Barclays 2005 Annual Report Download - page 221

54 Financial risk management (continued)
Market Risk Management
Market Risk is the risk that Barclays 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, credit spreads, foreign exchange rates, equity prices, and commodity prices.
The main market risks arise from trading activities. Barclays is also exposed to non-trading market risks relating to the Pension Fund and, to a
lesser extent, asset and liability management.
Categorisation of Market Risk
To facilitate the management, control, measurement and reporting of market risk, Barclays has grouped market risk into three broad categories:
Trading market risk
These risks arise in trading transactions where Barclays acts as principal with clients or with the market. Barclays policy is that market risks arising
from trading activities are concentrated in Barclays Capital.
Asset and liability risk
These risks arise from banking activities, including those incurred on non-trading positions such as customer assets and liabilities and capital
balances.
Other market risks
In some instances Barclays also incurs market risks that do not fit into the above categories. The principal risks of this type are defined benefit
pension scheme risk and asset management structural market risk.
Market Risk Management and Control Responsibilities
The Board Risk Committee approves the market risk appetite for all types of market risk. The Market Risk Director is responsible for the market risk
control framework and, under delegated authority from the Risk Director and Risk Oversight Committee, sets a limit framework within the context
of the approved market risk appetite.
The Market Risk Director is assisted by a central market risk team and by risk management departments in the businesses.
In Barclays Capital, the Head of Market Risk is responsible for the market risk governance and control framework. Day-to-day responsibility for
market risk lies with the senior management of Barclays Capital, supported by the Global Market Risk Management team that operates
independently of the trading areas. Daily market risk reports are produced for the main Barclays Capital business areas covering the six main risk
factor categories, namely interest rate, credit spread, inflation, foreign exchange, equity and commodity risk.
Market Risk Measurement
The measurement techniques used to measure and control market risk include:
Daily Value at Risk (DVaR);
Stress Tests;
Annual Earnings at Risk;
Economic Capital.
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.
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 six risk categories as discussed above: 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 potential stress loss exceeds the trigger limit, the positions captured by the stress test are reviewed and discussed by Barclays Capital Market
Risk and the respective Business Head(s).
Outside Barclays Capital, stress testing is carried out by the business centres and is reviewed by the senior management and business-level asset
and liability committees. The stress testing is tailored to the business and is typically scenario analysis and historical stress movements applied to
respective portfolios.
Annual Earnings at Risk (AEaR) 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 Base II framework for assessing banking book
interest rate risk.
AEaR is used to measure structural interest rate market risk and structural asset management risk.
Barclays PLC
Annual Report 2005 219
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