Annual Financial Report - 50b of 56

RNS Number : 6457S

HSBC Holdings PLC

18 March 2016

 

15  Financial assets designated at fair value

Accounting policy

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below, and are so designated irrevocably at inception. HSBC may designate financial instruments at fair value when the designation: ·   eliminates or significantly reduces measurement or recognition inconsistencies that would otherwise arise from measuring financial instruments or recognising gains and losses on different bases from related positions. Under this criterion, the main class of financial assets designated by HSBC are financial assets under unit-linked insurance and unit-linked investment contracts. Liabilities to customers under linked contracts are determined based on the fair value of the assets held in the linked funds. If no fair value designation was made for the related assets, the assets would be classified as available for sale, with changes in fair value recorded in other comprehensive income. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows the changes in fair values to be recorded in the income statement and presented in the same line; ·   applies to groups of financial instruments that are managed, and their performance evaluated, on a fair value basis in accordance with a documented risk management or investment strategy, and where information about the groups of financial instruments is reported to management on that basis. For example, certain financial assets are held to meet liabilities under non-linked insurance contracts. HSBC has documented risk management and investment strategies designed to manage and monitor the market risk of those assets on a net basis, after considering non-linked liabilities. Fair value measurement is also consistent with the regulatory reporting requirements under the appropriate regulations for those insurance operations; and ·   relates to financial instruments containing one or more non-closely related embedded derivatives. Designated financial assets are recognised at fair value when HSBC enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when sold. Subsequent changes in fair values are recognised in the income statement in 'Net income from financial instruments designated at fair value'.

 

Financial assets designated at fair value

		2015		2014
		$m		$m
Financial assets designated at fair value:
- not subject to repledge or resale by counterparties		23,852		28,357
- which may be repledged or resold by counterparties		-		680
At 31 December		23,852		29,037
Treasury and other eligible bills		396		56
Debt securities		4,341		8,891
Equity securities		18,995		20,006
Securities designated at fair value		23,732		28,953
Loans and advances to banks and customers		120		84
At 31 December		23,852		29,037

Securities designated at fair value¹

		2015		2014
		$m		$m
US Treasury and US Government agencies2		145		8
UK Government		103		140
Hong Kong Government		33		40
Other government		1,020		4,088
Asset-backed securities3		25		18
Corporate debt and other securities		3,411		4,653
Equities		18,995		20,006
At 31 December		23,732		28,953

1   Included within these figures are debt securities issued by banks and other financial institutions of $1,536m (2014: $1,388m), of which $35m (2014: $24m) are guaranteed by various governments.

2   Includes securities that are supported by an explicit guarantee issued by the US Government.

3   Excludes asset-backed securities included under US Treasury and US Government agencies.

Securities listed on a recognised exchange and unlisted

		Treasury                 and other              eligible bills		Debt                 securities		Equity                securities		Total
		$m		$m		$m		$m
Fair value
Listed1		-		2,458		11,690		14,148
Unlisted		396		1,883		7,305		9,584
At 31 December 2015		396		4,341		18,995		23,732

Securities listed on a recognised exchange and unlisted (continued)

		Treasury                 and other              eligible bills		Debt                  securities		Equity                 securities		Total
		$m		$m		$m		$m
Fair value
Listed1		5		2,731		13,837		16,573
Unlisted		51		6,160		6,169		12,380
At 31 December 2014		56		8,891		20,006		28,953

1   Included within listed investments are $1,181m of investments listed on a recognised exchange in Hong Kong (2014: $1,361m).

16  Derivatives

Accounting policy

Derivatives Derivatives are financial instruments that derive their value from the price of underlying items such as equities, bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives are recognised initially, and are subsequently measured, at fair value. Fair values of derivatives are obtained either from quoted market prices or by using valuation techniques. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. Embedded derivatives are bifurcated from the host contract when their economic characteristics and risks are not clearly and closely related to those of the host non-derivative contract, their terms would otherwise meet the definition of a stand-alone derivative and the combined contract is not held for trading or designated at fair value. The bifurcated embedded derivatives are measured at fair value with changes therein recognised in the income statement. Derivative assets and liabilities arising from different transactions are only offset for accounting purposes if the offsetting criteria presented in Note 32 are met. Gains and losses from changes in the fair value of derivatives, that do not qualify for hedge accounting are reported in 'Net trading income'. Gains and losses on derivatives managed in conjunction with financial instruments designated at fair value are reported in 'Net income from financial instruments designated at fair value' together with the gains and losses on the economically hedged items. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt. Hedge accounting When derivatives are designated in hedge relationships, HSBC classifies them as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments ('fair value hedges'); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction ('cash flow hedges'); or (iii) a hedge of a net investment in a foreign operation ('net investment hedges'). HSBC formally designates and documents each hedge relationship from inception, setting out the risk management objective and strategy for undertaking the hedge along with the specifically identified hedging instrument, hedged item or transaction, the nature of the risk being hedged and the method for assessing hedge effectiveness. The method selected to assess hedge effectiveness will depend on the risk management strategy. To qualify for hedge accounting, HSBC requires that a hedge must be expected to be highly effective at inception and on an ongoing basis for the duration of the hedge relationship with each hedge relationship subject to an ongoing retrospective and prospective hedge effectiveness assessment. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, along with changes in the fair value of the hedged assets or liabilities attributable to the hedged risk. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued; the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income; the ineffective portion of the change in fair value is recognised immediately in the income statement within 'Net trading income'. The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. In hedges of forecast transactions that result in recognition of a non-financial asset or liability, previous gains and losses recognised in other comprehensive income are included in the initial measurement of the asset or liability. When a hedge relationship is discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.

Net investment hedge Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain or loss on the effective portion of the hedging instrument is recognised in other comprehensive income; the residual change in fair value is recognised immediately in the income statement. Gains and losses previously recognised in other comprehensive income are reclassified to the income statement on the disposal, or part disposal, of the foreign operation. Derivatives that do not qualify for hedge accounting Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.

Fair values of derivatives by product contract type held by HSBC

		Assets						Liabilities
		Trading		Hedging		Total		Trading		Hedging		Total
		$m		$m		$m		$m		$m		$m
Foreign exchange		95,201		1,140		96,341		94,843		755		95,598
Interest rate		277,496		1,658		279,154		267,609		3,758		271,367
Equities		8,732		-		8,732		10,383		-		10,383
Credit		6,961		-		6,961		6,884		-		6,884
Commodity and other		3,148		-		3,148		2,699		-		2,699
Gross total fair values		391,538		2,798		394,336		382,418		4,513		386,931
Offset (Note 32)						(105,860)						(105,860)
At 31 December 2015						288,476						281,071
Foreign exchange		95,584		1,728		97,312		95,187		572		95,759
Interest rate		471,379		1,864		473,243		463,456		4,696		468,152
Equities		11,694		-		11,694		13,654		-		13,654
Credit		9,340		-		9,340		10,061		-		10,061
Commodity and other		3,884		-		3,884		3,508		-		3,508
Gross total fair values		591,881		3,592		595,473		585,866		5,268		591,134
Offset (Note 32)						(250,465)						(250,465)
At 31 December 2014						345,008						340,669

Derivative assets and liabilities decreased during 2015, primarily driven by 'portfolio compression' exercises, with a corresponding decrease in the offset amount.

Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries

		Assets						Liabilities
		Trading		Hedging		Total		Trading		Hedging		Total
		$m		$m		$m		$m		$m		$m
Foreign exchange		390		-		390		2,065		213		2,278
Interest rate		1,600		477		2,077		-		-		-
At 31 December 2015		1,990		477		2,467		2,065		213		2,278
Foreign exchange		680		-		680		1,066		103		1,169
Interest rate		1,607		484		2,091		-		-		-
At 31 December 2014		2,287		484		2,771		1,066		103		1,169

 

Use of derivatives

For details regarding use of derivatives, see page 171 under Market Risk.

Trading derivatives

Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.

Substantially all of HSBC Holdings' derivatives entered into with subsidiaries are managed in conjunction with financial liabilities designated at fair value.

The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

Notional contract amounts of derivatives held for trading purposes by product type

		HSBC				HSBC Holdings
		2015		2014		2015		2014
		$m		$m		$m		$m
Foreign exchange		5,658,030		5,548,075		19,036		15,595
Interest rate		14,462,113		22,047,278		10,150		8,650
Equities		501,834		568,932		-		-
Credit		463,344		550,197		-		-
Commodity and other		51,683		77,565		-		-
At 31 December		21,137,004		28,792,047		29,186		24,245

Credit derivatives

HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad range of users, structuring transactions to produce risk management products for its customers or making markets in certain products. Risk is typically controlled through entering into offsetting credit derivative contracts with other counterparties.

HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products.

Credit derivatives are also deployed to a limited extent for the risk management of the Group's loan portfolios. The notional contract amount of credit derivatives of $463bn (2014: $550bn) consisted of protection bought of $237bn (2014: $272bn) and protection sold of $226bn (2014: $278bn). The credit derivative business operates within the market risk management framework described on page 211.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:

Unamortised balance of derivatives valued using models with significant unobservable inputs

		2015		2014
		$m		$m
Unamortised balance at 1 January		114		167
Deferral on new transactions		196		177
Recognised in the income statement during the year:		(207)		(234)
- amortisation		(121)		(114)
- subsequent to unobservable inputs becoming observable		(2)		(13)
- maturity, termination or offsetting derivative		(84)		(107)
- risk hedged		-		-
Exchange differences		(6)		4
Unamortised balance at 31 December1		97		114

1   This amount is yet to be recognised in the consolidated income statement.

Hedge accounting derivatives

HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its asset and liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities.

The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

Notional contract amounts of derivatives designated in qualifying hedge accounting relationships by product type

		HSBC								HSBC Holdings
		2015				2014				2015		2014
		Cash flow                  hedge		Fair value                  hedge		Cash flow                  hedge		Fair value                  hedge		Fair value                  hedge		Fair value                  hedge
		$m		$m		$m		$m		$m		$m
Foreign exchange		32,128		196		25,340		-		1,120		1,120
Interest rate		107,796		105,127		190,902		90,338		5,132		5,477
At 31 December		139,924		105,323		216,242		90,338		6,252		6,597

Fair value hedges

HSBC's fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates.

Fair values of derivatives designated as fair value hedges

		2015				2014
		Assets		Liabilities		Assets		Liabilities
		$m		$m		$m		$m
HSBC
Foreign exchange		2		-		-		-
Interest rate		672		3,395		387		4,012
At 31 December		674		3,395		387		4,012
HSBC Holdings
Foreign exchange		-		213		-		103
Interest rate		477		-		484		-
At 31 December		477		213		484		103

Gains or losses arising from fair value hedges

		2015		2014		2013
		$m		$m		$m
HSBC
Gains/(losses):
- on hedging instruments		40		(2,542)		1,997
- on the hedged items attributable to the hedged risk		(51)		2,561		(1,932)
Year ended 31 December		(11)		19		65
HSBC Holdings
Gains/(losses):
- on hedging instruments		(4)		423		14
- on the hedged items attributable to the hedged risk		6		(422)		(21)
Year ended 31 December		2		1		(7)

Cash flow hedges

HSBC's cash flow hedges consist principally of interest rate swaps, futures and cross-currency swaps that are used to protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast transactions.

Fair values of derivatives designated as cash flow hedges

		2015				2014
		Assets		Liabilities		Assets		Liabilities
		$m		$m		$m		$m
Foreign exchange		1,027		748		1,673		572
Interest rate		986		363		1,477		684
At 31 December		2,013		1,111		3,150		1,256

Forecast principal balances on which interest cash flows are expected to arise

		3 months                       or less		More than 3     months but less             than 1 year		5 years or less        but more than                       1 year		More than                     5 years
		$m		$m		$m		$m
Net cash inflows/(outflows) exposure
Assets		94,256		93,528		62,664		971
Liabilities		(16,241)		(17,179)		(11,681)		(3,326)
At 31 December 2015		78,015		76,349		50,983		(2,355)
Net cash inflows/(outflows) exposure
Assets		131,694		122,728		79,529		959
Liabilities		(60,814)		(46,582)		(36,371)		(8,169)
At 31 December 2014		70,880		76,146		43,158		(7,210)

This table reflects the interest rate repricing profile of the underlying hedged items.

During the year to 31 December 2015 a gain of $15m (2014: gain of $34m; 2013: gain of $22m) was recognised due to hedge ineffectiveness.

Hedges of net investments in foreign operations

The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with foreign currency borrowings.

At 31 December 2015, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of $111m (2014: $55m), liabilities of $12m (2014: $1m) and notional contract values of $4,210m (2014: $3,525m).

Ineffectiveness recognised in 'Net trading income' in the year ended 31 December 2015 was nil (2014 and 2013: nil).

17  Financial investments

Accounting policy

Treasury bills, debt securities and equity securities intended to be held on a continuing basis, other than those designated at fair value, are classified as available for sale or held to maturity. They are recognised on the trade date when HSBC enters into contractual arrangements to purchase those instruments, and are normally derecognised when either the securities are sold or redeemed. (i)   Available-for-sale financial assets are initially measured at fair value plus direct and incremental transaction costs. They are subsequently remeasured at fair value, and changes therein are recognised in other comprehensive income until the assets are either sold or become impaired. When available-for-sale financial assets are sold, cumulative gains or losses previously recognised in other comprehensive income are recognised in the income statement as 'Gains less losses from financial investments'. Interest income is recognised over a debt security's expected life. Premiums and/or discounts arising on the purchase of dated debt securities are included in the interest recognised. Dividends from equity assets are recognised in the income statement when the right to receive payment is established. (ii)  Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that HSBC positively intends and is able to hold to maturity. Held-to-maturity investments are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost, less any impairment losses. The accounting policy relating to impairments of available-for-sale securities is presented in Note 1. Available-for-sale financial assets are reclassified to held to maturity if there is a change in intention or ability to hold those assets to maturity due to a change in the way they are managed. The fair value on reclassification becomes the new amortised cost and the assets are subsequently carried at amortised cost rather than fair value.

Financial investments

		2015		2014
		$m		$m
Financial investments:
- not subject to repledge or resale by counterparties		420,905		380,419
- which may be repledged or resold by counterparties		8,050		35,048
At 31 December		428,955		415,467

Carrying amount and fair value of financial investments

		2015				2014
		Carrying                     amount		Fair                         value		Carrying                     amount		Fair                         value
		$m		$m		$m		$m
Treasury and other eligible bills		104,551		104,551		81,517		81,517
- available for sale		104,551		104,551		81,517		81,517
Debt securities		318,569		319,725		323,256		324,668
- available for sale		274,467		274,467		285,505		285,505
- held to maturity		44,102		45,258		37,751		39,163
Equity securities		5,835		5,835		10,694		10,694
- available for sale		5,835		5,835		10,694		10,694
At 31 December		428,955		430,111		415,467		416,879

Financial investments at amortised cost and fair value

		Amortised                             cost1		Fair                          value2
		$m		$m
US Treasury		61,585		61,779
US Government agencies3		22,910		22,843
US Government sponsored entities3		10,365		10,627
UK Government		27,250		27,316
Hong Kong Government		53,676		53,674
Other government		141,329		143,370
Asset-backed securities4		14,239		13,375
Corporate debt and other securities		89,860		91,292
Equities		4,057		5,835
At 31 December 2015		425,271		430,111
US Treasury		33,931		34,745
US Government agencies3		18,326		18,516
US Government sponsored entities3		9,339		9,761
UK Government		28,680		29,758
Hong Kong Government		43,573		43,574
Other government		159,846		163,402
Asset-backed securities4		20,911		19,177
Corporate debt and other securities		84,387		87,252
Equities		7,421		10,694
				416,879
At 31 December 2014		406,414		416,879
US Treasury		50,369		50,421
US Government agencies3		19,211		18,771
US Government sponsored entities3		5,263		5,445
UK Government		23,565		23,580
Hong Kong Government		49,570		49,579
Other government		153,619		156,208
Asset-backed securities4		25,961		24,115
Corporate debt and other securities		87,469		88,999
Equities		8,081		9,140
At 31 December 2013		423,108		426,258

1   Represents the amortised cost or cost basis of the financial investment.

2   Included within 'Fair value' figures are debt securities issued by banks and other financial institutions of $61bn (2014: $54bn; 2013: $55bn), of which $18bn (2014: $9bn; 2013: $9bn) are guaranteed by various governments.

3   Includes securities that are supported by an explicit guarantee issued by the US Government.

4   Excludes asset-backed securities included under US Government agencies and sponsored entities.

Financial investments listed and unlisted

		Treasury and      other eligible      bills available                 for sale		Debt             securities              available                 for sale		Debt             securities                   held to               maturity		Equity             securities              available                 for sale		Total
		$m		$m		$m		$m		$m
Carrying amount
Listed1		6,151		170,271		9,565		842		186,829
Unlisted2		98,400		104,196		34,537		4,993		242,126
		104,551
At 31 December 2015		104,551		274,467		44,102		5,835		428,955
Carrying amount
Listed1		4,101		168,879		6,037		5,928		184,945
Unlisted2		77,416		116,626		31,714		4,766		230,522
At 31 December 2014		81,517		285,505		37,751		10,694		415,467

1   The fair value of listed held-to-maturity debt securities as at 31 December 2015 was $10bn (2014: $6bn). Included within listed investments were $5bn (2014: $4bn) of investments listed on a recognised exchange in Hong Kong.

2   Unlisted treasury and other eligible bills available for sale primarily comprise treasury bills not listed on an exchange but for which there is a liquid market.

Maturities of investments in debt securities at their carrying amount

		1 year or less		5 years or less    but over 1 year		10 years or less but over 5 years		Over 10 years		Total
		$m		$m		$m		$m		$m
Available for sale		61,664		131,023		42,140		39,640		274,467
Held to maturity		2,428		10,242		8,881		22,551		44,102
At 31 December 2015		64,092		141,265		51,021		62,191		318,569
Available for sale		68,344		134,815		44,938		37,408		285,505
Held to maturity		1,396		9,622		7,087		19,646		37,751
At 31 December 2014		69,740		144,437		52,025		57,054		323,256

Contractual maturities and weighted average yields of investment debt securities

		Within one year				After one year but within five years				After five years but within ten years				After ten years
		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
		$m		%		$m		%		$m		%		$m		%
Available for sale
US Treasury		9,316		0.5		20,352		1.2		12,805		2.1		3,594		3.3
US Government agencies		-		-		6		4.2		33		3.9		13,575		2.5
US Government-sponsored agencies		8		5.3		3,029		3.0		911		2.2		1,716		3.0
UK Government		2,479		1.7		8,005		1.3		8,518		1.4		1,215		0.1
Hong Kong Government		674		0.5		1,408		1.1		-		-		-		-
Other governments		37,197		2.0		60,899		2.4		10,312		2.9		2,543		3.0
Asset-backed securities		18		1.4		657		1.4		2,530		1.3		11,027		1.3
Corporate debt and other securities		12,285		1.5		35,210		1.4		5,937		1.9		6,287		3.0
Total amortised cost at 31 December 2015		61,977				129,566				41,046				39,957
Total carrying value		61,664				131,023				42,140				39,640
Held to maturity
US Treasury		2		0.9		76		4.9		46		4.8		119		4.2
US Government agencies		-		-		13		1.4		30		4.0		9,254		2.4
US Government-sponsored agencies		-		-		112		1.3		597		2.7		3,991		2.9
Hong Kong Government		4		0.7		44		1.4		16		1.8		9		1.4
Other governments		59		5.5		217		4.7		184		5.3		725		4.6
Asset-backed securities		-		-		-		-		-		-		7		6.5
Corporate debt and other securities		2,363		3.0		9,780		3.5		8,008		3.7		8,446		4.1
Total amortised cost at 31 December 2015		2,428				10,242				8,881				22,551
Total carrying value		2,428				10,242				8,881				22,551

The maturity distributions of ABSs are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2015 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives.

 

END

 

 

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