Barclays 2013 Annual Report Download - page 410

Risk management
Market risk management continued
The Management VaR model in some instances may not appropriately
measure some market risk exposures, especially for market moves that
are not directly observable via prices. Market risk managers are
required to identify risks which are not adequately captured in VaR
(‘risks not in VaR’ or ‘RNIVs’). RNIVs can be of two varieties:
 Non VaR-type RNIVs: Represents a risk which would not be well
captured by any VaR model either because it represents an event not
historically observed (e.g. currency peg break) or a market risk factor
which is not seen to move frequently (e.g. correlation).
 VaR-type RNIVs: Represents risks that are not captured in VaR, mainly
because of infrastructure limitations or methodology limitations.
Risk managers estimate RNIVs on a regular basis to improve the
accuracy of the VaR capture model.
When reviewing VaR estimates, the following considerations should be
taken into account:
 The 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 may not fully capture the market risk of
positions that cannot be closed out or hedged within one day;
 VaR is based on positions as at close of business and consequently, it
is not an appropriate measure for intra-day risk arising from a
position bought and sold on the same day; and
 VaR does not indicate the potential loss beyond the VaR confidence
level.
Limits are applied at the total Investment Bank level as well as by risk
factor type, which are then cascaded down to particular trading desks
and businesses by the market risk management function.
See page 192 for a review of Management VaR in 2013.
Primary stress tests
Key tool used by management to measure liquid market risks from
extreme market movements or scenarios in each major trading asset
class.
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;
 Foreign exchange – impact of unfavourable moves in currency prices
and volatility;
 Equity – shocks to share prices including exposures to specific
geographies, products 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
associated hedges.
Primary stresses apply moves to liquid assets incorporating up to a few
days holding period. Shock scenarios are determined by a combination
of observed extreme historical moves and forward looking elements as
appropriate.
Primary stresses are calculated for each asset class on a standalone
basis. Risk managers calculate several stress scenarios and publish
results to senior managers to highlight concentrations and the level of
exposures. Primary stress loss limits are applied across the Investment
Bank and is a key market risk control.
Secondary stress tests
 Key tool used by management to measure illiquid market risks from
extreme market movements or scenarios in each major trading asset
class.
Secondary stress tests are used in measuring potential losses arising
from illiquid market risks that cannot be hedged or reduced within the
time period covered in primary stress tests. Therefore, the extended
holding period under stress may compound the estimated losses under
a stressed environment which is a more conservative assumption.
These may relate to financial instruments or risk exposures which are
not readily or easily tradable or markets that are naturally sensitive to a
rapid deterioration in market conditions.
For each asset class, secondary stresses are aggregated to a single
stress loss which allows the business to manage its liquid and illiquid
risk factors. Limits against secondary stress losses are also applied,
which allows the firm to manage and control the level of illiquid risk
factors.
Stresses are specific to the exposure held and are calibrated on both
observed extreme moves and some forward looking elements as
appropriate.
Combined scenario stresses
 Key tool used by management to measure aggregated losses across
the entire trading book as a result of extreme forward looking
scenarios encompassing simultaneous shocks to multiple asset
classes.
The combined scenario stresses apply simultaneous shocks to several
risk factors assessed by applying respective changes in foreign
exchange rates, interest rates, credit spreads, commodities and equities
to the entire portfolio, for example, the impact of a rapid and extreme
slowdown in the global economy. The measure shows results on a
multi-asset basis across all Investment Banking trading exposures.
Combined scenarios are a useful tool in identifying concentrations of
exposures and highlighting areas that may provide some
diversification.
The estimated impact on market risk exposures are calculated and
reported by the market risk management function on a weekly basis.
The stress scenario and the calibration on the shocks are also reviewed
by market risk managers periodically for its relevance considering any
market environment.
Scenarios such as a global recession, deterioration in the availability of
liquidity and contagion effects of a slowdown in one of the major
economies are examples of combined scenarios. If necessary, market
event specific scenarios are also calculated, such as, an unfavourable
outcome of a US debt ceiling negotiation and the impact of a disorderly
exit of quantitative easing programmes.
See page 194 for a review of combined scenario stresses in 2013.
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408 Barclays PLC Annual Report 2013