Barclays 2015 Annual Report Download - page 180

178 I Barclays PLC Annual Report 2015 home.barclays/annualreport
Risk review
Volatility of the available for sale portfolio in the liquidity pool
Changes in value of the available for sale exposures flow directly through capital via the equity reserve. The volatility of the value of the available for
sale investments in the liquidity pool is captured and managed through a value measure rather than an earning measure, i.e. the non-traded market
risk VaR.
Although the underlying methodology to calculate the non-traded VaR is the same as the one used to calculate traded management VaR, the two
measures are not directly comparable. The non-traded VaR represents the volatility to capital driven by the available for sale exposures. This is used
for internal management purposes and although it is not formally backtested like the regulatory VaR (as shown on page 175), it is reviewed on a
regular basis by risk managers to ensure it remains adequate for risk appetite and monitoring purposes.
These exposures are in the banking book and do not meet the criteria for trading book treatment. As such available for sale volatility is a risk which is
taken into account in the IRRBB internal capital assessment, which is covered by the Pillar 2 capital framework.
2015 2016
£50m
£40m
£30m
Non-
traded
Value at
Risk (£m)
Volatility of the available for sale portfolio in liquidity pool
Analysis of volatility of the available for sale portfolio in liquidity pool
2015
For the year ended 31 December Average
£m
High
£m
Low
£m
Non-traded market VaR (daily, 95%) 41.6 48.5 37.0
The non-traded VaR is mainly driven by volatility of interest rates in developed markets in the chart above.
The increase in VaR seen in H215 is due to the volatility in the government and swap rate markets observed in that period, particularly in the US and
the UK. The subsequent decrease was due to subsiding market volatility in combination with a reduction in exposure.
Foreign exchange risk
The Group is exposed to two sources of foreign exchange risk.
a) Transactional foreign currency exposure
Transactional foreign exchange exposure represents exposure on banking assets and liabilities denominated in currencies other than the functional
currency of the transacting entity.
The Group’s risk management policies prevent the holding of significant open positions in foreign currencies outside the trading portfolio managed
by the Investment Bank which is monitored through VaR.
Banking book transactional foreign exchange risk outside of the Investment Bank is monitored on a daily basis by the market risk functions and
minimised by the businesses.
b) Translational foreign exchange exposure
The Group’s investments in overseas subsidiaries and branches create capital resources denominated in foreign currencies, principally USD, EUR and
ZAR. Changes in the GBP value of the net investments due to foreign currency movements are captured in the currency translation reserve, resulting
in a movement in CET1 capital.
The Group’s strategy is to minimise the volatility of the capital ratios caused by foreign exchange movements, by ensuring that the CET1 capital
movements broadly match the revaluation of the Group’s foreign currency RWA exposures.
The economic hedges primarily represent the USD and EUR preference shares and Additional Tier 1 (AT1) instruments that are held as equity, which
are accounted for at historic cost under IFRS and do not qualify as hedges for accounting purposes.
Risk performance
Market risk