Barclays 2005 Annual Report Download - page 71

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)
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 Basel II framework for assessing banking book
interest rate risk.
AEaR is used to measure structural interest rate market risk and
structural asset management risk (see the Other Market Risks section
(page 71) for more details).
Economic Capital
Economic capital methodologies are used to calculate risk sensitive
capital allocations for businesses incurring market risk. Consequently,
the businesses incur capital charges related to their market risk.
Trading Market Risk
Barclays policy is to concentrate trading activities in Barclays Capital.
This 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, Barclays 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 Barclays requirements.
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 77.
Analysis of Trading Market Risk Exposures
The table below shows the DVaR statistics for Barclays Capital’s trading
activities (trading book and banking book).
Barclays Capital DVaR: Summary table for 2005 and 2004
12 months to 12 months to
31st December 2005 31st December 2004
Average High(a) Low(a) Average High(a) Low(a)
£m £m £m £m £m £m
Interest rate risk 25.3 44.8 15.4 25.0 53.6 15.1
Credit spread risk 23.0 28.3 19.0 22.6 32.9 16.0
Foreign exchange risk 2.8 5.3 1.4 2.4 7.4 0.9
Equities risk 5.9 8.2 3.9 4.2 7.9 2.2
Commodities risk 6.8 11.4 4.5 6.0 14.4 2.2
Diversification effect (31.9) – – (25.9) – –
Total DVaR(b) 31.9 40.4 25.4 34.3 46.8 24.0
Notes
(a) The high (and low) DVaR figures reported for each category did not necessarily occur on the same day as the high (and low) DVaR reported as a whole.
Consequently, a diversification effect number for the high (and low) DVaR figures would not be meaningful and it is therefore omitted from the above table.
(b) The year-end total DVaR for 2005 was £37.4m (2004: £31.9m).
Barclays PLC
Annual Report 2005 69
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