Barclays 2005 Annual Report Download - page 72

Barclays PLC
Annual Report 2005
70
Risk management
Market risk management
Barclays Capital’s market risk exposure, as measured by average total
Daily Value at Risk, decreased by 7% in 2005. This was mainly a
consequence of increased geographical and product diversification
resulting from business growth.
The graph below shows the history of total DVaR on a daily basis for
2004 and 2005.
Analysis of Trading Revenue
The histograms below show the distribution of daily trading revenue
for Barclays Capital in 2005 and 2004. It includes dealing profits, net
interest income and net fees and commissions relating to primary
trading. The average daily revenue in 2005 was £16.3m (2004: £12.5m)
and there were 237 positive revenue days out of 252 (2004: 246 positive
revenue days out of 254).
Barclays Capital’s Trading Revenue 2004 £m
Number of days
80
60
40
20
0
<0
6
24
77
61
47
15 10 86
0 to
<5
5 to
<10
10 to
<15
15 to
<20
Revenue (£m)
20 to
<25
25 to
<30
30 to
<35
35+
Number of days
80
60
40
20
0
Barclays Capital’s Trading Revenue 2005 £m
<0
8
19
45
59
42 35
15 12 17
0 to
<5
5 to
<10
10 to
<15
15 to
<20
Revenue (£m)
20 to
<25
25 to
<30
30 to
<35
35+
2004 2005
0
Total DVaR in 2004 and 2005 (daily values) £m
50
40
30
20
DVaR Back-testing
Barclays recognises the importance of assessing the effectiveness of its
DVaR model. The main approach employed is the technique known as
back-testing, which counts the number of days when trading losses
are bigger than the estimated DVaR figure. The regulatory standard for
backtesting is to measure DVaR assuming a one-day holding period
with a 99% level of confidence. For Barclays Capital’s regulatory
trading book, there were no instances in 2005 or 2004, of a daily
trading revenue loss exceeding the corresponding back-testing DVaR.
Asset and Liability Market Risk
Interest rate exposures arising from mismatches of fixed rate assets
and liabilities in UK banking operations are passed to Treasury.
Treasury aggregates these positions and then passes the net position
to the market via Barclays Capital. Due mainly to timing considerations,
market risk can arise when some of the net position stays with
Treasury. Similarly, market risk can arise due to the impact of interest
rates on customer behaviour. The latter risk is managed and measured
by the Retail Market Risk team using behavioural models. The positions
are converted into wholesale swap or option exposures, passed to
Treasury and managed by the process described above.
Structural interest rate risk arises from the variability of income from
non-interest bearing products, managed variable rate products and the
Group’s equity. This risk is managed by Treasury, assisted by the Retail
Market Risk team.