Barclays 2009 Annual Report Download - page 288

286 Barclays PLC Annual Report 2009 www.barclays.com/annualreport09
Notes to the accounts
For the year ended 31st December 2009
continued
48 Market risk continued
Foreign exchange risk
The Group is exposed to two sources of foreign exchange risk.
a) Transactional foreign currency exposure
Transactional foreign exchange exposures represent exposure on banking assets and liabilities, denominated in currencies other than the functional
currency of the transacting entity.
The Group’s risk management policies prevent the holding of significant open positions in foreign currencies outside the trading portfolio managed by
Barclays Capital which is monitored through DVaR.
There were no material net transactional foreign currency exposures outside the trading portfolio at either 31st December 2009 or 2008. Due to the low
level of non-trading exposures no reasonably possible change in foreign exchange rates would have a material effect on either the Group’s profit or
movements in equity for the year ended 31st December 2009 or 2008.
b) Translational foreign exchange exposure
The Group’s translational foreign currency exposure arises from both its capital resources (including investments in subsidiaries and branches, intangible
assets, non-controlling interests, deductions from capital and debt capital instruments) and risk weighted assets (RWAs) being denominated in foreign
currencies. Changes in foreign exchange rates result in changes in the Sterling equivalent value of foreign currency denominated capital resources and risk
weighted assets. As a result, the Group’s regulatory capital ratios are sensitive to foreign exchange rate movements.
The Group’s capital ratio hedge strategy is to minimise the volatility of the capital ratios caused by foreign exchange rate movements. To achieve this,
the Group aims to maintain the ratio of foreign currency Core Tier 1, Tier 1 and Total Capital resources to foreign currency RWAs the same as the
Group’s capital ratios.
The Group’s foreign currency capital resources include investments in subsidiaries and branches, intangible assets, non-controlling interests, deductions
from capital and debt capital instruments.
The Group’s investments in foreign currency subsidiaries and branches create capital resources denominated in foreign currencies. Changes in the Sterling
value of the investments due to foreign currency movements are captured in the currency translation reserve, resulting in a movement in Core Tier 1 capital.
During 2009, structural currency exposures net of hedging instruments increased from £6.4bn to £12.5bn primarily as a result of US Dollar hedging
decisions taken in accordance with the Group’s capital ratio hedge strategy for foreign exchange rate movements.
To create foreign currency Tier 1 and Total Capital resources additional to the Core Tier 1 capital resources, the Group issues, where possible, debt capital
in non sterling currencies. This is primarily achieved by the issuance of debt capital from Barclays Bank PLC, but can also be achieved by subsidiaries issuing
capital in local currencies.
The carrying value of the Group’s foreign currency net investments in subsidiaries and branches and the foreign currency borrowings and derivatives used
to hedge them as at 31st December 2009 were as follows:
Functional currency of the operation involved Structural
Foreign Borrowings Derivatives currency Remaining
currency which hedge which hedge exposures structural
net the net the net pre economic Economic currency
investments investments investments hedges hedges exposures
£m £m £m £m £m £m
At 31st December 2009
US Dollar 16,677 3,205 – 13,472 6,056 7,416
Euro 6,772 3,418 – 3,354 2,902 452
Rand 4,055 – 1,542 2,513 189 2,324
Japanese Yen 4,436 3,484 940 12 – 12
Swiss Franc 2,840 2,734 92 14 – 14
Other 2,983 – 677 2,306 – 2,306
Total 37,763 12,841 3,251 21,671 9,147 12,524
At 31st December 2008
US Dollar 14,577 6,019 – 8,558 6,720 1,838
Euro 6,336 2,922 – 3,414 3,125 289
Rand 3,725 – 1,306 2,419 164 2,255
Japanese Yen 5,009 801 4,212 (4) – (4)
Swiss Franc 3,042 2,936 101 5 – 5
Other 2,940 – 880 2,060 – 2,060
Total 35,629 12,678 6,499 16,452 10,009 6,443