Market risk is the risk that arises from adverse movements in equity, bond, interest rate, foreign exchange or other traded markets and arises primarily in our Securities division.

The Securities division is exposed to the market risk deriving from trading in equity and fixed income securities. Senior management is closely involved in  its risk management process, which is also regularly monitored at group level. There are controls, supplemented by cash limits, on individual large or slow moving equity or fixed income positions. Real time controls on the size and risk profile of trading books and of individual books within these are maintained.

Our treasury operations do not trade in money market instruments although they are held for liquidity and yield purposes. Nor do we trade speculatively in derivatives as a principal. Interest rate mismatch and currency exposure policies are established by the Treasury Committee with compliance monitored daily. We continue our long established policy of broadly matching interest rate liabilities whereby we swap variable rate financing into fixed rate, particularly in regard to our asset financing book. We have minimal currency exposure, since most of our business is transacted in sterling. Non-sterling financing is funded by liabilities in the relevant currency or swapped into sterling to hedge currency exposure.

Returns from the group’s capital and reserves are necessarily subject to interest rate fluctuations and as a matter of policy these are not hedged.

Most of the group’s activities are located in the British Isles. Our currency exposure resulting from our investment in overseas subsidiaries, although increased, is currently relatively small, the extent to which the group’s profit and consolidated balance sheet is affected by movements in exchange rates is minimal.