Barclays 2012 Annual Report Download - page 270

18 Fair value of financial instruments continued
Sensitivity analysis of valuations using unobservable inputs
Fair value Favourable changes Unfavourable changes
Product type
Total
assets
£m
Total
liabilities
£m
Income
statement
£m
Equity
£m
Income
statement
£m
Equity
£m
As at 31 December 2012
Commercial real estate loans 1,798 – 87 – (80) –
Asset backed products 4,175 (539) 299 7 (210) (7)
Other credit products 1,792 (1,178) 191 – (191) –
Derivative exposure to monoline insurers 592 – 164 – (268) –
Non-asset backed debt instruments 3,845 (1,687) 32 12 (26) (12)
Equity products 1,242 (1,688) 220 3 (214) (3)
Private equity 1,675 – 257 74 (225) (71)
Funds and fund-linked products 864 – 112 – (112) –
Foreign exchange products 216 (246) 46 – (46) –
Interest rate products 1,275 (1,117) 108 – (108) –
Commodity products 665 (582) 68 – (68) –
Other 4,321 (102) 67 – (70) –
Total 22,460 (7,139) 1,651 96 (1,618) (93)
As at 31 December 2011
Commercial real estate loans 2,452 – 102 – (118) –
Asset backed products 5,752 (1,020) 488 2 (388) (2)
Other credit products 4,386 (3,765) 167 – (167) –
Derivative exposure to monoline insurers 1,129 – – – (133) –
Non-asset backed debt instruments 4,213 (2,086) 24 – (22) –
Equity products 1,079 (1,531) 169 11 (169) (15)
Private equity 2,827 – 375 81 (364) (82)
Funds and fund-linked products 1,290 – 174 – (174) –
Foreign exchange products 457 (187) 57 – (57) –
Interest rate products 2,433 (2,090) 60 – (60) –
Commodity products 773 (991) 116 – (123) –
Other 5,232 (53) 196 – (196) –
Total 32,023 (11,723) 1,928 94 (1,971) (99)
The effect of stressing unobservable inputs to a range of reasonably possible alternatives alongside considering the impact of using alternative
models would be to increase fair values by up to £1.7bn (2011: £2.0bn) or to decrease fair values by up to £1.7bn (2011: £2.1bn) with substantially
all the potential effect impacting profit and loss rather than equity.
Discounting approaches for derivative instruments
During 2011, in line with market practice, the methodology for valuing certain collateralised interest rate products, principally in the Fixed Income
Rates business, was amended to reflect the impact of ‘cheapest to deliver’ collateral on discounting curves, where counterparty Credit Support
Annex (CSA) agreements specify the right of the counterparty posting collateral to choose the currency of collateral posted. During 2012, the
valuation of collateralised derivatives in other business areas was updated to reflect CSA aware discounting. The December 2012 impact of this
transition was not material to the overall valuation.
Additionally, during 2012, a fair value adjustment was applied to account for the impact of incorporating the cost of funding into the valuation of
uncollateralised derivatives. This was driven by the impact of discounting future expected uncollateralised cash flows to reflect the cost of funding,
taking into account observed traded levels on uncollateralised derivatives and other relevant factors.
The Group continues to monitor market practices and activity to ensure the approach to discounting in derivative valuation remains appropriate.
Complex derivative instruments
Valuation estimates made by counterparties with respect to complex derivative instruments, for the purpose of determining the amount of
collateral to be posted, often differ, sometimes significantly, from Barclays own estimates. In almost all cases, Barclays has been able to
successfully resolve such differences or otherwise reach an accommodation with respect to collateral posting levels, including in certain cases by
entering into compromise collateral arrangements. Due to the ongoing nature of collateral calls, Barclays will often be engaged in discussions with
one or more counterparties in respect of such differences at any given time. Valuation estimates made by counterparties for collateral purposes
are, like any other third-party valuation, considered when determining Barclays own fair value estimates.
barclays.com/annualreport268 I Barclays PLC Annual Report 2012
Notes to the financial statements
For the year ended 31 December 2012 continued