Barclays 2009 Annual Report Download - page 283

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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:
2009 2008
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 9,901 25 – 9,926 4,491 53 – 4,544
Debt securities 109,237 5,321 2,036 116,594 141,454 5,556 1,676 148,686
Total trading portfolio 119,138 5,346 2,036 126,520 145,945 5,609 1,676 153,230
Financial assets designated at fair value
held on own account:
Debt securities 2,200 1,791 16 4,007 1,222 7,406 – 8,628
Available for sale financial investments:
Treasury and other eligible bills 4,049 1,870 – 5,919 2,823 1,180 – 4,003
Debt securities 40,184 3,185 519 43,888 55,817 2,347 667 58,831
Total available for sale financial investments 44,233 5,055 519 49,807 58,640 3,527 667 62,834
Total debt securities 165,571 12,192 2,571 180,334 205,807 16,542 2,343 224,692
%91.8 6.8 1.4 100.0 91.6 7.4 1.0 100.0
Included in the table above, there are impaired available for sale debt securities with a carrying value at 31st December 2009 of £265m (2008: £329m),
after a write-down of £692m (2008: £363m).
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 obtainable 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 2009 and 2008 was as follows:
2009 2008
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
Derivatives 399,534 15,565 1,716 416,815 939,071 42,266 3,465 984,802
%95.9 3.7 0.4 100.0 95.3 4.3 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 £374bn (2008: £917bn) lower than reported if netting were permitted for assets and liabilities with the same
counterparty or for which the Group holds cash collateral.