Barclays 2013 Annual Report Download - page 411

Traded market risk measurement – regulatory view
Regulatory view of traded positions
For regulatory purposes, the trading book is defined as one that
consists of all positions in CRD financial instruments and commodities
held either with trading intent or in order to hedge other elements of
trading and which are either free of any restrictive covenants on their
tradability or able to be hedged. A CRD financial instrument is defined
as a contract that gives rise to both a financial asset of one party and a
financial liability or equity instrument of another party.
All of the below regulatory measures, including the standardised
approach, generate market risk capital requirement, in line with the
regulatory requirements set out in the Capital Requirements Directive
(‘CRD III’) and the PRA’s Prudential Sourcebook for Banks, Building
Societies and Investment Firms (‘BIPRU’). Positions which cannot be
included in the trading book are included within the banking book and
generate risk capital requirements in line with this treatment.
Regulatory measurements are not used for market risk management
purposes due to the scope and model assumptions.
Regulatory measures for traded market risk
There are a number of regulatory measures which Barclays has
permission to use in calculating regulatory capital (internal models
approval). These are listed below:
Measure Definition
Regulatory Value at Risk (VaR) An estimate of the potential loss arising from unfavourable market movements calibrated to 99%
confidence interval 10 day holding period.
Stressed Value at Risk (SVaR) An estimate of the potential loss arising from a 12 month period of significant financial stress over a
10 day holding period.
Incremental Risk Charge (IRC) An estimate of the incremental risk arising from rating migrations and defaults, beyond what is already
captured in specific market risk VaR for the non correlation trading portfolio.
All Price Risk (APR) An estimate of all the material market risk, including rating migration and default for the correlation
trading portfolio.
Regulatory VaR
 Estimates the potential loss arising from unfavourable market movements.
 Regulatory VaR differs from the management approach
VaR Variable Regulatory Management
Confidence interval 99% 95%
Scope As approved by the Regulator (PRA) Barclays’ management view of market risk
exposures. Includes trading books and banking
books exposed to price risk
Look-back period 2 years 2 years
Liquidity Horizon 10 days 1 day
Regulatory VaR allows oversight of the total potential losses, at a given
confidence level, of those trading books which received approval from
the regulator to be covered via an internal model. Regulatory VaR levels
contribute to the calculation of the Market Risk RWAs.
Management VaR allows the bank to supervise the total risk within
Investment bank, including the trading book and some banking books.
Management VaR is also utilised for internal capital model (economic
capital).
Regulatory VaR is fundamentally the same as the Management VaR
(see page 407), with the key differences listed above.
The model includes RNIVs, as described on page 408.
Stressed Value at Risk (SVaR)
 Estimates the potential loss arising from unfavourable market
movements in a stressed environment;
 Identical to Regulatory VaR, but calibrated over a one year stressed
period; and
 Regulatory capital is allocated to individual businesses, but not
actively used by management to set limits on traded market risk.
As part of CRD III, Barclays is required to compute a market risk capital
requirement based on a 10 day, 99% VaR metric calibrated to a period
of significant financial stress. This Stressed VaR (‘SVaR’) capital
requirement is added to the market risk capital requirement arising
from Regulatory VaR, the Incremental Risk Charge and the All Price Risk
on an undiversified basis.
The SVaR model is required to be identical to the VaR model used by
Barclays, with the exception that the SVaR model must be calibrated to
a one-year period of significant financial stress (‘the SVaR period’).
Barclays selects the SVaR period to be a one-year period that
maximises the sum of general market risk Regulatory VaR and specific
market risk Regulatory VaR for positions in scope of regulatory
approval. The SVaR period is reviewed on a quarterly basis or when
required by material changes in market conditions or the trading
portfolio.
SVaR cannot be meaningfully backtested and is not sensitive to current
market conditions and consequently, it is more difficult to use SVaR as
a direct risk management tool as compared to VaR. Many market risk
factors with complete historical data over a two year period may not
have complete data covering the SVaR period and consequently, more
proxies may be required for SVaR than for VaR. The SVaR metric itself
has the same strengths and weaknesses as the Group’s VaR model.
Incremental Risk Charge (IRC)
 Captures risk arising from rating migrations and defaults for traded
debt instruments incremental to that already captured by Regulatory
VaR and SVaR.
As part of CRD III, Barclays was required to introduce IRC to capture the
risk arising from ratings migrations or defaults in the traded credit
portfolio. IRC measures this risk at a 99.9% confidence level with a one
year holding period and applies to all positions in scope for specific risk
including sovereign exposure.
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