Interim Report - 17 of 26

RNS Number : 1215M

HSBC Holdings PLC

12 August 2011

 



US$205m; 31 December 2010: US$262m). These relate to, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and the compliance to the origination criteria established by the agencies. In the event of a breach of our representations and warranties, HSBC Bank USA may be obliged to repurchase the loans with identified defects or to indemnify the buyers. The liability is estimated based on the level of outstanding repurchase demands, the level of outstanding requests for loan files and estimated future demands in respect of mortgages sold to date which are either two or more payments delinquent or are expected to become delinquent at an estimated conversion rate. Repurchase demands of US$103m were outstanding at 30 June 2011 (30 June 2010: US$160m; 31 December 2010: US$115m).

Participants in the US mortgage securitisation market that purchased and repackaged whole loans have been the subject of lawsuits and governmental and regulatory investigations and inquiries which have been directed at groups within the US mortgage market such as servicers, originators, underwriters, trustees or sponsors of securitisations. Further information is provided in Note 24 on the Financial Statements.

Liquidity and funding

Liquidity and funding in the first half of 2011 ..........	134
Management of liquidity risk ....................................	134
HSBC Finance ..........................................................	134
Contingent liability risk ...........................................	135

Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due, or will have to do so at an excessive cost. The risk arises from mismatches in the timing of cash flows.

There have been no material changes to our policies and practices for the management of liquidity and funding risks as described in the Annual Report and Accounts 2010.

Our liquidity and funding risk management framework

The objective of our liquidity framework is to allow us to withstand very severe liquidity stresses. It is designed to be adaptable to changing business models, markets and regulations.

We expect our operating entities to manage liquidity and funding risk on a standalone basis employing a centrally imposed framework and limit structure which is adapted to variations in business mix and underlying markets. Our operating entities are required to maintain strong liquidity positions and to manage the liquidity profiles of their assets, liabilities and commitments with the objective of ensuring that their cash flows are balanced under various severe stress scenarios and that all their anticipated obligations can be met when due.

A summary of our current policies and practices regarding liquidity and funding is provided in the Appendix to Risk on page 152.

Liquidity and funding in the first half of 2011

We continued to have good access to debt capital markets during the first half of 2011, with Group entities issuing US$18bn of term debt securities in the public capital markets. The market's focus on the eurozone sovereign debt problems did not restrict our term issuance during the period.

The liquidity position of the Group remained strong in the first half of 2011. Of particular note was the strong funding position of The Hongkong and Shanghai Banking Corporation, as reflected in the advances to core funding ratio in the table below, which allowed us to take advantage of loan growth opportunities in Asia while still maintaining ratios well below the Group's average. Reduced lending opportunities in the US, combined with further growth in customer deposits in that region, caused the funding position in HSBC Bank USA to strengthen further.

Management of liquidity risk

Advances to core funding ratio

The three principal banking entities listed in the table below represented 61% of HSBC's total core deposits at 30 June 2011 (30 June 2010: 60%; 31 December 2010: 60%). The table shows that loans and advances to customers in HSBC's principal banking entities were overwhelmingly financed by reliable and stable sources of funding. HSBC would meet any unexpected net cash outflows by selling securities and accessing additional funding sources such as interbank or collateralised lending markets. The distinction between core and non-core deposits generally means that the Group's measure of advances to core funding is more restrictive than that which can be inferred from the published financial statements.

HSBC's principal banking entities - the management of liquidity risk

	Advances to core funding ratio during half-year to:						Stressed one month coverage ratio during half-year to:
	30        June       2011		30          June        2010		31 December         2010		30        June       2011		30          June        2010		31 December         2010
	%		%		%		%		%		%
HSBC Bank plc50
Period-end ......................................................	99.7		107.3		103.0		115.9		107.4		111.1
Maximum .......................................................	103.4		110.0		107.3		115.9		111.3		111.1
Minimum ........................................................	98.4		105.0		102.6		109.4		103.2		107.4
Average ..........................................................	101.2		107.6		104.5		112.0		106.7		109.7
The Hongkong and Shanghai Banking Corporation50
Period-end ......................................................	78.9		64.8		70.3		116.9		143.0		144.6
Maximum .......................................................	78.9		64.8		70.3		144.6		165.4		148.3
Minimum ........................................................	70.3		55.5		64.8		116.9		143.0		132.6
Average ..........................................................	75.1		59.7		67.7		128.4		154.9		141.9
HSBC Bank USA
Period-end ......................................................	81.4		95.7		98.3		117.0		110.7		108.5
Maximum .......................................................	98.3		104.0		98.3		128.3		112.9		118.5
Minimum ........................................................	79.8		95.7		94.2		108.5		105.3		108.5
Average ..........................................................	86.3		100.4		95.4		121.7		110.1		114.3
Total of HSBC's other principal banking entities51
Period-end ......................................................	89.2		85.7		89.1		117.4		123.7		119.6
Maximum .......................................................	89.8		87.2		89.1		120.8		126.5		123.7
Minimum ........................................................	88.2		85.7		85.7		116.9		120.9		118.1
Average ..........................................................	89.2		86.6		87.2		118.8		123.7		121.0

For footnotes, see page 146.

Stressed one month coverage ratio

The stressed one month coverage ratios tabulated above are derived from projected cash flow scenario analyses, described in the Appendix to Risk on page 152 and express the stressed cash inflows as a percentage of stressed cash outflows over a one month time horizon. Group sites are required to target a ratio of 100% or greater.

HSBC Finance

As HSBC Finance is unable to accept standard retail deposits, it takes funding from the professional markets and securitises assets. At 30 June 2011, US$56bn (30 June 2010: US$73bn; 31 December 2010: US$62bn) of HSBC Finance's liabilities were drawn from professional markets, utilising a range of products, maturities and currencies.

HSBC Finance - funding

	At 30 Jun     2011		At   30 Jun     2010		At 31 Dec     2010
	US$bn		US$bn		US$bn
Maximum amounts of unsecured term funding maturing in any rolling:
3-month period ..................	5.1		5.2		5.1
12-month period ................	10.8		12.3		10.8
Unused committed sources of secured funding52 ................	0.5		0.5		0.5
Committed backstop lines from non-Group entities in support of CP programmes .............	4.0		4.3		4.3

For footnote, see page 146.

HSBC Finance uses a range of measures to monitor funding risk, including projected cash flow scenario analysis and caps placed on the amount of unsecured term funding that can mature in any rolling three-month and rolling 12-month periods. HSBC Finance also maintains access to committed sources of secured funding and has in place committed backstop lines for short-term refinancing commercial paper ('CP') programmes. A CP programme is a short-term, unsecured funding tool used to manage day to day cash flow needs. In agreement with the rating agencies, issuance under this programme will not exceed 100% of committed bank backstop lines.

The need for HSBC Finance to refinance maturing term funding is mitigated by the continued run-down of its balance sheet.

Contingent liquidity risk

Contingent liquidity risk is the risk associated with the need to provide additional funds to clients. The client-originated exposure relates to multi-seller conduits, which were established to enable clients to access a flexible market-based source of finance (see page 212). HSBC-managed asset exposures are differentiated in that they relate to consolidated SICs which issue debt secured by ABSs (see page 211). Other conduit exposures relate to third-party sponsored conduits (see page 213). Single issuer liquidity facilities are provided directly to clients rather than via any form of conduit. These facilities are split by the addition of the five largest specific facilities and the single largest market sector.

The Group's contractual exposures monitored under the contingent liquidity risk limit structure

	HSBC Bank						HSBC Bank USA						HSBC Bank Canada						The Hongkong and Shanghai Banking Corporation
	At 30 Jun    2011		At 30 Jun    2010		At 31 Dec    2010		At 30 Jun    2011		At 30 Jun    2010		At 31 Dec    2010		At 30 Jun    2011		At 30 Jun    2010		At 31 Dec    2010		At 30 Jun   2011		At 30 Jun    2010		At 31 Dec    2010
	US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn
Conduits
Client-originated assets
- total lines ..........	9.2		7.3		7.8		1.2		5.1		4.0		0.7		0.1		0.2		-		0.2		-
- largest individual lines ...................	0.4		0.8		0.7		0.4		0.5		0.4		0.5		0.1		0.1		-		0.2		-
HSBC-managed assets53 .................	23.6		26.9		25.6		-		-		-		-		-		-		-		-		-
Other conduits ........	-		-		-		1.1		1.3		1.4		-		-		-		-		-		-
Single-issuer liquidity facilities
- five largest ........	5.4		4.1		4.2		6.6		5.7		5.3		2.2		2.0		2.0		1.9		2.8		1.4
- largest market sector .................	9.8		6.8		8.4		5.1		4.4		4.9		4.3		3.5		3.8		2.6		2.9		2.4

For footnote, see page 146.

Market risk

Market risk in the first half of 2011 ........................	136
Trading and non-trading portfolios ..........................	136
Structural foreign exchange exposures ......................	138
Sensitivity of net interest income ............................	139
Defined benefit pension schemes ..............................	140
Additional market risk measures applicable only to the parent company .............................................	140

Market risk is the risk that movements in market factors, including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices, will reduce our income or the value of our portfolios.

There have been no material changes to our policies and practices for the management of market risk as described in the Annual Report and Accounts 2010.

Exposure to market risk

Exposure to market risk is separated into two portfolios:

·      Trading portfolios include positions arising from market-making and position-taking and others designated as marked to market.

·      Non-trading portfolios include positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments designated as available for sale and held to maturity, and exposures arising from our insurance operations (see page 142).

Monitoring and limiting market risk exposures

Our objective is to manage and control market risk exposures in order to optimise return on risk while maintaining a market profile consistent with our status as one of the world's largest banking and financial services organisations.

We use a range of tools to monitor and limit market risk exposures, including:

·      sensitivity measures are used to monitor the market risk positions within each risk type;

·      value at risk ('VAR') is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence; and

·      in recognition of VAR's limitations we augment VAR with stress testing to evaluate the potential impact on portfolio values of more extreme, though plausible, events or movements in a set of financial variables.

The major contributor to the trading and non-trading VAR for the Group is Global Markets.

A summary of our current policies and practices regarding market risk is provided in the Appendix to Risk on page 153.

Market risk in the first half of 2011

During the first half of 2011 the market continued to be dominated by concerns over sovereign debt and its contagion effects. Middle East turmoil, coupled with the perception that the world economic recovery remained fragile, created volatility in financial markets. In addition, inflationary pressures remained in emerging markets.

The overall impact on VAR was limited, however, as historical data was superseded by less volatile current data in the VAR model.

Further details of trading exposures to eurozone countries under pressure are described on page 98.

Trading and non-trading portfolios

The following table provides an overview of the reporting of risks within this section:

	Portfolio
	Trading	Non-trading
Risk type
Foreign exchange and commodity .................	VAR	VAR54
Interest rate ...................	VAR	VAR55
Equity ............................	VAR	Sensitivity
Credit spread ..................	VAR	VAR56

For footnotes, see page 146.

Value at risk of the trading and non-trading portfolios

The VAR, both trading and non-trading, for the Group is below. Comparative data have been restated to include credit spread.

Value at risk

	Half-year to
	30 June          2011		30 June         201057	31 December          2010
	US$m		US$m		US$m
At period-end .......	249.7		415.8		371.6
Average ................	289.5		294.4		418.1
Minimum .............	241.1		205.3		304.1
Maximum .............	403.2		482.0		556.3

For footnote, see page 146.

During the first half of 2011, the reduction in VAR mainly came from the non-trading interest rate and credit portfolios. This reduction was the result of volatility rolling out of the historical market data in our VAR model, offset by a reduction in portfolio diversification.

Daily distribution of Global Markets' trading, Balance Sheet Management and other trading revenues58
	Half-year to							Half-year to 30 June 2011
		30 Jun		30 Jun		31 Dec		Number of days
		2011		2010		2010
		US$m		US$m		US$m
Average daily revenue ..		50.7		60.0		38.9
Standard deviation59 .....		25.8		46.6		22.1
Ranges of most frequent daily revenues ...........		30 to 40		60 to 70		30 to 40    40 to 50
		days		days		days
- daily occurrences ....		25		21		24
Days of negative revenue		2		5		4
For footnotes, see page 146.								Revenues (US$m)
								< Profit and loss frequency
Half-year to 30 June 2010								Half-year to 31 December 2010
Number of days								Number of days
Revenues (US$m)								Revenues (US$m)
< Profit and loss frequency								< Profit and loss frequency

The daily VAR, both trading and non-trading, for the Group was as follows:

Daily VAR (trading and non-trading)

(US$m)

For a description of HSBC's fair value and price verification controls, see page 188.

Trading portfolios

Our control of market risk in the trading portfolios is based on a policy of restricting individual operations to trading within a list of permissible instruments authorised for each site by Group Risk, of enforcing new product approval procedures and of restricting trading in the more complex derivative products only to offices with appropriate levels of product expertise and robust control systems.

The VAR for trading intent activity within Global Markets (as analysed on page 138 by risk type) at 30 June 2011 (US$91.6m) was higher than at 31 December 2010 (US$80.8m) due to a reduction in the portfolio diversification benefit across asset classes. However, it was lower than the level at 30 June 2010 (US$117.7m) as the volatile historical market data rolled off.

Credit spread risk

At 30 June 2011, the Group credit spread VAR was US$43.5m (30 June 2010: US$91.7m; 31 December 2010: US$41.9m). Group credit spread VAR remained consistent with 31 December 2010 though it decreased compared with 30 June 2010 from the effect of volatile credit spread scenarios rolling off from the VAR calculation.

Credit spread risk also arises on credit derivative transactions entered into by Global Banking in order to manage the risk concentrations within our corporate loan portfolio and enhance capital efficiency.

At 30 June 2011, the credit VAR on these transactions was US$3.7m (30 June 2010: US$11.6m; 31 December 2010: US$12.3m). The mark-to-market of these transactions is reflected in the income statement.

Gap risk

We did not incur any significant gap loss in the half-year to 30 June 2011.

Non-trading portfolios

The principal objective of market risk management of non-trading portfolios is to optimise net interest income.

VAR by risk type for trading intent activities⁶⁰

	Foreign exchange and     commodity		Interest                 rate		Equity		Credit            spread61		Portfolio diversification62		Total63
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2011 .........	10.3		67.0		4.1		38.7		(28.5)		91.6
At 30 June 2010 ...........	21.7		43.3		3.8		91.7		(42.8)		117.7
At 31 December 2010 ...	24.9		49.5		13.0		39.1		(45.6)		80.8
Average
First half of 2011.....	15.0		52.0		9.2		46.2		(28.8)		93.6
First half of 2010 ......	31.4		56.1		11.6		63.6		(39.3)		123.3
Second half of 2010 ..	23.1		47.3		6.9		60.4		(33.7)		104.0
Minimum
First half of 2011.....	7.6		30.1		3.6		34.7		-		62.2
First half of 2010 ......	13.2		43.3		2.9		40.9		-		93.6
Second half of 2010 ..	8.0		34.7		3.5		33.7		-		55.0
......................................
Maximum
First half of 2011 ....	26.8		80.2		17.2		56.2		-		143.9
First half of 2010 ......	62.9		88.9		21.6		88.5		-		169.7
Second half of 2010 ..	56.3		71.8		13.3		102.5		-		212.2

For footnotes, see page 146.

Available-for-sale debt securities

At 30 June 2011, the sensitivity of equity capital to the effect of movements in credit spreads on our available-for-sale debt securities, including the gross exposure for the SICs consolidated within our balance sheet, based on credit spread VAR, was US$220m (30 June 2010: US$491m; 31 December 2010: US$299m). This sensitivity is calculated before taking into account losses which would have been absorbed by the capital note holders.

At 30 June 2011, the capital note holders can absorb the first US$2.2bn (30 June 2010: US$2.2bn; 31 December 2010: US$2.2bn) of any losses incurred by the SICs before we incur any equity losses.

Equity securities classified as available for sale

Fair values of equity securities

	At   30 Jun      2011		At    30 Jun      2010		At  31 Dec      2010
	US$bn		US$bn		US$bn
Private equity holdings ....	2.9		4.2		2.8
Funds invested for short- term cash management	0.6		0.5		0.5
Investment to facilitate ongoing business ...........	1.1		1.0		1.0
Other strategic investments .....................................	3.6		3.1		3.7
Total ...............................	8.2		8.8		8.0

Investments in private equity are primarily made through managed funds that are subject to limits on the amount invested. Potential new commitments are subject to risk appraisal to ensure that industry and geographical concentrations remain within acceptable levels for the portfolio. Regular reviews are performed to substantiate the valuation of the investments within the portfolio and investments held to facilitate ongoing business, such as holdings in government-sponsored enterprises and local stock exchanges.

The fair value of the constituents of equity securities classified as available for sale can fluctuate considerably. A 10% reduction in the value of the available-for-sale equities at 30 June 2011 would have reduced equity by US$0.8bn (30 June 2010: US$0.9bn; 31 December 2010: US$0.8bn). HSBC's policy for assessing impairment on available-for-sale equity securities is described on page 131 of the Annual Report and Accounts 2010.

Structural foreign exchange exposures

Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than the US dollar. HSBC's policies and procedures for managing these exposures are described on page 149 in the Annual Report and Accounts 2010.

Sensitivity of net interest income

There have been no material changes since 31 December 2010 to HSBC's measurement and management of the sensitivity of net interest income to movements in interest rates.

The table below sets out the effect on future net interest income of an incremental 25 basis points parallel rise or fall in all yield curves worldwide at the beginning of each quarter during the 12 months from 1 July 2011. Assuming no management actions, a sequence of such rises would increase planned net interest income for the 12 months to 30 June 2012 by US$1,020m (to 31 December 2011: US$882m), while a sequence of such falls would decrease planned net interest income by US$1,618m (to 31 December 2011: US$1,525m). These figures incorporate the effect of any option features in the underlying exposures.

Instead of assuming that all interest rates move together, HSBC groups its interest rate exposures into currency blocs whose rates are considered likely to move together. The sensitivity of projected net interest income, on this basis, is as follows:

Sensitivity of projected net interest income

	US dollar           bloc		Rest of Americas           bloc		Hong Kong        dollar           bloc		Rest of          Asia           bloc		Sterling           bloc		Euro           bloc		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
Change in July 2011 to June 2012 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:
+  25 basis points ...........................	237		2		223		242		430		(114)		1,020
-  25 basis points ...........................	(568)		(6)		(309)		(196)		(614)		75		(1,618)
Change in January 2011 to December 2011 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:
+  25 basis points ...........................	164		72		191		245		292		(82)		882
-  25 basis points ...........................	(550)		(68)		(280)		(143)		(546)		62		(1,525)

The interest rate sensitivities set out in the table above are illustrative only and are based on simplified scenarios. The limitations of this analysis are discussed in the Appendix to Risk on page 153.

HSBC monitors the sensitivity of reported reserves to interest rate movements on a monthly basis by assessing the expected reduction in valuation of available-for-sale portfolios and cash flow hedges due to parallel movements of plus or minus 100 basis points in all yield curves. The table below describes the sensitivity of HSBC's reported reserves to these movements and the maximum and minimum month-end figures during the period:

Sensitivity of reported reserves to interest rate movements

			Impact in the preceding 6 months
	US$m		Maximum              US$m		Minimum              US$m
At 30 June 2011
+ 100 basis point parallel move in all yield curves ..............................	(5,889)		(6,178)		(5,889)
As a percentage of total shareholders' equity ......................................	(3.7%)		(3.9%)		(3.7%)
- 100 basis point parallel move in all yield curves ..............................	6,081		6,329		6,081
As a percentage of total shareholders' equity ......................................	3.8%		4.0%		3.8%
At 30 June 2010
+ 100 basis point parallel move in all yield curves ..............................	(4,714)		(4,714)		(3,096)
As a percentage of total shareholders' equity ......................................	(3.5%)		(3.5%)		(2.3%)
- 100 basis point parallel move in all yield curves ..............................	4,690		4,690		3,108
As a percentage of total shareholders' equity ......................................	3.5%		3.5%		2.3%
At 31 December 2010
+ 100 basis point parallel move in all yield curves ..............................	(6,162)		(6,162)		(4,549)
As a percentage of total shareholders' equity ......................................	(4.2%)		(4.2%)		(3.1%)
- 100 basis point parallel move in all yield curves ..............................	6,174		6,174		4,604
As a percentage of total shareholders' equity ......................................	4.2%		4.2%		3.1%

The sensitivities are illustrative only and are based on simplified scenarios. The table above shows the potential sensitivity of reserves to valuation changes in available-for-sale portfolios and from cash flow hedges following the pro forma movements in interest rates. These particular exposures form only a part of the Group's overall interest rate exposures. The accounting treatment under IFRSs of the Group's remaining interest rate exposures, while economically largely offsetting the exposures shown in the above table, does not require revaluation movements to go to reserves.

Defined benefit pension schemes

Market risk arises within HSBC's defined benefit pension schemes to the extent that the obligations of the schemes are not fully matched by assets with determinable cash flows.

HSBC's defined benefit pension schemes

	At    30 Jun       2011		At     30 Jun       2010		At    31 Dec      2010
	US$bn		US$bn		US$bn
Liabilities (present value).................................	33.7		30.0		32.6
	%		%		%
Assets:
Equity investments .....	20		20		20
Debt securities ............	69		67		66
Other (including property)	11		13		14
	100		100		100

Higher corporate bond yields in the UK in 2011 resulted in an increase of 10 basis points in the real discount rate (net of the increase in expected inflation) used to value the accrued benefits payable under the HSBC Bank (UK) Pension Scheme ('the Scheme') funded defined benefit plan ('the principal plan'), the Group's largest plan. The effect of the discount rate change, and other market and actuarial movements in the first half of the year on the principal plan is set out in Note 5 on the Financial Statements.

For details of the latest actuarial valuation of the principal plan, see Note 7 on the Financial Statements in the Annual Report and Accounts 2010.

Additional market risk measures applicable only to the parent company

Interest repricing gap table

The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VAR, but is managed on a repricing gap basis. The interest rate repricing gap table below analyses the full-term structure of interest rate mismatches within HSBC Holdings' balance sheet. The change in the interest rate gap profile between 30 June 2010 and 30 June 2011 is predominantly due to new variable rate loans to HSBC entities.

Repricing gap analysis of HSBC Holdings

	Total		Up to       1 year		1-5 years		5-10 years		More than     10 years		Non-   interest     bearing
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2011
Total assets .........................................................	123,004		27,224		1,175		1,021		624		92,960
Total liabilities and equity ...................................	(123,004)		(3,886)		(12,468)		(16,243)		(13,373)		(77,034)
Off-balance sheet items sensitive to interest rate changes ...........................................................	-		(18,990)		10,033		6,315		3,535		(893)
Net interest rate risk gap .....................................	-		4,348		(1,260)		(8,907)		(9,214)		15,033
Cumulative interest rate gap ................................	-		4,348		3,088		(5,819)		(15,033)		-
At 30 June 2010
Total assets .........................................................	117,838		18,701		1,648		300		3,733		93,456
Total liabilities and equity ...................................	(117,838)		(3,290)		(9,844)		(6,376)		(20,455)		(77,873)
Off-balance sheet items sensitive to interest rate changes ...........................................................	-		(15,302)		6,724		3,899		3,794		885
Net interest rate risk gap .....................................	-		109		(1,472)		(2,177)		(12,928)		16,468
Cumulative interest rate gap ................................	-		109		(1,363)		(3,540)		(16,468)		-

	Total		Up to        1 year		1-5 years		5-10 years		More than     10 years		Non-     interest       bearing
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2010
Total assets .........................................................	119,341		21,475		1,175		2,354		1,336		93,001
Total liabilities and equity ...................................	(119,341)		(3,016)		(10,427)		(14,330)		(13,193)		(78,375)
Off-balance sheet items sensitive to interest rate changes ...........................................................	-		(15,302)		7,221		4,403		3,409		269
	-
Net interest rate risk gap .....................................	-		3,157		(2,031)		(7,573)		(8,448)		14,895
Cumulative interest rate gap ................................	-		3,157		1,126		(6,447)		(14,895)		-

Foreign exchange risk

Total foreign exchange VAR arising within HSBC Holdings was as follows:

HSBC Holdings - foreign exchange VAR

	Half-year to
	30 June          2011        US$m		30 June          2010         US$m	31 December           2010          US$m
At period end .......	43.4		55.3		40.4
Average.................	40.7		62.8		50.3
Minimum .............	38.2		52.7		40.2
Maximum .............	43.4		83.2		55.9

The foreign exchange risk largely arises from loans to subsidiaries of a capital nature that are not denominated in the functional currency of either the provider or the recipient and which are accounted for as financial assets. Changes in the carrying amount of these loans due to foreign exchange rate differences are taken directly to HSBC Holdings' income statement. These loans, and the associated foreign exchange exposures, are eliminated on a Group consolidated basis.

Operational risk

Operational risk is relevant to every aspect of our business, and covers a wide spectrum of issues, in particular legal, compliance, security and fraud. Losses arising from unauthorised activities, error, omission, inefficiency, fraud, systems failure or external events all fall within the definition of operational risk.

There have been no material changes to our policies and procedures for the management of operational risk as described in the Annual Report and Accounts 2010.

A summary of our current policies and practices regarding operational risk and reputational risk is provided in the Appendix to Risk on pages 156 and 157.

HSBC has continued to enhance its Operational Risk Management Framework including the use of the risk and control assessment process that provides business areas and functions with a forward-looking view of operational risks and an assessment of the effectiveness of controls, and a tracking mechanism for action plans so that they can proactively manage operational risks within acceptable levels.

Operational risk in the first half of 2011

During the first half of 2011, our top and emerging risk analysis included a number of risks which were of an operational nature:

·     challenges to our operating model in an economic downturn (in developed countries) and rapid growth (in emerging markets);

·     internet crime and fraud;

·     level of change creating operational complexity; and

·     information security.

There were no material issues relating to fraud and security during the period.

Reputational risk

The safeguarding of our reputation is of paramount importance to our continued prosperity and is the responsibility of every member of staff.

There have been no material changes to our objectives, policies and procedures for the management of reputational risk as described in the Annual Report and Accounts 2010.

 

END

 

 

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