RBS 2011 Annual Report Download - page 235

RBS Group 2011 233
Trading VaR
The Group has disclosed separately the Counterparty Exposure Management (CEM) trading book exposure and the exposure of Core excluding CEM.
The CEM desk manages the counterparty risk associated with over-the-counter derivatives on behalf of GBM. This risk is centrally controlled and
actively managed to reduce excessive concentrations and unwanted counterparty exposures. The hedge positions are reported in the trading books
and, thus, included in market risk VaR calculations for the Group, whereas the market value of the counterparty credit risk does not contribute to VaR for
regulatory capital. The CEM VaR is disclosed separately, to allow a clear representation of the risk exposure of the trading book including and excluding
these hedge activities.
The table below analyses the VaR for the Group’s trading portfolios segregated by type of market risk exposure.
2011 2010 2009
Trading VaR Average
£m
Period end
£m
Maximum
£m
Minimum
£m
Average
£m
Period end
£m
Maximum
£m
Minimum
£m
Average
£m
Period end
£m
Maximum
£m
Minimum
£m
Interest rate 53.4 68.1 79.2 27.5 51.6 57.0 83.0 32.5 57.0 50.5 112.8 28.1
Credit spread 82.7 74.3 151.1 47.4 166.3 133.4 243.2 110.2 148.3 174.8 231.2 66.9
Currency 10.3 16.2 19.2 5.2 17.9 14.8 28.0 8.4 17.9 20.7 35.8 9.2
Equity 9.4 8.0 17.3 4.6 9.5 10.9 17.9 2.7 13.0 13.1 23.2 2.7
Commodity 1.4 2.3 7.0 — 9.5 0.5 18.1 0.5 14.3 8.9 32.1 6.5
Diversification (1) (52.3) (75.6) (86.1)
105.5 116.6 181.3 59.7 168.5 141.0 252.1 103.0 155.2 181.9 229.0 76.8
Core (total) 75.8 89.1 133.9 41.7 103.6 101.2 153.4 58.3 101.5 127.3 137.8 54.8
Core CEM 36.8 52.4 54.1 21.9 53.3 54.6 82.4 30.3 29.7 38.6 41.3 11.5
Core excluding CEM 59.2 42.1 106.2 35.3 82.8 78.7 108.7 53.6 86.7 97.4 128.5 54.9
Non-Core 64.4 34.6 128.6 30.0
105.7 101.4 169.4 63.2 86.3 84.8 162.1 29.3
Note:
(1) The Group benefits from diversification, which reflects the risk reduction achieved by allocating investments across various financial instrument types, industry counterparties, currencies and regions.
The extent of diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. Diversification has an inverse relationship with correlation. The
diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
Key points
xThe Group’s market risk profile in 2010 was equally split across
Non-Core and Core divisions, with a concentrated exposure to credit
spread risk factors. The credit spread risk exposure significantly
decreased in 2011, primarily due to the reduction in ABS trading
inventory in Core and the restructuring of some monoline hedges for
banking book exposures in Non-Core, in line with the overall
business strategy to reduce risk exposures.
xThe credit spread VaR also decreased due to the adoption of a
more appropriate daily time series for sub-prime/subordinated
RMBS and as the period of high volatility relating to the 2008/2009
financial crisis dropped out of the VaR calculation.
xOverall the average interest rate trading VaR was relatively
unchanged between 2011 and 2010.
xAt the end of 2010, the commodity VaR was materially lower than
the average for that year as a result of the completion of the sale of
the Group’s interest in the RBS Sempra Commodities joint venture.
The commodity VaR increased slightly from mid-September 2011,
due to improvements in capturing risk for commodity futures and
indices.