Barclays 2012 Annual Report Download - page 336

Positions in the trading book are subject to market risk capital. Market
risk capital is computed using internal models (VaR, SVaR, IRC, APR)
where the position is amenable to market risk modelling and is model
approved by the FSA for capital. Otherwise the market risk capital
requirement is calculated using standard rules as defined by the FSA
in BIPRU. If any of the criteria specified in the TBPS are not met for
a position, then that position must be allocated to the banking book.
Risk measurement
Barclays uses a range of complementary technical approaches to
measure and control traded market risk including: Daily Value at Risk
(DVaR), Expected Shortfall, primary and secondary stress testing and
combined scenario stress testing. The risk management process also
involves a trade approval process and additional control mechanisms
where necessary such as position limits.
Daily Value at Risk (DVaR) is an estimate of the potential loss arising
from unfavourable market movements, if the current positions were to
be held unchanged for one business day. For internal market risk
management purposes, the Investment Bank uses a historical
simulation methodology with a two-year equally weighted historical
period, at the 95% confidence level for all trading portfolios and certain
banking books.
The table on page 335 demonstrates the risk types generated by
different Investment Bank businesses. The table shows the level of
DVaR type contribution to the total undiversified Management DVaR
for each of the separate business units.
As defined by the FSA, a green model is consistent with a good
working DVaR model and is achieved for models that have four or
fewer back-testing exceptions in a 12-month period. Back-testing
counts the number of days when a loss (as defined by the FSA)
exceeds the corresponding DVaR estimate, measured at the 99%
confidence level. For the Investment Bank’s DVaR model, green model
status was maintained for 2012.
The DVaR model is regularly assessed and reviewed internally by Group
Executive Models Committee and within the Investment Bank.
When reviewing DVaR estimates the following considerations should
be taken into account:
 Historical simulation uses the most recent two years of past data to
generate possible future market moves, but the past may not be a
good indicator of the future;
 The one day time horizon does not fully capture the market risk of
positions that cannot be closed out or hedged within one day;
 DVaR is based on positions as at close of business and consequently
intra-day risk, the risk from a position bought and sold on the same
day, is not captured; and
 DVaR does not indicate the potential loss beyond the DVaR
confidence level.
These drawbacks are common to Value at Risk models. In order to
partly mitigate these issues, Barclays also calculates Expected Shortfall
based on the same two year historical simulation data set as used to
calculate DVaR. Expected Shortfall is the average of all one day
hypothetical losses beyond the 95% confidence level DVaR.
Stress testing provides an estimate of potential significant future losses
that might arise from extreme market moves or scenarios. Primary
stress tests apply stress moves to key liquid risk factors for each of the
major trading asset classes, namely:
 Interest rates – shock to the level and structure of interest rates and
inflation across currencies;
 Credit – impact on traded corporate credit exposures, including
across rating grades, geography, sectors and products;
Management DVaR
Banking Book
Facilitation of Client and Barclays Group Business
Regular Reporting to Risk owners and Committees
Regulatory Trading book Regulatory Standardised
Global Stress Scenarios
Specific business and
asset class level metrics
and controls
Regular review
of measurement
methodology
Portfolio level risk
metrics and controls
Underlying exposure
on balance sheet
Asset Class Primary & Secondary Stresses
Asset Class DVaR
Position limits
Risk measurement
barclays.com/annualreport334 I Barclays PLC Annual Report 2012
Risk management
Market risk management continued