Barclays 2012 Annual Report Download - page 269

The strategic report Governance Risk review Financial review Financial statements Risk management Shareholder information
18 Fair value of financial instruments continued
Level 3 sensitivity: Sensitivity is calculated on an individual fund basis using a loss based scenario approach which factors in the underlying assets
of the specific fund and assumed recovery rates.
Foreign exchange products
Description: These products are derivatives linked to the foreign exchange market. This category includes foreign exchange (FX) forward
contracts, FX swaps and FX options. Exotic derivatives are valued using industry standard and bespoke models.
Valuation: Input parameters include FX rates, interest rates, FX volatilities, interest rate volatilities, FX interest rate correlations and others as
appropriate. Unobservable model inputs are set by referencing liquid market instruments and applying extrapolation techniques to match the
appropriate risk profile.
Observability: Certain correlations and long dated forward and volatilities are unobservable.
Level 3 sensitivity: Sensitivity relating to unobservable valuation inputs is based on the dispersion of consensus data services.
Interest rate products
Description: These are products linked to interest rates or inflation indices. This category includes interest rate and inflation swaps, swaptions,
caps, floors, inflation options, balance guaranteed swaps and other exotic interest rate derivatives. Interest rate products are valued using standard
discounted cash flow techniques.
Valuation: Interest rate derivative cash flows are valued using interest rate yield curves whereby observable market data is used to construct the
term structure of forward rates. This is then used to project and discount future cash flows based on the parameters of the trade. Instruments with
optionality are valued using volatilities implied from market observable inputs. Exotic interest rate derivatives are valued using industry standard
and bespoke models based on observable market parameters which are determined separately for each parameter and underlying instrument.
Where unobservable, a parameter will be set with reference to an observable proxy. Inflation forward curves and interest rate yield curves are
extrapolated beyond observable tenors.
Balance guaranteed swaps are valued using cash flow models that calculate fair value based on loss projections, prepayment, recovery and
discount rates. These parameters are determined by reference to underlying asset performance, independent research, ABX indices, broker quotes,
observable trades on similar securities and third party pricing sources. Prepayment is projected based on observing historic prepayment.
Observability: Inflation forward curves and interest rate yield curves are observable up to liquid maturities after which they are deemed
unobservable.
Level 3 sensitivity: Sensitivity relating to unobservable valuation inputs is based on the dispersion of consensus data services.
Commodity products
Description: These products are exchange traded and OTC derivatives based on underlying commodities such as metals, crude oil and refined
products, agricultural, power and natural gas.
Valuation: The valuations of certain commodity swaps and options are determined using models incorporating discounting of cash flows and
other industry standard modelling techniques. Valuation inputs include forward curves, volatilities implied from market observable inputs and
tenor correlation. Unobservable inputs are set with reference to similar observable products or by applying extrapolation techniques from the
observable market.
Observability: Within this population, certain forward curves and volatilities for longer dated exposures are unobservable.
Level 3 sensitivity: Sensitivity is determined primarily by measuring historical variability over two years. The estimate is 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
Description: This category is largely made up of fixed rate loans, which are valued using models that discount expected future cash flows.
The receivables resulting from the acquisition of the North American businesses of Lehman Brothers is also included within ‘Other’.
For more details, refer to Note 29 Legal Proceedings.
Valuation: Fixed rate loans are valued using models that calculate fair value based on observable interest rates and unobservable credit spreads.
Unobservable credit spreads are modelled according to issuer credit quality. Derived levels are validated against any origination activity that
occurs.
Level 3 sensitivity: The sensitivity for fixed rate loans is calculated by applying a 25% shift in borrower credit spreads.
No stress has been applied to the receivables relating to the Lehman acquisition (Note 29). The sensitivity inherent in the measurement of
the receivables is akin to a litigation provision. Due to this, an upside and downside stress on a basis comparable with the other assets cannot
be applied.
barclays.com/annualreport Barclays PLC Annual Report 2012 I 267