Barclays 2007 Annual Report Download - page 106

Risk management
Market risk management
104 Barclays PLC Annual Report 2007
Analysis of traded market risk exposures
The analysis of traded market risk exposures is given in Note 46.
Analysis of trading revenue
The histograms show the distribution of daily trading revenue for Barclays
Capital in 2007 and 2006. Revenue includes net trading income, net
interest income and net fees and commissions relating to primary trading.
The average daily revenue in 2007 was £26.2m (2006: £22.0m) and
there were 224 positive revenue days out of 253 (2006: 243 out of 252).
The number of negative revenue days increased in 2007 largely as a result
of volatile markets in the second half of the year. The number of large
positive revenue days also increased but these were spread across the year.
Interest rate risk in the banking book
Interest rate risk arises from the provision of retail and wholesale
(non-traded) banking products and services, as well as structural
exposures within Barclays balance sheet.
The management approach of Barclays with respect to interest rate risk
is to transfer the risk from the businesses either into local treasuries or to
Group Treasury using an internal transfer price or interest rate swap. The
methodology used to transfer this risk depends on whether the product
contains yield curve risk, basis risk or customer optionality. Limits exist to
ensure no material risk is retained within any business or product area.
Once each business’s risk has been transferred, the treasuries manage
any residual yield curve and basis risks subject to modest risk limits and
other controls. Market risk is also taken in overseas treasuries, within
these limits, to support and facilitate customer activity.
Risk measurement
The techniques used to measure and control interest rate risk in the
banking book include Annual Earnings at Risk, Daily Value at Risk and
Stress Testing.
Annual Earnings at Risk (AEaR) measures the sensitivity of net interest
income (NII) over the next 12 months. It is calculated as the difference
between the estimated income using the current yield curve and the
lowest estimated income following a 50 basis points increase or decrease
in interest rates.
Outside Barclays Capital, Barclays uses a simplified approach to calculate
DVaR. It is used as a complementary tool to AEaR. Both AEaR and DVaR are
supplemented by stress testing and a range of non-DVaR limits.
Stress testing is carried out by the business centres and is reviewed by senior
management and business-level asset and liability committees. The stress
testing is tailored to the business and typically incorporates scenario
analysis and historical stress movements applied to respective portfolios.
Analysis of interest rate risk in the banking book exposures
The analysis of interest rate risk in the banking book is given in Note 46.
Other market risks
Barclays maintains a number of defined benefit pension schemes for
past and current employees. The ability of the Pension Fund to meet the
projected pension payments is maintained through investments and
regular Bank contributions. Pension risk arises because: the estimated
market value of the pension fund assets might decline; or their investment
returns might reduce; or the estimated value of the pension liabilities
might increase. In these circumstances, Barclays could be required or
might choose to make extra contributions to the pension fund. Financial
details of the pension fund are in Note 30.
Investment risk is the risk of financial volatility arising from changes in the
market value of investments, principally occurring in Barclays insurance
companies. These investments may comprise various liquid instruments,
such as cash, bonds and listed equities, to cover future insurance liability
flows, and may therefore give rise to a mismatch between the revaluation
of assets and liabilities. It is Barclays policy to hedge such exposures in line
with a defined risk appetite.
Barclays policy is for foreign exchange trading risk to be concentrated
and managed in Barclays Capital. Some transaction foreign exchange
risk exposure arises within the local treasury operations in Global Retail
and Commercial Banking to support and facilitate client activity. This is
minimised in accordance with modest risk limits and was not material
as at end 2007. Other non-Barclays Capital foreign exchange exposure
is covered in Note 46.
Asset management structural market risk arises where the fee and
commission income earned by asset management products and
businesses is affected by a change in market levels, primarily through
the link between income and the value of assets under management.
Where support agreements exist, the Group is exposed to the
performance of the underlying asset. This exposure arises mainly within
Barclays Global Investors, but also in Global Retail and Commercial
Banking, and Barclays Wealth. It is Barclays policy that businesses monitor
and report this risk against a defined risk appetite and regularly assess
potential hedging strategies.
<0 5 to
<10
10 to
<15
15 to
<20
20 to
<25
25 to
<30
30 to
<35
35 to
<40
Barclays Capital’s trading revenue 2006 £m
23
30
49
42
31
24
12
10
8
Number of days
10
13
40 to
<45
45+
0 to
<5
<0 5 to
<10
10 to
<15
15 to
<20
20 to
<25
25 to
<30
30 to
<35
35 to
<40
Barclays Capital’s trading revenue 2007 £m
20
14
18
19
33
37
21
20
29
Number of days
7
35
40 to
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45+
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