Barclays 2013 Annual Report Download - page 409

Management of traded market risk
Barclays’ governance structure helps ensure all market risks that the
Group is exposed to are well managed and understood.
Traded market risk is generated primarily as a result of market making
activities, syndications and providing structured risk management
solutions to clients at Barclays Investment Bank only. The Investment
Bank also manages the Interest Rate risks for other businesses through
the Group Treasury function. Positions will contribute both to market
risk limits and regulatory capital if relevant.
Traded market risk measurement – management view
Market risk management measures
Barclays uses a range of complementary approaches to measure traded
market risk which aim to capture the level of losses that the Investment
Bank is exposed to due to unfavourable changes in asset prices. The
primary tools to control the firm’s exposures are:
Measure Description
Management Value at Risk (VaR) An estimate of the potential loss arising from unfavourable market movements, if the current positions
were to be held unchanged for one business day.
Primary stress tests An estimate of potential losses that might arise from extreme market moves or scenarios to key liquid risk
factors.
Secondary stress tests Modelled losses to unfavourable market movements to illiquid market risk exposures.
Combined scenario stresses Multi asset scenario analysis of extreme, but plausible events that may impact the market risk exposures
of the Investment Bank.
Barclays’ use of Management VaR for traded market risk is broader
than the application for use of VaR for regulatory capital and captures
standardised, advanced and certain banking books where traded
market risks are deemed to exist. The wider scope of Management VaR
is what Barclays deems as material market risk exposures which may
have a detrimental impact on the performance of the investment bank.
The scope used in Regulatory VaR (see page 409) applies only to
trading book positions as defined by the PRA which is a narrower
scope.
Stress testing and scenario analysis are also an important part of the
risk management framework, to capture potential risk that may arise in
severe but plausible events.
Management VaR
 Estimates the potential loss arising from unfavourable market
movements.
 Management VaR differs from the Regulatory VaR used for capital
purposes.
 Backtesting performed to ensure model is fit for purpose.
VaR 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 books and some banking books. VaR is split by risk
factor as summarised below:
Risk factor Description
Interest rate Changes in the level of interest rates can impact prices of interest rate sensitive assets, such as bonds and
derivative instruments, for example, Interest Rate Swaps.
Spread risk Spread Risk (difference between bond yields and swap rates) arises when the business has positions in
both bonds and derivative instruments; both assets may trade at different levels but are fundamentally
exposed to similar risk.
Foreign exchange risk The impact of changes in foreign exchange rates and volatilities. Investment Bank may be exposed to
adverse or favourable movements in FX prices (e.g. movement of FX trade after entering into a forward
rate FX contract).
Equity risk Market risk may arise due to changes in equity prices, volatilities and dividend yields, for example, the
Investment Bank is exposed to this risk as part of its market making activities, syndication or underwriting
Initial Public Offerings.
Commodity risk Commodity risk arises primarily from the Investment Bank’s commodities businesses, who provide
hedging solutions to clients and access to financial investors.
Inflation risk The impact of changes in inflation rates and volatilities on cash instruments and derivatives. This arises as
part of market making activities, whereby Investment Bank may be exposed to changes in inflation rates,
for example, market making syndications for inflation linked securities.
Credit risk The market risk that arises from the uncertainty of credit quality impacting prices of assets, for example,
positions such as Corporate Bonds, Securitised products and derivative instruments, for example, Credit
Default Swaps provide market risk exposure.
Basis risk The impact of changes in interest rate tenor basis (e.g. the basis between swaps vs. 3M LIBOR and swaps.
6M LIBOR) and cross currency basis and is primarily generated as a result of market making activities.
In some instances, historical data is not available for particular market
risk factors for the entire lookback period, for example, complete
historical data would not be available for an equity following an Initial
Public Offering. In these cases, market risk managers will proxy the
unavailable market risk factor data with available data for a related
market risk factor.
The output of the Management VaR model can be readily tested
through backtesting process. Backtesting checks instances where
actual losses exceed the predicted potential loss estimated by the VaR
model. If the number of instances is too high, where actual losses
exceed the predicted potential loss estimated by the VaR model, this
could indicate limitations with the VaR calculation, for example, the
calculation is not capturing certain market risk factors.
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