Barclays 2015 Annual Report Download - page 284

282 I Barclays PLC Annual Report 2015 home.barclays/annualreport
Notes to the financial statements
18 Fair value of assets and liabilities continued
Assets and liabilities move between Level 2 and Level 3 primarily due to i) an increase or decrease in observable market activity related to an input, or
ii) a change in the significance of the unobservable input, with assets and liabilities classified as Level 3 if an unobservable input is deemed
significant.
Unrealised gains and losses on Level 3 financial assets and liabilities
The following table discloses the unrealised gains and losses recognised in the year arising on Level 3 financial assets and liabilities held at year end.
Unrealised gains and losses recognised during the period on Level 3 assets and liabilities held at period end
As at 31 December
2015 2014
Income statement Other
compre-
hensive
income
£m
Total
£m
Income statement Other
compre-
hensive
income
£m
Total
£m
Trading
income
£m
Other
income
£m
Trading
income
£m
Other
income
£m
Trading portfolio assets (125) – – (125) 466 – – 466
Financial assets designated at fair value (562) (17) – (579) 1,849 (9) – 1,840
Available for sale assets – (20) 488 468 – 572 80 652
Trading portfolio liabilities (1) – – (1) (3) – – (3)
Financial liabilities designated at fair value (24) 76 – 52 98 118 – 216
Othera – (22) – (22) – 5 – 5
Net derivative financial instruments 123 – – 123 (238) – – (238)
Total (589) 17 488 (84) 2,172 686 80 2,938
The trading losses of £562m (2014: trading gains of £1,849m) within Level 3 financial assets designated at fair value was primarily due to fair value
losses on the ESHLA loan portfolio of £531m.
Valuation techniques and sensitivity analysis
Sensitivity analysis is performed on products with significant unobservable inputs (Level 3) to generate a range of reasonably possible alternative
valuations. The sensitivity methodologies applied take account of the nature of valuation techniques used, as well as the availability and reliability of
observable proxy and historical data and the impact of using alternative models.
Sensitivities are dynamically calculated on a monthly basis. The calculation is based on range or spread data of a reliable reference source or a
scenario based on relevant market analysis alongside the impact of using alternative models. Sensitivities are calculated without reflecting the impact
of any diversification in the portfolio.
The valuation techniques used for the material products within Levels 2 and 3, and observability and sensitivity analysis for products within Level 3,
are described below.
Interest rate derivatives
Description: These are derivatives linked to interest rates or inflation indices. This category includes futures, interest rate and inflation swaps,
swaptions, caps, floors, inflation options, balance guaranteed swaps and other exotic interest rate derivatives.
Valuation: Interest rate derivative cash flows are valued using interest rate yield curves whereby observable market data is used to construct the term
structure of forward rates. This is then used to project and discount future cash flows based on the parameters of the trade. Instruments with
optionality are valued using volatilities implied from market observable inputs. Exotic interest rate derivatives are valued using industry standard and
bespoke models based on observable and unobservable market parameter inputs. Input parameters include interest rates, volatilities, correlations
and others as appropriate. Inflation forward curves and interest rate yield curves may be extrapolated beyond observable tenors. Balance guaranteed
swaps are valued using cash flow models that calculate fair value based on loss projections, prepayment, recovery and discount rates. These
parameters are determined by reference to underlying asset performance.
Observability: In general, input parameters are deemed observable up to liquid maturities which are determined separately for each parameter and
underlying. Certain correlation, convexity, long dated forwards and volatility exposures are unobservable beyond liquid maturities. Unobservable
market data and model inputs are set by referencing liquid market instruments and applying extrapolation techniques or inferred via another
reasonable method.
Level 3 sensitivity: Sensitivity relating to unobservable valuation inputs is based on the dispersion of consensus data services where available,
otherwise stress scenarios or historic data are used.
Notes
a Other consists of investment properties.