Barclays plc - Annual Report 2008 - Financial statements - The Group

50 Fair value of financial instruments (continued)
At 31st December 2007
Significant Potential effect recorded Potential effect recorded
unobservable in profit or loss in equity
parameters a Favourable (Unfavourable) Favourable (Unfavourable)
£m £m £m £m
Asset backed securities and loans and derivatives with asset backed underlyings iii, iv, v, vi 868 (868) 5 (5)
Private equity iii, iv 75 (75) 36 (36)
Derivative assets and liabilities and financial liabilities designated at fair value:
– Fund derivatives and structured notes iii 441 (147) – –
– Other structured derivatives and notes i, ii, iii 57 (56) – –
Other i, ii, iii, iv, v, vi 3 (1) – –
Total 1,444 (1,147) 41 (41)
The effect of stressing the significant unobservable assumptions to a range of reasonably possible alternatives would be to increase the fair values by up
to £2.4bn (2007: £1.5bn) or to decrease the fair values by up to £3.0bn (2007: £1.2bn) with substantially all the potential effect being recorded in profit or
loss rather than equity.
Asset backed securities and loans, and derivatives with asset backed underlyings
Asset backed securities, loans and related derivatives contribute most to the sensitivity analysis as at 31st December 2008. The stress effect increased
in this area in 2008 due to continued market dislocation and increased levels of unobservability. The stresses having the most significant impact on the
analysis are: for commercial mortgage backed securities and loans, changing the spreads to discount rates to close to originated levels (favourable stress)
and increasing spreads to between 2 and 6% (unfavourable stress); for residential mortgage backed securities and loans, changing the spreads to
discount rates by +/-10%; and for collateralised debt obligations that reference asset backed securities and loans, primarily by changing the spreads to
discount rates by +/-20%.
Private equity
The sensitivity amounts are calculated by stressing the key valuation inputs to each individual valuation – generally either price:earnings ratios or EBITDA
analysis. The stresses are then determined by comparing these metrics with a range of similar companies.
Derivative exposure to Monoline insurers
The favourable stress is calculated by reference to counterparty quotes for second loss protection on the appropriate reference obligations. The unfavourable
stress is calculated by applying a default scenario to the monolines that are rated BBB or below.
Fund derivatives and structured notes
The valuation of these transactions takes into account the risk that the underlying fund-linked asset value will decrease too quickly to be able to re-hedge
with risk-free instruments (‘gap risk’). The sensitivity amounts are determined by applying stresses to market quotes for hedging the relevant gap risk.
The unfavourable stress is based on a shift in the gap risk price of 34bp, the favourable stress applies to a pricing level that assumes no gap event will occur.
Other structured derivatives and notes
The sensitivity amounts are calculated principally by adjusting the relevant correlation sensitivity used in the valuation model by a range based on
structured derivative data available in consensuses pricing services. The range applied to correlation sensitivity is an adverse or beneficial move of
15bp applied to the correlation sensitivity.
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 (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, was as follows:
At 31st December
2008 2007
£m £m
At 1st January 154 534
New transactions 77 134
Amounts recognised in profit or loss during the year (103) (514)
At 31st December 128 154
3
Financial statements
The net asset fair value position of the related financial instruments increased by £16,357m for the year ended 31st December 2008 (31st December 2007:
£2,842m). In many cases these changes in fair values were offset by changes in fair values of other financial instruments, which were priced in active
markets or valued by using a valuation technique which is supported by observable market prices or rates, or by transactions which have been realised.
Notes
a (i)-(vi) refer to valuation inputs listed on page 289.
Barclays PLC Annual Report 2008 291