Barclays 2004 Annual Report Download - page 64

Risk management
Market risk management
62
Market Risk Measurement
The measurement techniques used to measure and control market
risk include:
•Daily Value at Risk;
•Stress Tests;
•Annual Earnings at Risk;
•Economic capital.
Daily Value at Risk (DVaR)
DVaR is an estimate of the potential loss which might arise from
unfavourable market movements, if the current positions were to be
held unchanged for one business day, measured to a confidence level
of 98%. Daily losses exceeding the DVaR figure are likely to occur, on
average, twice in every 100 business days.
In Barclays Capital, DVaR is an important market risk measurement
tool. DVaR is calculated using the historical simulation method with
a historical sample of two years. Barclays Capital’s interest rate DVaR
methodology allows the measurement process to discriminate
between the market risk of holding bonds of differing credit quality,
for example AAA grade securities as against BBB grade securities.
This is achieved by incorporating eight interest rate credit categories,
these being government, interest rate swaps and six credit grades
for non-government exposures. We have initiated an extension to this
model to incorporate issuer specific risk. Outside Barclays Capital,
DVaR is calculated using a simplified approach.
The effectiveness of the DVaR model is assessed principally by back-
testing which counts the number of days when trading-related losses
are bigger than the estimated DVaR figure. Back-testing results are
shown on page 64.
Stress Tests
Stress tests provide an indication of the potential size of losses that
could arise in extreme conditions. The stress tests carried out by
Barclays Capital include risk factor stress testing where stress
movements are applied to each of the five risk categories, namely
interest rates, credit spreads, foreign exchange rates, and equity and
commodity prices; emerging market stress testing where emerging
market portfolios are subject to stress movements; and ad-hoc stress
testing, which includes applying possible stress events to specific
positions or regions e.g. the stress outcome to a region following
a currency peg break.
If the potential stress loss exceeds the trigger limit, the positions
captured by the stress test are reviewed and discussed by Capital
Market Risk and the respective Business Head(s). The minutes of the
discussion, including the merits of the position and the appropriate
course of action, are then sent to the Market Risk Director for review.
•Traded Products Risk Review
Committee.
Market Risk
Director
Barclays Capital
Other
Treasury
Overseas Treasuries
Asset and liability risk
•Treasury management market risk.
•Structural interest rate risk.
•Retail market risk.
•Overseas treasury market risk.
Trading risk
and reviewed by Market
Risk and…
…managed byRisk Type
Other market risks
•Pension Fund.
•Asset management.
•Treasury Committee.
•Treasury Hedging Committee.
•Business-level Asset and
Liability Committees.
•New product process.
•Business-level Asset and
Liability Committees.
•Barclays Market Risk supervision visits.
•New product process.
•Barclays Pension Governance Group.
Retail Market Risk
Managing market risk – organisational overview