Barclays 2011 Annual Report Download - page 235

20 Fair value of financial instruments continued
Non-asset backed debt instruments
These are government bonds, US agency bonds, corporate bonds, commercial paper, certificates of deposit, convertible bonds, notes and other
non-asset backed bonds. Within this population, valuation inputs are unobservable for certain convertible bonds and corporate bonds.
Liquid government bonds actively traded through an exchange or clearing house are marked to the closing levels observed in these markets. Less liquid
government bonds, US agency bonds, corporate bonds, commercial paper and certificates of deposit are valued using observable market prices which
are sourced from broker quotes, inter-dealer prices or other reliable pricing services. Where there are no observable market prices, fair value is
determined by reference to either issuances or CDS spreads of the same issuer as proxy inputs to obtain discounted cash flow amounts. In the absence
of observable bond or CDS spreads for the respective issuer, similar reference assets or sector averages are applied as a proxy (the appropriateness of
proxies being assessed based on issuer, coupon, maturity and industry).
Convertible bonds are valued using prices observed through broker sources, market data services and trading activity. Where reliable external sources
are not available, fair value is determined using a spread to the equity conversion value or the value of the bond without the additional equity
conversion. The spread level is determined with reference to similar proxy assets.
Fair valued issued notes are valued using discounted cash flow techniques and industry standard models incorporating various observable input
parameters depending on the terms of the instrument. Any unobservable inputs generally have insignificant impact on the overall valuation.
Equity products
This category includes listed equities, exchange traded equity derivatives, OTC equity derivatives, preference shares and contracts for difference.
OTC equity derivatives valuations are determined using industry standard models. The models calculate fair value based on input parameters such as
stock prices, dividends, volatilities, interest rates, equity repo curves and, for multi-asset products, correlations. In general, input parameters are deemed
observable up to liquid maturities which are determined separately for each parameter and underlying instrument. Unobservable model inputs are
determined by reference to liquid market instruments and applying extrapolation techniques to match the appropriate risk profile.
Private equity
Private equity investments are valued in accordance with the ‘International Private Equity and Venture Capital Valuation Guidelines’. This requires the
use of a number of individual pricing benchmarks such as the prices of recent transactions in the same or similar entities, discounted cash flow analysis,
and comparison with the earnings multiples of listed comparative companies. Unobservable inputs include earnings estimates, multiples of
comparative companies, marketability discounts and discount rates. Model inputs are based on market conditions at the reporting date. The valuation
of unquoted equity instruments is subjective by nature. However, the relevant methodologies are commonly applied by other market participants and
have been consistently applied over time. Full valuations are performed at least bi-annually, with the portfolio reviewed on a monthly basis for material
events that might impact upon fair value.
Funds and fund-linked products
This category includes holdings in hedge funds, funds of funds, and fund derivatives. Fund derivatives are derivatives whose underlyings include mutual
funds, hedge funds, fund indices and multi-asset portfolios. They are valued using underlying fund prices, yield curves and other available market
information.
In general, fund holdings are valued based on the latest available valuation received from the fund administrator. Funds are deemed unobservable
where the fund is either suspended, in wind-down, has a redemption restriction that severely affects liquidity, or where the latest net asset value from
the fund administrators is more than three months old. In the case of illiquid fund holdings the valuation will take account of all available information in
relation to the underlying fund or collection of funds and maybe adjusted relative to the performance of relevant index benchmarks.
Foreign exchange products
These products are derivatives linked to the foreign exchange market. This category includes forward contracts, FX swaps and FX options. Exotic
derivatives are valued using industry standard and bespoke models.
Input parameters include FX rates, interest rates, FX volatilities, interest rate volatilities, FX interest rate correlations and others as appropriate. Certain
correlations and long dated forward and volatilities are unobservable. Unobservable model inputs are set by referencing liquid market instruments and
applying extrapolation techniques to match the appropriate risk profile.
Barclays PLC Annual Report 2011 www.barclays.com/annualreport 233
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