Barclays 2006 Annual Report Download - page 92

Barclays PLC
Annual Report 2006
88
Risk management
Market risk management
The graph below shows the history of total DVaR on a daily basis for
2005 and 2006.
Analysis of trading revenue
The histograms below show the distribution of daily trading revenue
for Barclays Capital in 2006 and 2005. It includes dealing profits, net
interest income and net fees and commissions relating to primary
trading. The average daily revenue in 2006 was £22.0m (2005: £16.3m)
and there were 243 positive revenue days out of 252 (2005: 237 positive
revenue days out of 252).
<0 1 to
<5
5 to
<10
10 to
<15
15 to
<20
20 to
<25
25 to
<30
30 to
<35
35 to
<40
0
20
40
60
Barclays Capital’s trading revenue 2005 £m
Revenue (£m)
12
45
59
42
35
15
12
6
8
Number of days
7
8
3
40 to
<45
45+
0
<0 1 to
<5
5 to
<10
10 to
<15
15 to
<20
20 to
<25
25 to
<30
30 to
<35
35 to
<40
0
20
40
60
Barclays Capital’s trading revenue 2006 £m
Revenue (£m)
9
23
30
49
42
31
24
12
8
Number of days
1
13
10
40 to
<45
45+
0
DVaR in 2005 and 2006 (daily values) (£m)
05 06
0
20
30
40
50
DVaR Back-testing
Barclays recognises the importance of assessing the effectiveness of its
DVaR model. The main approach employed is the technique known as
back-testing, which counts the number of days when trading losses
exceed the estimated DVaR figure. The regulatory standard for back-
testing is to measure DVaR assuming a one-day holding period with a
99% level of confidence. For Barclays Capital’s regulatory trading book,
there were no instances in 2006 or 2005, of a daily trading revenue loss
exceeding the corresponding back-testing DVaR.
Asset and liability market risk
Interest rate exposures arising from mismatches of fixed rate assets and
liabilities in UK banking operations are passed to Treasury where these
positions are aggregated and the net position passed to the market via
Barclays Capital. Due mainly to timing considerations, market risk can
arise when some of the net position stays with Treasury. Similarly,
market risk can arise due to the impact of interest rates on customer
behaviour. The latter risk is managed and measured by the Retail Market
Risk Team using behavioural models. The positions are converted into
wholesale swap or option exposures, passed to Treasury and managed
by the process described above.
Structural interest rate risk arises from the variability of income from
non-interest bearing products, managed variable rate products and the
Group’s equity. Structural foreign currency risk results from holding
non-Sterling investments in subsidiaries, branches, associates or joint
ventures. These structural risks are managed by Treasury.
Market risk is also taken in overseas treasuries to support and facilitate
customer activity. The risk is comparatively modest. The market risks
are managed by local treasury functions and local asset and liability
committees. The central market risk team maintains regular contact
with the businesses and oversees a comprehensive risk reporting
framework.
Other market risks
Defined benefit pension scheme risk
Barclays maintains a number of defined benefit pension schemes for
past and current employees. The ability of the Pension Fund to meet
the projected pension payments is maintained through investments.
Market risk arises because the estimated market value of the pension
fund assets might decline or their investment returns might reduce or
because the estimated value of the pension liabilities might increase. In
these circumstances, Barclays could be required or might choose to
make extra contributions to the pension fund. Financial details of the
pension fund are in Note 35.
Asset management structural market risk
Asset management structural market risk is the risk that the value
of funds managed by Barclays on behalf of clients might reduce leading
to a reduction in fee and commission income. It affects Barclays Global
Investors, Global Retail and Commercial Banking, Barclays Wealth and
Barclays Life. The risk is controlled and managed by the respective
businesses and the central market risk team.