Barclays 2008 Annual Report Download - page 280

Notes to the accounts
For the year ended 31st December 2008
278 Barclays PLC Annual Report 2008 |Find out more at www.barclays.com/annualreport08
48 Market risk
Market risk management
Market risk is the risk that Barclays earnings or capital, or its ability to meet business objectives, will be adversely affected by changes in the level or
volatility of market rates or prices such as interest rates, credit spreads, commodity prices, equity prices and foreign exchange rates. Market risk mainly
arises from trading activities. Barclays is also exposed to market risk through interest rate risk on its non-trading activities and through the pension fund.
Organisation and structure
The Board approves market risk appetite for trading and non-trading activities. The Market Risk Director is responsible for the Market Risk Control
Framework and, under delegated authority from the Group Risk Director, sets a limit framework within the context of the approved market risk appetite.
A daily market risk report summarises Barclays market risk exposures against agreed limits. This daily report is sent to the Group Risk Director, the Market
Risk Director, the Group Finance Director and the appropriate Business Risk Directors.
The head of each business, assisted by the business risk management team, is accountable for all market risks associated with its activities. Each
business is responsible for the identification, measurement, management, control and reporting of market risk as outlined in Barclays Market Risk Control
Framework. Oversight and support is provided to the business by the Market Risk Director, assisted by the central market risk team. The Market Risk
Committee reviews, approves, and makes recommendations concerning the market risk profile across Barclays including risk appetite, limits and
utilisation. The Committee meets monthly and is chaired by the Market Risk Director. Attendees include the Risk Director, respective business risk
managers and senior managers from the central market risk team.
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.
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.
DVaR 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 1giving 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.
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 a loss (as defined by the FSA in BIPRU 7.10), exceeds the corresponding DVaR
estimate, measured at the 99% confidence level.
The FSA categorises a DVaR model as green (being best), amber or red. A green model is consistent with a good working DVaR model and is achieved for
models that have four or less back-testing exceptions in a 12-month period. For Barclays Capital’s trading book, green model status was maintained for
2008 and 2007.