Barclays 2007 Annual Report Download - page 105

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Business review
Barclays PLC Annual Report 2007 103
Traded 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. 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 105.
Traded market risk measurement
The measurement techniques used to measure and control traded market
risk include Daily Value at Risk and Stress Testing.
Daily Value at Risk (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.
DVaR uses the historical simulation method with a historic sample of two
years. The credit spread calculation takes into account specific risks
associated with different business names.
There are a number of considerations that should be taken into account
when reviewing DVaR numbers. These are:
– historical simulation assumes that the past is a good representation of
the future which may not always be the case.
– the assumed one day time horizon will not fully capture the market risk
of positions that cannot be closed out or hedged within one day.
– DVaR does not indicate the potential loss beyond the 98th percentile.
To complement DVaR, stress testing is performed and there is a large set
of non-DVaR limits including foreign exchange concentration limits and
interest rate delta limits.
DVaR is an important market risk measurement and control tool and
consequently the model is regularly assessed. The main approach employed
is the technique known as back-testing which counts the number of days
when trading losses exceed the corresponding DVaR estimate.
On the basis of DVaR estimated to a 98% confidence level, on average
there would be five days each year when trading losses would be expected
to exceed DVaR and would therefore be reflected as back-testing exceptions.
For Barclays Capital’s trading book, there were seven instances of a daily
trading loss exceeding the corresponding 98% back-testing DVaR.
These back-testing exceptions in 2007 reflected the increased volatility
across a number of markets in which Barclays Capital operates. There
were no instances of back-testing exceptions on a similar basis in 2006.
Stress testing provides an indication of the potential size of losses that
could arise in extreme conditions. The three main types of stress test are:
– risk factor: historical stress moves are applied to each of the risk
categories which include interest rate, credit spread, commodity,
equity and foreign exchange rate
– emerging market contagion: historical stress moves combined with
contagion factors are applied to the emerging markets portfolio
– scenario: stress scenarios are applied to the trading book
Stress results are produced at least fortnightly and are included in the
Traded Products Risk Review meeting information pack. If a potential
stress loss exceeds the corresponding 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.
Market Risk Director
Risk type ...managed by and reviewed by market risk and...
BGI
Barclays Capital
Global Retail and
Commercial Banking
Group Treasury
Pension Fund Trustees and
Barclays Central Functions
– BGI Global Risk and Compliance
Committee
– BGI Global Risk Investment
Committee
– Traded Products Risk
Review Meeting
– Asset and Liability Committees
– New product process team
– Supervisory visits from a central
risk team
– Treasury Committee
– Treasury Hedge Committee
– Investment Committee
– Barclays Pensions Board
Non-traded
– Banking book interest rate risk
– FX risk
– Banking book interest rate risk
– FX risk
– Pension risk
– Investment risk
– Asset management risk
Traded