Barclays 2003 Annual Report Download - page 65

Barclays PLC Annual Report 2003 63
The US Securities and Exchange Commission requires
disclosures relating to certain trading activities,
particularly energy trading and commodity trading
through non-exchange traded contracts.
The Group delivers a fully integrated service to clients for base metals,
precious metals, energy products (covering US natural gas, oil and oil-
related products) and European power and gas through Barclays Capital.
The base and precious metals business enters into outright metal
purchase and sales transactions as well as the associated ‘over the
counter’ (OTC) and exchange traded derivatives. The energy business
deals in commodity derivative contracts but does not maintain any
physical exposures. Structured products are also developed and offered
in respect of energy, base and precious metal and power and gas
commodities. The European power and gas business trades both physical
forwards and derivative contracts.
The Group’s commodity business continues to expand, as market
conditions allow, both through the addition of new products and
markets in European power and gas, and the continuing growth in the
existing metals and energy trading volumes.
The Group’s principal commodity related derivative contracts are swaps,
options, forwards and futures, which are similar in nature to such non-
commodity related contracts. Commodity derivatives contracts include
commodity specification and delivery location as well as forward date
and notional values.
The fair values of commodity physical and derivative positions are
determined through a combination of recognised market observable
prices, exchange prices and established inter-commodity relationships.
In common with all derivatives, the fair value of OTC commodity
derivative contracts is either determined using a quoted market price
or by using valuation models. Where a valuation model is used, the fair
value is determined based on the expected cash flows under the terms
of each specific contract, discounted back to present value. The expected
cash flows for each contract are either determined using market
parameters such as commodity price curves, commodity volatilities,
interest rate yield curves and foreign exchange rates, or derived from
historical or other market prices.
Fair values generated by models are independently validated with
reference to market price quotes, or price sharing with other
institutions. However, where no observable market parameter is available
then instrument fair value will include a provision for the uncertainty in
that parameter based on sale price or subsequent traded levels.
Discounting of expected cash flows back to present value is achieved
by constructing discount curves from the market price of observable
interest rate products, such as deposits, interest rate futures and swaps.
In addition, the Group maintains fair value adjustments reflecting the
cost of credit risk (where this is not embedded in the fair value), future
administration costs associated with ongoing operational support of
products, the cost of exiting illiquid or significant positions, as well as
the cost of trading out of a position (all positions are marked to mid-
market and hence the bid/offer cost would be incurred).
The tables on page 64 analyse the overall fair value of the commodity
derivative contracts by movement over time and source of fair value.
Additionally, the positive fair value, adjusted for the impact of netting,
of such contracts is analysed by counterparty credit risk rating.
Risk Management
Disclosures about Certain Trading Activities including Non-exchange Traded Contracts