Barclays 2011 Annual Report Download - page 124

Risk management
Market risk continued
The Market Risk Committee approves, and makes recommendations concerning the market risk profile across Barclays. This includes approving Barclays
Market Risk Control Framework and Group Policies; reviewing current and forward issues, limits and utilisation; and proposing risk appetite levels for the
Board. The Committee is chaired by the Group Market Risk Director and attendees include the Chief Risk Officer, respective business risk managers,
group treasury and senior managers from Group Market Risk as well as Internal Audit.
The head of each business, assisted by market risk management, is accountable for all market risks associated with its activities. The head of each
business market risk team is responsible for implementing the risk control framework for non-traded market risk, while Barclays Capital Market Risk
implements the risk control framework for traded market risk. The control frameworks for traded, non-traded and pensions risk are all governed by
the Barclays Market Risk Control Framework, which sets out how market risk should be identified, measured, controlled, reported and reviewed. The
Framework also outlines and references Group Market Risk policies.
Market risk oversight and challenge is provided by business committees, Group committees including the Market Risk Committee and Group Market
Risk. The chart above gives an overview of the business control structure.
Traded market risk (audited)
Traded market risk arises primarily as a result of client facilitation in wholesale markets. This involves market making, risk management solutions and
execution of syndications. Mismatches between client transactions and hedges result in market risk. In Barclays Capital, trading risk is measured for
the trading book, as defined for regulatory purposes, and certain banking books.
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 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. For management purposes Barclays Capital uses a historical simulation methodology with a two-year equally weighted historical period,
at the 95% confidence level for all trading portfolios and certain banking books.
Market volatility in 2011 was heightened, particularly in the second half, by uncertainty on the future economic growth and the sovereign debt crisis.
The high volatility observations of early 2009 rolled-out of the two year DVaR historical data set, however new tail points were added in the second half
of 2011.
As defined by the FSA, a green model is consistent with a good working DVaR model and is achieved for models that have four or fewer 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 2011.
The DVaR model is regularly assessed and reviewed internally by Group Executive Models Committee and within Barclays Capital.
When reviewing DVaR estimates the following considerations should be taken into account:
– 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 to mitigate these issues, Barclays also uses Expected Shortfall and 3W metrics which 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 tests
apply stress moves to key liquid risk factors for each of the major trading asset classes including interest rate, credit, commodity, equity foreign
exchange and securitised products. Secondary stress tests apply stress moves to less liquid risks. Combined scenarios apply simultaneous shocks to
several risk factors, reflecting defined extraordinary, but plausible macro scenarios. This is assessed by applying respective changes on foreign exchange
rates, interest rates, credit spreads, commodities and equities to the portfolio.
In 2011, Barclays Capital implemented new regulatory risk models to comply with the CRD3 revisions to the market risk capital requirement. These were
Stressed VaR (SVaR), Incremental Risk Charge (IRC) and the All Price Risk (APR). All three models were approved by the FSA for calculation of regulatory
capital for designated trading book portfolios. The SVaR approval matches the scope of the DVaR model as used for regulatory capital calculations.
SVaR is an estimate of the potential loss arising from a 12 month period of significant financial stress. SVaR uses DVaR methodology based on inputs
calibrated to historical data from a continuous 12 month period that maximises the DVaR based capital at a 99% one-tailed confidence limit.
IRC is computed on all fixed income positions subject to specific market risk. It calculates the incremental risk arising from rating migrations and
defaults, beyond what is already captured in specific market risk, to a 99.9% confidence level over a one year holding period.
122 Barclays PLC Annual Report 2011 www.barclays.com/annualreport