Barclays 2013 Annual Report Download - page 407

Introduction to the management of market risk
Barclays’ definition of market risk
Market risk is the risk of the Group’s earnings or
capital being reduced due to:
 The Group being impacted by changes in the
level or volatility of positions in its trading
books. This includes changes in the interest
rates, credit spreads, commodity prices, equity
prices and foreign exchange levels (‘traded
market risk’).
 The Group being unable to hedge its banking
book balance sheet at prevailing market levels
(‘non-traded market risk’).
 The Group’s defined benefit obligations
increasing or the value of the assets backing
these defined benefit obligations decreasing
due to changes in both the level and volatility
of prices (‘pension risk’).
Each of the above has been identified by
Barclays’ management as key risks underlying
the principal risk: market risk.
These disclosures are unaudited unless otherwise stated
Overview
Traded market risk overview (audited)
Traded market risk arises primarily as a result of client facilitation in
wholesale markets, involving market making activities, risk
management solutions and execution of syndications. Upon execution
of a trade with a client, Barclays will look to hedge against the risk of
the trade moving in an adverse direction. Mismatches between client
transactions and hedges result in market risk due to changes in asset
prices.
Non-traded market risk overview (audited)
Barclays banking book operations generate non-traded market risk,
primarily through interest rate risk arising from the sensitivity of net
interest margins to changes in interest rates. Banking businesses, such
as RBB or Corporate Banking, engage in internal derivative trades with
Treasury to remove this interest rate risk, however, the businesses
remain susceptible to market risk from three key sources:
 Prepayment risk: Balance run-off may be faster or slower than
expected due to economic conditions or customers’ response to
interest rates. This can lead to a mismatch between the anticipated
balance of products provided to customers and the hedges executed
with Treasury;
 Recruitment risk: The volume of new business may be lower or
higher than expected requiring the business to unwind or execute
hedging transactions with Treasury at different rates than expected;
and
 Residual risk and margin compression: The business may retain a
small element of interest rate risk to facilitate the day-to-day
management of customer business. Additionally, in the current low
rate environment, Barclays managed rate deposits are exposed to
margin compression. This is because for any further fall in base rate
Barclays must absorb an increasing amount of the rate move in its
margin.
Barclays banking operations also generate non-traded market risk
through the sensitivity of balance sheet items to movements in market
levels, primarily foreign exchange and interest rates.
Pension risk overview (audited)
Barclays maintains a number of defined benefit pension schemes for
past and current employees. The ability of the pension fund to meet the
projected pension payments is maintained principally through
investments.
Pension risk arises because the estimated market value of the pension
fund assets might decline; or their investment returns might reduce; or
the estimated value of the pension liabilities might increase. Barclays
monitors the market risks arising from its defined benefit pension
schemes, and works with the trustees to address shortfalls. In these
circumstances, Barclays could be required or might choose to make
extra contributions to the pension fund. The Group’s main defined
benefit scheme was closed to new entrants in 2012.
Organisation and structure
Traded risk in the businesses resides primarily in the Investment Bank,
while non-traded market risk resides mainly in Retail and Business
Banking, Corporate Banking, Wealth and Investment Management and
Treasury. Pension risk is monitored centrally with the cost borne across
businesses.
Risk management
Market risk management
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