Barclays 2014 Annual Report Download - page 287

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18 Fair value of financial instruments continued
Assets and liabilities move between Level 2 and Level 3 primarily due to (i) an increase or decrease in observable market activity related to an
input; or (ii) a change in the significance of the unobservable input, with assets and liabilities classified as Level 3 if an unobservable input is
deemed significant.
During 2014, transfers into Level 3 totalled £431m (2013: £15,024m). This was primarily due to:
Q £676m of government and government sponsored debt held as trading portfolio assets following a decrease in observable market activity for UK
Gilt strips;
Q £204m in fund and fund linked products held as trading portfolio assets;
Q £(346)m of government and government sponsored debt held as trading portfolio liabilities; and
Q £(108)m of certificates of deposit, commercial paper and other money market instruments which are designated as held at fair value through
profit and loss.
Transfers out of Level 3 totalled £155m (2013: £606m). This was primarily due to:
Q £215m of private equity investments held as financial assets designated at fair value through profit and loss;
Q £89m of non-asset backed loans held as trading portfolio assets; and
Q £(166)m of equity derivatives as a result of more observable valuation inputs.
Unrealised gains and losses on Level 3 financial assets and liabilities
The following table discloses the unrealised gains and losses recognised in the year arising on Level 3 financial assets and liabilities held at
year end.
Unrealised gains and losses recognised during the period on Level 3 assets and liabilities held at period end
As at 31 December
2014 2013
Income statement Other
compre-
hensive
income
£m
Total
£m
Income statement Other
compre-
hensive
income
£m
Total
£m
Trading
income
£m
Other
income
£m
Trading
income
£m
Other
income
£m
Trading portfolio assets 466 – – 466 222 – – 222
Financial assets designated at fair value 1,849 (9) – 1,840 (1,276) 10 – (1,266)
Available for sale assets – 572 80 652 – (5) 27 22
Trading portfolio liabilities (3) – – (3) – – – –
Financial liabilities designated at fair value 98 118 – 216 74 – – 74
Other – 5 – 5 (27) (31) – (58)
Net derivative financial instruments (238) – – (238) (411) (75) – (486)
Total 2,172 686 80 2,938 (1,418) (101) 27 (1,492)
The trading income of £1,849m within financial assets designated at fair value was primarily due to gains on the ESHLA fixed rate loan portfolio as
a result of a decrease in interest rate forward curves offset by the reduction in fair value of £935m arising from the valuation methodology change
described on page 281. The gains relating to interest rate curves are offset by a trading loss recognised on the Level 2 derivative instruments that
hedge the ESHLA loan portfolio interest rate risk.
Trading income of £466m on trading portfolio assets and net derivative financial instruments of £(238)m was driven by the effects of the decrease
in interest rate forward curves, with Level 3 assets and liabilities increasing over the period.
Other income of £572m on available for sale assets was driven by foreign exchange fluctuations and a £461m valuation gain on the US Lehman
acquisition assets.
Valuation techniques and sensitivity analysis
Sensitivity analysis is performed on products with significant unobservable inputs (Level 3) to generate a range of reasonably possible alternative
valuations. The sensitivity methodologies applied take account of the nature of valuation techniques used, as well as the availability and reliability
of observable proxy and historical data and the impact of using alternative models.
Sensitivities are dynamically calculated on a monthly basis. The calculation is based on range or spread data of a reliable reference source or a
scenario based on relevant market analysis alongside the impact of using alternative models. Sensitivities are calculated without reflecting the
impact of any diversification in the portfolio.
The valuation techniques used for the material products within Levels 2 and 3, and observability and sensitivity analysis for products within Level
3 are described below.
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