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Re:	Santander UK plc

1.	We note that your table of contractual obligations appears to exclude the related interest obligations on your deposits and debt obligations. To promote transparency of your total contractual obligations, please revise these tables in future filings to include the following disclosures:

·	Disclose the estimated interest payments on your long-term debt and interest-bearing deposits and any assumptions you made to derive these amounts.

·	To the extent that you have excluded certain types of interest payments from the table, such as for variable rate debt, provide quantification of the amount of long-term obligations that have these types of interest rates and thus have been excluded from the table.

The amounts and maturities of contractual obligations in respect of guarantees are described in Note 38 to the Consolidated Financial Statements. Other contractual obligations, including payments of principal and interest where applicable, are set out in the table below. Interest payments are included in the maturity column of the interest payments themselves, and are calculated using current interest rates:

2.	According to the chart on page 72 it appears that there are some risks for which no party is responsible for risk assurance, i.e. Credit and Market Risk. Please tell us why you have not designated a party responsible for risk assurance in these areas.

Risk Management			Risk Oversight	Risk Assurance
	Board
Credit (including residual credit and concentration)	Retail Banking, Corporate Banking, Markets and Asset and Liability Management (‘ALM’ within Group Infrastructure)		Risk Division – Credit Risk Department	Board Risk Committee   Board Audit Committee   Internal Audit   are responsible for all risks.
Market (including trading and non-traded)	Markets and ALM		Risk Division – Market Risk Department
Funding and Liquidity
- Funding	ALM		Risk Division – Market Risk Department
- Liquidity	ALM		Risk Division – Market Risk Department
Operational
- Non-regulatory	All		Risk Division – Operational Risk Department
- Regulatory	All		Finance Department Compliance Department
Other
- Pension obligation	CEO supported by the Chief Financial Officer and Strategic Pensions Committee		Risk Division – Market Risk Department
- Business/strategic	CEO supported by Executive Committee		Chief Risk Officer
- Reputational	CEO supported by Executive Committee		Chief Risk Officer
- Residual value	CEO supported by Risk Committee		Risk Division – Credit Risk Department

3.

You disclose that the parameters estimated for global portfolios (e.g. banks) are the same throughout the Banco Santander, S.A. group, and therefore, a financial institution will have the same PD (probability of default) for a specific rating, regardless of the Banco Santander, S.A. group entity in which the exposure is booked. Please tell us the following:

·	Whether you have separately determined that the historical loss rates based upon your own experience is consistent with the PD assumption that you utilize in your impairment loan loss allowance, which is based upon Banco Santander, S.A. group’s PD assumption.

·	How you confirmed that you were using entity-specific loss experience as contemplated by paragraph AG89 of IAS 39.

·

How you considered whether your borrowers were related to certain geographic units of global banks or corporations that are either higher or lower in credit quality as compared to the numerous geographic units of such global banks or corporations that would be Banco Santander, S.A. group’s customers.

·	The extent of differences between loss estimates and actual losses experienced that you have observed when reviewing the methodology and assumptions used.

·

Our global portfolios are low default portfolios where we have no loss experience or very little entity-specific loss experience. It is therefore not possible to use our own experience to generate reliable PD assumptions. As a result, we use peer group (i.e. that of the Banco Santander, S.A. group) experience for these assets for the purposes of making internal credit risk assessments and lending decisions and for calculating regulatory capital in accordance with Basel II requirements.

·	As noted above, the methodology described is not used in the calculation of the impairment loss allowance for accounting purposes under IFRS.

·

Santander UK assesses the credit quality of borrowers on both a global and local basis in determining the final rating of a borrower where it is a subsidiary of a global institution. When evaluating the credit quality of a specific UK subsidiary of a global institution, Santander UK initially assesses the client subsidiary’s stand-alone rating. Santander UK then assesses the support that the client subsidiary receives from its parent company in order to calculate the appropriate percentage of that parent company’s rating to incorporate in determining the final rating of the client subsidiary. The global parent company rating is determined by Banco Santander’s global credit analysts. The support is measured from 0% to 100% and depends on factors such as the financial and capital aid historically provided when needed, the involvement of the parent company in the client subsidiary’s decision-making processes, and the importance of the client subsidiary’s activity to the overall activity of the global institution.

·	The Group has experienced only two incidences of actual loss in its global portfolios. Such limited experience of actual losses is felt to be insufficient on which to base reliable comment on the extent of differences between our loss estimates and the actual losses we have experienced.

4.

You disclose that the LGD (loss given default) is calculated by observing the recoveries of defaulted loans, taking into account not only the income and expenses associated with the recovery process, but also the timing thereof and the indirect costs arising from the recovery process. Please revise your future filings to more clearly describe the nature of these costs, whether direct or indirect. Also, address the following:

·

As it relates to unsecured loans, revise your future filings to disclose why you consider income and expenses associated with the recovery process and indirect costs in your LGD measure, as these are not related to the principal, interest or other contractual cash flows of the loan. Refer to Section E.4.3 of the IAS 39 Implementation Guidance and paragraph 59 of IAS 39.

·	As it relates to secured loans, revise your future filings to disclose why you consider indirect costs in your LGD measure. Refer to paragraph AG84 of IAS 39.

 

5.

Please expand your disclosure here and elsewhere as appropriate regarding your interest-only and flexible loans mortgages. With respect to interest-only loans the expanded discussion should include a discussion of the lending policies that mitigate the risks inherent in this repayment structure and your typical experiences when a borrower reaches the point where the interest-only period ceases. Do you typically refinance the mortgages into non interest-only mortgages? Does your experience differ with respect to loans that are refinanced into interest only loans as a concession? With respect to flexible loans, please describe the predetermined criteria used to determine how customers may vary their payments. Additionally, please describe how these loans perform as compared to more traditional mortgage loans.

≥	The drawdown must not exceed the available limit.
≥	The total number of drawdowns made in any month must not exceed the limit (if any) specified in the current tariff of charges.
≥	The customer must not be more than two payments in arrears.
≥	The customer must not have had any insolvency events, which can include County Court Judgments, Bankruptcies, Individual Voluntary Arrangements, Administration Orders and Debt Relief Orders.

While the risks with respect to flexible loans can be higher than more traditional capital repayment mortgage loans, the performance of this significant sub-portfolio has been stable and has exhibited a lower level of defaults than the Group’s more traditional capital repayment mortgage loans.

6.

We note your disclosure on page 89 that in 2011 you no longer originated interest-only loans with an LTV greater than 75%. Please revise your future filings to disclose the maximum loan to value prior to this change. Also, briefly describe any other specific policies in place during each reported period that were intended to mitigate credit risk related to these loans.

We also propose to describe the policies in place during each period as set out in our response to question 5.

7.

We note your disclosure on page 85 that a technical change in the definition of non-performing loans caused the balance of these loans to increase. You also disclose in your Form 6-K furnished September 4, 2012 that mortgage non-performing loans increased to 1.57% as of June 30, 2012 from 1.46% at December 31, 2011 due to a change in collections policy implemented in late 2011.

	2011 £m
Non performing loans at 1 January	2,586
Transfers in to NPL	1,317
Transfers out of NPL:
- Modifications, renegotiations and forbearance	(369)
- Change in arrears/Return to performing status	(511)
- Loan repayments/redemptions	(116)
- Write-offs	(453)
Effect of changes in policies(1)	189
Non performing loans at 31 December	2,643

	2011 £m
Non performing loans at 1 January	824
Transfers in to NPL	616
Transfers out of NPL:
- Modifications, renegotiations and forbearance	-
- Loan repayments/redemptions	(376)
- Write-offs	(105)
Effect of changes in policies	-
Non performing loans at 31 December	959

 

Legacy portfolios non performing loans	2011 £m
Non performing loans at 1 January	353
Transfers in to NPL	217
Transfers out of NPL:
- Modifications, renegotiations and forbearance	-
- Loan repayments/redemptions	(66)
- Write-offs	(70)
Effect of changes in policies	-
Non performing loans at 31 December	434

8.

We note that 64% of your mortgage non-performing loans are interest-only loans as of December 31, 2011, and 41% of your residential mortgage portfolio as of December 31, 2011 is interest-only loans. Given that you have identified these loans as “higher risk” and that the risk of non-payment increases upon maturity, please revise your disclosure on page 41 in future filings to separately disclose interest-only mortgage loans by year of maturity.

	On demand £m	In not more than three months £m	In more than three months but not more than one year £m	In more than one year but not more than five years £m	In more than five years but not more than ten years £m	In more than ten years £m	Total £m
UK
Advances secured on residential property	28	904	2,517	15,229	19,612	128,551	166,841
Corporate loans	3	3,350	1,318	12,035	2,280	7,292	26,278
Finance leases	-	380	762	1,435	150	217	2,944
Other secured advances	532	83	254	443	642	1,756	3,710
Other unsecured advances	606	900	1,775	3,547	461	256	7,545
Purchase and resale agreements	-	6,150	-	-	-	-	6,150
Loans and receivables securities	3	95	2	47	62	605	814
Amounts due from fellow group subsidiaries	-	32	-	-	-	-	32
Total UK	1,172	11,894	6,628	32,736	23,207	138,677	214,314
Non-UK
Advances secured on residential property	-	-	-	-	2	4	6
Other secured advances	-	-	-	1	-	-	1
Purchase and resale agreements	-	188	-	-	-	-	188
Total non-UK	-	188	-	1	2	4	195
Total	1,172	12,082	6,628	32,737	23,209	138,681	214,509
Of which:
– Fixed interest rate	3	7,739	3,144	11,157	9,679	52,657	84,379
– Variable interest rate	1,169	4,343	3,484	21,580	13,530	86,024	130,130
Total	1,172	12,082	6,628	32,737	23,209	138,681	214,509
Of which:
- Interest-only advances secured on residential property	22	110	392	4,269	9,648	54,281	68,722

9.

You disclose on page 85 that past maturity loans are considered non-performing loans but that the customer continues to make the monthly payments. Please revise your future filings to discuss whether these loans are considered impaired or renegotiated or restructured loans. If not, please disclose why not, considering that the overall timing of your expected cash flows has changed and the contractual interest rate on the loan may or may not be equal to the current market rate for loans of similar credit quality. Also, discuss the facts and circumstances considered when concluding that the lack of payment of the full balance of the loan was not due to the inability of the borrower to pay off the loan according to the contractual terms.

 

Past maturity refers to loans that have reached the maturity date when the mortgage should have been repaid but still remains outstanding. Past maturity NPLs amounted to £38m at 31 December 2011. with the customer continuing to pay the normal monthly instalments. Where an account is past maturity, interest continues to be charged at the contractual rate. Past maturity accounts are considered impaired and are reported as non-performing loans once they reach 90 days past maturity. Actions are undertaken by Collections & Recoveries to recover the overdue balance consistent with the approach to all other accounts that are 90 days overdue. For capital repayment mortgages, the only circumstances in which an account goes past maturity are because of payment arrears. These are treated as any other payment arrears. For interest-only mortgages, the failure to repay the capital at maturity can be caused by the lack of, or shortfall in, a repayment vehicle. However, there are circumstances when the lack of repayment of the full balance of the loan at maturity is not due to the inability of the borrower to repay the loan in accordance with the contractual terms. These circumstances typically occur where the lack of repayment is due to a short-term mismatch in the timing of the release of funds from a repayment vehicle through which the customer intends to repay the loan.
 

10.

Please revise your future filings to disclose the factors considered when concluding whether a borrower is experiencing financial difficulty for the purpose of reporting the loan as in forbearance, restructured or renegotiated. Also, disclose whether you modify loans for borrowers that are not considered to be experiencing financial difficulty. If so, disclose the types of modifications you make, the reasons why you make them and the balance of these loans at each reporting date.

 

11.

We note your disclosure in Form 6-K furnished September 4, 2012 that non-performing loans increased, in part, as a result of further stress on legacy commercial real estate exposures written pre-2009. You also transferred certain non-core portfolios to the Corporate Center, including Commercial Mortgage loans, where you believe it is more appropriate for the management of these assets. Given the distinction of different risk characteristics based on vintage in your disclosure, please revise your future filings to separately present the following for pre-2009 vintages as well as 2009 and subsequent vintages:

·	The amount of commercial real estate loans outstanding for each group of vintages;

·	The NPL ratio for commercial real estate loans for each group of vintages; and

·	The weighted average LTV for commercial loans for each group of vintages.

	Original vintage
	pre 2009	2009 onwards	Total
Total loans	£4,103m	£4,549m	£8,652m
NPL ratio	12.1%	-	5.7%
Weighted average LTV	72%	57%	65%

The pre-2009 vintage loans were written on terms prevailing in the market at that time which, compared to more recent times included higher original LTVs, lower interest coverage and in some cases exposure to development or letting risk. Following the significant and unprecedented downturn in the commercial real estate market in 2008 and 2009 some of these customers suffered financial stresses resulting in either their inability to meet the contractual payment terms or to comply with covenants or to achieve refinancing/repayment at maturity. As a result, the pre-2009 sub-portfolio has experienced high NPL rates in recent years. In light of the market deterioration, the Group’s lending criteria were tightened from 2009 onwards, with lower LTVs and the avoidance of transactions with any material letting or development risks. In addition, while the market remains challenging, prices have not declined significantly further since the Group’s lending criteria were significantly. As a result, the sub-portfolio representing loans originated from 2009 onwards has performed significantly better than the pre-2009 sub-portfolio.

 

 

13.	In this regard, we note your disclosure on page 300 that indicates renegotiation will lead to a new agreement, which is treated as a new loan in certain situations. Please address the following:

·	Revise your future filings to quantify the amount of new Retail and Corporate loans that you have granted during the periods presented in situations that you reference in this disclosure.

·	Tell us the circumstances under which you granted those loans, and specifically, address the factors that led you to conclude such agreements were new loans.

·

Revise your future filings to disclose how these loans are considered for the purposes of determining the appropriate level of allowance for loan losses. For example, discuss if these loans are collectively assessed and if so, whether they are segregated into separate pools. If you do not segregate these loans into separate pools, discuss why not, considering that the borrowers have experienced observable credit deterioration compared to a loan that has not been renegotiated.

Renegotiated loans

Loans and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a concessionary rate of interest to genuinely distressed borrowers. This will result in the asset continuing to be overdue and will be individually impaired where the renegotiated payments of interest and principal will not recover the original carrying amount of the asset. In other cases, renegotiation will lead to a new agreement, although in such cases the new agreement which is not treated as a new loan.

 

14.	We note your tabular disclosure of liquid assets. Please revise your future filings to address the following:

·	Clarify the types of financial instruments that you have included as other liquid assets within your quantified disclosure, both at December 31, 2011 and at June 30, 2012.

·	Disclose the maturity and location/jurisdiction of each financial instrument that you consider to be a liquid asset.

·	To the extent that there are significant fluctuations in the balance of liquid assets intra-period, disclose the weighted average amounts in addition to the period-end balances. If not, disclose that fact.

	At 30 June 2012	Weighted average 2012
	£bn	£bn
Cash at central banks	29	27
Government bonds	11	5
Core liquid assets	40	32
High quality bonds	2	2
Other liquid assets:
- Own securities (retained issuance) (1)	26	27
- Other securities	1	2
Total liquid assets	69	63

	30 June 2012 £bn	31 December 2011 £bn
Core liquid assets: Cash at central banks:
- UK	27	18
- US	2	7
	29	25
Government bonds:
- UK	7	2
- Japan	1	-
- Germany	1	-
- Other countries, each less than £1bn(1)	1	1
	11	3
Total core liquid assets	40	28
High quality(2) corporate bonds and asset-backed securities:
- UK	1	1
- US	1	1
	2	2
Other liquid assets:
- UK – Own debt securities (retained issuance) and loans(3)	26	24
- UK – Other debt securities, bonds, and equities included in major indices	1	1
- US – Debt securities and bonds	-	1
	27	26
Total liquid assets	69	56

(1)   Consists of US, Switzerland, France and Denmark.

(2)   A- rated or above

(3)

Consists of debt securities and bonds (mortgage-backed securities, other asset-backed securities and covered bonds) issued by subsidiaries and retained by the Company, and loans eligible for discount at central banks.

15.

You disclose that collateral calls on derivative positions can pose a significant liquidity risk. Please revise your future filings to quantify the impact of a ratings downgrade on your business. For example, disclose the amount of additional collateral required upon a one or two notch credit ratings downgrade, etc.

 

16.

Your measure of “Total operating income” includes certain operating expenses and losses such as fee and commission expense and trading losses, but it excludes various other operating expenses, provisions, and charges. Please revise your consolidated income statement in future filings to remove this measure of operating income that excludes charges that appear to be clearly related to your operations. Refer to paragraphs 85, 86 and BC56 of IAS 1.

Total operating income

Total operating income comprises net interest and similar income, net fee and commission income and net trading and other income, as described in Notes 3, 4 and 5, respectively, of the Consolidated Financial Statements.

 

17.

You disclose that in making a collective assessment for impairment, the loss is discounted at the effective interest rate, and the unwind of the discount over time is reported through interest receivable within the income statement, with the impairment loss allowances on the balance sheet increasing. You also disclose that future fees and interest included in the gross loss per case are removed and the balance discounted so as to calculate the present value of the loss per case. Please address the following related to these disclosures:

·	Tell us why the loss is discounted at the effective interest rate rather than discounting the estimated future cash flows of the loan. Refer to paragraph 63 of IAS 39.

·

Please provide a representative example of a collectively assessed loan for which the unwind of the loss discount over time is reported as interest in the income statement with the impairment loss allowance increasing in the balance sheet. Also, tell us whether this results in recognition of interest income and impairment losses on the same loan within the same period and whether you adjust the carrying amount of the loan to reflect actual and revised estimated cash flow receipts. Refer to paragraph AG8 of IAS 39.

·

Tell us why you remove interest from the gross loss per case in order to calculate the present value of the loss per case instead of including all estimated future cash flows, including principal and interest, in your present value calculation. Refer to paragraph 63 of IAS 39. In this regard, we note that you realize the gross loss in cash several months after the customer first defaults, during which time interest and fees continue to accrue. Therefore, it is unclear how your loss model incorporates losses related to accrued but uncollected interest, and it is unclear how this disclosure relates to that on page 171 where you state that the element of interest not anticipated to be recovered is provided for.

·	Paragraph 63 of IAS 39 states that if there is objective evidence of impairment the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate (‘EIR’).

·

A representative example of a collectively assessed loan is attached as an appendix to this letter. We advise the Staff that this results in recognition of interest income and impairment losses on the same loan within the same period and we confirm that we adjust the carrying amount of the loan to reflect actual and revised estimated cash flow receipts, in accordance with the requirements of paragraph AG8 of IAS 39.

·	We further advise the Staff that the reference on page 178 to excluding “future fees and interest” from the gross loss per case should refer to excluding “future fees and charges”.

 

18.

You disclose that for secured loans, a write-off is only made when all collection procedures have been exhausted, including the security has been sold and/or any mortgage indemnity guarantee or other insurance claims have been made. For unsecured loans, you disclose that a write-off is only made when all internal avenues of collecting the debt have been exhausted and the debt is passed over to external collection agencies. Please revise your disclosure in future filings, here and on page 181, to state whether you have a threshold based on past due status beyond which all loans are written-off, and state whether this varies by loan class.

19.

We note that you issue deposit contracts involving the receipt of cash on which customers receive an index-linked return. In future filings, please revise your disclosure in the Business and Financial Review section to discuss the financial results of these products, including the impact on results of operations and liquidity. Please address the following:

·	Explain the differences between the new capital guaranteed products, which are treated as deposits with any associated embedded derivatives bifurcated as compared to the remaining equity index-linked deposit products. Quantify the amount of each product type.

·	Disclose the guaranteed principal amount and the guaranteed return amount by product for each period presented, and explain any differences between the guaranteed amounts and the fair value amounts recorded on the balance sheet.

·	Disclose the gains and losses on these contracts for each period presented.

·	Discuss the management process for these products, including how you manage certain assets in order to match or cover the guaranteed liabilities related to these contracts. Also, discuss the success of any such management and/or asset-liability matching procedures during the periods presented.

	Group		Company
	2011 £m	2010 £m	2011 £m	2010 £m
Deposits by banks           - securities sold under repurchase agreements	10,105	21,411	-	-
- other(1)	4,403	4,327	-	-
Deposits by customers   - securities sold under repurchase agreements	5,519	11,112	-	-
- other(2)	4,963	4,859	-	-
Short positions in securities and unsettled trades	755	1,118	-	-
	25,745	42,827	-	-

	Group		Company
	2011 £m	2010 £m	2011 £m	2010 £m
Current and demand accounts:
- interest-bearing	30,843	29,616	24,677	23,501
- non interest-bearing	948	2,085	879	2,017
Savings accounts(1)	72,729	74,608	71,319	71,397
Time deposits	42,873	45,748	30,851	33,023
Securities sold under repurchase agreements	418	-	-	-
Amounts due to Santander UK subsidiaries	-	-	47,155	40,412
Amounts due to fellow Banco Santander subsidiaries	531	586	186	229
	148,342	152,643	175,067	170,579

We also advise the Staff that the fair value movements recognised in the income statement with respect to the embedded derivatives related to these products amounted to a loss of £61m in the six months ended 30 June 2012 and a loss of  £161m in the year ended 31 December 2011. As part of the Group’s risk management strategy, the Group enters into other derivatives that offset (i.e. economically hedge) the risks underlying these fair value movements. On this basis, the overall fair value movements are immaterial. In view of this, we do not propose to expand our disclosures in future filings on Form 20-F for these products, either in respect of our management process for them or their income statement effect.

20.

You disclose here that a reasonably possible change in any of the key assumptions underlying the estimated future taxable profits in the Group’s 3 Year plan would not cause a reduction in the deferred tax assets recognized. We note your disclosure regarding the use of a switch to a 5 year plan in connection with the testing of your goodwill for impairment on page 217, which is consistent with the period for which management is required to prepare detailed plans for UK regulatory purposes. Please revise your future filings to disclose why you do not also use this 5 year plan for the purposes of determining whether a change in the amount of deferred tax assets would be recognized. Tell us whether your conclusion regarding a reduction in the deferred tax assets recognized would change if you did utilize the 5 year plan and if so, tell us by how much.

We propose to amend our disclosures in future filings on Form 20-F to replace the reference to the 3 year plan in the deferred tax disclosures with a reference to the 5 year plan.

21.

You disclose that for your own debt securities in issue, you apply your methodology to determine the Group’s credit spread consistently across all securities where it is believed that counterparties would consider the Group’s creditworthiness when pricing trades. Please tell us whether you have any securities for which you do not incorporate consideration of your own credit spread and if so, quantify the amount and discuss the reasons why you do not believe a market participant would consider it when pricing trades.

22.	Please revise your future filings to provide a description of the valuation method used by the independent expert to determine the fair value of your loan and receivable securities. Refer to paragraph 27 of IFRS 7.

These debt securities consist primarily of floating rate notes, asset-backed securities and collateralised loan obligations. The fair values of the floating rate notes have been determined using the same valuation techniques for financial instruments accounted for at fair value as described in the valuation techniques section below. The asset-backed securities and collateralised loan obligations are more complex products and are valued with the assistance of valuations prepared by an independent, specialist valuation firm. These fair values are determined using industry-standard valuation techniques, including discounted cash-flow models. The inputs to these models used in these valuation techniques include quotes from market makers, prices of similar assets, adjustments for differences in credit spreads, and additional quantitative and qualitative research.

23.	Please revise your disclosure in future filings to clarify the operations of your other subsidiaries that are presented on a combined basis within “Other” in your consolidating financial statements.

24.	In future filings please quantify in this risk factor the additional collateral requirements that would be triggered by a one and two notch downgrade in your credit ratings under your derivative contracts and other borrowings.

 

25.

Please revise your disclosure in future filings to clarify how you define and identify indirect exposure to risks in the peripheral countries of the Eurozone, and describe the indirect risk exposures that you have identified. Also, address how you are monitoring and/or mitigating the effects of such indirect exposure as it relates to your overall risk management process. Note that we believe indirect exposure could include the following:

·	Exposure to other entities that are highly concentrated in the affected areas and to affected counterparties; and,

·	A slowdown in global economic activity including wider economic contraction in the corporate sector.

The risk arising from indirect exposures from our transactions with other corporates is mitigated by standard financial and non-financial guarantees and the fact that the companies are geographically well diversified in terms of their assets, operations and profits.

26.

We note that total liabilities to other Santander group companies increased from £9.9 billion as of December 31, 2011 to £14.4 billion as of June 30, 2012. You disclose that these balances represent holdings of debt securities by the wider Santander group as a result of market purchases and for liability management purposes, and that although you do not rely on other members of the Santander group for funding, at the time that central bank facilities were available, funding was obtained from your parent and other members of the Santander group through debt issuance facilities. Please revise your disclosure in future filings to address the following:

·

Disclose the specific reasons why your related party borrowings are increasing particularly in light of your policy of independent funding. For example, disclose if the funding obtained at the time central bank facilities were available were lower cost than the alternative, or if there were other reasons to obtain funding from related parties instead of in the marketplace.

·	Disclose whether, and if so how, you would be able to replace this intercompany funding with third party funding, including how quickly you would be able to do so and at what terms.

 

Other UK Government schemes

28.

We note your disclosure that you welcome the announcements made at the Mansion House in June 2012 aimed at increasing the supply of credit to the UK economy through the Extended Collateral Term Repo facility (‘ECTR’) and Funding for Lending. We also note your disclosure, within Risk Factors that, as of yet, it is not clear how banks might participate in these schemes and their effect on the market. Please tell us more about your participation in the Funding for Lending scheme and any similar schemes under the UK government by addressing the items noted below:

·	Clearly quantify the amount of your debt that is guaranteed under these schemes.

·	Tell us and revise your future filings to more clearly identify how you account for any obligations you incur in return for your participation under these schemes.

·

As part of your analysis, specifically address whether, by participating in the Funding for Lending guarantee, you incur a commitment to reduce the rate of future loans to eligible customers. Specifically identify the nature and amount of the commitment, and explain how you account for this commitment.

·

Specifically address the respective timing of the issuance of your debt under the Funding for Lending program versus the origination of customer loans that qualify under the program and how any disparity is considered accounted for. For example, if you issue debt under the program, thus incurring an obligation, explain how that obligation is accounted for if it is not fulfilled until months later, when you originate customer loans that qualify under the program.

·

Tell us the IFRS guidance you considered in evaluating all aspects of these transactions in the context of the overall arrangement, as well as the guidance you ultimately relied on for your accounting. As part of your response, tell us how you considered the guidance of IAS 39 and IAS 20, specifically addressing but not limited to paragraph 10A of IAS 20.

·	None of our debt is guaranteed under these schemes. The ECTR scheme is a repo facility and the Funding for Lending scheme is a stock lending and borrowing arrangement. Neither scheme is a form of guarantee of any of our debt issuances.

·	No obligations to lend to customers have been incurred as a result of our participation in these schemes.

·	No commitment to reduce the rate of future loans to eligible customers is incurred by participating in the Funding for Lending scheme.

·	As noted above, the Funding for Lending scheme is a stock lending and borrowing arrangement. None of our debt is issued under this scheme and participation in the scheme is not linked to any obligation for us to originate loans.

·

We intend to account for our participation in the ECTR scheme in accordance with our accounting policy under IFRS for sale and repurchase agreements as set out on page 176 of our 2011 Form 20-F. Our accounting for our participation in the Funding for Lending scheme, including consideration of IAS 20 and IAS 39, is still being finalised.

 

29.	As the capital ratios under Basel III are not yet implemented, please revise future filings to reconcile your reported ratio under the transitional and full Basel III currently drafted rules to the ratio currently required by your regulator.

 

30.

You disclose that after considering the impact of the change in collections policy, the underlying performance remained broadly stable, and you go on to state that impairment loss allowances increased due to the increase in non-performing loans. If true, please tell us how and why the change in your collections policy resulted in an increase in your impairment loss allowances. Furthermore, tell us whether the historical performance of certain loans led to your policy change and if so, explain when and how such historical performance was incorporated into your allowance for the periods presented.

*     *     *     *

·	we are responsible for the adequacy and accuracy of the disclosure in our 2011 Form 20-F and in our Form 6-K;

·	Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to our 2011 Form 20-F or our Form 6-K; and

·	we may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

 

/s/ STEPHEN E. JONES
Stephen E. Jones