Barclays 2011 Annual Report Download - page 122

Risk management
Credit risk continued
Analysis of indirect exposures
Indirect exposure to sovereigns can arise through a number of different sources, including credit derivatives referencing sovereign debt; guarantees to
savings and investment funds which hold sovereign risk; lending to financial institutions who themselves hold exposure to sovereigns and guarantees,
implicit or explicit, by the sovereign to the Group’s counterparties. A geographic and industrial analysis of the Group’s loans and advances, including
lending to European counterparties by type, is set out on pages 93 to 94.
Credit derivatives referencing sovereign debt
The Group enters into credit mitigation primarily for risk management purposes for which the reference asset is government debt. These have the net
effect of reducing the Group’s exposure in the event of sovereign default. An analysis of the Group’s credit derivatives referencing sovereign debt is
presented below.
As at 31 December 2011 Spain
£m
Italy
£m
Portugal
£m
Ireland
£m
Greece
£m
Belgium
£m
Fair value
– Bought 919 1,934 1,047 538 2,197 223
– Sold (917) (1,836) (1,023) (538) (2,257) (227)
Net derivative fair value 2 98 24 – (60) (4)
Contract notional amount
– Bought (9,429) (14,056) (3,659) (2,782) (3,300) (2,755)
– Sold 9,270 13,584 3,609 2,733 3,379 2,755
Net derivative notional amount (159) (472) (50) (49) 79 –
Impact of credit derivatives in the event of sovereign default
(notional less fair value of protection)
(157) (374) (26) (49) 19 (4)
The fair values and notional amounts of credit derivative assets and liabilities would be lower than reported under IFRS if netting was permitted for
assets and liabilities with the same counterparty or for which we hold cash collateral. An analysis of the effects of such netting is presented below.
As at 31 December 2011 Spain
£m
Italy
£m
Portugal
£m
Ireland
£m
Greece
£m
Belgium
£m
Fair value
– Bought 326 681 346 170 669 69
– Sold (324) (583) (322) (170) (729) (73)
Net derivative fair value 2 98 24 – (60) (4)
Contract notional amount
– Bought (2,924) (4,742) (1,027) (854) (1,019) (859)
– Sold 2,765 4,270 977 805 1,098 859
Net derivative notional amount (159) (472) (50) (49) 79 –
Impact of credit derivatives in the event of sovereign default
(notional less fair value of protection)
(157) (374) (26) (49) 19 (4)
Credit derivatives (principally credit default swaps (CDS) and total return swaps) are arrangements whereby the default risk of an asset (reference
asset) is transferred from the buyer to the seller of protection. The majority of credit derivatives referencing sovereign assets are bought and sold to
support customer transactions and for risk management purposes. Wherever possible, the Group matches the maturity of derivative protection bought
with the maturity of the underlying reference assets to help maximise the effectiveness of the mitigation against the exposure.
The contract notional amount represents the value of the reference asset being insured, while the fair value represents the change in value of the
reference asset, adjusted for the creditworthiness of the counterparty providing the protection. The net derivative notional amount, representing a
reduction in exposures, is not included in the country tables but should be considered alongside the direct exposures shown.
Sovereign CDS would trigger on the occurrence of a credit event as determined by ISDA’s Determination Committee. CDS positions are monitored
considering counterparty, country of counterparty and concentration level with respect to counterparties and sovereigns. Further information on the
credit quality of the Group’s derivative assets is presented on page 107.
Group guarantees relating to savings and investment funds
The Group has indirect sovereign exposure through the guarantee of certain savings and investment funds, which hold a proportion of their assets
in sovereign debt. As at 31 December 2011, the recognised liability in respect of these guarantees was £41m, with a £1.5bn gross notional exposure.
In addition, a Group associate, Vida Y Pensiones Compania De Seguros, holds investments with a total fair value of £1.2bn relating to certain customer
investment products, of which a proportion are guaranteed and the majority comprise sovereign, financial institution and corporate debt in Eurozone
countries.
120 Barclays PLC Annual Report 2011 www.barclays.com/annualreport