Barclays 2008 Annual Report Download - page 122

120 Barclays PLC Annual Report 2008 |Find out more at www.barclays.com/annualreport08
Risk management
Market risk management
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, client and market activities
are managed together. In Barclays Capital, trading risk occurs in both the
trading book and the banking book, as defined for regulatory purposes.
Risk measurement and control
The measurement techniques used to measure and control traded market
risk include Daily Value at Risk (DVaR), Expected Shortfall (ES), stress testing
and scenario testing. Book limits such as foreign exchange and interest rate
delta limits are also in place.
Daily Value at Risk is an estimate of the potential loss arising from
unfavourable market movements, if the current positions were to be held
unchanged for one business day. Barclays Capital uses the historical
simulation method with a two year unweighted historical period.
In 2008, the confidence level was changed to 95% from 98% as an
increasing incidence of significant market movements made the existing
measure more volatile and less effective for risk management purposes.
Switching to 95% made DVaR more stable and consequently improved
management, transparency and control of the market risk profile.
The historical simulation calculation can be split into three parts:
– Calculate hypothetical daily profit or loss for each position over the most
recent two years, using observed daily market moves.
– Sum hypothetical profit or losses for day one, giving one total profit or
loss. This is repeated for all other days in the two year history.
– DVaR is the 95th percentile selected from the two years of daily
hypothetical total profit or loss.
The DVaR model has been approved by the FSA to calculate regulatory capital
for the trading book. The approval covers general market risk in interest rate,
foreign exchange, commodities and equity products, and issuer specific risk
for the majority of single name and portfolio traded credit products. Internally,
as noted before, DVaR is calculated for both the trading and banking books.
When reviewing DVaR estimates, a number of considerations should
be taken into account. These are:
– Historical simulation uses the recent past to generate possible future
market moves but the past may not be a good indicator of the future
– The one day time horizon does not fully capture the market risk of
positions that cannot be closed out or hedged within one day
– Intra-day risk is not captured
– DVaR does not indicate the potential loss beyond the 95th percentile.
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
The daily average, maximum and minimum values of DVaR, 95% and 98%, were calculated as below.
DVaR (95%)
12 months to 12 months to
31st December 2008 31st December 2007
Average High Low Average High Low
£m £m £m £m £m £m
Interest rate risk 28.9 47.8 15.1 15.3 26.5 10.0
Credit spread risk 31.1 71.7 15.4 17.3 28.0 10.8
Commodity risk 18.1 25.4 12.5 15.3 19.0 10.7
Equity risk 9.1 21.0 4.8 8.0 12.1 4.5
Foreign exchange risk 5.9 13.0 2.1 3.8 7.2 2.1
Diversification effecta(39.7) n/a n/a (27.2) n/a n/a
Total DVaR 53.4 95.2 35.5 32.5 40.9 25.2
DVaR (98%)
12 months to 12 months to
31st December 2008 31st December 2007
Average High Low Average High Low
£m £m £m £m £m £m
Interest rate risk 45.0 80.9 21.0 20.0 33.3 12.6
Credit spread risk 54.0 143.4 30.1 24.9 43.3 14.6
Commodity risk 23.9 39.6 16.5 20.2 27.2 14.8
Equity risk 12.8 28.9 6.7 11.2 17.6 7.3
Foreign exchange risk 8.1 21.0 2.9 4.9 9.6 2.9
Diversification effecta(67.3) n/a n/a (39.2) n/a n/a
Total DVaR 76.5 158.8 47.5 42.0 59.3 33.1
Note
aThe 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.