Barclays 2015 Annual Report Download - page 292

290 I Barclays PLC Annual Report 2015 home.barclays/annualreport
Notes to the financial statements
18 Fair value of assets and liabilities continued
Uncollateralised derivative trading activity is used to determine this scaling factor. The trading history analysed includes new trades, terminations,
trade restructures and novations. The FFVA balance and movement is driven by the Barclays’ own cost of funding spread over LIBOR, counterparty
default probabilities and recovery rates, as well as the market value of the underlying derivatives. Movements in the market value of the portfolio in
scope for FFVA are mainly driven by interest rates, inflation rates and foreign exchange levels.
Barclays continues to monitor market practices and activity to ensure the approach to uncollateralised derivative valuation remains appropriate. The
above approach has been in use since 2012 with no significant changes.
Derivative credit and debit valuation adjustments
Credit valuation adjustments (CVA) and debit valuation adjustments (DVA) are incorporated into derivative valuations to reflect the impact on fair
value of counterparty credit risk and Barclays’ own credit quality respectively. These adjustments are calculated for uncollateralised and partially
collateralised derivatives across all asset classes. CVA and DVA are calculated using estimates of exposure at default, probability of default and
recovery rates, at a counterparty level. Counterparties include, but are not limited to, corporates, monolines, sovereigns and sovereign agencies,
supranationals and special purpose vehicles.
Exposure at default is generally based on expected exposure, estimated through the simulation of underlying risk factors. For some complex
products, where this approach is not feasible, simplifying assumptions are made, either through approximating with a more vanilla structure, or
using current or scenario based mark to market as an estimate of future exposure. Where a strong CSA exists to mitigate counterparty credit risk, the
exposure at default is set to zero.
Probability of default and recovery rate information is generally sourced from the CDS markets. For counterparties where this information is not
available, or considered unreliable due to the nature of the exposure, alternative approaches are taken based on mapping internal counterparty
ratings onto historical or market based default and recovery information. In particular, this applies to sovereign related names where the effect of
using the recovery assumptions implied in CDS levels would imply a £56m (2014: £120m) increase in CVA.
Correlation between counterparty credit and underlying derivative risk factors may lead to a systematic bias in the valuation of counterparty credit
risk, termed ‘wrong way’ or ‘right way’ risk. This is not incorporated into the CVA calculation, but risk of ‘wrong way’ exposure is controlled at the
trade origination stage.
CVA decreased by £91m to £327m, primarily due to reduction in the average maturity date of the portfolio as trades tend to maturity. In addition,
there was a reduction in monoline CVA of £15m due to trade unwinds. DVA increased by £12m to £189m, primarily as a result of Barclays’ credit
spreads deteriorating.
Portfolio exemptions
The Group uses the portfolio exemption in IFRS 13 Fair Value Measurement to measure the fair value of groups of financial assets and liabilities.
Instruments are measured using the price that would be received to sell a net long position, i.e. an asset, for a particular risk exposure or to transfer a
net short position, i.e. a liability, for a particular risk exposure in an orderly transaction between market participants at the balance sheet date under
current market conditions. Accordingly, the Group measures the fair value of the group of financial assets and liabilities consistently with how market
participants would price the net risk exposure at the measurement date.
Unrecognised gains as a result of the use of valuation models using unobservable inputs
The amount that has yet to be recognised in income that relates to the difference between the transaction price, i.e. the fair value at initial
recognition, and the amount that would have arisen had valuation models using unobservable inputs been used on initial recognition, less amounts
subsequently recognised, is £101m (2014: £96m). There are additions of £35m (2014: nil) and £31m (2014: £41m) of amortisation and releases.
The reserve held for unrecognised gains is predominantly related to derivative financial instruments.
Third party credit enhancements
Structured and brokered certificates of deposit issued by Barclays Group are insured up to $250,000 per depositor by the Federal Deposit Insurance
Corporation (FDIC) in the US. The FDIC is funded by premiums that Barclays and other banks pay for deposit insurance coverage. The carrying value
of these issued certificates of deposit that are designated under the IAS 39 fair value option includes this third party credit enhancement. The
on-balance sheet value of these brokered certificates of deposit amounted to £3,729m (2014: £3,650m).
Valuation control framework
The valuation control framework covers fair value positions and is a key control in ensuring the material accuracy of valuations.
The valuation control function within Finance is responsible for independent price verification, oversight of prudent and fair value adjustments and
escalation of valuation issues.
Governance over the valuation process is the responsibility of the Valuation Committee, and this is the governance forum to which valuation issues
are escalated.
The Valuation Committee meets on a monthly basis and is responsible for overseeing valuation policy and practice within the Group. It provides
reports to the Board Audit Committee, which examines the judgements taken on valuation and related disclosures.
Price verification uses independently sourced data that is deemed most representative of the market. The characteristics against which the data
source is assessed are independence, reliability, consistency with other sources and evidence that the data represents an executable price. The most
current data available at the balance sheet date is used. Where significant variances are noted in the independent price verification process, an
adjustment is made to fair value. Additional fair value adjustments may be made to reflect such factors as bid-offer spreads, market data uncertainty,
model limitations and counterparty risk. Further detail on these fair value adjustments is disclosed on page 289.