Barclays 2006 Annual Report Download - page 239

Barclays PLC
Annual Report 2006 235
Financial statements
3
52 Financial risks (continued)
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.
Analysis of trading market risk exposures
The table below shows the DVaR statistics for Barclays Capital’s trading activities:
Barclays Capital DVaR: Summary table for 2006 and 2005
12 months to 12 months to
31st December 2006 31st December 2005(b)
Average High(a) Low(a) Average High(a) Low(a)
£m £m £m £m £m £m
Interest rate risk 20.1 28.8 12.3 25.4 44.8 15.4
Credit spread risk 24.3 33.1 17.9 23.0 28.3 19.0
Commodities risk 11.3 21.6 5.7 6.8 11.4 4.5
Equities risk 7.8 11.6 5.8 6.0 8.3 3.9
Foreign exchange risk 4.0 7.7 1.8 2.8 5.4 1.6
Diversification effect (30.4) n/a n/a (32.0) n/a n/a
Total DVaR 37.1 43.2 31.3 32.0 40.7 25.4
The graph below shows the history of total DVaR on a daily basis for 2005 and 2006.
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 2006 or 2005, of a daily trading revenue loss exceeding the corresponding back-testing DVaR.
Asset and Liability Market Risk
Interest rate exposures arise from mismatches of fixed rate assets and liabilities in UK banking operations and are passed to Treasury where these
positions are aggregated and the net position passed 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 outlined 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. Structural foreign currency risk results from holding non-Sterling investments in subsidiaries, branches, associates or joint ventures.
These structural risks are managed by Treasury.
Interest rate exposures, structural interest rate risk and other market risks may be managed through the use of derivatives. Where this is the case,
hedge accounting is obtained where possible so that the benefits of Risk management are reflected in the financial statements.
Liquidity Risk Management
Liquidity risk is the risk that the Group is unable to meet its payment obligations when they fall due or to replace funds when they are withdrawn.
The Group has several core liquidity management strategies. The first is to project future cash flows and make plans to address normal operating
requirements, as well as variable scenarios and contingencies. The second is to manage day to day funding, by controlling intraday liquidity in real
DVaR in 2005 and 2006 (daily values) (£m)
05 06
0
20
30
40
50
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) 2005 has been restated. The increase reflects the inclusion of Absa Capital.