Barclays 2010 Annual Report Download - page 262

Notes to the financial statements
For the year ended 31st December 2010 continued
41 Fair value of financial instruments continued
Other credit and debit valuation adjustments
Derivative CVAs and DVAs for non-Monoline exposures are calculated using Monte-Carlo simulation to generate an expected exposure profile. The
expected exposure is calculated at a counterparty level after netting and collateral are applied. The PD and LGD are derived from a combination of single
name credit default swap prices where observable, industry curves, indices, and loan/note pricing taking into account geographic factors, internal credit
ratings, loss assumptions and ratings agency data.
For counterparties with an observable credit market, the PD and LGD are derived from single name credit default swap prices. For counterparties with
no observable credit market, the PD and LGD are derived from either a generic or a specific curve. The PD and LGD is derived from internal credit ratings
and the appropriate geographic index. Specific curves will incorporate any relevant additional factors into the generic curve.
Where the curve is unobservable and the CVA is significant to the overall value of the underlying derivative, the full value of the derivative and its
associated credit valuation adjustment is deemed unobservable.
CVAs are not incorporated into the fair value of certain counterparties where it has been observed that the market does not apply a credit charge.
The categories of counterparties excluded are as follows:
– Strongly collateralised counterparties – this is any counterparty with a collateral agreement with minimum weekly calls and the collateral threshold
plus minimum transfer amount below a defined level;
– Certain highly-rated sovereigns, supra-nationals and government agencies; and
– Liquidity providers – when trading on the interbank market with certain collateralised market making counterparties no counterparty spreads are applied.
Where counterparty credit quality and exposure to that counterparty are linked, wrong way risk may arise. In these instances, wrong way risk suggests
that exposure to the counterparty is likely to increase as counterparty credit quality deteriorates. Exposure to ‘wrong way risk’ is limited via internal
governance processes and deal pricing.
Barclays Capital uses credit default swap spreads to determine the impact of Barclays own credit quality on the fair value of derivative liabilities. At
31st December 2010, cumulative adjustments of £352m (31st December 2009: £307m) were recorded against derivative liabilities. The impact of these
adjustments in both periods was more than offset by the impact of the credit valuation adjustments to reflect counterparty creditworthiness that were
netted against derivative assets.
Own credit adjustments
The carrying amount of issued notes that are designated under the IAS 39 fair value option is adjusted to reflect the effect of changes in own credit
spreads. The resulting gain or loss is recognised in the income statement.
For funded instruments such as issued notes, credit spreads on Barclays issued bonds represent the most appropriate basis for this adjustment.
At 31st December 2010, the own credit adjustment arose from the fair valuation of £96.0bn (31st December 2009: £86.0bn) of Barclays Capital’s
financial liabilities designated at fair value. Barclays credit spreads widened during 2010, leading to a profit of £391m (2009: loss £1,820m) from the
fair value of changes primarily in own credit but also from the effects of foreign exchange rates, time decay and trade activity.
260 Barclays PLC Annual Report 2010 www.barclays.com/annualreport10