At 30 June 2010, HSBC's principal exposures were to companies in two sectors: US$3.1 billion to data processing (30 June 2009: US$3.7 billion; 31 December 2009: US$3.8 billion) and US$1.7 billion to communications and infrastructure (30 June 2009: US$1.9 billion; 31 December 2009: US$1.9 billion). During the period, 99 per cent of the total fair value movement not recognised was against exposures in these two sectors (30 June 2009: 98 per cent; 31 December 2009: 99 per cent). The reduction in exposure in the current period was primarily a result of sales of the most junior tranches of securitised positions.
This section on fair values of financial instruments forms part of the interim consolidated financial statements.
The accounting policies which determine the classification of financial instruments and the use of assumptions and estimation in valuing them are described on pages 63 to 65 and 369 to 385, respectively, of the Annual Report and Accounts 2009. The following is a description of HSBC's methods of determining fair value and its related control framework, and a quantification of its exposure to financial instruments measured at fair value.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm's length transaction.
Financial instruments measured at fair value on an ongoing basis include trading assets and liabilities, instruments designated at fair value, derivatives and financial investments classified as available for sale (including treasury and other eligible bills, debt securities and equity securities).
Fair values of financial instruments carried at fair value
Control framework
Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk-taker. To this end, ultimate responsibility for the determination of fair values lies with Finance, which reports functionally to the Chief Financial Officer, Executive Director, Risk and Regulation. Finance establishes the accounting policies and procedures governing valuation, and is responsible for ensuring that they comply with all relevant accounting standards.
Further details of the control framework, including details on fair values determined using a valuation model, are included on pages 166 to 168 of the Annual Report and Accounts 2009.
Determination of fair value
Fair values are determined according to the following hierarchy:
· Level 1 - quoted market price: financial instruments with quoted prices for identical instruments in active markets.
· Level 2 - valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.
· Level 3 - valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable.
The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used.
The judgement as to whether a market is active may include, but is not restricted to, the consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. The bid/offer spread represents the difference in prices at which a market participant would be willing to buy compared with the price at which they would be willing to sell. In inactive markets, obtaining assurance that the transaction price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the instrument requires additional work during the valuation process.
The majority of valuation techniques employ only observable market data. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable and, for them, the derivation of fair value is more judgemental. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument's carrying amount and/or inception profit ('day 1 gain or loss') is driven by unobservable inputs. 'Unobservable' in this context means that there is little or no current market data available from which to determine the price at which an arm's length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used). Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant unobservable inputs may be attributable to observable inputs. Consequently, the effect of uncertainty in determining unobservable inputs will generally be less than the overall fair value of the financial instrument being measured. To help in understanding the extent and the range of this uncertainty, additional information is provided in the section headed 'Effect of changes in significant unobservable assumptions to reasonably possible alternatives' on page 120.
In certain circumstances, primarily where debt is hedged with interest rate derivatives, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument concerned, if available. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based upon quoted prices in an inactive market for the instrument, or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to HSBC's liabilities. For all issued debt securities, discounted cash flow modelling is used to separate the change in fair value that may be attributed to HSBC's credit spread movements from movements in other market factors such as benchmark interest rates or foreign exchange rates. Specifically, the change in fair value of issued debt securities attributable to the Group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using a LIBOR-based discount curve. The difference in the valuations is attributable to the Group's own credit spread. This methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instrument liabilities are included within trading liabilities and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes. These market spreads are generally smaller than credit spreads observed for plain vanilla debt or in the credit default swap markets.
Gains and losses arising from changes in the credit spread of liabilities issued by HSBC reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.
All net positions in non-derivative financial instruments, and all derivative portfolios, are valued at bid or offer prices as appropriate. Long positions are marked at bid prices; short positions are marked at offer prices.
The fair value of a portfolio of financial instruments in an active market is calculated as the product of the number of units and its quoted price and no block discounts are applied.
Fair value adjustments
The valuation models applied for 'level 2' and 'level 3' assets incorporate assumptions that HSBC believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant that are not incorporated within the valuation model. The magnitude of fair value adjustments depends upon many entity-specific factors, including modelling sophistication, the nature of products traded, and the size and type of risk exposures. For this reason, fair value adjustments may not be comparable across the banking industry.
HSBC classifies fair value adjustments as either 'risk-related' or 'model-related'. They form part of the portfolio fair value and are incorporated within the balance sheet values of the product types to which they have been applied. The majority of these adjustments relate to Global Banking and Markets. The magnitude and types of fair value adjustment adopted by Global Banking and Markets are listed in the following table:
Global Banking and Markets fair value adjustments
|
At 30 June |
|
At 31 December |
|
2010 |
|
2009 |
|
US$m |
|
US$m |
Type |
|
|
|
Risk-related ......................................................................................................................... |
2,243 |
|
2,955 |
Bid-offer ......................................................................................................................... |
560 |
|
528 |
Uncertainty ..................................................................................................................... |
162 |
|
223 |
Credit risk adjustment ...................................................................................................... |
1,493 |
|
2,172 |
Other .............................................................................................................................. |
28 |
|
32 |
|
|
|
|
Model-related ...................................................................................................................... |
447 |
|
457 |
Model limitation ............................................................................................................. |
367 |
|
391 |
Other .............................................................................................................................. |
80 |
|
66 |
|
|
|
|
Inception profit (Day 1 P&L reserves) ............................................................................... |
256 |
|
260 |
|
|
|
|
|
2,946 |
|
3,672 |
The quantum of fair value adjustments reduced by US$726 million during the first half of 2010. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, if a model is enhanced to incorporate an additional factor previously not included in the model but incorporated in the valuation through a fair value adjustment, then following that change the fair value adjustment in respect of that factor will no longer be required. As another example, if a position is unwound at a price which reflects the fair value adjustment, then the fair value adjustment base will decrease, but no profit or loss will result.
The major movement occurred in the credit risk adjustment category. The reduction of US$679 million in the first half of 2010 reflected the release of US$442 million of credit risk adjustment held against monoline insurers. Of this, US$318 million resulted from commutations which did not result in any material gain or loss being recognised in the income statement, which provided evidence that fair value adjustments historically applied against monoline and other counterparty exposures successfully represented fair value measurement. A further US$176 million reduction arose from commutations and/or restructures with non-monoline counterparties.
Detailed descriptions of risk-related and model-related adjustments, HSBC's credit risk adjustment methodology, and the valuation techniques applied to instruments of particular interest are provided on page 168 of the Annual Report and Accounts 2009.
Consideration of other methodologies for calculation of credit risk adjustments
The credit risk adjustment methodology used by HSBC, in the opinion of management, appropriately quantifies the exposure of HSBC to counterparty risk on its OTC derivative portfolio and appropriately reflects the risk management strategy of the business.
HSBC recognises that a variety of credit risk adjustment methodologies are adopted within the banking industry. HSBC has estimated the impact of adopting two alternative methodologies on the level of its credit risk adjustment (excluding the monoline credit risk adjustment), as follows:
· adapting HSBC's existing methodology to utilise probabilities of default implied from credit default swaps with no adjustment factor applied, and also implying HSBC's own credit probability of default from credit default swaps, results in an additional adjustment of US$285 million (31 December 2009: US$170 million); and
· adapting HSBC's existing methodology to exclude collateralised counterparties, include HSBC's own probability of default based on historical data, and apply loss given default assumptions consistent with those used in regulatory capital calculations, results in a reduction of the credit risk adjustment of US$200 million (31 December 2009: US$300 million).
Fair value valuation bases
The table below provides an analysis of the various bases described above which have been deployed for valuing financial assets and financial liabilities measured at fair value in the consolidated financial statements.
The movement in the balances of assets and liabilities measured at fair value with significant unobservable inputs was mainly attributable to a decrease in the fair value of derivative liabilities and available-for-sale ABSs. At 30 June 2010, financial instruments measured at fair value using a valuation technique with significant unobservable inputs represented 1.8 per cent of total assets and liabilities measured at fair value (30 June 2009: 2.0 per cent; 31 December 2009: 2.0 per cent).
Bases of valuing financial assets and liabilities measured at fair value
|
|
|
Valuation techniques |
|
|
||
|
Quoted |
|
Using observable inputs |
With significant unobservable inputs |
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
At 30 June 2010 |
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
Trading assets ......................................................... |
258,303 |
|
139,855 |
|
5,642 |
|
403,800 |
Financial assets designated at fair value ................... |
19,043 |
|
12,151 |
|
1,049 |
|
32,243 |
Derivatives ............................................................. |
1,844 |
|
281,705 |
|
4,730 |
|
288,279 |
Financial investments: available for sale ................. |
181,160 |
|
177,447 |
|
7,951 |
|
366,558 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Trading liabilities .................................................... |
126,435 |
|
139,961 |
|
8,440 |
|
274,836 |
Financial liabilities designated at fair value .............. |
28,271 |
|
51,689 |
|
476 |
|
80,436 |
Derivatives ............................................................. |
1,612 |
|
281,126 |
|
4,276 |
|
287,014 |
|
|
|
|
|
|
|
|
At 30 June 2009 |
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
Trading assets ......................................................... |
272,812 |
|
134,897 |
|
6,649 |
|
414,358 |
Financial assets designated at fair value ................... |
20,550 |
|
12,218 |
|
593 |
|
33,361 |
Derivatives ............................................................. |
7,304 |
|
296,242 |
|
7,250 |
|
310,796 |
Financial investments: available for sale ................. |
145,558 |
|
182,075 |
|
9,521 |
|
337,154 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Trading liabilities .................................................... |
134,641 |
|
122,941 |
|
6,980 |
|
264,562 |
Financial liabilities designated at fair value .............. |
26,849 |
|
50,465 |
|
- |
|
77,314 |
Derivatives ............................................................. |
9,288 |
|
285,726 |
|
3,862 |
|
298,876 |
|
|
|
|
|
|
|
|
At 31 December 2009 |
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
Trading assets ......................................................... |
272,509 |
|
142,452 |
|
6,420 |
|
421,381 |
Financial assets designated at fair value ................... |
24,184 |
|
11,773 |
|
1,224 |
|
37,181 |
Derivatives ............................................................. |
1,961 |
|
244,472 |
|
4,453 |
|
250,886 |
Financial investments: available for sale ................. |
163,149 |
|
178,168 |
|
10,214 |
|
351,531 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Trading liabilities .................................................... |
119,544 |
|
139,812 |
|
8,774 |
|
268,130 |
Financial liabilities designated at fair value .............. |
27,553 |
|
52,032 |
|
507 |
|
80,092 |
Derivatives ............................................................. |
1,843 |
|
240,611 |
|
5,192 |
|
247,646 |
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - level 3
|
Assets |
|
Liabilities |
||||||||||
|
Available |
|
Held for trading |
Designated |
|
Derivatives |
|
Held for trading |
Designated at fair value through profit or loss |
|
Derivatives |
||
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
At 30 June 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity investments ...... |
3,672 |
|
195 |
|
396 |
|
- |
|
- |
|
- |
|
- |
Asset-backed securities ............ |
1,903 |
|
659 |
|
- |
|
- |
|
- |
|
- |
|
- |
Leveraged finance ................... |
- |
|
42 |
|
- |
|
- |
|
- |
|
- |
|
18 |
Loans held for securitisation ... |
- |
|
1,127 |
|
- |
|
- |
|
- |
|
- |
|
- |
Structured notes ...................... |
- |
|
- |
|
- |
|
- |
|
7,786 |
|
- |
|
- |
Derivatives with monolines ..... |
- |
|
- |
|
- |
|
1,104 |
|
- |
|
- |
|
- |
Other derivatives .................... |
- |
|
- |
|
- |
|
3,626 |
|
- |
|
- |
|
4,258 |
Other portfolios ...................... |
2,376 |
|
3,619 |
|
653 |
|
- |
|
654 |
|
476 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,951 |
|
5,642 |
|
1,049 |
|
4,730 |
|
8,440 |
|
476 |
|
4,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - level 3 (continued)
|
Assets |
|
Liabilities |
||||||||||
|
Available |
|
Held for trading |
Designated |
|
Derivatives |
|
Held for trading |
Designated at fair value through profit or loss |
|
Derivatives |
||
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
At 30 June 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity investments ...... |
2,566 |
|
31 |
|
235 |
|
- |
|
- |
|
- |
|
- |
Asset-backed securities ............ |
3,977 |
|
1,257 |
|
- |
|
- |
|
- |
|
- |
|
- |
Leveraged finance ................... |
- |
|
143 |
|
- |
|
- |
|
- |
|
- |
|
40 |
Loans held for securitisation ... |
- |
|
1,539 |
|
- |
|
- |
|
- |
|
- |
|
- |
Structured notes ...................... |
- |
|
138 |
|
- |
|
- |
|
4,650 |
|
- |
|
- |
Derivatives with monolines ..... |
- |
|
- |
|
- |
|
2,102 |
|
- |
|
- |
|
- |
Other derivatives .................... |
- |
|
- |
|
- |
|
5,148 |
|
- |
|
- |
|
3,822 |
Other portfolios ...................... |
2,978 |
|
3,541 |
|
358 |
|
- |
|
2,330 |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,521 |
|
6,649 |
|
593 |
|
7,250 |
|
6,980 |
|
- |
|
3,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity investments ...... |
2,949 |
|
197 |
|
345 |
|
- |
|
- |
|
- |
|
- |
Asset-backed securities ............ |
4,270 |
|
944 |
|
- |
|
- |
|
- |
|
- |
|
- |
Leveraged finance ................... |
- |
|
73 |
|
- |
|
- |
|
- |
|
- |
|
25 |
Loans held for securitisation ... |
- |
|
1,395 |
|
- |
|
- |
|
- |
|
- |
|
- |
Structured notes ...................... |
- |
|
196 |
|
- |
|
- |
|
5,055 |
|
- |
|
- |
Derivatives with monolines ..... |
- |
|
- |
|
- |
|
1,305 |
|
- |
|
- |
|
- |
Other derivatives .................... |
- |
|
- |
|
- |
|
3,148 |
|
- |
|
- |
|
5,167 |
Other portfolios ...................... |
2,995 |
|
3,615 |
|
879 |
|
- |
|
3,719 |
|
507 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,214 |
|
6,420 |
|
1,224 |
|
4,453 |
|
8,774 |
|
507 |
|
5,192 |
At 30 June 2010, available-for-sale ABSs valued using a valuation technique with significant unobservable inputs comprised Alt-A securities, with no particular concentration in any other ABS category. The reduction in available-for-sale ABSs valued using a valuation technique with significant unobservable inputs since December 2009 reflected greater pricing certainty, particularly in commercial property-related securities and leveraged finance-related securities, which resulted in these assets being transferred out of level 3.
Trading assets valued using a valuation technique with significant unobservable inputs principally comprised ABSs, loans held for securitisation and other portfolios. The ABSs are classified in level 3 as a result of the unobservability of the underlying price of the assets. Loans held for securitisations are valued using a proprietary model which utilises inputs relating to the credit spread of the obligor. Other portfolios included holdings in various bonds, preference shares and debentures.
Derivative products with monolines valued using techniques with unobservable inputs decreased during the period as a result of a decrease in exposure to the monoline counterparties, primarily as a result of commutations undertaken. The primary unobservable input relates to the probability of default of the counterparty. Further details of the transactions with monoline counterparties are shown on page 111.
Derivative products valued using valuation techniques with significant unobservable inputs included certain types of correlation products, such as foreign exchange basket options, equity basket options, foreign exchange interest rate hybrid transactions and long-dated option transactions. Examples of the latter are equity options, interest rate and foreign exchange options and certain credit derivatives. Credit derivatives include certain tranched CDS transactions. The increase in derivative assets during the first half of 2010 was mainly due to certain types of tranched CDS transactions being transferred into the level 3 category.
Trading liabilities valued using a valuation technique with significant unobservable inputs principally comprised equity-linked structured notes, which are issued by HSBC, and provide the counterparty with a return that is linked to the performance of certain equity securities, and other portfolios. The notes are classified as level 3 due to the unobservability of parameters such as long-dated equity volatilities and correlations between equity prices, between equity prices and interest rates and between interest rates and foreign exchange rates. The movement in trading liabilities during the first half of 2010 was primarily due to the issue of new equity derivative linked structures and other structured notes.
The decrease in derivative liabilities valued using a valuation technique with significant unobservable inputs was primarily attributable to a fall in market value of securitisation structures, primarily as a result of foreign exchange movements.
Reconciliation of fair value measurements in level 3 of the fair value hierarchy
The following table provides a reconciliation of the movement between opening and closing balances of level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:
Movement in level 3 financial instruments
|
Assets |
|
Liabilities |
||||||||||
|
Available |
|
Held for trading |
Designated |
|
Derivatives |
|
Held for trading |
Designated at fair value through profit or loss |
|
Derivatives |
||
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 1 January 2010 .................. |
10,214 |
|
6,420 |
|
1,224 |
|
4,453 |
|
8,774 |
|
507 |
|
5,192 |
Total gains or losses recognised |
112 |
|
131 |
|
41 |
|
199 |
|
(245) |
|
(8) |
|
(431) |
Total gains or losses recognised in other comprehensive income ................................ |
198 |
|
(181) |
|
(36) |
|
(133) |
|
(325) |
|
(23) |
|
(24) |
Purchases ................................ |
1,428 |
|
419 |
|
36 |
|
- |
|
- |
|
- |
|
- |
Issues ...................................... |
- |
|
- |
|
- |
|
- |
|
1,730 |
|
- |
|
- |
Sales ........................................ |
(960) |
|
(1,044) |
|
(28) |
|
- |
|
- |
|
- |
|
- |
Settlements ............................. |
(173) |
|
18 |
|
(6) |
|
(92) |
|
(823) |
|
- |
|
(407) |
Transfers out .......................... |
(4,731) |
|
(339) |
|
(304) |
|
(442) |
|
(1,165) |
|
- |
|
(423) |
Transfers in ............................ |
1,863 |
|
218 |
|
122 |
|
745 |
|
494 |
|
- |
|
369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 30 June 2010 ................... |
7,951 |
|
5,642 |
|
1,049 |
|
4,730 |
|
8,440 |
|
476 |
|
4,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses recognised in profit or loss relating to those assets and liabilities held at the end of the reporting period .................................. |
70 |
|
74 |
|
42 |
|
720 |
|
(246) |
|
(8) |
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 1 January 2009 .................. |
9,116 |
|
7,561 |
|
460 |
|
9,883 |
|
6,509 |
|
- |
|
3,805 |
Total gains or losses recognised |
(350) |
|
(714) |
|
1 |
|
(2,358) |
|
(283) |
|
- |
|
(100) |
Total gains or losses recognised in other comprehensive income ................................ |
196 |
|
110 |
|
- |
|
211 |
|
171 |
|
- |
|
197 |
Purchases ................................ |
841 |
|
550 |
|
138 |
|
- |
|
312 |
|
- |
|
- |
Issues ...................................... |
- |
|
- |
|
- |
|
- |
|
1,001 |
|
- |
|
- |
Sales ........................................ |
(551) |
|
(1,120) |
|
(7) |
|
- |
|
- |
|
- |
|
- |
Settlements ............................. |
(574) |
|
(199) |
|
- |
|
(113) |
|
(484) |
|
- |
|
(171) |
Transfers out .......................... |
(890) |
|
(481) |
|
- |
|
(715) |
|
(1,196) |
|
- |
|
(475) |
Transfers in ............................ |
1,733 |
|
942 |
|
1 |
|
342 |
|
950 |
|
- |
|
606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 30 June 2009 ..................... |
9,521 |
|
6,649 |
|
593 |
|
7,250 |
|
6,980 |
|
- |
|
3,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses recognised in profit or loss relating to those assets and liabilities held at the end of the reporting period .................................. |
(349) |
|
(560) |
|
1 |
|
(1,836) |
|
(271) |
|
- |
|
485 |
Movement in level 3 financial instruments (continued)
|
Assets |
|
Liabilities |
||||||||||
|
Available |
|
Held for trading |
Designated through profit or loss |
|
Derivatives |
|
Held for trading |
Designated at fair value through profit or loss |
|
Derivatives |
||
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 1 July 2009 ........................ |
9,521 |
|
6,649 |
|
593 |
|
7,250 |
|
6,980 |
|
- |
|
3,862 |
Total gains or losses recognised |
90 |
|
(16) |
|
96 |
|
(2,917) |
|
176 |
|
(3) |
|
(1,272) |
Total gains or losses recognised in other comprehensive income ................................ |
421 |
|
(25) |
|
- |
|
(92) |
|
130 |
|
10 |
|
(103) |
Purchases ................................ |
944 |
|
1,048 |
|
122 |
|
- |
|
(290) |
|
- |
|
- |
Issues ...................................... |
- |
|
- |
|
- |
|
- |
|
1,521 |
|
500 |
|
- |
Sales ........................................ |
(255) |
|
(1,046) |
|
(6) |
|
- |
|
- |
|
- |
|
- |
Settlements ............................. |
(485) |
|
(96) |
|
(6) |
|
9 |
|
(782) |
|
- |
|
(35) |
Transfers out .......................... |
(2,153) |
|
(596) |
|
- |
|
(342) |
|
659 |
|
- |
|
(145) |
Transfers in ............................ |
2,131 |
|
502 |
|
425 |
|
545 |
|
380 |
|
- |
|
2,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2009 ............. |
10,214 |
|
6,420 |
|
1,224 |
|
4,453 |
|
8,774 |
|
507 |
|
5,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses recognised in profit or loss relating to those assets and liabilities held at the end of the reporting period .................................. |
(22) |
|
(36) |
|
97 |
|
(1,917) |
|
135 |
|
(3) |
|
(620) |
For available-for-sale securities, the greater pricing certainty associated with certain ABSs (particularly related to commercial property and leveraged finance) resulted in assets being transferred out of level 3 during the first half of 2010.
For trading assets, sales related to the disposal of certain loans held for securitisation and ABSs.
For derivative assets, transfers into level 3 were driven by certain types of tranched CDS transaction.
For held-for-trading liabilities, issues reflect new structured note issuance, settlements reflect structured note redemptions/maturities and transfers out of level 3 reflect increased observability as the residual maturity of existing notes falls, and also some additional market observability for certain longer-dated equity volatilities.
For derivative liabilities, total gains or losses recognised in profit and loss includes a fall in market value of securitisation structures, primarily as a result of foreign exchange movements.
During the first half of 2010, there were no significant transfers between levels 1 and 2.
For assets and liabilities classified as held for trading, realised and unrealised gains and losses are presented in the income statement under 'Trading income excluding net interest income'.
Fair value changes on long term debt designated at fair value and related derivatives are presented in the income statement under 'Changes in fair value of long-term debt issued and related derivatives'. The income statement line item 'Net income/(expense) from other financial instruments designated at fair value' captures fair value movements on all other financial instruments designated at fair value and related derivatives.
Realised gains and losses from available-for-sale securities and impairment charges on equity instruments classified as available for sale are presented under 'Gains less losses of financial investments' while impairment charges on other available-for-sale securities are presented under 'Loan impairment charges and other credit risk provisions' in the income statement. Unrealised gains and losses are presented in 'Fair value gains/(losses)' within 'Available-for-sale investments' in other comprehensive income.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data. The following table shows the sensitivity of these fair values to reasonably possible alternative assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
|
Reflected in profit or loss |
|
Reflected in equity |
||||
|
Favourable changes |
|
Unfavourable |
|
Favourable changes |
|
Unfavourable changes |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
At 30 June 2010 |
|
|
|
|
|
|
|
Derivatives, trading assets and trading liabilities21 ........... |
661 |
|
(637) |
|
- |
|
- |
Financial assets and liabilities designated at fair value ...... |
116 |
|
(103) |
|
- |
|
- |
Financial investments: available for sale ......................... |
- |
|
- |
|
595 |
|
(573) |
|
|
|
|
|
|
|
|
At 30 June 2009 |
|
|
|
|
|
|
|
Derivatives, trading assets and trading liabilities21 ........... |
1,428 |
|
(1,126) |
|
- |
|
- |
Financial assets and liabilities designated at fair value ...... |
39 |
|
(39) |
|
- |
|
- |
Financial investments: available for sale ......................... |
- |
|
- |
|
1,263 |
|
(1,288) |
|
|
|
|
|
|
|
|
At 31 December 2009 |
|
|
|
|
|
|
|
Derivatives, trading assets and trading liabilities21 ........... |
984 |
|
(577) |
|
- |
|
- |
Financial assets and liabilities designated at fair value ...... |
102 |
|
(98) |
|
- |
|
- |
Financial investments: available for sale ......................... |
- |
|
- |
|
1,161 |
|
(1,157) |
For footnote, see page 137.
The decrease in the effect of favourable changes in significant unobservable inputs in relation to derivatives, trading assets and trading liabilities during the year primarily reflected internal downgrades of certain monolines. The decrease in the effect of changes in significant unobservable inputs for available-for-sale assets arose primarily from the decrease in ABSs in level 3.
Sensitivity of fair values to reasonably possible alternative assumptions by level 3 instrument type
|
Reflected in profit or loss |
|
Reflected in equity |
||||
|
Favourable changes |
|
Unfavourable |
|
Favourable changes |
|
Unfavourable changes |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
At 30 June 2010 |
|
|
|
|
|
|
|
Private equity investments ............................................. |
69 |
|
(59) |
|
356 |
|
(340) |
Asset-backed securities ................................................... |
18 |
|
(11) |
|
131 |
|
(134) |
Leveraged finance .......................................................... |
1 |
|
(1) |
|
- |
|
- |
Loans held for securitisation ........................................... |
10 |
|
(10) |
|
- |
|
- |
Structured notes .............................................................. |
24 |
|
(33) |
|
- |
|
- |
Derivatives with monolines ............................................ |
116 |
|
(85) |
|
- |
|
- |
Other derivatives ............................................................ |
328 |
|
(370) |
|
- |
|
- |
Other portfolios ............................................................. |
211 |
|
(171) |
|
108 |
|
(99) |
|
|
|
|
|
|
|
|
At 30 June 2009 |
|
|
|
|
|
|
|
Private equity investments ............................................. |
26 |
|
(26) |
|
267 |
|
(292) |
Asset-backed securities ................................................... |
124 |
|
(103) |
|
709 |
|
(708) |
Leveraged finance .......................................................... |
2 |
|
(2) |
|
- |
|
- |
Loans held for securitisation ........................................... |
19 |
|
(19) |
|
- |
|
- |
Structured notes .............................................................. |
21 |
|
(21) |
|
- |
|
- |
Derivatives with monolines ............................................ |
211 |
|
(444) |
|
- |
|
- |
Other derivatives ............................................................ |
895 |
|
(397) |
|
- |
|
- |
Other portfolios ............................................................. |
169 |
|
(153) |
|
287 |
|
(288) |
|
|
|
|
|
|
|
|
At 31 December 2009 |
|
|
|
|
|
|
|
Private equity investments ............................................. |
54 |
|
(54) |
|
302 |
|
(299) |
Asset-backed securities ................................................... |
41 |
|
(41) |
|
734 |
|
(735) |
Leveraged finance .......................................................... |
1 |
|
(1) |
|
- |
|
- |
Loans held for securitisation ........................................... |
16 |
|
(16) |
|
- |
|
- |
Structured notes .............................................................. |
3 |
|
(3) |
|
- |
|
- |
Derivatives with monolines ............................................ |
333 |
|
(25) |
|
- |
|
- |
Other derivatives ............................................................ |
309 |
|
(332) |
|
- |
|
- |
Other portfolios ............................................................. |
329 |
|
(203) |
|
125 |
|
(123) |
|
|
|
|
|
|
|
|
Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result of varying the levels of the unobservable parameter using statistical techniques. When parameters are not amenable to statistical analysis, quantification of uncertainty is judgemental.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or most unfavourable change from varying the assumptions individually.
In respect of private equity investments, the valuations are assessed on an asset by asset basis using a valuation methodology appropriate to the specific investment, in line with industry guidelines. In many of the methodologies, the principal assumption is the valuation multiple to be applied to the main financial indicators. This may be determined with reference to multiples for comparable listed companies and includes discounts for marketability.
For ABSs whose prices are unobservable, models are used to generate the expected value of the asset. The principal assumptions in these models are based on benchmark information about prepayment speeds, default rates, loss severities and the historical performance of the underlying assets. The models used are calibrated by using securities for which external market information is available.
For leveraged finance, loans held for securitisation and derivatives with monolines the principal assumption concerns the appropriate value to be attributed to the counterparty credit risk. This requires exposure at default, probability of default and recovery in the event of default to be estimated. For loan transactions, assessment of exposure at default is straightforward. For derivative transactions, a future exposure profile is generated on the basis of current market data. Probabilities of default and recovery levels are estimated using market evidence, which may include financial information, historical experience, CDS spreads and consensus recovery levels. In the absence of such evidence, management's best estimate is used.
For structured notes and other derivatives, principal assumptions concern the value to be attributed to future volatility of asset values and the future correlation between asset values. These principal assumptions include credit volatilities and correlations used in the valuation of structured credit derivatives (including leveraged credit derivatives). For such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy method to derive a volatility or a correlation from comparable assets for which market data is more readily available, and/or an examination of historical levels.
Assessing available-for-sale assets for impairment
HSBC's policy on impairment of available-for-sale assets is described on page 375 of the Annual Report and Accounts 2009. The following is a description of HSBC's application of that policy.
A systematic impairment review is carried out periodically of all available-for-sale assets, and all available indicators are considered to determine whether there is any objective evidence that an impairment may have occurred, whether as the result of a single loss event or as the combined effect of several events.
Debt securities
When assessing available-for-sale debt securities for objective evidence of impairment at the reporting date, HSBC considers all available evidence, including observable data or information about events specifically relating to the securities which may result in a shortfall in recovery of future cash flows. These events may include a significant financial difficulty of the issuer, a breach of contract such as a default, bankruptcy or other financial reorganisation, or the disappearance of an active market for the debt security because of financial difficulties relating to the issuer.
These types of specific event and other factors such as information about the issuers' liquidity, business and financial risk exposures, levels of and trends in default for similar financial assets, national and local economic trends and conditions, and the fair value of collateral and guarantees may be considered individually, or in combination, to determine if there is objective evidence of impairment of a debt security.
In addition, when assessing available-for-sale ABSs for objective evidence of impairment, HSBC considers the performance of underlying collateral and the extent and depth of market price declines. Changes in credit ratings are considered but a downgrade of a security's credit rating is not, of itself, evidence of impairment. The primary indicators of potential impairment are considered to be adverse fair value movements, and the disappearance of an active market for a security.
At 30 June 2010, the population of available-for-sale ABSs considered to be most at risk of impairment included residential MBSs backed by sub-prime and Alt-A mortgages originated in the US, commercial MBSs originated in the US and Europe and CDOs with considerable exposure to this sector. The estimated future cash flows of these securities are assessed at the specific financial asset level to determine whether any of their cash flows are unlikely to be recovered as a result of events occurring on or before the reporting date.
In particular, for residential and commercial MBSs the estimated future cash flows are assessed by determining the future projected cash flows arising on the underlying collateral taking into consideration the delinquency status of underlying loans, the probability of delinquent loans progressing to default, the proportion of the advances subsequently recoverable and the prepayment profiles of underlying assets. Management uses externally available data and applies judgement when determining the appropriate assumptions in respect of these factors. HSBC uses a modelling approach which incorporates historically observed progression rates to default, to determine if the decline in aggregate projected cash flows from the underlying collateral will lead to a shortfall in contractual cash flows. In such cases the security is considered to be impaired.
In respect of CDOs, in order to determine whether impairment has occurred, the expected future cash flows of the CDOs are compared with the total of the underlying collateral on the non-defaulted assets and the recovery value of the defaulted assets. In the event of a shortfall, the CDO is considered to be impaired.
When a security benefits from a contract provided by a monoline insurer that insures payments of principal and interest, the expected recovery on the contract is assessed in determining the total expected credit support available to the ABS.
Equity securities
Objective evidence of impairment for available-for-sale equity securities may include specific information about the issuer as detailed under 'Debt securities' above, but may also include information about significant changes in technology, markets, economics or the law that provides evidence that the cost of the equity securities may not be recovered.
A significant or prolonged decline in the fair value of the asset below its cost is also objective evidence of impairment. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is evaluated against the period in which the fair value of the asset has been below its original cost at initial recognition.
For impairment losses on available-for-sale debt and equity securities, see pages 21 and 19, respectively. Any impairment losses relating to ABSs recognised in the income statement are recorded as 'Loan impairment charges and other credit risk provisions'. Impairment losses incurred on assets held by consolidated securities investment conduits (excluding Solitaire) are offset by a credit to the impairment line for the amount of the loss borne by capital note holders.
Fair values of financial instruments not carried at fair value
Fair values of financial instruments which are not carried at fair value on the balance sheet
|
At 30 June 2010 |
|
At 30 June 2009 |
|
At 31 December 2009 |
||||||
|
Carrying amount |
|
Fair value |
|
Carrying amount |
|
Fair value |
|
Carrying amount |
|
Fair value |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
Assets |
|
|
|
|
|
|
|
|
|
|
|
Loans and advances to banks ................... |
196,296 |
|
196,122 |
|
182,266 |
|
181,507 |
|
179,781 |
|
179,658 |
Loans and advances to customers ............. |
893,337 |
|
864,274 |
|
924,683 |
|
871,973 |
|
896,231 |
|
855,780 |
Financial investments: |
|
|
|
|
|
|
|
|
|
|
|
- debt securities .................................... |
18,788 |
|
20,075 |
|
16,290 |
|
16,571 |
|
17,526 |
|
18,097 |
- treasury and other eligible bills .......... |
125 |
|
125 |
|
- |
|
- |
|
101 |
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Deposits by banks .................................... |
127,316 |
|
127,286 |
|
129,151 |
|
129,076 |
|
124,872 |
|
124,856 |
Customer accounts ................................... |
1,147,321 |
|
1,148,229 |
|
1,163,343 |
|
1,164,256 |
|
1,159,034 |
|
1,160,036 |
Debt securities in issue ............................. |
153,600 |
|
152,820 |
|
156,199 |
|
151,295 |
|
146,896 |
|
145,888 |
Subordinated liabilities .............................. |
28,247 |
|
27,978 |
|
30,134 |
|
28,299 |
|
30,478 |
|
30,307 |
Fair values of financial instruments held for sale which are not carried at fair value on the balance sheet
|
At 30 June 2010 |
|
At 30 June 2009 |
|
At 31 December 2009 |
||||||
|
Carrying amount |
|
Fair value |
|
Carrying amount |
|
Fair value |
|
Carrying amount |
|
Fair value |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
Assets classified as held for sale |
|
|
|
|
|
|
|
|
|
|
|
Loans and advances to banks and customers ............................................................. |
40 |
|
40 |
|
801 |
|
729 |
|
1,300 |
|
1,257 |
Financial investments: debt securities ....... |
70 |
|
70 |
|
45 |
|
45 |
|
59 |
|
59 |
Analysis of loans and advances to customers by geographical segment
|
At 30 June 2010 |
|
At 30 June 2009 |
|
At 31 December 2009 |
||||||
|
Carrying amount |
|
Fair value |
|
Carrying amount |
|
Fair value |
|
Carrying amount |
|
Fair value |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
|
US$m |
Loans and advances to customers |
|
|
|
|
|
|
|
|
|
|
|
Europe ..................................................... |
407,226 |
|
400,580 |
|
457,090 |
|
445,335 |
|
439,481 |
|
431,158 |
Hong Kong .............................................. |
114,075 |
|
114,265 |
|
97,486 |
|
97,052 |
|
99,381 |
|
99,694 |
Rest of Asia-Pacific ................................. |
91,672 |
|
91,616 |
|
74,062 |
|
74,082 |
|
80,043 |
|
79,972 |
Middle East .............................................. |
23,394 |
|
23,389 |
|
25,097 |
|
24,798 |
|
22,844 |
|
22,538 |
North America ........................................ |
208,141 |
|
185,643 |
|
226,258 |
|
185,826 |
|
206,853 |
|
174,957 |
Latin America ......................................... |
48,829 |
|
48,781 |
|
44,690 |
|
44,880 |
|
47,629 |
|
47,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
893,337 |
|
864,274 |
|
924,683 |
|
871,973 |
|
896,231 |
|
855,780 |
Financial instruments that are not carried at fair value on the balance sheet include loans and advances to banks and customers, deposits by banks, customer accounts, debt securities in issue and subordinated liabilities. Their fair values are, however, provided for information by way of note disclosure and are calculated as described below.
The calculation of fair value incorporates HSBC's estimate of the amount at which financial assets could be exchanged, or financial liabilities settled, between knowledgeable willing parties in an arm's length transaction. It does not reflect the economic benefits and costs that HSBC expects to flow from the instruments' cash flows over their expected future lives. Other reporting entities may use different valuation methodologies and assumptions in determining fair values for which no observable market prices are available, so comparisons of fair values between entities may not be meaningful and users are advised to exercise caution when using this data.
As a consequence of the market turmoil, there has been a significant reduction in the secondary market demand for US consumer lending assets. Uncertainty over the extent and timing of future credit losses, together with a near absence of liquidity for non-prime ABSs and loans, continued to be reflected in a lack of bid prices at 30 June 2010. It is not possible from the indicative market prices that are available to distinguish between the relative discount to nominal value within the fair value measurement that reflects cash flow impairment due to expected losses to maturity, and the discount that the market is demanding for holding an illiquid asset. Under impairment accounting for loans and advances, there is no requirement to adjust carrying value to reflect illiquidity as HSBC's intention is to fund assets until the earlier of prepayment, charge-off or repayment on maturity. The fair value, by contrast, reflects both incurred loss and loss expected through the life of the asset, a discount for illiquidity and a credit spread which reflects the market's current risk preferences. This usually differs from the credit spread applicable in the market at the time the loan was underwritten and funded.
The estimated fair values at 30 June 2010, 30 June 2009 and 31 December 2009 of loans and advances to customers in North America reflect the combined effect of these conditions. As a result, the fair values are substantially lower than the carrying amount of customer loans held on-balance sheet and lower than would otherwise be reported under more normal market conditions. Accordingly, the fair values reported do not reflect HSBC's estimate of the underlying long-term value of the assets.
Fair values of the assets and liabilities set out below are estimated for the purpose of disclosure as follows:
· Loans and advances to banks and customers
The fair value of loans and advances is based on observable market transactions, where available. In the absence of observable market transactions, fair value is estimated using discounted cash flow models. Performing loans are grouped, as far as possible, into homogeneous pools segregated by maturity and interest rates. In general, contractual cash flows are discounted using HSBC's estimate of the discount rate that a market participant would use in valuing instruments with similar maturity, repricing and credit risk characteristics.
The fair value of a loan portfolio reflects both loan impairments at the reporting date and estimates of market participants' expectations of credit losses over the life of the loans.
For impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.
· Financial investments
The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that take into consideration the prices and future earnings streams of equivalent quoted securities.
· Deposits by banks and customer accounts
For the purpose of estimating fair value, deposits by banks and customer accounts are grouped by remaining contractual maturity. Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. The fair value of a deposit repayable on demand is assumed to be the amount payable on demand at the reporting date.
· Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the reporting date where available, or by reference to quoted market prices for similar instruments.
These fair values are stated at a specific date and may be significantly different from the amounts which will actually be paid on the maturity or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to HSBC as a going concern.
For all classes of financial instruments, fair value represents the product of the value of a single instrument, multiplied by the number of instruments held. No block discount or premium adjustments are made where instruments are quoted in an active market. The fair values of intangible assets related to the businesses which originate and hold the financial instruments subject to fair value measurement, such as values placed on portfolios of core deposits, credit card and customer relationships, are not included in the above because they are not classified as financial instruments. Accordingly, an aggregation of fair value measurements does not approximate to the value of the organisation as a going concern.
The following table lists financial instruments whose carrying amount is a reasonable approximation of fair value because, for example, they are short-term in nature or reprice to current market rates frequently:
Assets
Cash and balances at central banks
Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness
Endorsements and acceptances
Short-term receivables within 'Other assets'
Accrued income
Liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Investment contracts with DPF within 'Liabilities under insurance contracts'
Endorsements and acceptances
Short-term payables within 'Other liabilities'
Accruals
This section contains disclosures about HSBC-sponsored SPEs that are included in HSBC's consolidated balance sheet, with a particular focus on SPEs containing exposures affected by the turmoil in credit markets which began in mid-2007, and those that are not consolidated by HSBC under IFRSs. Information on other off-balance sheet arrangements has also been included in this section.
HSBC enters into certain transactions with customers in the ordinary course of business which involve the establishment of SPEs to facilitate or secure customer transactions. Newly established structures that utilise SPEs are authorised centrally by HSBC to ensure appropriate purpose and governance. The activities of SPEs administered by HSBC are closely monitored by senior management.
HSBC-sponsored SPEs
HSBC sponsors the formation of entities which are designed to accomplish certain narrow and well-defined objectives, such as securitising financial assets or effecting a lease, and this requires a form of legal structure that restricts the assets and liabilities within the structure to the single purpose for which it was established. HSBC consolidates these SPEs when the substance of the relationship indicates that HSBC controls them. In assessing control, all relevant factors are considered, including qualitative and quantitative aspects, as described on pages 181 and 182 of the Annual Report and Accounts 2009.
HSBC reassesses the required consolidation accounting tests whenever there is a change in the substance of the relationship between HSBC and an SPE, for example, when the nature of HSBC's involvement or the governing rules, contractual arrangements or capital structure of the SPE change. The most significant categories of SPEs are discussed in more detail below.
Conduits
HSBC sponsors and manages two types of conduits which issue commercial paper ('CP'): securities investment conduits ('SIC's) and multi-seller conduits. HSBC has consolidated these conduits from inception because it is exposed to the majority of risks and rewards of ownership.
Securities investment conduits
Solitaire, HSBC's principal SIC, purchases highly rated ABSs to facilitate tailored investment opportunities. HSBC's other SICs, Mazarin Funding Limited ('Mazarin'), Barion Funding Limited ('Barion') and Malachite Funding Limited ('Malachite'), evolved from the restructuring of HSBC's sponsored structured investment vehicles ('SIV's), as discussed in the Annual Report and Accounts 2009.
Multi-seller conduits
These vehicles were established for the purpose of providing access to flexible market-based sources of finance for HSBC's clients, for example, to finance discrete pools of third-party originated trade and vehicle finance loan receivables. HSBC's principal multi-seller conduits are Regency Assets Limited ('Regency'), Bryant Park Funding Limited LLC ('Bryant Park') and Performance Trust.
Ratings analysis of assets held by HSBC's conduits
|
Solitaire |
|
Other |
|
Total |
|
Total |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
S&P ratings at 30 June 2010 |
|
|
|
|
|
|
|
AAA ............................................................................ |
4.6 |
|
4.9 |
|
9.5 |
|
6.5 |
AA .............................................................................. |
3.0 |
|
4.7 |
|
7.7 |
|
1.1 |
A ................................................................................. |
1.0 |
|
5.8 |
|
6.8 |
|
1.5 |
BBB ............................................................................. |
0.9 |
|
0.9 |
|
1.8 |
|
- |
BB ............................................................................... |
0.2 |
|
0.2 |
|
0.4 |
|
0.5 |
B ................................................................................. |
0.4 |
|
0.3 |
|
0.7 |
|
- |
CCC ............................................................................. |
0.8 |
|
0.7 |
|
1.5 |
|
- |
CC ............................................................................... |
0.5 |
|
0.8 |
|
1.3 |
|
- |
D ................................................................................. |
0.6 |
|
0.6 |
|
1.2 |
|
- |
|
|
|
|
|
|
|
|
Total investments .......................................................... |
12.0 |
|
18.9 |
|
30.9 |
|
9.6 |
Cash and other investments ............................................ |
1.9 |
|
0.1 |
|
2.0 |
|
0.4 |
|
|
|
|
|
|
|
|
|
13.9 |
|
19.0 |
|
32.9 |
|
10.0 |
S&P ratings at 31 December 2009 |
|
|
|
|
|
|
|
AAA ............................................................................ |
5.2 |
|
6.7 |
|
11.9 |
|
6.2 |
AA .............................................................................. |
3.0 |
|
4.1 |
|
7.1 |
|
1.3 |
A ................................................................................. |
0.8 |
|
6.0 |
|
6.8 |
|
1.8 |
BBB ............................................................................. |
0.7 |
|
0.8 |
|
1.5 |
|
0.5 |
BB ............................................................................... |
0.2 |
|
0.3 |
|
0.5 |
|
0.5 |
B ................................................................................. |
0.4 |
|
0.3 |
|
0.7 |
|
- |
CCC ............................................................................. |
1.0 |
|
1.0 |
|
2.0 |
|
- |
CC ............................................................................... |
0.3 |
|
0.4 |
|
0.7 |
|
- |
D ................................................................................. |
0.1 |
|
0.1 |
|
0.2 |
|
- |
|
|
|
|
|
|
|
|
Total investments .......................................................... |
11.7 |
|
19.7 |
|
31.4 |
|
10.3 |
Cash and other investments ............................................ |
1.1 |
|
0.3 |
|
1.4 |
|
0.6 |
|
|
|
|
|
|
|
|
|
12.8 |
|
20.0 |
|
32.8 |
|
10.9 |
At 30 June 2010, 6.9 per cent of the SICs' exposures to sub-prime and US Alt-A mortgages, which in aggregate amounted to US$0.4 billion, remained AAA rated (31 December 2009: 6.8 per cent, US$0.4 billion), while 20.7 per cent, which in aggregate amounted to US$1.2 billion, remained investment grade (31 December 2009: 30.5 per cent, US$1.8 billion).
It should be noted that securities purchased by SICs typically benefit from substantial transaction-specific credit enhancements such as subordinated tranches and/or excess spread, which absorb any credit losses before they fall on the tranche held by the SPE.
Weighted average life of portfolios
|
Weighted average life (years) |
||||||
|
Solitaire |
|
Other |
|
Total |
|
Total |
|
|
|
|
|
|
|
|
At 30 June 2010 ........................................................... |
5.8 |
|
3.9 |
|
4.6 |
|
2.1 |
At 31 December 2009 .................................................... |
6.3 |
|
4.1 |
|
4.9 |
|
2.4 |
Composition of asset portfolios
|
Solitaire |
|
Other |
|
Total |
|
Total multi-seller conduits22 |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
Asset class at 30 June 2010 |
|
|
|
|
|
|
|
Structured finance |
|
|
|
|
|
|
|
Vehicle loans and equipment leases .............................. |
- |
|
- |
|
- |
|
2.6 |
Consumer receivables ................................................... |
- |
|
- |
|
- |
|
0.7 |
Credit card receivables ................................................. |
0.3 |
|
- |
|
0.3 |
|
1.3 |
Residential MBSs ......................................................... |
3.9 |
|
4.7 |
|
8.6 |
|
0.2 |
Commercial MBSs ....................................................... |
2.5 |
|
3.9 |
|
6.4 |
|
0.1 |
Auto floor plan ............................................................ |
- |
|
- |
|
- |
|
0.5 |
Trade receivables ......................................................... |
- |
|
- |
|
- |
|
3.2 |
Student loan securities .................................................. |
2.4 |
|
1.8 |
|
4.2 |
|
- |
Vehicle finance loan securities ..................................... |
0.1 |
|
0.1 |
|
0.2 |
|
- |
Leverage loan securities ............................................... |
1.9 |
|
2.3 |
|
4.2 |
|
- |
Other ABSs .................................................................. |
0.9 |
|
1.0 |
|
1.9 |
|
0.9 |
|
|
|
|
|
|
|
|
|
12.0 |
|
13.8 |
|
25.8 |
|
9.5 |
Finance |
|
|
|
|
|
|
|
Commercial bank securities and deposits ..................... |
- |
|
4.3 |
|
4.3 |
|
0.4 |
Investment bank debt securities .................................. |
- |
|
0.6 |
|
0.6 |
|
- |
Finance company debt securities ................................. |
- |
|
0.2 |
|
0.2 |
|
0.1 |
Other assets ................................................................ |
1.9 |
|
0.1 |
|
2.0 |
|
- |
|
|
|
|
|
|
|
|
|
1.9 |
|
5.2 |
|
7.1 |
|
0.5 |
|
|
|
|
|
|
|
|
|
13.9 |
|
19.0 |
|
32.9 |
|
10.0 |
|
|
|
|
|
|
|
|
Sub-prime mortgages ...................................................... |
0.6 |
|
1.5 |
|
2.1 |
|
- |
US Alt-A ........................................................................ |
1.9 |
|
1.8 |
|
3.7 |
|
- |
|
|
|
|
|
|
|
|
|
2.5 |
|
3.3 |
|
5.8 |
|
- |
|
|
|
|
|
|
|
|
Composition of asset portfolios (continued)
|
Solitaire |
|
Other |
|
Total |
|
Total multi-seller conduits22 |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
Asset class at 31 December 2009 |
|
|
|
|
|
|
|
Structured finance |
|
|
|
|
|
|
|
Vehicle loans and equipment leases ............................. |
- |
|
- |
|
- |
|
3.0 |
Consumer receivables .................................................. |
- |
|
- |
|
- |
|
0.8 |
Credit card receivables ................................................ |
0.2 |
|
- |
|
0.2 |
|
1.3 |
Residential MBSs ........................................................ |
3.8 |
|
4.6 |
|
8.4 |
|
0.3 |
Commercial MBSs ...................................................... |
2.4 |
|
3.3 |
|
5.7 |
|
0.2 |
Auto floor plan ........................................................... |
- |
|
- |
|
- |
|
0.5 |
Trade receivables ........................................................ |
- |
|
- |
|
- |
|
2.8 |
Student loan securities ................................................. |
2.3 |
|
1.8 |
|
4.1 |
|
- |
Vehicle finance loan securities .................................... |
0.1 |
|
0.2 |
|
0.3 |
|
- |
Leverage loan securities .............................................. |
1.9 |
|
2.3 |
|
4.2 |
|
- |
Other ABSs ................................................................. |
1.0 |
|
1.8 |
|
2.8 |
|
1.2 |
|
|
|
|
|
|
|
|
|
11.7 |
|
14.0 |
|
25.7 |
|
10.1 |
Finance |
|
|
|
|
|
|
|
Commercial bank securities and deposits ..................... |
0.1 |
|
4.8 |
|
4.9 |
|
0.6 |
Investment bank debt securities .................................. |
- |
|
0.8 |
|
0.8 |
|
- |
Finance company debt securities ................................. |
- |
|
0.2 |
|
0.2 |
|
0.2 |
Other assets ................................................................ |
1.0 |
|
0.2 |
|
1.2 |
|
- |
|
|
|
|
|
|
|
|
|
1.1 |
|
6.0 |
|
7.1 |
|
0.8 |
|
|
|
|
|
|
|
|
|
12.8 |
|
20.0 |
|
32.8 |
|
10.9 |
|
|
|
|
|
|
|
|
Sub-prime mortgages ...................................................... |
0.7 |
|
1.5 |
|
2.2 |
|
- |
US Alt-A ........................................................................ |
1.9 |
|
1.8 |
|
3.7 |
|
- |
|
|
|
|
|
|
|
|
|
2.6 |
|
3.3 |
|
5.9 |
|
- |
For footnote, see page 137.
Asset analysis by geographical origination for multi-seller conduits23
|
At |
|
At |
|
US$bn |
|
US$bn |
|
|
|
|
Europe ................................................................................................................................... |
5.9 |
|
6.1 |
Rest of Asia-Pacific ............................................................................................................... |
0.5 |
|
0.6 |
North America ...................................................................................................................... |
3.6 |
|
4.2 |
|
|
|
|
|
10.0 |
|
10.9 |
For footnote, see page 137.
Total assets by balance sheet classification
|
Solitaire |
|
Other |
|
Total |
|
Total conduits |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
At 30 June 2010 |
|
|
|
|
|
|
|
Financial instruments designated at fair value ................. |
0.1 |
|
- |
|
0.1 |
|
- |
Loans and advances to banks .......................................... |
- |
|
- |
|
- |
|
0.2 |
Loans and advances to customers ................................... |
- |
|
- |
|
- |
|
9.6 |
Financial investments ..................................................... |
11.9 |
|
19.0 |
|
30.9 |
|
- |
Other assets .................................................................... |
1.9 |
|
- |
|
1.9 |
|
0.2 |
|
|
|
|
|
|
|
|
|
13.9 |
|
19.0 |
|
32.9 |
|
10.0 |
|
|
|
|
|
|
|
|
At 31 December 2009 |
|
|
|
|
|
|
|
Financial instruments designated at fair value ................. |
0.1 |
|
- |
|
0.1 |
|
- |
Loans and advances to banks .......................................... |
- |
|
- |
|
- |
|
0.3 |
Loans and advances to customers ................................... |
- |
|
- |
|
- |
|
10.3 |
Financial investments ..................................................... |
11.6 |
|
19.8 |
|
31.4 |
|
- |
Other assets .................................................................... |
1.1 |
|
0.2 |
|
1.3 |
|
0.3 |
|
|
|
|
|
|
|
|
|
12.8 |
|
20.0 |
|
32.8 |
|
10.9 |
Funding structure
|
Solitaire |
|
Other SICs |
|
Total SICs |
|
Total multi-seller conduits |
||||||||
|
Total |
|
Provided by HSBC |
|
Total |
|
Provided by HSBC |
|
Total |
|
Provided by HSBC |
|
Total |
|
Provided by HSBC |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
At 30 June 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital notes ............... |
- |
|
- |
|
0.3 |
|
- |
|
0.3 |
|
- |
|
- |
|
- |
Drawn liquidity |
8.5 |
|
8.5 |
|
- |
|
- |
|
8.5 |
|
8.5 |
|
- |
|
- |
Commercial paper ....... |
9.5 |
|
0.3 |
|
8.7 |
|
8.7 |
|
18.2 |
|
9.0 |
|
9.4 |
|
- |
Medium-term notes ..... |
- |
|
- |
|
5.2 |
|
5.2 |
|
5.2 |
|
5.2 |
|
- |
|
- |
Other funding .............. |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.6 |
|
0.6 |
Term repos executed ... |
- |
|
- |
|
7.8 |
|
7.8 |
|
7.8 |
|
7.8 |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.0 |
|
8.8 |
|
22.0 |
|
21.7 |
|
40.0 |
|
30.5 |
|
10.0 |
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital notes ............... |
- |
|
- |
|
0.7 |
|
- |
|
0.7 |
|
- |
|
- |
|
- |
Drawn liquidity |
7.6 |
|
7.6 |
|
- |
|
- |
|
7.6 |
|
7.6 |
|
- |
|
- |
Commercial paper ....... |
10.8 |
|
0.7 |
|
10.1 |
|
10.1 |
|
20.9 |
|
10.8 |
|
10.3 |
|
- |
Medium-term notes ..... |
- |
|
- |
|
3.8 |
|
3.8 |
|
3.8 |
|
3.8 |
|
- |
|
- |
Other funding .............. |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.4 |
|
0.4 |
Term repos executed ... |
- |
|
- |
|
10.2 |
|
10.2 |
|
10.2 |
|
10.2 |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.4 |
|
8.3 |
|
24.8 |
|
24.1 |
|
43.2 |
|
32.4 |
|
10.7 |
|
0.4 |
Weighted average life of the funding liabilities
|
Weighted average life of funding liabilities (years) |
||||||
|
Solitaire |
|
Other |
|
Total |
|
Total |
At 30 June 2010 |
|
|
|
|
|
|
|
CP funding ..................................................................... |
0.2 |
|
0.1 |
|
0.1 |
|
0.1 |
MTN funding ................................................................. |
- |
|
5.8 |
|
5.8 |
|
- |
|
|
|
|
|
|
|
|
At 31 December 2009 |
|
|
|
|
|
|
|
CP funding ..................................................................... |
0.2 |
|
0.1 |
|
0.1 |
|
0.1 |
MTN funding ................................................................. |
- |
|
10.3 |
|
10.3 |
|
- |
HSBC's maximum exposure
Conduits
Mazarin
HSBC is exposed to the par value of Mazarin's assets through the provision of a liquidity facility equal to the lesser of the amortised cost of issued senior debt and the amortised cost of non-defaulted assets. At 30 June 2010, HSBC's exposure amounted to US$12.1 billion (31 December 2009: US$13.6 billion). First loss protection is provided through the capital notes issued by Mazarin, which are substantially all held by third parties.
At 30 June 2010, HSBC held 1.3 per cent (31 December 2009: 1.3 per cent) of Mazarin's capital notes, which had a par value of US$17 million (31 December 2009: US$17 million), and a carrying amount of US$0.6 million (31 December 2009: US$0.6 million).
Barion and Malachite
These SICs are term funded by HSBC, consequently HSBC's primary exposure to them is represented by the amortised cost of the debt required to support the non-cash assets of the vehicles. At 30 June 2010 this amounted to US$9.6 billion (31 December 2009: US$10.5 billion).
First loss protection is provided through the capital notes issued by these vehicles, which are substantially all held by third parties.
At 30 June 2010, HSBC held 3.8 per cent (31 December 2009: 3.8 per cent) of the capital notes issued by these vehicles which have a par value of US$34 million (31 December 2009: US$37 million), and a carrying amount of US$1.9 million (31 December 2009: US$2 million).
Solitaire
CP issued by Solitaire benefits from a 100 per cent liquidity facility provided by HSBC. First loss credit protection against CP-funded securities, after any transaction-specific credit enhancement (as described on page 101) and retained reserves, is provided by HSBC in the form of letters of credit with a combined notional value of US$1.2 billion at 30 June 2010 (31 December 2009: US$1.2 billion).
At 30 June 2010, US$8.5 billion of Solitaire's assets were funded by the draw-down of the liquidity facility (31 December 2009: US$7.6 billion). HSBC is exposed to credit losses on the drawn amounts.
HSBC's maximum exposure to Solitaire is limited to the amortised cost of non-cash equivalent assets, which represents the risk that HSBC may be required to fund the vehicle in the event the debt is redeemed without reinvestment from third parties.
HSBC's maximum exposure at 30 June 2010 amounted to US$18 billion (31 December 2009: US$18.4 billion).
Multi-seller conduits
HSBC provides transaction-specific liquidity facilities to each of its multi-seller conduits, designed to be drawn in order to ensure the repayment of the CP issued. At 30 June 2010, the committed liquidity facilities amounted to US$12.7 billion (31 December 2009: US$14.4 billion).
First loss protection is provided through transaction-specific credit enhancements, for example, over-collateralisation and excess spread. These credit enhancements are provided by the originator of the assets and not by HSBC. In addition, a layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities, and at 30 June 2010 this amounted to US$0.6 billion (31 December 2009: US$0.6 billion). HSBC's maximum exposure is equal to the transaction-specific liquidity facilities offered to the multi-seller conduits, as described above.
The liquidity facilities are set to support total commitments and therefore exceed the funded assets at both 30 June 2010 and 31 December 2009.
In consideration of the significant first loss protection afforded by the structure, the credit enhancements and a range of indemnities provided by the various obligors, HSBC carries only a minimal risk of loss from the programme.
Money market funds
HSBC has established and manages a number of money market funds which provide customers with tailored investment opportunities with a set of narrow and well-defined objectives. In most cases, they are not consolidated in HSBC because the Group's holdings in them are not of sufficient size to represent the majority of the risks and rewards of ownership.
Investors in money market funds generally have no recourse other than to the assets in the funds, so asset holdings are designed to meet expected fund liabilities. Usually, money market funds are constrained in their operations should the value of their assets and their ratings fall below predetermined thresholds. The risks to HSBC are, therefore, contingent, arising from the reputational damage which could occur if an HSBC-sponsored money market fund was thought to be unable to meet withdrawal requests on a timely basis or in full.
In aggregate, HSBC has established money market funds with total assets of US$99.6 billion at 30 June 2010 (31 December 2009: US$99.0 billion).
The main sub-categories of money market funds are:
· US$74.2 billion (31 December 2009: US$73.6 billion) in Constant Net Asset Value ('CNAV') funds, which invest in shorter-dated and highly-rated money market securities with the objective of providing investors with a highly liquid and secure investment;
· US$0.6 billion (31 December 2009: US$0.7 billion) in French domiciled dynamique ('dynamic') funds and Irish 'enhanced' funds, together Enhanced Variable Net Asset Value ('Enhanced VNAV') funds, which invest in longer-dated money market securities to provide investors with a higher return than traditional money market funds; and
· US$24.8 billion (31 December 2009: US$24.7 billion) in various other money market Variable Net Asset Value ('VNAV') funds, including funds predominantly domiciled in Brazil, France, India and Mexico.
These money market funds invest in diverse portfolios of highly-rated debt instruments, and historically included limited holdings in instruments issued by SIVs.
Constant Net Asset Value funds
During 2008, action was taken by HSBC in respect of the CNAV funds to maintain their AAA rating and mitigate the forced sale of liquid assets to meet potential redemptions.
As a result of this action, HSBC concluded that the relationship with these CNAV funds had substantively changed, so HSBC consolidated them from 30 September 2008. It was not necessary for any further action to be taken after this date by HSBC in respect of maintaining the rating of the CNAV funds.
Total assets of HSBC's CNAV funds which are on‑balance sheet
|
At |
|
At |
|
US$bn |
|
US$bn |
|
|
|
|
ABSs ................................... |
0.3 |
|
0.3 |
Certificates of deposit ......... |
17.8 |
|
16.6 |
CP ....................................... |
19.6 |
|
12.0 |
Asset-backed CP .................. |
2.7 |
|
4.6 |
Government agency bonds ... |
2.5 |
|
6.6 |
Other assets ......................... |
1.0 |
|
2.3 |
|
|
|
|
Total ................................... |
43.9 |
|
42.4 |
The associated liabilities included on HSBC's balance sheet at 30 June 2010 amounted to US$43.1 billion (31 December 2009: US$41.5 billion) and are shown in 'Other liabilities'. The associated interest income from the funds and the expense payable to third-party holders of units in the funds are presented within 'Net interest income on trading activities'.
HSBC's maximum exposure
HSBC's maximum exposure to consolidated and unconsolidated CNAV funds is represented by HSBC's investment in the units of each CNAV fund. HSBC's exposure at 30 June 2010 amounted to US$0.8 billion (31 December 2009: US$1.0 billion).
Enhanced Variable Net Asset Value funds
Enhanced VNAV funds price their assets on a fair value basis and, consequently, prices may change from one day to the next. These funds pursue an 'enhanced' investment strategy, as part of which investors accept greater credit and duration risk in the expectation of higher returns.
During 2008, HSBC consolidated two of its French dynamic money market funds as a result of continued redemptions by unitholders. HSBC's aggregate holdings in these funds at 30 June 2010 amounted to €0.4 billion (US$0.5 billion) (31 December 2009: €0.5 billion (US$0.6 billion)).
HSBC's maximum exposure
HSBC's maximum exposure to consolidated and unconsolidated Enhanced VNAV and unconsolidated VNAV funds is represented by HSBC's investment in the units of each fund. HSBC's maximum exposure at 30 June 2010 amounted to US$0.5 billion (31 December 2009: US$0.6 billion) and US$0.2 billion (31 December 2009: US$0.2 billion), for Enhanced VNAV and VNAV funds, respectively.
Total assets of HSBC's money market funds which are on-balance sheet by balance sheet classification
|
At |
|
At 31 December |
|
US$bn |
|
US$bn |
|
|
|
|
Trading assets .................. |
44.4 |
|
42.8 |
Other assets ..................... |
- |
|
0.3 |
|
|
|
|
|
44.4 |
|
43.1 |
Non-money market investment funds
Through its fund management business, HSBC has established a large number of non-money market funds to enable customers to invest in a range of assets, typically equities and debt securities. At the launch of a fund HSBC, as fund manager, usually provides a limited amount of initial capital known as 'seed capital' to enable the fund to start purchasing assets. These holdings are normally redeemed over time. The majority of these funds are off-balance sheet for HSBC because the Group's limited economic interest means it does not have the majority of the risks and rewards of ownership. As the non-money market funds explicitly provide investors with tailored risk, the risk to HSBC is restricted to HSBC's own investments in the funds.
In aggregate, HSBC has established non-money market funds with total assets of US$243.8 billion at 30 June 2010 (31 December 2009: US$255.4 billion).
The main sub-categories of non-money market funds are:
· US$108.6 billion (31 December 2009: US$115.6 billion) in specialist funds, which comprise fundamental active specialists and active quantitative specialists;
· US$116.2 billion (31 December 2009: US$121.7 billion) in local investment management funds, which invest in domestic products, primarily for retail and private clients; and
· US$19.0 billion (31 December 2009: US$18.1 billion) in multi-manager funds, which offer fund of funds and manager-of-managers products across a diversified portfolio of assets.
Total assets of HSBC's on-balance sheet non-money market funds by balance sheet classification
|
At |
|
At 31 December |
|
US$bn |
|
US$bn |
|
|
|
|
Cash ................................ |
0.4 |
|
0.2 |
Trading assets .................. |
0.7 |
|
0.2 |
Financial instruments designated at fair value . |
5.3 |
|
5.3 |
|
|
|
|
|
6.4 |
|
5.7 |
HSBC's maximum exposure
HSBC's maximum exposure to consolidated and unconsolidated non-money market funds is represented by HSBC's investment in the units of each respective fund. HSBC's exposure at 30 June 2010 amounted to US$7.5 billion (31 December 2009: US$6.8 billion).
Securitisations
HSBC uses SPEs to securitise customer loans and advances that it has originated, mainly in order to diversify its sources of funding for asset origination and for capital efficiency purposes. In such cases, the loans and advances are transferred by HSBC to the SPEs for cash, and the SPEs issue debt securities to investors to fund the cash purchases. Credit enhancements to the underlying assets may be used to obtain investment grade ratings on the senior debt issued by the SPEs. HSBC has also established securitisation programmes in the US and Germany where loans originated by third parties are securitised. Most of these vehicles are not consolidated by HSBC as it is not exposed to the majority of risks and rewards of ownership in the SPEs. In the first half of 2010, demand for the securitised products remained low.
In addition, HSBC uses SPEs to mitigate the capital absorbed by some of the customer loans and advances it has originated. Credit derivatives are used to transfer the credit risk associated with these customer loans and advances to an SPE, using securitisations commonly known as synthetic securitisations by which the SPE writes credit default swap protection to HSBC. The SPE is funded by the issuance of notes with the cash held as collateral against the credit default protection. From a UK regulatory perspective, the credit protection issued by the SPE in respect of the customer loans allows the risk weight of the loans to be replaced by the risk weight of the collateral in the SPE and as a result mitigates the capital absorbed by the customer loans. Any notes issued by the SPE and held by HSBC attract the appropriate risk weight under the relevant regulatory regime. These SPEs are consolidated when HSBC is exposed to the majority of risks and rewards of ownership.
Total assets of HSBC's securitisations which are on‑balance sheet, by balance sheet classification
|
At |
|
At 31 December |
|
US$bn |
|
US$bn |
|
|
|
|
Trading assets .................. |
0.9 |
|
0.9 |
Loans and advances to customers .................... |
29.7 |
|
35.4 |
Other assets ..................... |
- |
|
1.4 |
Derivatives ...................... |
0.9 |
|
1.2 |
|
|
|
|
|
31.5 |
|
38.9 |
These assets include US$0.9 billion (31 December 2009: US$0.9 billion) of exposure to US sub-prime mortgages.
Total assets of HSBC's securitisations which are off‑balance sheet
|
At |
|
At 31 December |
|
US$bn |
|
US$bn |
|
|
|
|
HSBC originated assets .... |
0.6 |
|
0.6 |
Non-HSBC originated assets - term securitisation ..... programmes .............. |
9.4 |
|
10.5 |
|
|
|
|
|
10.0 |
|
11.1 |
HSBC's financial investments in off-balance sheet securitisations at 30 June 2010 were US$46 million (31 December 2009: US$109 million). These assets include assets which are classified as available-for-sale securities and measured at fair value, and have been securitised by HSBC under arrangements by which HSBC retains a continuing involvement in them.
HSBC's maximum exposure
The maximum exposure is the aggregate of any holdings of notes issued by these vehicles and the reserve account positions intended to provide credit support under certain pre-defined circumstances to senior note holders. HSBC is not obligated to provide further funding. At 30 June 2010, HSBC's maximum exposure to consolidated and unconsolidated securitisations amounted to US$5.9 billion (31 December 2009: US$8.0 billion).
Other
HSBC also establishes SPEs in the normal course of business for a number of purposes, for example, structured credit transactions for customers to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions.
Structured credit transactions
HSBC provides structured credit transactions to third‑party professional and institutional investors who wish to obtain exposure, sometimes on a leveraged basis, to a reference portfolio of debt instruments. In such structures, the investor receives returns referenced to the underlying portfolio by purchasing notes issued by the SPEs. HSBC enters into contracts with the SPEs, generally in the form of derivatives, in order to pass the required risks and rewards of the reference portfolios to the SPEs. HSBC's risk in relation to the derivative contracts with the SPEs is managed within HSBC's trading market risk framework (see 'Market risk' on page 175).
In certain transactions HSBC is exposed to risk often referred to as gap risk. Gap risk typically arises in transactions where the aggregate potential claims against the SPE by HSBC pursuant to one or more derivatives could be greater than the value of the collateral held by the SPE and securing such derivatives. HSBC often mitigates such gap risk by incorporating in the SPE transaction features which allow for deleveraging, a managed liquidation of the portfolio, or other mechanisms including trade restructuring or unwinding the trade. Following the inclusion of such risk reduction mechanisms, HSBC has, in certain circumstances, retained all or a portion of the underlying exposure in the transaction. In these circumstances HSBC assesses whether the exposure retained causes a requirement under IFRSs to consolidate the SPE. When this retained exposure represents ABSs, it has been included in 'Nature and extent of HSBC's exposures' on page 103.
Often transactions are facilitated through SPEs to enable the notes issued to the investors to be rated. The SPEs are not consolidated by HSBC when the investors bear substantially all the risks and rewards of ownership through the notes.
The total fair value of liabilities (notes issued and derivatives) in structured credit transaction SPEs was US$19.3 billion at 30 June 2010 (31 December 2009: US$20.6 billion). There were no SPEs that were consolidated by HSBC included in these amounts in either period.
Other uses of SPEs
HSBC participates in Public-Private Partnerships to provide financial support for infrastructure projects initiated by government authorities. The funding structure is commonly achieved through the use of SPEs. HSBC consolidates these SPEs when it is exposed to the majority of risks and rewards of the vehicles.
HSBC's Asset and Structured Finance business specialises in leasing and arranging finance for aircraft and other physical assets, which it is customary to ring-fence through the use of SPEs, and in structured loans and deposits, where SPEs introduce cost efficiencies. HSBC consolidates these SPEs when the substance of the relationship indicates that HSBC controls the SPE.
HSBC's risks and rewards of ownership in these SPEs are in respect of its on-balance sheet assets and liabilities.
HSBC's maximum exposures to SPEs
The following tables show the total assets of the various types of SPEs, and the amount and types of funding provided by HSBC to these SPEs. The tables also show HSBC's maximum exposure to the SPEs and, within that exposure, the types of liquidity and credit enhancements provided by HSBC. The maximum exposures to SPEs represent HSBC's maximum possible risk exposure that could occur as a result of the Group's arrangements and commitments to SPEs. The maximum amounts are contingent in nature, and may arise as a result of drawdowns under liquidity facilities, where these have been provided, and any other funding commitments, or as a result of any loss protection provided by HSBC to the SPEs. The conditions under which such exposure might arise differ depending on the nature of each SPE and HSBC's involvement with it. The aggregation of such maximum exposures across the different forms of SPEs results in a theoretical total maximum exposure number. The elements of the maximum exposure to an SPE are not necessarily additive and a detailed explanation of how maximum exposures are determined is provided under each category of SPE.
HSBC's maximum exposure to consolidated SPEs affected by the market turmoil
Securities |
|
Multi- |
|
|
Enhanced |
|
Non-money market funds |
|
|
|
|
|||||
|
ment conduits24 |
|
seller conduits |
|
CNAV funds |
|
VNAV |
|
Specialist funds |
|
Local funds25 |
|
Securi- tisations26 |
|
Total |
|
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
At 30 June 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets ..................................... |
32.9 |
|
10.0 |
|
43.9 |
|
0.5 |
|
0.5 |
|
5.9 |
|
31.5 |
|
125.2 |
|
Direct lending27 ........................... |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.9 |
|
0.9 |
|
ABSs27 ........................................ |
25.8 |
|
- |
|
0.3 |
|
0.2 |
|
- |
|
- |
|
- |
|
26.3 |
|
Asset-backed CP ......................... |
- |
|
- |
|
2.7 |
|
- |
|
- |
|
- |
|
- |
|
2.7 |
|
Other .......................................... |
7.1 |
|
10.0 |
|
40.9 |
|
0.3 |
|
0.5 |
|
5.9 |
|
30.6 |
|
95.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding provided by HSBC .............. |
30.5 |
|
0.6 |
|
0.7 |
|
0.5 |
|
0.2 |
|
5.9 |
|
2.5 |
|
40.9 |
|
CP .............................................. |
9.0 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
9.0 |
|
MTNs ......................................... |
5.2 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
2.3 |
|
7.5 |
|
Junior notes ................................ |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.2 |
|
0.2 |
|
Term repos executed ................... |
7.8 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
7.8 |
|
Investments in funds ................... |
- |
|
- |
|
0.7 |
|
0.5 |
|
0.2 |
|
5.9 |
|
- |
|
7.3 |
|
Drawn liquidity facility................. |
8.5 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
8.5 |
|
Other funding............................... |
- |
|
0.6 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total maximum exposure to |
39.7 |
|
12.7 |
|
0.7 |
|
0.5 |
|
0.2 |
|
5.9 |
|
5.9 |
|
65.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and credit enhancements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deal-specific liquidity facilities .... |
- |
|
12.7 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
12.7 |
|
Programme-wide liquidity facilities ................................................. |
26.9 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
26.9 |
|
Programme-wide limited credit enhancements .......................... |
1.2 |
|
0.6 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
1.8 |
|
Other liquidity and credit enhancements .......................... |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.1 |
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets ..................................... |
32.8 |
|
10.9 |
|
42.4 |
|
0.7 |
|
0.4 |
|
5.3 |
|
38.9 |
|
131.4 |
|
Direct lending27 ........................... |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.9 |
|
0.9 |
|
ABSs27 ........................................ |
25.7 |
|
- |
|
0.3 |
|
0.2 |
|
- |
|
- |
|
- |
|
26.2 |
|
Asset-backed CP ......................... |
- |
|
- |
|
4.6 |
|
- |
|
- |
|
- |
|
- |
|
4.6 |
|
Other .......................................... |
7.1 |
|
10.9 |
|
37.5 |
|
0.5 |
|
0.4 |
|
5.3 |
|
38.0 |
|
99.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding provided by HSBC .............. |
32.4 |
|
0.4 |
|
0.9 |
|
0.6 |
|
0.1 |
|
5.3 |
|
2.9 |
|
42.6 |
|
CP .............................................. |
10.8 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
10.8 |
|
MTNs ......................................... |
3.8 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
2.8 |
|
6.6 |
|
Junior notes ................................ |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.1 |
|
0.1 |
|
Term repos executed ................... |
10.2 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
10.2 |
|
Investments in funds ................... |
- |
|
- |
|
0.9 |
|
0.6 |
|
0.1 |
|
5.3 |
|
- |
|
6.9 |
|
Drawn liquidity facility................. |
7.6 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
7.6 |
|
Other funding............................... |
- |
|
0.4 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total maximum exposure to |
42.5 |
|
14.4 |
|
0.9 |
|
0.6 |
|
0.1 |
|
5.3 |
|
7.9 |
|
71.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and credit enhancements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deal-specific liquidity facilities .... |
- |
|
14.4 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
14.4 |
|
Programme-wide liquidity facilities ................................................. |
29.1 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
29.1 |
|
Programme-wide limited credit enhancements .......................... |
1.2 |
|
0.6 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
1.8 |
|
Other liquidity and credit enhancements .......................... |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
0.1 |
|
0.1 |
|
For footnotes, see page 137.
HSBC's maximum exposure to unconsolidated SPEs
|
Securitisations28 |
|
Money market funds28 |
|
Non-money market funds28 |
|
|
|
|
||||||||||
|
HSBC originated assets |
|
Non-HSBC originated assets29 |
|
CNAV |
|
Enhanced VNAV |
|
VNAV funds |
|
Specialist funds |
|
Local funds25 |
|
Multi- manager funds |
|
Other |
|
Total |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
|
US$bn |
At 30 June 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets .................................................... .................................................................... |
0.6 |
|
9.4 |
|
30.3 |
|
0.1 |
|
24.8 |
|
108.1 |
|
110.3 |
|
19.0 |
|
19.3 |
|
321.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding provided by HSBC ............................. |
- |
|
- |
|
0.1 |
|
- |
|
0.2 |
|
1.3 |
|
0.1 |
|
- |
|
8.8 |
|
10.5 |
MTNs ........................................................ |
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
8.8 |
|
8.8 |
Investments in funds .................................. |
- |
|
- |
|
0.1 |
|
- |
|
0.2 |
|
1.3 |
|
0.1 |
|
- |
|
- |
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total maximum exposure to unconsolidated SPEs ............................................................ .................................................................... |
- |
|
- |
|
0.1 |
|
- |
|
0.2 |
|
1.3 |
|
0.1 |
|
- |
|
3.4 |
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets .................................................... .................................................................... |
0.6 |
|
10.5 |
|
31.2 |
|
- |
|
24.7 |
|
115.2 |
|
116.4 |
|
18.1 |
|
20.6 |
|
337.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding provided by HSBC ............................. |
- |
|
0.1 |
|
0.1 |
|
- |
|
0.2 |
|
1.1 |
|
0.2 |
|
0.1 |
|
8.8 |
|
10.6 |
MTNs ........................................................ |
- |
|
0.1 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
8.8 |
|
8.9 |
Investments in funds .................................. |
- |
|
- |
|
0.1 |
|
- |
|
0.2 |
|
1.1 |
|
0.2 |
|
0.1 |
|
- |
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total maximum exposure to unconsolidated SPEs ............................................................ .................................................................... |
- |
|
0.1 |
|
0.1 |
|
- |
|
0.2 |
|
1.1 |
|
0.2 |
|
0.1 |
|
3.2 |
|
5.0 |
For footnotes, see page 137.
Third-party sponsored SPEs
Through standby liquidity facility commitments, HSBC has exposure to third-party sponsored SIVs, conduits and securitisations under normal banking arrangements on standard market terms. These exposures are quantified below.
HSBC's commitments under liquidity facilities to third-party SIVs, conduits and securitisations
|
Commit- ments |
|
Drawn |
|
US$bn |
|
US$bn |
At 30 June 2010 |
|
|
|
Third-party conduits ..... |
1.3 |
|
0.3 |
Third-party securitisations ........... |
0.7 |
|
0.1 |
|
|
|
|
|
2.0 |
|
0.4 |
|
|
|
|
At 31 December 2009 |
|
|
|
Third-party conduits ..... |
1.3 |
|
0.3 |
Third-party securitisations ........... |
0.7 |
|
0.1 |
|
|
|
|
|
2.0 |
|
0.4 |
Other exposures to third-party SIVs, conduits and securitisations where a liquidity facility has been provided
|
At |
|
At |
|
2010 |
|
2009 |
|
US$bn |
|
US$bn |
|
|
|
|
Derivative assets .......... |
0.1 |
|
0.1 |
Other off-balance sheet arrangements and commitments
Financial guarantees, letters of credit and similar undertakings
Note 16 on the Financial Statements describes various types of guarantees and discloses the maximum potential future payments under such arrangements. Credit risk associated with all forms of guarantees is assessed in the same manner as for on-balance sheet credit advances and, where necessary, provisions for assessed impairment are included in 'Other provisions'.
Commitments to lend
Undrawn credit lines are disclosed in Note 16 on the Financial Statements. The majority by value of undrawn credit lines arise from 'open to buy' lines on personal credit cards, advised overdraft limits and other pre-approved loan products, and mortgage offers awaiting customer acceptance. HSBC generally has the right to change or terminate any conditions of a personal customer's overdraft, credit card or other credit line upon notification to the customer. In respect of corporate commitments to lend, in most cases HSBC's position will be protected through restrictions on access to funding in the event of material adverse change.
Leveraged finance transactions
Loan commitments in respect of leveraged finance transactions are accounted for as derivatives where it is HSBC's intention to sell the loan after origination. Further information is provided on page 113.
Footnotes to Impact of Market Turmoil
1 Total includes holdings of ABSs issued by Freddie Mac and Fannie Mae.
2 'Recorded in the income statement' represents the accrual of the effective interest rate and, for the first half of 2010, also includes a US$25 million write-back in respect of impairment (first half of 2009: US$160 million write-down; second half of 2009: US$3 million write-down).
3 Effect on the income statement during the period had the reclassification not occurred.
4 The carrying amount includes funded loans plus the net exposure to unfunded leveraged finance commitments, held within fair value through profit or loss.
5 'Directly held' includes assets held by Solitaire where HSBC provides first loss protection and assets held directly by the Group.
6 Impairment charges allocated to capital note holders represent impairments where losses would be borne by external third-party investors in the structures.
7 Mortgage-backed securities ('MBS's), asset-backed securities ('ABS's) and collateralised debt obligations ('CDO's).
8 High grade assets rated AA or AAA.
9 Gains or losses on the net principal exposure (footnote 15) recognised in the income statement as a result of changes in the fair value of the asset.
10 Fair value gains and losses on the net principal exposure (footnote 15) recognised in other comprehensive income as a result of the changes in the fair value of available-for-sale assets.
11 Realised fair value gains and losses on the net principal exposure (footnote 15) recognised in the income statement as a result of the disposal of assets or the receipt of cash flows from assets.
12 Reclassified from equity on impairment, disposal or payment. This includes impairment losses recognised in the income statement in respect of the net principal exposure (footnote 15) of available-for-sale assets. Payments are the contractual cash flows received on the assets.
13 The gross principal is the redemption amount on maturity or, in the case of an amortising instrument, the sum of the future redemption amounts through the residual life of the security.
14 A credit default swap ('CDS') gross protection is the gross principal of the underlying instrument that is protected by CDSs.
15 Net principal exposure is the gross principal amount of assets that are not protected by CDSs. It includes assets that benefit from monoline protection, except where this protection is purchased with a CDS.
16 Carrying amount of the net principal exposure.
17 Net exposure after legal netting and any other relevant credit mitigation prior to deduction of the credit risk adjustment.
18 Cumulative fair value adjustment recorded against OTC derivative counterparty exposures to reflect the creditworthiness of the counterparty.
19 Funded exposure represents the loan amount advanced to the customer, less any fair value write-downs, net of fees held on deposit.
20 Unfunded exposures represent the contractually committed loan facility amount not yet drawn down by the customer, less any fair value write-downs, net of fees held on deposit.
21 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial instruments are risk-managed.
22 Assets within multi-seller conduits are classified as collateralised loans. Under IFRSs, the conduits cannot recognise the underlying assets.
23 For details of the geographical origin of the mortgage loans held at fair value and ABSs, including those represented by MBSs and CDOs held in consolidated securities investment conduits, see 'Nature and extent of HSBC's exposures' on page 103.
24 The securities investment conduits include Mazarin, Barion, Malachite and Solitaire.
25 Local investment management funds.
26 Also includes consolidated SPEs that hold mortgage loans held at fair value.
27 These assets only include those measured at fair value. For details on the geographical origin of the mortgage loans held at fair value and ABSs, including those represented by MBSs and CDOs held in consolidated securities investment conduits, see 'Nature and extent of HSBC's exposures' on page 103. The geographical origin of the loans and receivables held by the multi-seller conduits is disclosed on page 128.
28 HSBC's financial investments in off-balance sheet money market funds and non-money market funds have been classified as available-for-sale securities, and measured at fair value. HSBC's financial investments in off-balance sheet securitisations have been classified as trading assets and available-for-sale securities, and measured at fair value.
29 In the US, HSBC has established securitisation programmes where term-funded SPEs are used to securitise third-party originated mortgages, mainly sub-prime and Alt-A residential mortgages. The majority of these SPEs are not consolidated by HSBC as it is not exposed to the majority of the risk and rewards of ownership in the SPEs. No liquidity facility has been provided by HSBC.