Barclays 2009 Annual Report Download - page 285

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48 Market risk
Market risk management
Market risk is the risk that the Group’s 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. The majority of market risk exposure
resides in Barclays Capital. 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 Chief Risk Officer, 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 Chief Risk Officer, 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 Group 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 Chief Risk Officer, respective business risk managers and Group Market Risk.
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 , average of the three
worst hypothetical losses from the DVaR simulation (3W), Global Asset Class stress testing and Global Scenario stress 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 methodology with a two-year unweighted historical period at the 95% confidence level.
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 all hypothetical profit or losses for day one across all positions, giving one total profit or loss. Repeat 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), exceeds the corresponding DVaR estimate,
measured at the 99% confidence level.
The FSA categorises a DVaR model as green, 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 2009 and 2008.
Expected Shortfall is the average of all hypothetical losses from the historical simulation beyond DVaR. To improve the control framework, formal monitoring
of 3W (average of the three worst observations from the DVaR historical simulation) was started in the first half of 2009.
Stress testing provides an indication of the potential size of losses that could arise in extreme conditions. Global Asset Class stress testing has been
designed to cover major asset classes including interest rate, credit spread, commodity, equity and foreign exchange rates. They are based on past stress
moves in respective asset class prices and rates. Global Scenario stress testing is based on hypothetical events which could lead to extreme yet plausible
stress type moves, under which profitability is seriously challenged.
Market Risk is controlled through the use of limits where appropriate on the above risk measures. Limits are set at the total Barclays Capital level, risk factor
level such as interest rate risk, and business line level. Book limits such as foreign exchange and interest rate sensitivity limits are also in place.