Barclays 2010 Annual Report Download - page 253

41 Fair value of financial instruments continued
Valuation inputs
‘IFRS 7 Financial Instruments: Disclosures’ requires an entity to classify its financial instruments held at fair value according to a hierarchy that reflects
the significance of observable market inputs.
The classification of a financial instrument is based on the lowest level input that is significant to the fair value measurement in its entirety. The three
levels of the fair value hierarchy are defined below.
Quoted market prices – Level 1
Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted
quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly
occurring market transactions on an arm’s length basis. An active market is one in which transactions occur with sufficient volume and frequency to
provide pricing information on an ongoing basis.
This category includes exchange traded government bonds, actively traded listed equities and actively exchange-traded derivatives.
Valuation technique using observable inputs – Level 2
Financial instruments classified as Level 2 have been valued using models whose inputs are observable in an active market. Valuations based on
observable inputs include financial instruments such as swaps and forwards which are valued using market standard pricing techniques, and options
that are commonly traded in markets where all the inputs to the market standard pricing models are observable.
This category includes most investment grade and liquid high yield bonds, certain asset backed securities, US agency securities, government bonds,
less actively traded listed equities, bank, corporate and municipal obligations, certain OTC derivatives, certain convertible bonds, certificates of deposit,
commercial paper, certain collateralised debt obligations (CDOs) (cash and synthetic underlyings), collateralised loan obligations (CLOs), most
commodities based derivatives, credit derivatives, certain credit default swaps (CDSs), most fund units, certain loans, foreign exchange spot and
forward ransactions and certain issued notes.
Valuation technique using significant unobservable inputs – Level 3
Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data (unobservable
inputs). Such inputs are generally determined based on observable inputs of a similar nature, historical observations on the level of the input or other
analytical techniques.
This category includes certain corporate debt securities, distressed debt, private equity investments, commercial real estate loans, certain OTC derivatives
(requiring complex and unobservable inputs such as correlations and long dated volatilities), certain convertible bonds, some CDOs (cash and synthetic
underlyings), credit default swaps, derivative exposures to Monoline insurers, fund units, certain asset backed securities, certain issued notes, certain
collateralised loan obligations (CLOs) and certain loans.
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