Welcome to Barclays Structural Hedge Teach-In. I will now hand over to Marina Shchukina, Head of Investor Relations. Good afternoon, everyone, and welcome to this teaching session on structural hedging. We know that structural hedging programs have become a key focus area for the market, so I'm delighted to introduce Dan Fairclough, our group treasurer, who will explain what Barclays Structural Hedge program is and how it is managed. Please note, all the information presented is either illustrative or existing Barclays disclosure, but we hope that this will provide helpful conceptual background as well as transparency to this important topic. Without further ado, I'll hand over to Dan now. Thank you, Marina, and good afternoon. The agenda today is to cover: how does interest rate risk arise on a bank's balance sheet? Why are some products subject to structural hedge rather than hedged directly? What is the purpose of structural hedging? How these hedges are executed. What are the factors that drive the income contribution? What is the process for determining the size and life of the hedge? And I'll conclude with a reminder of our existing disclosure. Let's begin on slide 3 with a stylized bank balance sheet. We can split the balance sheet into a trading book and a banking book. Trading book contains broadly matched assets and liabilities that are held with trading intent, such as derivatives and repos. Generally, a set level of interest rate risk will be permitted to trading desks or governed under a bank's market risk management framework. The trading book is accounted for at fair value. Earnings are recognized as trading income, and any interest rate risk is capitalized under the VaR framework. Let me turn to the banking book, which is the focus for today's presentation. Banking book assets and liabilities consist of a mix of fixed and floating rate products with varying durations. Some example products are shown on the slide. Mismatches between the profile of assets and liabilities create interest rate risk. This whole topic is referred to as interest rate risk in the banking book, or IRRBB, as it's happily known. This is the subject of considerable regulatory interest, particularly post SVB, which at its heart, was an interest rate stress first and a liquidity stress second. The banking book is mostly accounted for at amortized cost. Its earnings recognized as net interest income, or NII, and its interest rate risk. Net of hedging activity is generally capitalized in the U.K. under Pillar Two. Going into slide four, where we'll cover at a high level how Barclays Treasury proactively manages banking book interest rate risk. As a broad principle, the bank will seek to manage interest rate risk back to a floating rate. At Barclays, treasury performs this role by extracting interest rate risks and undertaking hedging activity centrally, the financial result of which is then passed back to the business. To do this, we refer to two types of hedging programs: a product hedge, as shown on the right of the slide, and a structural hedge, as shown on the left. Let me cover off the product hedge first. It's relatively simple and involves products with a fixed rate and fixed maturity date. Example, products include fixed rate mortgages and consumer loans on the asset side, or a fixed rate term deposit on the liability side. The interest rate risk can be hedged with an interest rate swap, where the received fixed cash flows from assets or pay fixed flows from liabilities are swapped to floating rate. This is simple to do given contractual rates and maturities, although additional complexity might arise from product features such as prepayment options. Such risks can then be managed at a portfolio level. Let me turn to the structural hedge. For liabilities to be eligible for structural hedging, they must meet three criteria. Firstly, they are fixed rate, or if not fixed rate, then expected to be insensitive to rates. Secondly, they have no contractual maturity date. And thirdly, they're expected to remain on the balance sheet. Some examples include equity and certain products, such as rate-insensitive current accounts and a portion of instant access savings accounts. Interest rate risk on these products is managed on a portfolio approach based on a view of their tenure or stability, which requires an expectation of customer behavior. We will go into more detail on structural hedge eligibility in later slides. To effect the hedge, we use interest rate swaps. These swaps are received fixed rates, pay floating rate, and they produce cash flows that match against pay fixed liabilities we're seeking to hedge, and the received floating assets on the balance sheet, either from customer assets or cash held at central banks in the liquidity pool. As a consequence, they will smooth income through the interest rate cycle and protect NII from a sharp or unexpected fall in rates. More on this to come later. Let me talk through an illustrative scenario on slide 5 that demonstrates in more detail how interest rate risk arises in a world without hedging. For reference, we've put a diagram map on the top right of the page to show you where we've zoomed in on the diagram from slide 4. As marked step 1 on the slide, the customer deposits cash in a rate-insensitive current account. In step 2, Barclays pays a 0% fixed rate on this account. In step 3, the business places the cash with Treasury, who in turn places it with the Bank of England as an overnight floating rate. Finally, in step 4, Treasury reflects this floating rate income earned back to the business. Together, the pay fixed and received floats generate an interest rate risk exposure, and this exposure will be fully reflected in changes to product margin. As you can see illustrated in the table on the bottom right, this will be positive for financial performance when rates are rising and negative when rates are falling. Now on slide 6, we show how the picture has changed through structural hedging and set out the resulting stabilization of margins over time. In step 5, as marked on the slide, the business passes the interest rate risk to Treasury, and Treasury executes a term receive fixed and pay floating swap. In step 6, the floating rate income from the central bank cash and the pay leg on the swap offset, resulting in a fixed rate interest income for the business at that point in time. The margin remains stable and will remain there for some time, even as the bank rate moves. In step seven, Treasury then hedges the group's net position across all these portfolios, thus transferring the interest rate risk to the market. This scenario is stylized, and in reality, there are many businesses with different products and different behavioral profiles. Some commentators have pointed out that although the hedge is often referred to as a tailwind, in that it increases income when rates are rising, it has actually had the effect of dampening income compared to having no hedge in place. This is indeed the case. It is a hedge after all. The real benefit of the hedge arises when rates are falling or are stable after a period of rising. Effectively, the structural hedge has the effect of partially deferring the benefit of rising rates to later periods when this income is expected to be more valuable. Before I continue, it's also worth a comment on how these hedges are accounted for and capitalized. These received fixed swaps are entered into a hedge accounting relationship with floating rate assets on the balance sheet, either business loans or balances at central banks. The match of these cash flows means movements are taken to the cash flow hedge reserve and not taken to P&L. U.K. regulators use Pillar Two to assess whether any unhedged risk remains in the banking book, and if there is, will require capital to be held against it. For Barclays, this is assessed by using a VaR model to simulate exposures and apply capital to a tail scenario. If the hedge is operated and governed as a hedge, then the swaps will be taken into account for this purpose, removing the need to hold as much capital against the banking book exposures. Another regulatory tool to be aware of is the Supervisory Outlier Test. This is a set of shocks that banks must apply to their banking books, including certain hedges. The net capital at risk in these scenarios is not allowed to exceed 50% of Tier 1 capital. Both of these regulatory overlays give additional insights into why, in addition to income smoothing, U.K. banks hedge in this way. As an aside, the Supervisory Outlier Test is also a reason why an SVB-type crisis is far less likely in Europe. The exposures involved in that event would have been well beyond regulatory appetite. The previous example showed a structural hedge at one point in time. In reality, structural hedge will contain numerous swaps executed over time. On slide 7, this example, structural hedge, includes 6 5-year swaps, each with a GBP 100 notional value. One swap has been executed each year at the prevailing swap rate. At T 0 on that chart, the annual income in year 1 generated from this hedge would total GBP 12, resulting in an average yield of 2.4% and an average duration of 2.5 years. This income is what is referred to as gross structural hedge income, the income from the structural hedge. Going to slide 8, the structural hedge is often called a caterpillar hedge. This is because each month, as shown in step two, part of the hedge matures. In step three, a new trade is then entered into to maintain the overall duration. This hedge will result in a received fixed position, contributing to a fixed income with certainty for each of the next periods, T plus one, T plus two, T plus three, and so on. This causes the hedge profile to creep forward a bit like a caterpillar. I like to think of the most recent received fixed cash flows running through the hedge program over time as the undulation of a caterpillar. In the illustrative example, each swap is of the same duration. In practice, each period's maturing swaps may be a combination of different historic duration swaps. At Barclays, whilst our average duration is 2.5 years, and most of our hedging is a 5-year tenor, we do hedge at a variety of points across the yield curve, including the 3-year and 7-year tenors, again, to manage the duration profile of various portfolios. The maturity of these swaps will be rolled more frequently, for example, monthly, creating a very granular reinvestment profile. The average maturing yields are therefore a blend of the various duration swaps, and the forward hedge yield will be an averaged reinvestment rate over time. In Barclays, these swaps will be across a number of different currencies, reflecting where we have equity and deposit balances, and will also be across different legal entities, depending upon where the exposures sit, although clearly sterling is dominant. The use of swaps enables granular profiling for expected behavior and provides flexibility to manage balance sheet changes through the monthly roll. This is a key differentiator to many U.S. banks, which more typically structurally hedged through investment in fixed rate securities, which in my mind, co-mingles liquidity risk management and interest rate risk management. It can be more difficult to adjust over time to balance sheet changes and can be less transparent. On slide 9, this example helps illustrate some of the points we've been making about the momentum nature of the hedge. Once it gets going on a trajectory, it has some resilience to marginal changes in rates and notionals.... We start with the previous example we provided. From a rates perspective, in example 1 at the top right of the slide, we show that with a 100 basis points drop in rates, we still see a material increase in income from GBP 12 to GBP 15. This is because of two factors: firstly, the recent year of interest income continues to pay at the higher level, and the new rates are still at a materially higher level than the low rates that are maturing. From a notional perspective, there is also resilience. In example two, on the bottom right of the slide, despite a 10% reduction in total notional to GBP 450, NII would still increase over 10%. Even here, NII would be materially higher again in the following year, as we would expect to roll the full GBP 100, unless we had a further reduction in the total notional. From a maturing notional or hedge roll perspective, only 20% of the maturing notional would need to be rolled to maintain GBP 12 annual income. As above, if there was stability in the following year, the prior trend of increased income would be restored. I will add again that all of this is illustrative, but hopefully it's useful to understand the basic dynamics at play. Regulators across various jurisdictions provide guidance on interest rate risk in the banking book and what they look for in a structural hedge to ensure it's treated as a hedge for capital purposes. They generally expect that the hedge should be programmatic and with an objective of income smoothing. While changes can be made to the hedge, they should be made within a framework, appropriately governed, and generally infrequent. In that context, when building a structural hedge, there are two key considerations that we'll briefly touch on: the size of the notional hedged and the duration. Starting with the notional on slide 10, banks structurally hedge the stable portions of balances that are expected to remain on the balance sheet. In general, there are three principles underpinning whether a balance is hedgeable or not. These are: firstly, we exclude floating rate and contractual balances. Secondly, we undertake behavioral modeling to remove volatile and concentrated balances. The analysis focuses on concentration by customer type, business segment, and balance. This determines the total hedgeable capacity. And finally, additional outflow buffers can be used to provide protection from short-term, unexpected, or uncertain attrition. We've also listed out three key products included in the structural hedge. Firstly, current accounts, which follow the principles just mentioned. Secondly, managed rate deposits, which are instant access savings accounts, are hedged based on the expected pass-through, meaning that we only hedge the expected fixed rate portion. Finally, with equity, only the tangible cash portion is hedged. As at Q3 2023, Barclays' total deposits and equity was GBP 617 billion. After factoring in all of the considerations just mentioned, the total structural hedge notional was GBP 252 billion. There's been some discussion about how deposit dynamics might impact the size of the hedge and economic impacts. The consideration is that the frequent roll of hedge provides an effective lever to adjust hedge size if needed. The size of the U.K. structural hedges has declined modestly, given market deposit dynamics, and potentially there's more of this to come. While there will be an income impact to this, as I noted earlier, there is some resilience built into the hedge at current rates, and there's also some symmetry in how the dynamic between rates and balances play out. By this, I mean that if rates decline, we may expect to see less deposit movement. The impact will also depend on where the customer migrates to, and whether this is to another deposit type not eligible for structural hedging within the bank or external to the bank. Turning to the duration of the hedge on slide 11, the first input into hedge duration is the expected behavioral life of the underlying balance being hedged. This is determined using historical customer behavior data and effectively provides an upper bound to hedge life. Generally, stickier deposits will have a longer tenor. For example, current accounts will generally be our longest tenor. In addition, though, we will also consider within deposit behavior parameters, accepting that these cannot be perfectly calculated, the optimal duration for the hedge. Generally, this is within a reasonably tight range, as there's a natural trade-off between the level of income protection that the hedge provides and how quickly it will respond to changes in rates. The hedge duration is evaluated on an ongoing basis to ensure it provides a profile that fits with our product characteristics and provides the best trade-off from an income smoothing perspective. Generally, the shorter the hedge, the more quickly it will reprice at current rates, positive in a rising rate environment. Barclays structural hedge average duration is circa 2.5 years, and this has ranged between 2.5 years and 3 years in recent times. Turning to slide 12, the outcome of all of these actions is that the structural hedge smooths income and protects against sharp downward movements in interest rates. During 2008-2009, fall in interest rates from 5% to 0.5% could have reduced the income on our non-interest bearing current accounts by 90% without a structural hedge program. In fact, our income decreased less than 5% over this period, which was supported by having hedges in place. Onto slide 13, we arrive back at the structural hedge disclosure that Barclays provided in Q3, showing the hedge notional, average yield, and the gross hedge income since 2019, including the amounts that are locked in for 2024 and 2025, based on hedges we have already executed. But we hope this presentation has provided some useful background to this slide... Turning finally to slide 14, to summarize our key messages today on the structural hedge. Firstly, banks generally seek to hedge balances back to floating rate. Structural hedging is undertaken on fixed rate or rate-insensitive balances that are challenging to product hedge, as they have no fixed maturity. The largest balances are current accounts, managed rate savings accounts, and equity. Hedging reduces the income volatility that businesses would otherwise experience, given mismatches between their assets and liabilities, and it also manages capital add-ons that would otherwise apply in Pillar Two. In practice, the hedge consists of a granular set of received fixed swaps that offset the pay fixed nature of structural hedge balances. These swaps are rolled on an ongoing basis, providing a smoothed interest rate profile. We talk about the income from the structural hedge as the gross income, given the offset between pay float and floating rate assets. At this point in the cycle, this income growth is relatively robust to changes in rates and balances, given its momentum properties. The hedge effectively defers some of the margin benefit from recent sharp rises in interest rates to future periods, when it's expected to be more valuable. The hedge provided major support to income in 2008 to 2009, as the bank rate reduced, and the hedge should continue to support Barclays NII going forward. Thank you for listening, and I hope you found this presentation helpful. I will ask the operator in a moment to open up the call for questions. Before I do, I want to make clear that this event is what it says on the tin. It's an education session on the structural hedge, and so I'll be taking questions solely related to this content. You will, I know, understand that there is no intention here to go beyond the disclosure boundary established at our Q3 results. Operator, over to you. If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by two. Thank you. Our first question today comes from Rohith Chandra-Rajan from Bank of America. Please go ahead. Your line is now open. Hi, good afternoon, and thank you very much for doing this. It's a really helpful session on a key topic. I was wondering if you could help me just understand a little bit more on two aspects, please. One is how you think about the notional, and the second is just to help us model the yield going forward. So on the notional, I guess, you know, we're all aware as the deposit mix changes, so the hedgability of those deposits changes. But I thought slide ten was interesting, particularly the behavioral analysis, which I guess is, you know, if you think about current accounts, for example, you may or may not think now that current accounts might be a bit less sticky than you thought they were two or three years ago. So I was just wondering if you could help us understand the impact of the behavioral analysis as well as the deposit mix when we think about the hedge notional and how sort of forward-looking you are when you're thinking about sizing the hedge. That would be the first one. Can give you the second one now, if that's helpful. Well, why don't we take them in turn? Hey, Rohit. Rohit, how are you? So look, first thing I'd say is we do take into account a range of different factors when we consider the behavioral analysis. I've quoted some of those in my earlier comments. But clearly we try and make this dynamic. And there's clearly a lot of new data that we're now getting, and so we're factoring those into our analysis as well. And then I think you had another comment on the current account stability. Probably the first thing I'll say is that we were pretty conservative and prudent in terms of reacting to the increase in current account and other balances during the COVID period. So we consider that very, very carefully, and we manage buffers on that basis. But obviously we'll be making sure that we feed in to that analysis that the learnings that we've got over the past 18 months or so. But we're broadly comfortable with that analysis as it is now. How forward-looking- Um, w- Are you on the hedge? When... so when you're thinking about behavior, how... it's obviously not just based on deposit base today, it's based on what you think is gonna happen, but how forward-looking- Yeah Are you in that? The analysis is an attempt to be forward-looking. So it is designed to be a view of which balances do we think are gonna be there for, for the foreseeable future, and you can see that in the, you know, in the life that we hedge to. So it is a forward-looking assessment of what balances do we think are gonna be there over that period. Having said that, as I sort of, you know, mentioned in my comments, we've obviously got significant levers available should we need to adjust the size of the hedge in response to, to, to deposit moves. Do you have a... Did you have a second question? Yeah. Yeah, that links in very nicely to the second question, so thank you for that. So the previous slide, I guess, slide 9, exhibit 2, where you show the example of the reduction in hedge notional. I guess there are a number of... So the way that that example is set up, where you just don't you don't roll all of the maturity, so you don't reinvest all of the maturities. If you continue- Yeah to do that over a period of time, you'd obviously shorten the duration of the hedge. So if you think- Yeah of a hedge is... So it... Question one, is that what happens? And if it's not, if you want to maintain the duration, do you do that through a series of offsetting swaps along the life of the hedge, or, or how does that work? And then I guess what I'm trying to get to is- Yeah You know, as the notional declines, how should we, from the outside, think about modeling the hedge yield? ... Yeah. Yeah, no, you're, you're absolutely right. If you don't reinvest, then over time, you'll see a fairly slow and small, but, but definitely a creep shorter in the hedge. You know, generally, what we'll, what we'll look to do is take action to just maintain the overall duration. So, you know, you could obviously put on offsetting, offsetting swaps, but from our perspective, the first thing we would do in the waterfall of actions is to pause the reinvestments. And then we, we'd adjust for that at the appropriate time to, to maintain broadly the same tenor. Uh, okay. Thank you. Sorry, so when we try and model that, we think about the maturities in the period and what you may or may not put on. Is that the best way to think about it from an- Yeah ... from an external perspective? So what's maturing- Uh, correct. And how much of that- Yeah ... you're reinvesting at five years? Correct. Correct, yes. Okay. Thank you very much. And the effect of the non-rolls reducing the duration of the tenor is a factor, but it's gonna... it's a relatively modest impact. Okay. Thank you. Thanks, Rohith. Next question, please. Thank you. The next question comes from Guy Stebbings from BNP Paribas. Please go ahead, Guy. Your line is now open. Good afternoon, thanks also for hosting this, very much appreciated. A couple questions, similar to Rohith, really building on some of his. So in terms of the hedge notional and customer behavior, I just wondered if you could talk at all about the rate backdrop when you think about whether deposits are rate insensitive. What I mean by that is, and clearly, whether something is rate insensitive might depend on exactly what sort of rate assumptions you're making there. Yeah. Presumably, if you say rates are going from 1- 3, you'd have a much larger pool than saying rates going from 1- 7 or 8. So I don't know if you're able to frame that at all for us. And then the second question, if you want me to give it now as well, sort of on that notion of how it might evolve. I mean, in a hypothetical scenario that you had to reduce the hedge down in a given period more than the maturities in that period, can you just talk us through that process? I know you, that certainly would not be your central expectation. You've got lots of flexibility, but just in that hypothetical scenario, how you would go about doing that. Thank you. Yeah, I mean, I probably don't have too much more to add on the first question. As I said, we look at a range of factors that will determine whether we think the balances are gonna be around or not for the foreseeable future. That's obviously the basis on which we would structurally hedge. We will take into account in that analysis the sensitivity to rates, and as you said, that may vary as rates move higher. On the second question, which I think was kind of what levers would we have available if we saw a very material drop in deposits. I mean, I think the first thing I'd say is just to reiterate, we obviously have significant levers available in terms of the role of the hedge balances. So we've said that's sort of GBP 50 billion-GBP 60 billion over the course of 2024, so it's quite a powerful lever. If we move beyond that, then obviously we could decide whether we wanted to, you know, run that risk and take the capital consequences of that, or put in place offsetting swaps to neutralize the position. And the effect of that would obviously be to then have that income change run through the life of the swaps over time. So they would probably be the two levers that we would consider. And obviously, if we're near that, we'd consider the circumstances at the time. Okay, thank you. Um- Thanks very much, Guy. Next question, please. The next question comes from Harry Bartlett from Redburn Atlantic. Please go ahead, Harry. Your line is now open. Hi, thanks for taking my questions. Just a couple of mechanical questions. I guess, would you be able to say, you know, what the kind of ramifications are if you were to overhedge on the structural hedge? You know, what are the kind of key risks. And I guess, you know, again, another mechanical one: Does the floating rate portion of the hedge always net out? That's it. Thank you. Yeah. Yep, thank you. So I think we covered some of this on the previous question. You know, if we, if we ended up in an overhedge position, obviously the first thing that we would, we would look to do was just manage that through the, through the monthly rolls, of which there's, there's considerable quantum to do that. And as we said in the comments, there's quite a bit of resilience built in overall NII from doing so, given where we are in the rate cycle. As I said in the answer to the previous question, you know, clearly there are other levers available to us, in the event that we move beyond that point. And we could, could put in place offsetting swaps, to neutralize the hedge. And clearly, that would result in an impact in NII sort of over time, through the life of those swaps. So that would be the two main levers I would call out. And I think your second question was, have we got an offset to the floating leg? And the answer to that is absolutely yes. There are obviously significant floating rate assets on balance sheet. So, you know, in effect, you could view that as being part of what we're hedging, the mismatch between the floating rate assets and the fixed rate liability. So yes, there's another side to the swap leg. Thanks for your question, Harry. Next question please, operator. The next question comes from Robin Down from HSBC. Please go ahead, Robin. Your line is now open. Good afternoon, Dan. Can I ask you the same question I asked you at breakfast a couple of weeks ago, and see if I can get a bit more, a bit more kind of detail in the answer? And that's around the yield on the maturing swaps in 2024 and 2025. I mean, if I look at your kind of slide 12, which sort of chart that I think we've all the others kind of draw. You know, if we look at where five-year swaps were, kind of back in, in kind of 2019, they were kind of 70-80 basis points. And yet you've got—you're telling us that maturing swaps in 2024 are gonna be kind of something like 110-125. Now, I accept there's probably a small element of the equity structural hedge that was kind of perhaps invested out at 10 years, that will have a slightly higher yield. But I'm still kind of struggling to work out why your maturing swap yield is so high. And one of your competitors is talking about an 80 basis point maturing of swap yield in 2024, which feels kind of far more logical. So where is the gap? You know, what, why is it so high in 2024? Yeah, I think it's... Obviously, I can't comment on, you know, the hedging profile for other peers. Yeah. But from our perspective, as I said, the five-year is a weighted average, and we will hedge to other maturities. And the reason we do that is driven by the behavioral analysis, and where we, you know, where we feel comfortable, that we've got stability of those balances. So there is a range. It's not just five. So there's a... As I said, there's an element of three years, there's an element of seven years. So that will explain, you know, differences, from peers. Obviously, I don't know exactly what their behavioral analysis is, but, from a Barclays perspective, that's the reason you can't just look back to the historic five-year rate. Clearly, how that will play out will depend on sort of the shape of the curve going forward over time. I think you also said previously that there were the swap wasn't entirely sterling. I don't know if you could give us a mix between- Yeah ... sterling and kind of dollar. I assume the rest of it is dollar. Yeah, there'll be a little bit of dollars and a little bit of euros. And really, this is linked to partly where we have equity invested in subsidiaries for the equity structural hedge. But it will also be partly to do with whether we have structural balances, other currencies, in other currencies and geographies. And obviously, you know, we have a corporate business in Europe. So, I don't think I can give any additional disclosure on the breakdown here. But, you know, if you sort of look through the mix of the group, that'll give you a pretty good sense. And as I said in the comments, it is predominantly sterling. Okay, great. Thank you. All right. Thank you, Robin. Next question, please. The next question comes from Simon Ponset from JP Morgan. Please go ahead, Simon, your line is now open. Hello, can you hear me properly? Yes. Hey, Simon. Yeah, I have a question on the degree of involvement of the regulator in your hedging policy. I presume you have to explain in quite a lot of detail what you are planning to do, and it seems to be extremely mechanical. The way you explain it, it seems to be extremely mechanical. And I was wondering what level of flexibility do you still have in regards to the control of the regulator? And point number two- Yeah. Some banks are claiming they don't have a structural hedge in other countries. And I was wondering, is—I'm surprised that it's okay with the regulator, actually, because the regulator doesn't like variable net interest income. So there are two questions to my angle. Is it encouraged by the regulator, and as a result, what level of flexibility do you still have once you expose your hedge policy, explain your hedge policy to the regulator? Yeah, thanks, Simon. They're good questions. So from a regulatory framework perspective, there's a couple of constraints that are applied here. Firstly, there is the Pillar 2A regime. So, you know, to the extent that we've got unhedged banking book balances or unhedged risk, that will be taken into account for the Pillar 2A calculation. So there is a capital consequence of not hedging. The second element, which is a little bit newer, which is right the way across Europe, is the Supervisory Outlier Test. So this is where the regulator takes the banking book balance sheet and it subjects it to a number of shocks, and then it computes the earnings at risk against Tier 1 capital. That, that really does provide sort of an absolute constraint to the amount of risk that can be taken or the amount of risk that can be left unhedged. So there is, there is quite a bit of regulatory regime around this area. And then obviously on an ongoing basis, we will have strong discussions with the regulator about the framework that we've got and the modeling we do. So there is, there is quite a bit of regulatory backdrop to it. I obviously can't comment on other banks specifically. I mean, I'd be surprised if any bank in Europe doesn't do some form of structural hedging, 'cause otherwise their Supervisory Outlier Test would, would become, you know, a material constraint for them. So maybe there's mixing up of different terms, but I would imagine banks in Europe generally will need to do hedging on their balance sheet. Thanks for your question, Simon. Thank you. Thank you. Next question, please. The next question comes from Jonathan Pierce from Numis. Please go ahead, Jonathan, your line is now open. Hi, Dan, and thanks for doing this. I've got a couple of questions, the first is a broader question on how active you are or could be in the management of the hedge. Because I understand you don't really wanna mess around with the mechanics of it too much, but right now, you've effectively got GBP 252 billion of swaps with a pay floating leg of 5.2%, certainly the sterling leg, and a fixed receive of 1.5%. So it's costing you about GBP 9 billion a year. And I suppose that's probably a much larger delta than you'd ordinarily expect at any point in a normal rate cycle. So I don't know, are you looking at it, are you looking at maybe pulling forward some of the future unwind of that hedge cost through... I I don't know, you could take out, pay five-year fixes and receive two-year fixes, given the shape of the curve at the moment. And really, it, Yeah. It's a philosophical question about how wedded you are to this idea that the hedge is purely there to smooth the rate cycle. Are you willing to manage it a bit more aggressively to smooth, not just NII, but also earnings? So that's the first question. And the second one is on the illustration of the hedge tailwind, 'cause I think sometimes, you know, the extent of the tailwind can get a bit lost because of an assumption that the notional itself is going to reduce. But at a group level, the size of the notional in this rate environment should be broadly NII neutral. One of your peers last week put a chart in their full year results presentation, showing what the hedge income would be if the hedge notional were static moving forward, to give a much better sense of the tailwind from a group perspective. Is that something you would consider? And if not, why not? Thanks a lot. Okay. Thanks for the questions, Jonathan. I mean, as I said in my comments, we do continually reassess the duration of the hedge. Obviously, you know, we do this in line with the behavioral assessment of the balance sheet, but we do consider the duration, and we're trying to balance the trade-off between, you know, sensitivity to rates and income stability over time. And I think it's important that you've got both of those two factors in mind. Obviously, you can increase income in period one, but, you know, you might well be less protected for future periods. So, you know, we do, we do consider it on a, on a commercial basis, but, you know, it is, it is a hedge, and we think it's important that it operates, on a programmatic basis. As I've said, sort of earlier on in the answer to the last question, there is also a regulatory environment backdrop regarding Interest Rate Risk in the banking book. So, you know, we're, we're unlikely to, manage the hedge solely for profit reasons. It needs to be a hedge that is focused on profitability over, over time. In terms of the second question, I mean, hopefully, this has been helpful, Jonathan, in terms of sort of, you know, making it clear exactly what the hedge is and exactly what the factors that go into it, and hopefully, it gives people the building blocks to sort of think about it and express it, in the way that they find most useful. We'll obviously continually evaluate the disclosure that we've got and just make sure that we're doing it in the most helpful and constructive way. Okay, great. Thanks a lot. Thank you, Jonathan. Next question, please. The next question comes from Adam Terelak, from Mediobanca. Please go ahead. Your line is now open. Afternoon. Thank you for hosting the call. I just wanted to ask about product dynamics a little bit more. Clearly, you're talking about the duration of the hedge at the, the global level. Are there differences in how we should be thinking about the deposit bases in the U.K. business versus the international business? And does that kind of come to different durations on the hedges sat opposite those two, or is that a combination and then managed to this 2.5 years? So just trying to understand whether we should be thinking about the hedge dynamics differently in, some of your CIB or CC&P deposits versus the U.K., and then how that would look on a, on a forward look if there was a difference in duration. And then secondly, was on the managed rate deposit book. Any more color there about how we should be thinking about volumes and how we should be thinking about how that dictates or is the input into the hedge volume outlook from here? Clearly, that's been an interesting product that you've seen some growth in. So I just want to understand the shift between current accounts and those other deposits and what that means in terms of the outlook on the hedge. Thank you. Yeah. Okay. So in response to the first question, I mean, we do think about it at a deposit class level, and therefore, we would think about it at an entity or division level. So, you know, you might find that there are different durations in the different businesses, and that will be influenced by our assessment of the stability of the deposits in the respective areas. So the 2.5-year has quite a significant degree of bottoms-up building in terms of the behavioral analysis. But as I said, overall, we'll then also consider whether we think it's the best trade-off between sensitivity to rates and income stability. Your second question was the managed rate deposit. Yeah. So obviously in the managed rate deposit book, we'll hedge the portion of that that we think is fixed rate. So we'll take an assessment of that sort of through the cycle over time. We're comfortable with the assumptions that we've made there. Clearly, there is a bit of... There can be a bit of shift within the deposit portfolio's underlying. So we've certainly seen some shifts from current accounts into the managed rate deposit book. That won't affect actually the overall structural hedge size necessarily, and it won't affect the structural hedge income, but it obviously may affect other elements of the NIM walk, in terms of the, you know, the price that we pay on those, on those individual deposits. Okay, great. To come back to the first question, you mentioned 3-, 5-, 7-year hedges kind of underlying that average hedge. I mean, does the- Yeah. Does the corporate book look materially shorter than the U.K. book? Yeah. I mean, I won't get too much into detail here, but, like, generally, we would normally view current accounts to be more stable and have a longer tenor, and equity probably longer still. So, you know, broadly, your view is probably about correct there, but. Okay, great. Thank you. Thank you. Next question, please. The next question comes from Perlie Mong from Stifel. Please go ahead. Your line is now open. Hello. Just one question on the note. I mean, it's always a bit hard to figure out what the sort of non-interest bearing balances are, because you only do it once in 20-F. But based on last 20-F and I, you know, based on NIM reduction, et cetera, I would have thought that, you know, this year the movements are probably for you are not so different from your... It looks like your notional is larger than your peers, as a proportion of non-interest bearing balances. So is that fair to think that that you're hedging more of the proportion of your managed rate deposits versus your peers? And if so, is there a reason why you're entering asset savings? You know, is it something to do with the product or the client segment that makes it sort of more eligible for hedging? Yeah. Hey, Perlie. It's probably difficult to get into the detail of that because it's obviously comparing, you know, us versus peers. What I would say is that these comparisons on the amount of balance that is hedged can get quite confusing when people look at the U.K. versus Group. And often, you know, they'll get confused with the fact that our ring-fence can be quite, is quite different in size and scope to others. So, you know, when you look at the U.K. position, for example, you would sort of probably conclude that there is a higher hedgeable proportion. But I think that's as much a comment on business mix, anything else, and it's got obviously a much, much smaller corporate book in it, and it's mainly a retail book. I think our hedgeable balances overall are probably broadly similar to peers when you look at sort of group to group comparison. But happy to take that offline, Perlie. You know, we'll try and make sure we've specifically got you what you need on that question. But I wouldn't call out sort of material differences at group level. Thank you, Dan. Thank you. Next question, please. The next question comes from Andrew Coombs from Citigroup. Please go ahead. Your line is now open. Afternoon. I have two questions. The first actually a follow-up from what Perlie was asking. If you look at your Q3 slides, I think you said of your GBP 561 billion of deposits, 36% was transactional, which you described as current accounts in household and then operational accounts in corporate, and that's GBP 202 billion. I think by coincidence, that also happens to be the size of the hedge that you outline on slide 10. I don't think it's necessarily supposed to be a one-for-one relationship, it just happens to be coincidental that after you've done your behavioral analysis and your outflow buffers, effectively, you end up with a hedge notional that's identical to your transactional account balance. So effectively- Yeah. On that basis, it appears that you're almost not hedging any of the, of the managed rate deposits as it were. And I know that's not an accurate statement, but that's optically what it looks like. Whereas when we look at your peers, they actually seem to be hedging or have hedge balances that are larger than the non-interest bearing deposit total, whereas yours is obviously in line, if I use that disclosure. So almost the flip side of that question, I guess my question would be, if I look at the behavioral analysis and outflow buffers, so it's on slide 10, are they meaningfully bigger than they would have been historically, presumably? And that's perhaps why your notional balance is now only in line with your non-interest bearing. Yeah. Okay. I mean, certainly, those two numbers being the same is a coincidence. That's not to say we're not hedging any of the MRD book. It'll just be a coincidence. Obviously, as I said in my comments, we will go through each of the deposit types. We'll do the analysis to determine what exclusions are we gonna make in terms of the hedgeable balance. And we'll do that both for the current accounts and the other transactional balances, and then we'll also do it for the MRD book. We'll We'll add all of that up. So, I wouldn't read too much into that. In terms of, in terms of buffers, you know, we've obviously, we obviously have been running significant buffers, as particularly as we saw deposits increase over the, over the COVID period. As you would expect, as you would expect, we've used some of those, as, as deposit balances has, have reduced, but, probably not too much more I'd say on, on buffers. And obviously very difficult for me to comment on, you know, what we may have done versus, versus that is. That's helpful. And my second question was, if I could just take you back to Q4 of last year. And there was this situation with some active treasury management that led to a decline in the NIM, but then expected to reverse out through this year. I mean, given that we have you presented to us, perhaps you could just give us your take on exactly what drove that during Q4 of last year. Thank you. Yeah. Yeah, yeah. Okay. Not really a hedge question, but I'll try and be helpful. So we called out in Q4 a reduction in the quarter-on-quarter treasury contribution to the U.K. NIM. Treasury undertakes a range of activities that are sensitive to market funding costs, and these spiked materially in Q3 following the Mini Budget. And these included some fixed rate exposures that were managed over time. I think we said at the time that these were short term in nature, and that has indeed been the case. And we have seen positive contributions in subsequent quarters, which is what we flagged at the time. So I probably don't have too much more to say on that topic, but hopefully that's a bit of pretty useful context. Yeah. Thank you again for the presentation today. Okay, thank you. Next question, please, operator. Thank you. The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead. Your line is now open. Hi, thanks for the call. A couple of questions for me, hopefully pretty simple. Does it make any difference to have the hedge, and as some people call it, a natural hedge, i.e., just not swapping your mortgages, versus having sort of facing the market with outright swaps? Is it... Does it mean, is there any changes in terms of flexibility rate you can take, et cetera? And the second, if the thing which hopefully is a bit more interesting, the second question is, look, if we look at the rate curve, it probably by historical standards or certainly recent history, it looks pretty high. And if someone's gonna present a three-year plan, there's a temptation to lock in that rate curve to... which will make budgeting easier, I guess. How much flexibility do you have to actually sort of lock in those rates through forwards? Can you do it in practice? Can you take some interest rate view? Can you lock it up, which makes budgeting easier over a longer time period? How much flexibility is there to do that? Thanks. Yes. On the first question, I mean, you look, in theory, we could look to offset with fixed rate mortgages. That's obviously less, that's obviously less flexible. What we tend to do is take the fixed rate mortgages, swap them back to floating, and then consider the, the liability hedge separately. I think you get to broadly the same, output, but, I think doing it, doing it separately means you've got a, a more perfect hedge on the asset side, of which there's obviously more certainty in terms of the product characteristics, and you've got more flexibility to, to tailor on the, on, on the liability side. Your second question, which I think we probably had sort of shapes of, throughout the session, was really, you know, sort of how much, how much appetite do we have to take risk? I probably covered that, as we've been through. So, you know, fundamentally, it's a hedge. Fundamentally, it's driven by the deposit balances, and our analysis of stability of that over time. But clearly, we will have a view on both notional and on duration, to make sure that we're positioned for the sort of right balance between, you know, sensitivity to the changes in rates and locking in those rates for long. We constantly evaluate this. Do you do forward swaps? We- By anticipation at, I don't know, 2025, sort of 5-year swap, that could make sure you've got the reinvestment of the hedge locked in. Yeah, look, probably that is a slightly too specific question, but, you know, but generally, as I've said- Well, I mean, I don't, I don't mean 25. As, as a strategy, do you, do you do those things? So as a strategy, we try and be very programmatic with the way that we manage the overall hedge. I think that's in line with sort of the regulatory regime that we operate in. Thanks. Thank you. To the question. Next question, please. Our final question today comes from Jeremy Hosking from Hosking Partners. Please go ahead, Jeremy. Your line is now open. Thank you very much. It's a most interesting presentation. I had three conceptual questions. The first is: how does your smoothing ecosystem cope with the consequences of every bank doing what you're doing compared with you being the only bank? Presumably, the economics of it would deteriorate. My second question goes to regulatory capital, but can I ask the question in a specific way, the other way around? If there was no structural hedging, how much would the bank gross balance sheet shrink by? Is it more or less than 20%? And thirdly, does your smoothing world take into account the valuation, or should I say, the extreme undervaluation of your share price? And would you change your behavior if, instead of Barclays selling at a 70% discount to book, the equity sold at a 90% discount to book? Thank you. Okay, let me, let me try and take those in turn. So the first question, I think, was one about market liquidity. You were talking about whether we felt we thought we would get a different outcome with other banks looking to have the same position versus just us alone, I think. Well, obviously, that's, that's- How would the returns deteriorate if all the banks are doing the same thing? Yeah, I think that's almost an impossible question to try and answer. Clearly, it's an extremely deep fixed income swap market. And clearly there are very significant flows coming the other way. So it's pretty hard to disassociate what the consequence would be of one bank doing structural hedging versus others, but it's obviously an extremely deep market. Your second question was a question around the amount of regulatory capital that we would hold if we were undertaking no structural hedging. I mean, I think that one's a bit of a moot point. We would be prohibited under the Supervisory Outlier Test from running a completely unhedged balance sheet. So at that point, I think we'd be in breach of regulatory requirements, given that regime. So the answer to the asset question, they would shrink by way much more than 20% if you weren't doing any structural hedging. Okay. Could we go on to the third question, which I think was a comment about the impact of structural hedging on valuation of the bank? No. It's the effect on valuation of the share on structural hedging. Yeah, I don't think there's any impact, connection between the two. Valuation of the shares has gone down. The structural hedging is a hedging program that is designed to close out interest rate risk on the bank's balance sheet. It's got a regulatory underpinning to it, and it's designed to ensure that we've got a smoother income over time. So I think you've got to look at it on a long range basis. That's what it's designed to do. So- Thank you very much for your questions. Any other questions, operator? We have no further questions, so I'll hand back over to you for closing remarks. Okay. Thank you very much for all of your participation in the call. I hope that you've, I hope you found it useful. Thank you very much for your time, and we'll look forward to speaking again next year. Thank you. Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.