Barclays 2010 Annual Report Download - page 121

Traded market risk (audited)
Traded market risk is predominantly the result of client facilitation in
wholesale markets. This involves market making, offering hedge solutions,
pre-hedging and assisting clients to execute large trades. Not all client
trades are hedged completely, giving rise to market risk. In Barclays Capital,
trading risk is measured for the trading book, as defined for regulatory
purposes, and certain banking books. Barclays policy is to concentrate
trading activities in Barclays Capital.
Risk measurement
Barclays uses a range of complementary technical approaches to measure
and control traded market risk including: Daily Value at Risk (DVaR),
Expected Shortfall, 3W, Primary and Secondary risk factor stress testing
and Combined scenario stress testing.
DVaR is an estimate of the potential loss arising from unfavourable
market movements, if the current positions were to be held unchanged
for one business day. Barclays Capital uses the historical simulation
methodology with a two-year equally weighted historical period, at the
95% confidence level.
The historical simulation methodology can be split into three parts:
– Calculate hypothetical daily profit or loss for each position over the most
recent two years, using observed daily market moves;
– Sum all hypothetical profits or losses for day one across all positions,
giving one total profit or loss. Repeat for all other days in the two-year
history; and
– DVaR is the 95th percentile selected from the two-year history of daily
hypothetical total profit or loss.
Market volatility in 2010 was impacted by concerns over future economic
growth and the sovereign debt crisis, but remained below the high levels
observed in 2008. During 2010, the high volatility observations of 2008
rolled out of the two year DVaR historical data set and were replaced in
the data time series by less volatile 2010 observations.
Barclays Capital’s DVaR model has been approved by the FSA to calculate
regulatory capital for certain trading book portfolios. The approval covers
general market risk in interest rate, foreign exchange, commodities and
equity products, and issuer specific risk for the majority of single name
and portfolio traded credit products. For internal management purposes
DVaR is also calculated for certain banking books as well as all trading
book portfolios.
The FSA categorises a DVaR model as green, amber or red. A green model
is consistent with a good working DVaR model and is achieved for models
that have four or less back-testing exceptions in a 12-month period.
Back-testing counts the number of days when a loss (as defined by the
FSA) exceeds the corresponding DVaR estimate, measured at the 99%
confidence level. For Barclays Capital’s DVaR model, green model status
was maintained for 2010 and 2009.
The DVaR model is regularly assessed and reviewed internally by the Group
Executive Models Committee and the Barclays Capital Model Committee.
When reviewing DVaR estimates, a number of considerations should be
taken into account. These are:
– Historical simulation uses the most recent two years of past data to
generate possible future market moves but the past may not be a good
indicator of the future;
– The one-day time horizon does not fully capture the market risk
of positions that cannot be closed out or hedged within one day;
– DVaR is based on positions as at close of business and consequently
intra-day risk, the risk from a position bought and sold on the same day,
is not captured; and
– DVaR does not indicate the potential loss beyond the 95th percentile.
In part due to the points above, and in part due to the desire to measure
risk beyond DVaR, Barclays uses additional metrics. These include
Expected Shortfall, 3W, Primary risk factor stress testing, Secondary risk
factor stress testing and Combined scenario stress testing.
Both Expected Shortfall and 3W metrics use the same two-year historical
simulation data set as used to calculate DVaR. Expected Shortfall is the
average of all one day hypothetical losses beyond the 95% confidence level
DVaR while 3W is the average of the three largest one day estimated losses.
Stress testing provides an estimate of potential significant future losses
that might arise from extreme market moves or scenarios. Primary stress
testing applies stress moves to key liquid risk factors for each of the major
trading asset classes including interest rate, credit spread, commodity,
equity and foreign exchange. Secondary stress testing applies stress
moves to less liquid risks such as option volatility skew. Combined scenario
stress testing applies simultaneous shocks to several risk factors, reflecting
a defined extraordinary, but plausible scenario e.g. what is the estimated
impact on profits of a fixed exchange rate becoming floating. This is
assessed by applying respective changes on foreign exchange rates,
interest rates, credit spreads and equities to the portfolio.
Risk control
Market Risk is controlled through the use of limits, where appropriate, on
the above risk measures. Limits are set at the total Barclays Capital level,
risk factor level e.g. interest rate risk, and business line level e.g. Emerging
Markets. Stress limits and many book limits, such as foreign exchange and
interest rate sensitivity limits, are also in place.
The total DVaR limit, risk factor DVaR limits, and 3W limit are approved
by the Board Risk Committee. Primary stress limits are approved by the
Chief Risk Officer and are tabled for noting by the Board Risk Committee.
Compliance with limits is monitored by Barclays Capital’s Market Risk team
with oversight provided by Group Market Risk.
In 2010, to further improve the application of the market risk control
framework, Group Market Risk initiated an ongoing programme of
conformance visits to Barclays Capital business areas. These visits
review both the current market risk profile and potential market risk
developments, as well as verifying conformance with Barclays Market
Risk Control Framework.
The oversight and governance of Barclays Capital’s market risk models
was also improved in 2010. This included making the model committee
more granular by having two distinct committees, one specifically for
model methodology and the other specifically for data integrity and
infrastructure. Group Market Risk is a member of both these committees.
Risk reporting
Barclays Capital Market Risk team produce a number of detailed and
summary market risk reports daily, weekly, fortnightly and monthly.
These include, new for 2010, the Executive Key Risk Report (daily) and
the Senior Management Significant Risk Pack (monthly). These reports
summarise the positions, risks and top stresses covering interest rate,
credit spread, commodity, equity and foreign exchange. Barclays Capital
market risk reports are sent to Group Market Risk for review and inclusion
in the Group Daily Market Risk Report.
Barclays PLC Annual Report 2010 www.barclays.com/annualreport10 119
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