Barclays 2006 Annual Report Download - page 238

Notes to the accounts
For the year ended 31st December 2006
Barclays PLC
Annual Report 2006
234
52 Financial risks (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, commodity prices, equity prices and foreign exchange rates.
The main market risks arise from trading activities. Barclays is also exposed to non-trading market risks to asset and liability management and to the
Pension Fund.
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. Barclays also incurs market risks that are assessed under a slightly different framework. The principal risks of this type are
defined benefit pension scheme risk and asset management structural market risk.
The Board 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, sets a limit framework within the context of the approved market risk appetite. A daily market
risk report summarises Barclays market risk exposures against agreed limits. This daily report is sent to the Risk Director, the Market Risk Director, the
Finance Director and the appropriate Business Risk Directors.
In Barclays Capital, the Head of Market Risk is responsible for implementing the market risk control framework. Day to day responsibility for market
risk lies with the senior management of Barclays Capital, supported by the 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 types of trading market risk:
interest rate, inflation, credit spread, commodity, equity and foreign exchange. A more detailed trading market risk presentation is produced
fortnightly and discussed at Barclays Capital’s Traded Products Risk Review meeting. The attendees at this meeting include the senior managers
from Barclays Capital and the central market risk team.
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.
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 rate, inflation, credit spread,
commodity, equity and foreign exchange rate; emerging market stress testing where emerging market portfolios are subject to stress movements;
and ad hoc stress testing, which includes applying stress scenarios to the trading risk book.
If potential stressed losses exceed the trigger limit, the positions captured by the stress test are reviewed and discussed by Barclays Capital Market
Risk and the respective senior management.
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.
Economic capital
The total average economic capital required by the Group is determined by risk assessment models and after considering the Group’s estimated
portfolio effects. Methodologies are used for both operational and business risks to calculate risk sensitive capital allocations. The Group regularly
enhances its economic capital methodologies and benchmarks outputs to external reference points. Economic capital is allocated on a consistent
basis across all of the Group’s businesses and risk activities, and these allocations reflect varying levels of risk.
Trading Market Risk
Group 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, client and market activities are managed together.