Barclays 2008 Annual Report Download - page 278

Notes to the accounts
For the year ended 31st December 2008
47 Credit risk (continued)
Debt securities
Trading portfolio assets, financial assets designated at fair value and available for sale assets are measured on a fair value basis. The fair value will reflect,
among other things, the credit risk of the issuer.
Most listed and some unlisted securities are rated by external rating agencies. The Group mainly uses external credit ratings provided by Standard&
Poors’ or Moody’s. Where such ratings are not available or are not current, the Group will use its own internal ratings for the securities.
An analysis of the credit quality of the Group’s debt securities is set out below:
2008 2007
AAA to BBB- AAA to BBB-
(investment B- and (investment B- and
grade) BB+to B below Total grade) BB+to B below Total
£m £m £m £m £m £m £m £m
Trading portfolio:
Treasury and other eligible bills 4,491 53 – 4,544 1,984 110 – 2,094
Debt securities 141,454 5,556 1,676 148,686 143,161 8,958 659 152,778
Total trading portfolio 145,945 5,609 1,676 153,230 145,145 9,068 659 154,872
Financial assets designated at fair value
held on own account:
Debt securities 1,222 7,406 – 8,628 10,010 14,207 – 24,217
Available for sale financial investments:
Treasury and other eligible bills 2,823 1,180 – 4,003 2,130 593 – 2,723
Debt securities 55,817 2,347 667 58,831 36,623 1,528 522 38,673
Total available for sale financial investments 58,640 3,527 667 62,834 38,753 2,121 522 41,396
Total debt securities 205,807 16,542 2,343 224,692 193,908 25,396 1,181 220,485
%91.6 7.4 1.0 100.0 88.0 11.5 0.5 100
In addition to the above, there are impaired available for sale debt securities with a carrying value at 31st December 2008 of £329m (2007: £432m), after
a write-down of £363m (2007: £13m).
Collateral is not generally obtained directly from the issuers of debt securities. Certain debt securities may be collateralised by specifically identified assets
that would be obtained in the event of default.
Derivatives
Derivatives are measured on a fair value basis.
The credit quality of the Group’s derivative assets according to the credit quality of the counterparty at 31st December 2008 and 2007 was as follows:
2008 2007
AAA to BBB– AAA – BBB–
(investment B– and (investment B– and
grade) BB+to B below Total grade) BB+to B below Total
£m £m £m £m £m £m £m £m
Derivatives 939,071 42,266 3,465 984,802 243,491 3,630 967 248,088
%95.3 4.3 0.4 100.0 98.1 1.5 0.4 100.0
Credit risk from derivatives is mitigated where possible through netting agreements whereby derivative assets and liabilities with the same counterparty
can be offset. Group policy requires all netting arrangements to be legally documented. The ISDA Master Agreement is the Group’s preferred agreement
for documenting OTC derivatives. It provides the contractual framework within which dealing activities across a full range of OTC products are conducted
and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or
other pre-determined events occur.
Collateral is obtained against derivative assets, depending on the creditworthiness of the counterparty and/or nature of the transaction. Any collateral
taken in respect of OTC trading exposures will be subject to a ‘haircut’ which is negotiated at the time of signing the collateral agreement. A haircut is the
valuation percentage applicable to each type of collateral and will be largely based on liquidity and price volatility of the underlying security. The collateral
obtained for derivatives is either cash, direct debt obligation government (G14+) bonds denominated in the domestic currency of the issuing country,
debt issued by supranationals or letters of credit issued by an institution with a long-term unsecured debt rating of A+/A3 or better. Where the Group has
ISDA master agreements, the collateral document will be the ISDA Credit Support Annex (CSA). The collateral document must give Barclays the power to
realise any collateral placed with it in the event of the failure of the counterparty, and to place further collateral when requested or in the event of
insolvency, administration or similar processes, as well as in the case of early termination.
Derivative assets and liabilities would be £917,074m (2007: £215,585m) lower than reported if netting were permitted for assets and liabilities with the
same counterparty or for which the Group holds cash collateral.
276 Barclays PLC Annual Report 2008 |Find out more at www.barclays.com/annualreport08