Wells Fargo 2013 Annual Report Download - page 97

VaR Backtesting The Basel 2.5 market risk capital rule requires
conducting backtesting as one form of validation of the VaR
model. Backtesting is a comparison of the daily VaR estimate
with the actual clean profit and loss (clean P&L) as defined by
the market risk capital rule. Clean P&L is the change in the value
of the Company’s covered trading positions that would have
occurred had previous end-of-day covered trading positions
remained unchanged (therefore, excluding fees, commissions,
net interest income, and intraday trading gains and losses). The
backtesting analysis compares the daily Total VaR Measure for
each of the trading days in the preceding 12 months with the net
clean P&L. Clean P&L does not include credit adjustments and
other activity not representative of daily price changes driven by
market risk factors. The clean P&L measure of revenue is used to
evaluate the performance of the Total VaR Measure and is not
comparable to our actual daily trading net revenues, as reported
elsewhere in this Report.
Any observed clean P&L loss in excess of the Total VaR
Measure is considered an exception. The actual number of
exceptions (that is, the number of business days for which the
clean P&L losses exceed the corresponding 1-day, 99% Total VaR
Measure) over the preceding 12 months is used to determine the
VaR multiplier for the capital calculation. The number of actual
backtesting exceptions is dependent on current market
performance relative to historic market volatility. This capital
multiplier increases from a minimum of three to a maximum of
four, depending on the number of exceptions.
There were no backtesting exceptions which occurred in
fourth quarter 2013. There were exceptions in second quarter
2013 that were driven by increased volatility in the fixed income
markets from uncertainty about the Federal Reserve’s intentions
regarding their quantitative easing efforts. These exceptions did
not result in an increase in the capital multiplier.
Table 51 shows daily Total VaR Measure (1-day, 99%) for the
year ended December 31, 2013. The Wells Fargo average Total
VaR Measure for fourth quarter 2013 was $21 million with a low
of $18 million and a high of $25 million.
Table 51: Daily Total VaR Measure
95