Barclays 2013 Annual Report Download - page 311

Note 18: Fair value of assets and liabilities continued
Assets and liabilities move between Level 2 and Level 3 primarily due to i) an increase or decrease in observable market activity related to an input
or ii) a change in the significance of the unobservable input, with assets and liabilities classified as Level 3 if an unobservable input is deemed
significant.
During 2013, transfers into Level 3 totalled £15.1bn primarily due to the remainder of the ESHLA loan portfolio amounting to £15.3bn, which was
transferred from Level 2 to Level 3 following reassessment of the significance of unobservable loan spreads on valuation. Liabilities of £205m were
also transferred from Level 2 to Level 3 mainly representing issued debt classified as financial liabilities designated at fair value. A further £(146)m
of commodity derivatives were also transferred into level 3 in line with observable market activity.
Transfers out of Level 3 totalled £606m. This was primarily due to £141m of government and government sponsored debt held as trading portfolio
assets and £119m of asset backed loans held as financial assets designated at fair value through profit and loss. Liabilities transferred out included
£153m of issued debt and £47m of certificates of deposit, commercial paper and other money market instruments both designated as held at fair
value through profit and loss. There were also transfers of £(406)m in interest rate derivatives offset by £206m in credit derivatives as a result of
more observable valuation inputs.
Unrealised gains and losses on Level 3 financial assets and liabilities
The following table discloses the unrealised gains and losses recognised in the year arising on Level 3 assets and liabilities held at year end.
Unrealised gains and losses recognised during the period on Level 3 assets and liabilities held at period end
2013 2012
As at 31 December
Income statement Other
compre-
hensive
£m
Income statement Other
compre-
hensive
£m
Trading
income
£m
Other
income
£m
Total
£m
Trading
income
£m
Other
income
£m
Total
£m
Trading portfolio assets 222 – – 222 186 (7) – 179
Financial assets designated at fair value (1,276) 10 – (1,266) (174) (2) – (176)
Available for sale assets – (5) 27 22 (3) (11) 67 53
Investment property (27) (31) – (58) 14 (28) – (14)
Trading portfolio liabilities – – – – (1) – – (1)
Financial liabilities designated at fair value 74 – – 74 39 63 – 102
Net derivative financial instruments (411) (75) – (486) (1,747) (61) – (1,808)
Total (1,418) (101) 27 (1,492) (1,686) (46) 67 (1.665)
The decrease in trading income of £1,102m within financial assets designated at fair value is primarily driven by a trading loss on the ESHLA loan
portfolio due to losses incurred on fixed rate loan portfolios as a result of an increase in interest rate forward curves. Trading income on net
derivative financial instruments increased by £1,336m over the year mainly driven by more favourable returns on derivatives. Credit and monoline
derivatives within the Structured Capital Portfolio Markets business resulted in an increase in trading income of £461m compared to prior year.
Additionally, within rates trading, interest rate derivates drove a £247m increase in trading income; whilst equity derivatives also had a positive
variance of £235m over prior year.
Valuation techniques and sensitivity analysis
Sensitivity analysis is performed on products with significant unobservable inputs (Level 3) to generate a range of reasonably possible alternative
valuations. The sensitivity methodologies applied take account of the nature of valuation techniques used, as well as the availability and reliability
of observable proxy and historical data and the impact of using alternative models.
Sensitivities are dynamically calculated on a monthly basis. The calculation is based on range or spread data of a reliable reference source or a
scenario based on relevant market analysis alongside the impact of using alternative models. Sensitivities are calculated without reflecting the
impact of any diversification in the portfolio.
The valuation techniques used for the main products that are not determined by reference to unadjusted quoted prices (Level 1), observability and
sensitivity analysis for Level 3 are described below.
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