Barclays 2006 Annual Report Download - page 91

Barclays PLC
Annual Report 2006 87
Operating review
1
Market risk measurement
The 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.
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 88. 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 main 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 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 Barclays Capital 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.
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 88) for more details).
Economic capital
Economic capital methodologies calculate market risk sensitive capital
allocations and are used to determine each business’s capital charge.
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 94.
Analysis of trading market risk exposures
The table below shows the DVaR statistics for Barclays Capital’s trading
activities (trading book and banking book).
Total DVaR as at 31st December 2006 was £41.9m (31st December
2005: £37.6m(c)). Barclays Capital’s market risk exposure, as measured
by average total Daily Value at Risk (DVaR), increased by 16% to £37.1m
(2005: £32.0m(a)). Interest rate risk fell while non-interest rate risks were
higher, primarily in commodities. The range of total DVaR between high
and low was consistent with 2005 and diversification across risk types
remained significant, reflecting the broad business mix.
Barclays Capital DVaR: Summary table for 2006 and 2005
12 months to
31st December 2006
Average High(b) Low(b)
£m £m £m
Interest rate risk 20.1 28.8 12.3
Credit spread risk 24.3 33.1 17.9
Commodities risk 11.3 21.6 5.7
Equities risk 7.8 11.6 5.8
Foreign exchange risk 4.0 7.7 1.8
Diversification effect (30.4) n/a n/a
Total DVaR 37.1 43.2 31.3
12 months to
31st December 2005(a)
Average High(b) Low(b)
£m £m £m
Interest rate risk 25.4 44.8 15.4
Credit spread risk 23.0 28.3 19.0
Commodities risk 6.8 11.4 4.5
Equities risk 6.0 8.3 3.9
Foreign exchange risk 2.8 5.4 1.6
Diversification effect (32.0) n/a n/a
Total DVaR 32.0 40.7 25.4
Notes
(a) 2005 has been restated. The increase reflects the inclusion of Absa Capital.
(b) 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.
(c) This was previously reported as £37.4m. The increase reflects the inclusion of Absa Capital.