Barclays 2003 Annual Report Download - page 62

Risk Management
Market Risk Management
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Market Risk Management
Market risk is the risk that the Group’s earnings or capital,
or its ability to meet business objectives, will be adversely
affected by changes in the level or volatility of market
rates or prices such as interest rates including credit
spreads, foreign exchange rates, equity prices, and
commodity prices.
Market risk management and control responsibilities
The market risk management policies of the Group are determined by
the Group Risk Oversight Committee, which also recommends overall
market risk appetite, via the Group Executive Committee, to the Board
Risk Committee. The Group’s policy is that the market risks associated
with the Group’s business activities are clearly identified, assessed and
controlled within agreed limits and that the market risks arising from
trading activities are concentrated in Barclays Capital.
The Group Market Risk Director is responsible for the content,
effectiveness and efficiency of the Group’s market risk control
framework, and is assisted by risk management departments in the
Group’s businesses and a central market risk management team. The
Group Market Risk Director reports to the Group Financial Risk Director
who reports to the Group Risk Director.
The Group Risk Oversight Committee allocates a total Daily Value at Risk
(DVaR) limit for the Group and delegates the day-to-day control and
monitoring of market risk to the Group Market Risk Director, who sets
limits for each business area. To assist this process, a market risk report
is produced daily which summarises the Group’s market risk exposures
against agreed limits. Data for this report is supplied by the business
areas. This daily report is sent to the Group Risk Director, the Group
Financial Risk Director, the Group Market Risk Director, the Group
Finance Director and the appropriate Business Risk Directors.
A more detailed market risk report is presented each month by the
Group Market Risk Director to the Group Risk Oversight Committee.
This report brings to the attention of all Committee members current
Group market risk exposures and issues along with relevant
background information.
Each business area of the Group is accountable for identifying,
measuring and managing all market risks associated with its activities.
In managing market risk, businesses must consider asset liquidity risk
and funding liquidity risk where these issues are relevant.
Market risk measurement
Barclays uses DVaR as the primary mechanism for controlling market
risk. DVaR is an estimate, with a confidence level of 98%, of the
potential loss which might arise if the current positions were to be held
unchanged for one business day. Daily losses exceeding the DVaR figure
are likely to occur, on average, twice in every 100 business days.
Where DVaR does not adequately measure the risk, alternative methods
are used such as Annual Earnings at Risk. Annual Earnings at Risk
measures the sensitivity of annual earnings to shocks in market rates at
the 99th percentile for change over a one-year period. This shock is
consistent with the standardised interest rate shock recommended by
the Basel II framework for assessing banking book interest rate risk.
To facilitate the identification, measurement, control and reporting of
market risk, Barclays has categorised market risk into three broad
categories as described below:
(i) Trading market risk
Trading includes transactions where Barclays Capital acts as principal
with clients or with the market. A detailed review of this risk is
provided below.
(ii) Asset and liability management
The Group encounters risks in managing its assets and liabilities.
A detailed review of these risks is covered in the Treasury Asset and
Liability Management section on pages 66 to 69.
(iii) Other market risks
In some instances, the Group incurs market risks that do not fit into the
above categories. The principal risks of this type are asset management
structural market risk and defined benefit pension scheme risk. These
are covered below.
Trading Market Risk
As mentioned above, the Group’s policy is to concentrate trading
activities in Barclays Capital. Trading includes transactions where
Barclays Capital acts as principal with clients or with the market.
For maximum efficiency, Barclays manages client and market activities
together. In Barclays Capital, trading risk occurs in both the trading
book and the banking book as defined for regulatory purposes.
In anticipation of future customer demand, the Group maintains access
to market liquidity by quoting bid and offer prices with other market
makers and carries an inventory of capital market and treasury
instruments, including a broad range of cash, securities and derivatives.
Trading positions and any offsetting hedges are established as
appropriate to accommodate customer or Group requirements. Barclays
Capital takes principal positions in the interest rate, credit spread,
foreign exchange, equity and commodity markets based on expectations
of customer demand or a change in market conditions.
Derivatives entered into for trading purposes include swaps, forward rate
agreements, futures, credit derivatives, options and combinations of
these instruments. For a description of the nature of derivative
instruments, see page 65.