those set forth in the risk factors and the other uncertai nties described in NatWest Markets Plc’s Annual Repo rt and its other public filings. The principal risks and uncertainties tha t could adversely NWM Group’s future results, its f inancial condition and prospects and cause them to be materially different from what is forecast or expected, include, but are no t limited to: economic and political risk (including in respect of: the impac t of the COVID-19 pandemic on NWM Group and its customers; political and economic risks and uncertainty in the UK and glob al markets; uncertainty regarding the effe cts of Brexit; changes in interest rates and foreign currency exchange rates ; and HM Treasury’s ownership of NatWest Group plc); st rategic risk (including in respect of: the imple mentation of NatWest Group’s and NWM Group’s strategy and NWM Group’s ability to achieve its targets; the effect of the CO VID-19 pandemic on NWM Group’s strategic objects and targets); fina ncial resilience risk (including in respect of: NWM G roup’s ability to meet targets; the competitive environment; counterpa rty risk; prudential regulatory requirements for capital and MREL; fun ding and liquidity risk; changes in the credit ratings; the adequ acy of NatWest Group’s resolution plans; the requiremen ts of regulatory stress tests; model ri sk; sensitivity to accounting policies, judgments, assumptions and estimates; changes in applicable accounting standards; and the applica tion of UK statutory stabilisation or resolution powers); climate and sustainability risk (including in re spect of: risks relating to climate change and the transitioning to a net ze ro economy; the implementation of NatWest Group’s and NWM Group’s climate change strategy and climate change resilient sys tems, controls and procedures; climate-related data and model risk; the failure to adapt to emerging climate, environmental and sust ainability risks and opportunities; changes in ES G ratings; increasing levels of climate, environmental and sustain ability related regulation and oversight; and climate, environmen tal and sustainability related litigation, e nforcement proceedings and investigations); operational and IT resilience risk (includi ng in respect of: operational risks (including reliance on third party suppliers); cyberattacks; the accuracy and eff ective use of data; complex IT systems (including those that enable rem ote working); attracting, retaining and developing senio r management and skilled personnel; NWM G roup’s risk management framework; and reputational risk); and legal, regulatory and conduct risk (including in respect of: the impact of substantial regulation and ove rsight; compliance with regulatory requirements; the outcome of leg al, regulatory and governmental actions and inves tigations; the transition of LIBOR other IBOR rates to alternative risk-free r ates;) and changes in tax legislation or failure to generate future tax able profits). Caution about climate and sustainable funding and fin ancing (CSFF) information. Climate and ESG disclosures in this report use a g reater number and level of judgments, assumptions a nd estimates, including with respect to the classification of climate an d sustainable funding and financing activities, than our repo rting of historical financial information. These judgments, assumptions and estimates are highly likely to change over time, an d, when coupled with the longer time fr ames used in these disclosures, make any assessment of materiality inhe rently uncertain. In addition, our climate risk analys is and net zero strategy remain under development, and the data underlying our analysis and strategy remain subject to evolution ove r time. As a result, we expect that certain climate and ESG disclosures made in this report are likely to be amended , updated, recalculated or restated in the future. This for ward-looking statement should be read together with the ‘Climate-related and othe r forward- looking statements and metrics’ of the NatWest Group 2021 Climate-related Disclosures Report. The information, statements and opinions contained i n this document do not constitute a public offer under any a pplicable legislation or an offer to sell or a solicitation of an offe r to buy any securities or financial instruments o r any advice or recommendation with respect to su ch securities or other financial instruments. . NatWest Group plc 36 St Andrew Square Edinburgh, EH2 2YB www.natwestgroup.com NatWest Group plc 2021 Annual Report and Accounts Designed and produced by Black Sun Plc. This Report is printed on Edixion Offset which has been independently certified according to the rules of the Forest Stewardship Council® (FSC®). Printed in the UK by Pureprint, a CarbonNeutral® company. Both manufacturing paper mill and the printer are registered to the Environmental Management System ISO 14001:2004 and are Forest Stewardship Council® (FSC) chain-of-custody certified.

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