Barclays 2005 Annual Report Download - page 70

Barclays PLC
Annual Report 2005
68
Risk management
Market risk management
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. In 2005, the DVaR methodology for
credit spread risk was enhanced. The original methodology is currency
dependent and incorporates seven credit categories, these being
interest rate swaps and six credit rating based categories. The enhanced
‘specific credit spread’ method replaces the rating and currency-based
approach with a name specific approach and was rolled out in phases
across a number of business lines. The enhanced model captures
concentration risk and responds quickly to changing market conditions
and individual company circumstances. ‘Specific credit spread’ risk is
reported within credit spread risk in the DVaR table.
Also in 2005, a methodology enhancement was introduced for
inflation products. Inflation risk is reported within interest rate risk in
the DVaR table.
The impact of these methodology changes was not material and has
not been reflected in the 2004 comparative data.
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 70. Outside Barclays Capital, Barclays uses a simplified
approach to calculate DVaR.
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, namely
interest rates, credit spread, inflation, 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 Barclays
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