Barclays 2012 Annual Report Download - page 337

The strategic report Governance Risk review Financial review Financial statements Risk management Shareholder information
 Foreign exchange – impact of unfavourable moves in currency prices
and volatility;
 Equity – shocks to share prices including exposures to specific
markets and sectors;
 Emerging Markets – stresses across specific countries including
corporate and sovereign credit, interest rates and currency shocks;
 Commodities – adverse commodity price changes across both
physical and derivative markets; and
 Securitised Products – stresses to securitised structures and hedges.
Secondary stress tests apply stress moves to less liquid risks, e.g. equity
volatility skew. Secondary stresses are aggregated by the same set of
asset classes shown above and assuming a severe flight to quality
scenario. The asset class stress scenarios are frequently calibrated to
previously observed market shocks.
Combined scenarios apply simultaneous shocks to several risk factors,
reflecting extraordinary, but plausible macro scenarios. This is assessed
by applying respective changes in foreign exchange rates, interest rates,
credit spreads, commodities and equities to the portfolio. E.g. impact of
a rapid and extreme slowdown in the global economy.
The annual Group-wide stress testing exercise aims to simulate the
dynamics of exposures across Barclays Group and cover all risk factors.
The exercise is also designed to measure the impact to Barclays
fundamental business plan, and is used to manage the wider group’s
strategy.
Where necessary, market risk managers also apply specific position
limits, e.g. on currency open positions, in order to limit certain activities
and for monitoring exposure. The Investment Bank also applies a trade
approval process designed to assess the impact of potential new
transactions on the firm’s risk profile.
Trading Book Regulatory Capital Models
In 2011, the Investment Bank implemented new regulatory risk
models to comply with the CRD III revisions to the market risk capital
requirement. These were Stressed VaR (SVaR), Incremental Risk Charge
(IRC) and the All Price Risk (APR). All three models were approved by
the FSA for calculation of regulatory capital for designated trading
book portfolios. The SVaR approval matches the scope of the DVaR
model as used for regulatory capital calculations.
SVaR is an estimate of the potential loss arising from a 12 month
period of significant financial stress. SVaR uses the DVaR methodology
based on inputs calibrated to historical data from a continuous 12
month period that maximises the DVaR based capital at a 99%
one-tailed confidence limit.
IRC is computed on all fixed income positions subject to specific
market risk (excluding the correlation trading portfolio). It calculates
the incremental risk arising from rating migrations and defaults,
beyond what is already captured in specific market risk DVaR, to a
99.9% confidence level over a one year holding period.
APR covers the correlation trading portfolio and is intended to capture
all risk factors relevant to corporate nth-to-default and tranched credit
derivatives. As for IRC, the capital requirement is based on a 99.9%
confidence interval over a one year holding period.
When reviewing estimates produced by the CRD III models the
following considerations should be taken into account:
 SVaR uses the same methodology as the DVaR model and hence is
subject to the same considerations as this model. In addition, SVaR is
calibrated to a specific 12 month historical stress period which may
not reflect a stress period that could arise in the future;
 In common with DVaR, neither IRC nor APR indicate the potential
loss beyond the specified confidence level, and they do not measure
risk from trades which are bought and sold in between weekly runs;
and
 Both IRC and APR are computed to a 1-in-1,000 year confidence level
which cannot be backtested on a similar historical basis as with other
regulator models.
IR Spread FX Equity Commodity Infl ation Credit Basis
Foreign exchange
Commodities
Prime services
Emerging markets
FI Rates
Syndicate
Absa Capital
FI credit
Securitised products
Municipals
FICC total
Equities total
Treasury total
Counterparty risk trading
Other credit
Primary contribution
Signifi cant contribution
Limited or nil contribution
Concentration of market risk by business unit and risk type
barclays.com/annualreport Barclays PLC Annual Report 2012 I 335