Barclays 2010 Annual Report Download - page 265

41 Fair value of financial instruments continued
Interest rate products
Uncertainty relating to the valuation of the products is mainly driven from the range and the standard deviation of the consensus data used for
price testing.
For base rate derivatives, the sensitivity is based on bid offer spreads of base rates swaps. The sensitivity was determined by applying a +/- 0.12% shift
on the net PV01.
Commodity products
Sensitivity is determined primarily by measuring historical variability over two years. The estimate has been calculated using data for short dated
parameter curves to generate best and worst case scenarios. Where historical data is unavailable or uncertainty is due to volumetric risk, sensitivity is
measured by applying appropriate stress scenarios or using proxy bid-offer spread levels.
Other
The sensitivity for fixed rate loans is calculated using a +/- 1% shift in credit spreads, except for certain loans within Barclays Corporate where the
sensitivity is calculated using a shift in credit spreads of +/- 0.02% – 0.11%.
No stress has been applied to the receivables relating to the Lehman acquisition. As outlined in Note 26, it is possible to identify a maximum loss.
However, due to the uncertainty inherent in such legal proceedings, it is not possible to identify reasonable upside and downside stresses on a basis
comparable with the other assets analysed.
Valuation control framework
The Independent Valuation Control function is responsible for independent price verification, oversight of fair value adjustments and escalation of
valuation issues. This process covers all fair value positions and is a key control in ensuring the material accuracy of valuations.
Price verification uses independently sourced data that is deemed most representative of the market. The reliability of the data source is assessed in
determining the independent valuation. The characteristics against which the data source is assessed are independence, reliability, consistency with
other sources and evidence that the data represents an executable price. The most current data available at balance sheet date is used. Where
significant variances are noted in the independent price verification process, an adjustment is taken to the fair value position. Additional fair value
adjustments may be taken to reflect such factors as bid-offer spreads, market data uncertainty, model limitations and counterparty risk.
Independent price verification results and fair value adjustments are reported on a monthly basis to the Valuation Committee. This committee is
responsible for overseeing valuation and fair value adjustment policy within Barclays Capital and this is the forum to which valuation issues are escalated.
The Valuation Committee delegates more detailed review to the following five Sub-Committees: Independent Valuations, Primary Commercial Real
Estate, Available for Sale and Other Assets, Models and Governance.
The Independent Valuations sub-committee reviews the results of the independent price verification and fair value adjustments process on a monthly
basis. This includes, but is not limited to, reviewing fair value adjustments and methodologies, independent price verification results, limits and
valuation uncertainty. The Primary Commercial Real Estate and Available for Sale and Other Assets sub-committees focus on independent price
verification results specific to the asset classes. The Available for Sale and Other Assets sub-committee also assesses contingent risks and examines
counterparty related issues.
The Models sub-committee is responsible for overseeing policies and controls related to the use of valuation models. This includes but is not limited
to reviewing (i) global model risk reports and defining associated procedures and controls (ii) output from pipeline meetings and approximate booking
meetings, and the trade approval process (iii) issues arising from model review (iv) population of valuation adjustments (v) defining policies and
procedures relating to valuation models and (vi) instances of independent price verification variances or collateral disputes relating to model usage.
The Governance sub-committee is responsible for the governance of valuation processes, policies and procedures. This sub-committee oversees each
sub-committee to ensure that the objectives set out in each committee’s terms of reference are being achieved. Regulatory and accounting issues
related to fair value are also assessed by the Governance sub-committee.
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