Barclays 2014 Annual Report Download - page 289

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18 Fair value of financial instruments continued
Observability: In general, input parameters are deemed observable up to liquid maturities which are determined separately for each parameter and
underlying.
Level 3 sensitivity: Sensitivity is estimated based on the dispersion of consensus data services either directly or through proxies.
Derivative exposure to monoline insurers
Description: These products are derivatives through which credit protection has been purchased on structured debt instruments (primarily
collateralised loan obligations or CLOs) from monoline insurers.
Valuation: Given the bespoke nature of the CDS, the primary valuation input is the price of the cash instrument it protects.
Observability: While the market value of the cash instrument underlying the CDS contract may be observable, its use in the valuation of CDS is
considered unobservable due to the bespoke nature of the monoline CDS contracts.
Level 3 sensitivity: Due to the high degree of uncertainty, the sensitivity reflects the impact of writing down the credit protection element of fair
value to zero.
Government and government sponsored debt
Description: These are government bonds, supra sovereign bonds and agency bonds.
Valuation: Liquid government bonds actively traded through an exchange or clearing house are marked to the closing levels observed in these
markets. Less liquid bonds are valued using observable market prices which are sourced from broker quotes, inter-dealer prices or other reliable
pricing services. Where there are no observable market prices, fair value is determined by reference to either issuances or CDS spreads of the same
issuer as proxy inputs to obtain discounted cash flow amounts.
Observability: Where an observable market price is not available, the bond is considered Level 3.
Level 3 sensitivity: Sensitivity is calculated by using the range of observable proxy prices.
Corporate debt
Description: This primarily contains corporate bonds.
Valuation: Corporate bonds are valued using observable market prices which are sourced from broker quotes, inter-dealer prices or other reliable
pricing services. Where there are no observable market prices, fair value is determined by reference to either issuances or CDS spreads of the same
issuer as proxy inputs to obtain discounted cash flow amounts. In the absence of observable bond or CDS spreads for the respective issuer, similar
reference assets or sector averages are applied as a proxy (the appropriateness of proxies being assessed based on issuer, coupon, maturity and
industry).
Observability: Where an observable market price is not available, the security is considered Level 3.
Level 3 sensitivity: The sensitivity for the corporate bonds portfolio is determined by applying a shift to each underlying position driven by average
ranges of external levels observed in the market for similar bonds.
Non-asset backed loans
Description: This category is largely made up of fixed rate loans, such as the ESHLA portfolio, which are valued using models that discount
expected future cash flows.
Valuation: Fixed rate loans are valued using models that calculate fair value based on observable interest rates and unobservable loan spreads.
Unobservable loan spreads incorporate funding costs, the level of comparable assets such as gilts, issuer credit quality and other factors.
Observability: Within this population, the unobservable input is the loan spread.
Level 3 sensitivity: The sensitivity for fixed rate loans is calculated by applying a shift to loan spreads.
Asset backed securities
Description: These are securities that are linked to the cash flows of a pool of referenced assets via securitisation. This category includes residential
mortgage backed securities, commercial mortgage backed securities, CDOs, CLOs and other asset backed securities.
Valuation: Where available, valuations are based on observable market prices which are sourced from broker quotes and inter-dealer prices.
Otherwise, valuations are determined using industry standard discounted cash flow analysis that calculates the fair value based on valuation
inputs such as constant default rate, conditional prepayment rate, loss given default and yield. These inputs are determined by reference to a
number of sources including proxying to observed transactions, market indices or market research, and by assessing underlying collateral
performance.
Proxying to observed transactions, indices or research requires an assessment and comparison of the relevant securities’ underlying attributes
including collateral, tranche, vintage, underlying asset composition (historical losses, borrower characteristics, and loan attributes such as
loan-to-value ratio and geographic concentration) and credit ratings (original and current).
Observability: Where an asset backed product does not have an observable market price, and the valuation is determined using a discounted cash
flow analysis, an instrument is considered unobservable.
Level 3 sensitivity: The sensitivity analysis for asset backed products is based on externally sourced pricing dispersion, defined at the position level.
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