Financial review

	Market risk management Market risk is the risk of loss arising from changes in the level or volatility of market prices, which can occur in the interest rate, foreign exchange, equity and commodity markets. It is incurred as a result of both trading and asset/liability management activities.
	The market risk management policies of the Group are determined by the Group Risk Management Committee, which also determines overall market risk appetite. The Group’s policy is that exposure to market risk arising from trading activities is concentrated in Barclays Capital. The Group’s banking businesses are also subject to market risk, which arises in relation to non-trading positions, such as capital balances, demand deposits and customer originated transactions and flows. The management of market risk in this context is discussed further under Treasury asset and liability management on Treasury asset and liability management Trading activities Trading includes both customer oriented business and positions which are taken on Barclays Capital’s own account. For maximum efficiency, these two activities are managed together. In anticipation of future customer demand, the Group maintains access to market liquidity by quoting bid and offer prices with other market makers and carries an inventory of capital market and treasury instruments including a broad range of cash, securities and derivatives. Trading positions and any offsetting hedges are established as appropriate to accommodate customer or Group requirements. Barclays Capital also takes positions in the interest rate, foreign exchange, debt, equity and commodity markets based on expectations of customer demand or a change in market conditions. Derivatives entered into for trading purposes include swaps, forward rate agreements, futures, options and combinations of these instruments. For a description of the nature of derivative instruments, see Derivatives In Barclays Capital, the formal process for the management of risk is through the Barclays Capital Risk Management Committee. Day to day responsibility for managing exposure to market risk lies with the Chief Executive of Barclays Capital, supported by a dedicated global market risk management unit that operates independently of the business areas. Risk control The Group uses a daily ‘value at risk’ measure as the primary mechanism for controlling market risk. Daily Value at Risk (DVAR) is an estimate, with a confidence level of 98%, of the potential loss which might arise if the current positions were to be held unchanged for one business day. Daily losses exceeding the DVAR figure are likely to occur, on average, only twice in every one hundred business days. The Group Risk Management Committee allocates a total DVAR limit for the Group and delegates the day to day control and monitoring of market risk to the Group Market Risk Director, who sets limits for each business area. In the case of Barclays Capital, the overall limit is cascaded down to the trading business areas, subject to endorsement by the Group Market Risk Director and the Barclays Capital Risk Management Committee. Daily risk utilisation reports are produced across four main risk categories, namely interest rate (including credit spread risk), currency, equity and commodity risk. As DVAR does not provide a direct indication of the potential size of losses that could arise in extreme conditions, Barclays Capital uses a number of complementary techniques for controlling market risk. Weekly firm-wide stress tests, based on both historical and hypothetical extreme movements of market prices, are produced. These are reviewed by the senior management of Barclays Capital at a risk meeting chaired by the Chief Executive of Barclays Capital. If the potential loss indicated by a stress test exceeds an agreed trigger level, then the positions captured by the stress test are reported to, and reviewed by, Group Risk Oversight Committee. Revenue losses are also subject to triggers, which can also lead to positions being reported to Group Risk Oversight Committee. Analysis of market risk exposures There has been no significant change in overall market risk exposure in 2000, although average DVAR was slightly higher than in 1999 (see table and chart below). Year-end DVAR was £19.0m (1999 £20.2m).

	DVAR: Summary table for 2000 and 1999
		Twelve months to 31st December 2000			Twelve months to 31st December 1999
		Average £m	High* £m	Low* £m	Average £m	High* £m	Low* £m
	Interest rate risk	16.2	23.7	10.7	13.7	30.2	6.2
	Foreign exchange risk	2.9	4.7	1.8	2.8	11.7	0.8
	Equities risk	3.9	7.1	1.4	1.7	3.7	0.6
	Commodities risk	1.4	3.5	0.9	1.2	2.2	0.5
	Diversification effect	(6.9)			(3.3)
	Total DVAR	17.5	27.7	11.5	16.1	32.5	7.7
	* The high (and low) DVAR figures reported for each category did not necessarily occur on the same day as the high (and low) DVAR reported as a whole. A corresponding diversification effect cannot be calculated and is therefore omitted from the above table.

Risk measurement Barclays Capital uses the historical simulation method for calculating DVAR. At the beginning of 2000, the length of the historical sample was increased from one to two years. This change has not had a material impact on the reported numbers. The above table includes the daily average, maximum and minimum values of DVAR, calculated using a one year sample for 1999 and a two year sample for 2000. In August 2000, Barclays Capital introduced an enhanced methodology for calculating DVAR. The previous methodology segregated interest rate exposures into two categories: government and non-government. For risk measurement purposes, all non-government exposures were assumed to trade at LIBOR flat, and were therefore implicitly assumed to have the same price volatility as an interest rate swap. The new methodology maps interest rate exposures into eight categories: government, interest rate swaps and six credit grades for non-government exposures. The greater definition provided allows the system to discriminate between the market risk of holding bonds with different credit qualities, for example AAA securities as against non-investment grade securities. In particular, it will better measure the effectiveness of hedging strategies such as shorting governments or swaps against non-government bond portfolios. Since the introduction of the new method, Barclays Capital has also continued to produce DVAR estimates using the old methodology. The impact of the change has been to increase reported DVAR by an amount which has averaged £3.2m and which has ranged between £1.3m and £5.8m. It has not been possible to apply the new methodology retrospectively to daily positions prior to August 2000, and so the figures tabulated above are based on the old methodology. As at 31st December 2000, the total DVAR using the new methodology was £21.3m compared with £19.0m using the old methodology. Barclays Capital recognises the importance of assessing the effectiveness of DVAR. The main approach employed is the technique known as back-testing, which counts the number of days when trading related losses are bigger than the estimated DVAR figure. For Barclays Capital as a whole there were no instances in 2000 of a trading revenue loss exceeding the corresponding DVAR.