Barclays 2013 Annual Report Download - page 413

Regulatory Backtesting
Backtesting is the method by which Barclays checks and affirms that its
procedures for estimating VaR are reasonable and serve its purpose of
estimating the potential loss arising from unfavourable market
movements. Barclays’ backtesting process is a regulatory requirement
and seeks to estimate the performance of the regulatory VaR model if it
had been employed in prior periods. Performance is measured by the
number of exceptions to the model i.e. net trading P&L loss in one
trading day is greater than the estimated VaR for the same trading day.
If exceptions occur regularly (a 99% confidence interval indicates that
one exception will occur in 100 days), Barclays’ procedures could be
underestimating VaR.
Backtesting is performed at a legal entity level and at sub-portfolio
levels on Barclays’ regulatory VaR model. Regulatory backtesting
compares Regulatory VaR at 99% confidence level (1 day holding
period equivalent) to a clean and hypothetical P&L as defined in BIPRU
7.10. The consolidated Barclays Bank Plc and Barclays Capital Securities
Ltd is the highest level of consolidation for the VaR models that are
used in the calculation of regulatory capital.
A backtesting exception is generated when a loss is greater than the
daily VaR for any given day.
As defined by the PRA, a green model is consistent with a good
working VaR model and is achieved for models that have four or fewer
backtesting exceptions in a 12-month period. Backtesting counts the
number of days when a loss (as defined by the PRA) exceeds the
corresponding VaR estimate, measured at the 99% regulatory
confidence level. For the Investment Bank’s VaR model, green model
status was maintained for 2013.
Backtesting is also performed on management VaR to ensure it
remains reasonable and fit for purpose.
The table below shows the VaR backtesting exceptions in 2013. A
backtesting exception is generated when a loss is greater than the VaR
for a given day.
Regulatory portfolios Total exceptions Status
Equities 3 Green
Commodities 3 Green
Foreign Exchange 3 Green
Credit Correlation 2 Green
Fixed Income Rates 2 Green
Emerging Markets (excluding credit) 2 Green
Credit Support Annex Aware Discounting Valuation 1 Green
Treasury 0 Green
Client Capital Management 0 Green
Fixed Income Credit 0 Green
Emerging Markets Credit 0 Green
Counterparty Risk Trading Single Name Trading 0 Green
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