Barclays 2015 Annual Report Download - page 136

134 I Barclays PLC Annual Report 2015 home.barclays/annualreport
Risk review
Risk management
Market risk management
Overview
Traded market risk
Traded market risk arises primarily as a result of client facilitation in
wholesale markets, involving market making activities, risk management
solutions and execution of syndications. Upon execution of a trade with
a client, the Group will look to hedge against the risk of the trade
moving in an adverse direction. Mismatches between client transactions
and hedges result in market risk due to changes in asset prices.
Non-traded market risk
Banking book operations generate non-traded market risk, primarily
through interest rate risk arising from the sensitivity of net interest
margins due to changes in interest rates. The principal banking
businesses engage in internal derivative trades with Treasury to manage
their interest rate risk to within its defined risk appetite. However, the
businesses remain susceptible to market risk from four key sources:
 prepayment risk: balance run-off may be faster or slower than
expected, due to customer behaviour in response to general economic
conditions or interest rates. This can lead to a mismatch between the
actual balance of products and the hedges executed with Treasury
based on initial expectations
 recruitment risk: the volume of new business may be lower or higher
than expected, requiring the business to unwind or execute hedging
transactions with Treasury at different rates than expected
 residual risk and margin compression: the business may retain a small
element of interest rate risk to facilitate the day-to-day management
of customer business. Additionally, in the current low rate
environment, deposits on which the Group sets the interest rate are
exposed to margin compression. This is because for any further fall in
base rate the Group must absorb an increasing amount of the rate
move in its margin
 lag risk: the risk of being unable to re-price products immediately after
a change in interest rates due to mandatory notification periods. This
is highly prevalent in managed rates saving products (e.g. Every Day
Saver) where customers must be informed in writing of any planned
reduction in their savings rate.
Pension risk
The Group maintains a number of defined benefit pension schemes for
past and current employees. The ability of the pension fund to meet the
projected pension payments is maintained principally through
investments.
Pension risk arises because the estimated market value of the pension
fund assets might decline; investment returns might reduce; or the
estimated value of the pension liabilities might increase as a result of
changes to the market process. The Group monitors the market risks
arising from its defined benefit pension schemes, and works with the
Trustees to address shortfalls. In these circumstances, the Group could
be required or might choose to make extra contributions to the pension
fund. The Group’s main defined benefit scheme was closed to new
entrants in 2012.
Insurance risk
Insurance risk is managed within Africa Banking, where four categories
of insurance risk are recognised: short-term insurance underwriting risk,
life insurance underwriting risk, life insurance mismatch risk, and life and
insurance investment risk.
Insurance risk arises when:
 aggregate insurance premiums received from policyholders under a
portfolio of insurance contracts are inadequate to cover the claims
arising from those policies and the expenses associated with the
management of the portfolio of policies and claims
 premiums are not invested to adequately match the duration, timing
and size of expected claims
 unexpected fluctuations in claims arise or excessive exposure (e.g. in
individual or aggregate exposures) relative to capacity is retained in
the entity.
Insurance entities also incur market risk (on the investment of
accumulated premiums and shareholder capital), credit risk
(counterparty exposure on investments and reinsurance transactions),
liquidity risk and operational risk from their investments and financial
operations.
Market risk
The risk of a reduction to earnings or capital
due to volatility of trading book positions or
as a consequence of running a banking book
balance sheet and liquidity pools.
Board Risk Committee
Organisation and structure
Financial Risk Committee
■ monitors risk profile with respect to financial risk appetite
■ debates and agrees actions on the financial risk profile and risk strategy across the Group
■ considers issues escalated by Risk Type Heads and Business Risk Directors
Market Risk Committee
■ oversees the management of the Group’s market risk profile
■ reviews market risk appetite proposals from the business
■ reviews arising market or regulatory issues
■ reviews state of the implementation of the Key Risk Frameworks in the businesses