Barclays 2010 Annual Report Download - page 126

Risk management
Market risk management continued
During 2010, structural currency exposures net of hedging instruments
increased from £12.5bn to £15.3bn as a result of hedging decisions taken
in accordance with the Group’s capital ratio management 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 economic hedges primarily represent the US Dollar and Euro Preference
Shares and Reserve Capital Instruments in issue that are treated as equity
under IFRS, and do not qualify as hedges for accounting purposes. During
the year €850m Reserves Capital Instruments were redeemed.
The impact of a change in the exchange rate between Sterling and any
of the major currencies would be:
– A higher or lower Sterling equivalent value of non-Sterling denominated
capital resources and risk weighted assets. This includes a higher
or lower currency translation reserve within equity, representing the
retranslation of non-Sterling subsidiaries, branches and associated
undertakings net of the impact of foreign exchange rate changes on
derivatives and borrowings designated as hedges of net investments.
– A higher or lower profit after tax, arising from changes in the exchange
rates used to translate items in the consolidated income statement.
– A higher or lower value of available for sale investments denominated
in foreign currencies, impacting the available for sale reserve.
Foreign exchange risk (audited)
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 2010 or 2009. 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 2010 or 2009.
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 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.
Functional currency of operations (audited)
Foreign
currency
net
investments
£m
Borrowings
which hedge
the net
investments
£m
Derivatives
which hedge
the net
investments
£m
Structural
currency
exposures
pre economic
hedges
£m
Economic
hedges
£m
Remaining
structural
currency
exposures
£m
As at 31st December 2010
US Dollar 22,646 7,406 – 15,240 6,330 8,910
Euro 7,327 3,072 1,294 2,961 2,069 892
Rand 4,826 – 1,626 3,200 – 3,200
Japanese Yen 5,304 3,603 1,683 18 – 18
Swiss Franc 152 – 157 (5) – (5)
Other 3,139 – 824 2,315 – 2,315
Total 43,394 14,081 5,584 23,729 8,399 15,330
As 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
124 Barclays PLC Annual Report 2010 www.barclays.com/annualreport10