Annual Financial Report - 40 of 44

RNS Number : 1644A

HSBC Holdings PLC

27 March 2012

 



41   Contingent liabilities, contractual commitments and guarantees

	HSBC				HSBC Holdings
	2011		2010		2011		2010
	US$m		US$m		US$m		US$m
Guarantees and contingent liabilities
Guarantees .........................................................................	75,672		71,157		49,402		46,988
Other contingent liabilities .................................................	259		166		-		-
	75,931		71,323		49,402		46,988
Commitments
Documentary credits and short-term trade-related transactions ....................................................................	13,498		12,051		-		-
Forward asset purchases and forward forward deposits placed .......................................................................................	87		30		-		-
Undrawn formal standby facilities, credit lines and other commitments to lend .....................................................	641,319		590,432		1,810		2,720
	654,904		602,513		1,810		2,720

The above table discloses the nominal principal amounts of commitments excluding capital commitments, which are separately disclosed below, and guarantees and other contingent liabilities, which are mainly credit-related instruments including both financial and non-financial guarantees and commitments to extend credit. Contingent liabilities arising from legal proceedings and regulatory matters against Group companies are disclosed in Note 44. Nominal principal amounts represent the amounts at risk should the contracts be fully drawn upon and clients default. The amount of the loan commitments shown above reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. As a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements.

Guarantees

HSBC provides guarantees and similar undertakings on behalf of both third-party customers and other entities within the HSBC Group. These guarantees are generally provided in the normal course of HSBC's banking business. The principal types of guarantees provided, and the maximum potential amount of future payments which HSBC could be required to make at 31 December 2011, were as follows:

	At 31 December 2011				At 31 December 2010
	Guarantees in favour of third parties		Guarantees by HSBC Holdings in favour of other HSBC Group entities		Guarantees in favour of third parties		Guarantees by HSBC Holdings in favour of other HSBC Group entities
	US$m		US$m		US$m		US$m
Guarantee type1
Financial guarantees2 ..........................................................	26,830		36,800		29,208		36,800
Credit-related guarantees3 ...................................................	12,494		12,602		20,228		10,188
Other guarantees ................................................................	36,348		-		21,721		-
	75,672		49,402		71,157		46,988

1  The balances have been grouped by major category of guarantee, revised from prior periods to present financial guarantees separately.

2  Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.

3  Credit related guarantees are contracts that have similar features to financial guarantee contracts but fail to meet the strict definition of a financial guarantee contracts under IAS 39.

The amounts disclosed in the above table are nominal principal amounts and reflect HSBC's maximum exposure under a large number of individual guarantee undertakings. The risks and exposures arising from guarantees are captured and managed in accordance with HSBC's overall credit risk management policies and procedures. Approximately half of the above guarantees have a term of less than one year. Guarantees with terms of more than one year are subject to HSBC's annual credit review process.

Financial Services Compensation Scheme

The Financial Services Compensation Scheme ('FSCS') has provided compensation to consumers following the collapse of a number of deposit takers. The compensation paid out to consumers is currently funded through loans from the Bank of England and HM Treasury. HSBC Bank could be liable to pay a proportion of the outstanding borrowings that the FSCS has borrowed from HM Treasury which at 31 December 2011 stood at approximately £18.5bn (US$28.6bn). Currently, the Management Expenses Levy paid by the bank represents its share of the interest on these borrowings.

The interest rate to be applied on HM Treasury loans for the period from 1 April 2012, on which the Management Expenses Levy for Scheme Year 2012/2013 will be based, has yet to be formally agreed by the FSCS and HM Treasury. HSBC Bank's accrual for the Scheme Year 2012/2013 levy is based on an estimated funding rate which considers rates levied in prior years as well as previous public announcements.

The accrual at 31 December 2011 reflects an estimate of US$87m in respect of expected Management Expenses Levy due in Scheme Year 2012/2013 (2010: US$144m in respect of the Scheme Years 2010/11 and 2011/12). However until negotiations are complete and the funding rate is finalised there exists the possibility that the levy for Scheme Year 2012/2013 will be based on a higher rate and that the bank's liability will be consequently higher. In addition, an agreement by the FSCS not to charge Compensation Cost Levy for three years is also at an end and there exists the possibility that compensation for losses suffered could be levied in the Scheme Year commencing 1 April 2012.

The ultimate FSCS levy to the industry as a result of the collapses cannot currently be estimated reliably as it is dependent on various uncertain factors including the potential recoveries of assets by the FSCS and changes in the interest rate, and the level of protected deposits at the time.

Commitments

In addition to the commitments disclosed on page 399, at 31 December 2011 HSBC had US$715m (2010: US$1,071m) of capital commitments contracted but not provided for and US$272m (2010: US$287m) of capital commitments authorised but not contracted for.

Associates

HSBC's share of associates' contingent liabilities amounted to US$34,311m at 31 December 2011 (2010: US$25,640m). No matters arose where HSBC was severally liable.

42   Lease commitments

Finance lease commitments

HSBC leases land and buildings (including branches) and equipment from third parties under finance lease arrangements to support its operations.

	At 31 December 2011						At 31 December 2010
	Total future    minimum     payments		Future        interest        charges		Present value    of finance             lease commitments1		Total future       minimum       payments		Future          interest          charges		Present value     of finance lease commitments
	US$m		US$m		US$m		US$m		US$m		US$m
Lease commitments:
- no later than one year ....................	98		(26)		72		107		(20)		87
- later than one year and no later than five years ....	216		(99)		117		187		(92)		95
- later than five years ...................	362		(92)		270		390		(118)		272
	676		(217)		459		684		(230)		454

1  Lease commitments include US$31m of finance leases which are shown as part of liabilities of disposal groups held for sale in Note 31.

At 31 December 2011, future minimum sublease payments of US$413m (2010: US$436m) are expected to be received under non-cancellable subleases at the balance sheet date.

Operating lease commitments

At 31 December 2011, HSBC was obligated under a number of non-cancellable operating leases for properties, plant and equipment on which the future minimum lease payments extend over a number of years.

	At 31 December 2011				At 31 December 2010
	Land and buildings		Equipment		Land and buildings		Equipment
	US$m		US$m		US$m		US$m
Future minimum lease payments under non-cancellable operating leases:
- no later than one year ................................................	1,130		18		920		23
- later than one year and no later than five years ..........	2,656		18		2,663		37
- later than five years ...................................................	2,496		-		2,614		-
	6,282		36		6,197		60

At 31 December 2011, future minimum sublease payments of US$17m (2010: US$21m) are expected to be received under non-cancellable subleases at the balance sheet date.

In 2011, US$973m (2010: US$888m; 2009: US$1,100m) was charged to 'General and administrative expenses' in respect of lease and sublease agreements, of which US$952m (2010: US$869m; 2009: US$833m) related to minimum lease payments, US$20m (2010: US$18m; 2009: US$16m) to contingent rents, and US$1m (2010: US$1m; 2009: US$251m) to sublease payments.

The contingent rent represents escalation payments made to landlords for operating, tax and other escalation expenses.

Finance lease receivables

HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft), property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for further terms. Lessees may participate in any sales proceeds achieved. Lease rentals arising during the lease terms will either be fixed in quantum or be varied to reflect changes in, for example, tax or interest rates. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income.

	At 31 December 2011						At 31 December 2010
	Total future minimum payments		Unearned finance income		Present value		Total future minimum payments		Unearned finance income		Present value
	US$m		US$m		US$m		US$m		US$m		US$m
Lease receivables:
- no later than one year ..........	3,766		(459)		3,307		3,002		(344)		2,658
- later than one year and no later than five years .........	8,618		(1,055)		7,563		8,940		(813)		8,127
- later than five years ..............	5,969		(1,204)		4,765		6,629		(1,462)		5,167
	18,353		(2,718)		15,635		18,571		(2,619)		15,952

At 31 December 2011, unguaranteed residual values of US$267m (2010: US$243m) had been accrued, and the accumulated allowance for uncollectible minimum lease payments receivable amounted to US$25m (2010: US$11m). No contingent rents were received in 2011 (2010: nil).

43   Special purpose entities

HSBC enters into certain transactions with customers in the ordinary course of business which involve the establishment of special purpose entities ('SPE's) to facilitate or secure customer transactions. HSBC structures that utilise SPEs are authorised centrally when they are established, to ensure appropriate purpose and governance. The activities of SPEs administered by HSBC are closely monitored by senior management.

SPEs are assessed for consolidation in accordance with the accounting policy set out in Note 1e.

Total consolidated assets held by SPEs by balance sheet classification

	Conduits		Securit-       isations		Money        market           funds		Non-money        market investment           funds		Total
	US$bn		US$bn		US$bn		US$bn		US$bn
At 31 December 2011
Cash ............................................................................	0.8		0.3		-		0.3		1.4
Trading assets .............................................................	0.1		0.5		0.2		0.4		1.2
Financial assets designated at fair value........................	0.1		-		-		6.5		6.6
Derivatives .................................................................	-		0.1		-		-		0.1
Loans and advances to banks .......................................	-		1.2		-		-		1.2
Loans and advances to customers ................................	10.5		8.0		-		-		18.5
Financial investments .................................................	25.8		-		-		-		25.8
Other assets ................................................................	1.6		-		-		-		1.6
	38.9		10.1		0.2		7.2		56.4
At 31 December 2010
Cash ............................................................................	1.0		0.7		-		0.3		2.0
Trading assets .............................................................	0.1		0.6		0.4		0.5		1.6
Financial assets designated at fair value .......................	0.1		-		-		6.4		6.5
Derivatives .................................................................	-		0.3		-		-		0.3
Loans and advances to banks .......................................	-		1.4		-		-		1.4
Loans and advances to customers ................................	8.4		22.2		-		-		30.6
Financial investments .................................................	30.5		0.1		-		-		30.6
Other assets ................................................................	1.6		0.4		-		0.4		2.4
	41.7		25.7		0.4		7.6		75.4

HSBC's maximum exposure to SPEs

The following table shows the total assets of the various types of SPEs and the amount of funding provided by HSBC to these SPEs. The table also shows HSBC's maximum exposure to the SPEs and, within that exposure, the 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.

Total assets of consolidated and unconsolidated SPEs and HSBC's funding and maximum exposure

	Consolidated SPEs								Unconsolidated SPEs
	Total assets		Funding provided by HSBC		Liquidity and credit enchance- ments		HSBC's maximum exposure		Total assets		Funding provided by HSBC		HSBC's maximum exposure
	US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn
At 31 December 2011
Conduits ................................	38.9		27.7		37.1		48.5		-		-		-
Securities investment conduits..........................	27.9		27.4		22.1		33.5		-		-		-
Multi-seller conduits ...........	11.0		0.3		15.0		15.0		-		-		-
Securitisations ........................	10.1		1.6		0.1		3.8		8.1		-		-
Money market funds ..............	0.2		0.2		-		0.2		73.9		0.9		0.9
Constant net asset value funds...............................	-		-		-		-		54.4		0.7		0.7
Other .................................	0.2		0.2		-		0.2		19.5		0.2		0.2
Non-money market investment funds ................	7.2		6.9		-		6.9		260.8		1.7		1.7
Other .....................................	-		-		-		-		19.4		3.7		4.6
	56.4		36.4		37.2		59.4		362.2		6.3		7.2

	Consolidated SPEs								Unconsolidated SPEs
	Total assets		Funding provided by HSBC		Liquidity and credit enchance- ments		HSBC's maximum exposure		Total assets		Funding provided by HSBC		HSBC's maximum exposure
	US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn
At 31 December 2010
Conduits .................................	41.7		28.6		38.3		50.5		-		-		-
Securities investment conduits.......................................	32.2		28.6		25.6		37.8		-		-		-
Multi-seller conduits ...........	9.5		-		12.7		12.7		-		-		-
Securitisations ........................	25.7		1.9		0.1		4.7		9.9		-		-
Money market funds ..............	0.4		0.4		-		0.4		95.8		0.7		0.7
Constant net asset value funds.......................................	-		-		-		-		74.9		0.5		0.5
Other .................................	0.4		0.4		-		0.4		20.9		0.2		0.2
Non-money market investment funds ..................................	7.6		6.9		-		6.9		274.7		1.7		1.7
Other .....................................	-		-		-		-		19.0		9.4		3.7
	75.4		37.8		38.4		62.5		399.4		11.8		6.1

Conduits

HSBC sponsors and manages two types of conduits: securities investment conduits ('SIC's) and multi-seller conduits.

Securities investment conduits

Solitaire, HSBC's principal SIC, holds asset-backed securities ('ABS's) on behalf of HSBC. At 31 December 2011, Solitaire held US$10.6bn of ABSs (2010: US$11.7bn). These are included within the disclosures of ABS 'held through consolidated SPEs' on page 152. HSBC's other SICs, Mazarin, Barion and Malachite, evolved from the restructuring of HSBC's sponsored structured investment vehicles ('SIV's) in 2008.

Solitaire

Commercial Paper ('CP') issued by Solitaire benefits from a 100% liquidity facility provided by HSBC. At 31 December 2011, US$9.3bn of Solitaire's assets were funded by the draw-down of the liquidity facility (2010: US$7.6bn). HSBC is exposed to credit losses on the drawn amounts.

HSBC's maximum exposure represents the risk that HSBC may be required to fund the vehicle in the event the CP is redeemed without reinvestment from third parties. At 31 December 2011 this amounted to US$15.6bn (31 December 2010: US$16.8bn).

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 31 December 2011, this amounted to US$9.5bn (2010: US$11.6bn). First loss protection is provided through the capital notes issued by Mazarin, which are substantially all held by third parties.

At 31 December 2011, HSBC held 1.3% of Mazarin's capital notes (2010: 1.3%) which have a par value of US$17m (2010: US$17m) and a carrying amount of nil (2010: US$0.6m).

Barion and Malachite

HSBC's primary exposure to these SICs is represented by the amortised cost of the debt required to support the non‑cash assets of the vehicles. At 31 December 2011, this amounted to US$8.4bn (2010: US$9.4bn). First loss protection is provided through the capital notes issued by these vehicles, which are substantially all held by third parties.

At 31 December 2011, HSBC held 3.7% of the capital notes issued by these vehicles (2010: 3.7%) which have a par value of US$35m (2010: US$35m) and a carrying amount of US$1.1m (2010: US$2m).

Multi-seller conduits

These vehicles were established for the purpose of providing access to flexible market-based sources of finance for HSBC's clients.

HSBC's maximum exposure is equal to the transaction-specific liquidity facilities offered to the multi-seller conduits. First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities.

The following table sets out the weighted average life of the asset portfolios for the above mentioned conduits.

Weighted average life of portfolios

	Solitaire		Other SICs		Total SICs		Total multi-     seller conduits
Weighted average life (years)
At 31 December 2011 ............................................	5.9		4.1		4.9		2.0
At 31 December 2010 ..............................................	5.1		4.0		4.4		1.8

Securitisations

HSBC uses SPEs to securitise customer loans and advances that it has originated in order to diversify its sources of funding for asset origination and for capital efficiency purposes. 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.

HSBC's 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.

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.

Money market funds

HSBC has established and manages a number of money market funds which provide customers with tailored investment opportunities within narrow and well-defined objectives.

HSBC's maximum exposure to money market funds is represented by HSBC's investment in the units of each fund, which at 31 December 2011 amounted to US$1.1bn (2010: US$1.1bn).

Non-money market investment funds

HSBC has established a large number of non-money market investment funds to enable customers to invest in a range of assets, typically equities and debt securities.

HSBC's maximum exposure to non-money market investment funds is represented by its investment in the units of each fund which at 31 December 2011 amounted to US$8.6bn (2010: US$8.6bn).

Other

HSBC also establishes SPEs in the normal course of business for a number of purposes, for example, structured transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions.

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 of HSBC's exposures' on page 194.

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 not considered significant to HSBC's operations.

Additional off-balance sheet arrangements and commitments

Additional off-balance sheet commitments such as financial guarantees, letters of credit and commitments to lend are disclosed in Note 41.

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 pages 155 and 156.

44   Legal proceedings and regulatory matters

HSBC is party to legal proceedings, investigations and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters is material, either individually or in the aggregate. HSBC recognises a provision for a liability in relation to these matters when it is probable that an outflow of economic benefits will be required to settle an obligation which has arisen as a result of past events, and for which a reliable estimate can be made of the amount of the obligation. While the outcome of these matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of legal proceedings and regulatory matters as at 31 December 2011 (see Note 33).

Securities litigation

As a result of an August 2002 restatement of previously reported consolidated financial statements and other corporate events, including the 2002 settlement with 46 State Attorneys General relating to real estate lending practices, Household International (now HSBC Finance) and certain former officers were named as defendants in a class action law suit, Jaffe v Household International Inc, et al No 2. C 5893 (N.D.Ill, filed 19 August 2002). The complaint asserted claims under the US Securities Exchange Act of 1934, on behalf of all persons who acquired and disposed of Household International common stock between 30 July 1999 and 11 October 2002. The claims alleged that the defendants knowingly or recklessly made false and misleading statements of material fact relating to Household's Consumer Lending operations, including collections, sales and lending practices, some of which ultimately led to the 2002 State settlement agreement, and facts relating to accounting practices evidenced by the restatement. Following a jury trial concluded in April 2009, which was decided partly in favour of the plaintiffs, the Court issued a ruling on 22 November 2010 within the second phase of the case to determine actual damages, that claim forms should be mailed to class members, and also set out a method for calculating damages for class members who filed claims. As previously reported, lead plaintiffs, in court filings in March 2010, estimated that damages could range 'somewhere between US$2.4bn to US$3.2bn to class members', before pre-judgement interest.

On 22 December 2011, plaintiffs submitted the report of the Court-appointed claims administrator to the Court. That report stated that the total number of claims that generated an allowed loss was 45,921, and that the aggregate amount of these claims was approximately US$2.23bn. Now that the claims administration process is complete, plaintiffs are expected to ask the Court to assess pre-judgement interest to be included as part of the Court's final judgement. On 27 January 2012, the Court held a status conference at which it set a schedule for us to provide plaintiffs with objections to the claims and for plaintiffs to respond to such objections. The Court also indicated at that conference that it expects to schedule a further conference in April 2012. We expect the Court's final judgement to be entered at some point after this conference.

Despite the jury verdict and the 22 November 2010 ruling, HSBC continues to believe that it has meritorious grounds for appeal of one or more of the rulings in the case, and intends to appeal the Court's final judgement, which could involve a substantial amount once it is entered. Upon appeal, HSBC Finance will be required to provide security for the judgement in order to suspend its execution while the appeal is ongoing by either depositing cash in an interest-bearing escrow account or posting an appeal bond in the amount of the judgement (including any pre-judgement interest awarded).

Given the complexity and uncertainties associated with the actual determination of damages, including the outcome of any appeals, there is a wide range of possible damages. HSBC believes it has meritorious grounds for appeal on matters of both liability and damages and will argue on appeal that damages should be nil or a relatively insignificant amount. If the Appeals Court rejects or only partially accepts HSBC's arguments, the amount of damages, including pre‑judgement interest, could be higher, and may lie in a range from a relatively insignificant amount to somewhere in the region of US$3.5bn.

Bernard L. Madoff Investment Securities LLC

In December 2008, Bernard L. Madoff ('Madoff') was arrested for running a Ponzi scheme and a trustee was appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC ('Madoff Securities'), an SEC-registered broker-dealer and investment adviser. Since his appointment, the trustee has been recovering assets and processing claims of Madoff Securities customers. Madoff subsequently pleaded guilty to various charges and is serving a 150 year prison sentence. He has acknowledged, in essence, that while purporting to invest his customers' money in securities and, upon request, return their profits and principal, he in fact never invested in securities and used other customers' money to fulfil requests for the return of profits and principal. The relevant US authorities are continuing their investigations into his fraud, and have brought charges against others, including certain former employees and the former auditor of Madoff Securities.

Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was US$8.4bn, an amount that includes fictitious profits reported by Madoff. Based on information available to HSBC to date, we estimate that the funds' actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time that HSBC serviced the funds totalled approximately US$4bn.

Plaintiffs (including funds, fund investors, and the Madoff Securities trustee) have commenced Madoff-related proceedings against numerous defendants in a multitude of jurisdictions. Various HSBC companies have been named as defendants in suits in the US, Ireland, Luxembourg and other jurisdictions. Certain suits (which included four US putative class actions) allege that the HSBC defendants knew or should have known of Madoff's fraud and breached various duties to the funds and fund investors.

In July 2010, the US District Court Judge overseeing a putative class action in the Southern District of Florida dismissed all claims against the HSBC defendants for lack of personal jurisdiction and on forum non conveniens grounds. In August 2011, the US Court of Appeals for the Eleventh Circuit affirmed the dismissal.

In November 2011, the US District Court Judge overseeing three related putative class actions in the Southern District of New York dismissed all claims against the HSBC defendants on forum non conveniens grounds, but temporarily stayed this ruling as to one of the actions against the HSBC defendants - the claims of investors in Thema International Fund plc - in light of a proposed amended settlement agreement pursuant to which, subject to various conditions, the HSBC defendants had agreed to pay from US$52.5m up to a maximum of US$62.5m. In December 2011, the court lifted this temporary stay and dismissed all remaining claims against the HSBC defendants, and declined to consider preliminary approval of the settlement. In light of the court's decisions, HSBC has terminated the settlement agreement. The Thema plaintiff contests HSBC's right to terminate. Plaintiffs in all three actions have filed notices of appeal to the US Court of Appeals for the Second Circuit.

In December 2010, the Madoff Securities trustee commenced suits against various HSBC companies in the US Bankruptcy Court and in the English High Court. The US action (which also names certain funds, investment managers, and other entities and individuals) sought US$9bn in damages and additional recoveries from HSBC and the various co-defendants. It sought damages against HSBC for allegedly aiding and abetting Madoff's fraud and breach of fiduciary duty. In July 2011, after withdrawing the case from the Bankruptcy Court in order to decide certain threshold issues, the US District Court Judge dismissed the trustee's various common law claims on the grounds that the trustee lacks standing to assert them. In December 2011, the District Court issued an order that allowed the trustee to immediately appeal that ruling and the trustee has filed a notice of appeal.

The District Court returned the remaining claims to the US Bankruptcy Court for further proceedings. Those claims seek, pursuant to US bankruptcy law, recovery of unspecified amounts received by HSBC from funds invested with Madoff, including amounts that HSBC received when it redeemed units HSBC held in the various funds. HSBC acquired those fund units in connection with financing transactions HSBC had entered into with various clients. The trustee's US bankruptcy law claims also seek recovery of fees earned by HSBC for providing custodial, administration and similar services to the funds. In September 2011, certain non-HSBC defendants moved again to withdraw the case from the Bankruptcy Court. Those withdrawal motions are currently pending before the District Court.

The trustee's English action seeks recovery of unspecified transfers of money from Madoff Securities to or through HSBC, on the grounds that the HSBC defendants actually or constructively knew of Madoff's fraud. HSBC has not been served.

Between October 2009 and July 2011, Fairfield Sentry Limited and Fairfield Sigma Limited ('Fairfield'), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands ('BVI') and the US against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC's private banking business and other clients who invested in the Fairfield funds. The Fairfield actions seek restitution of amounts paid to the defendants in connection with share redemptions, on the ground that such payments were made by mistake, based on inflated values resulting from Madoff's fraud, and some actions also seek recovery of the share redemptions under BVI insolvency law. The actions in the US are currently stayed in the Bankruptcy Court while plaintiffs pursue an appeal of a decision that reversed the Bankruptcy Court's denial of defendants' motions to remand or abstain and pending developments in related appellate litigation in the BVI.

There are many factors which may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings, including but not limited to the circumstances of the fraud, the multiple jurisdictions in which the proceedings have been brought and the number of different plaintiffs and defendants in such proceedings. For these reasons, among others, it is not practicable at this time for HSBC to estimate reliably the aggregate liabilities, or ranges of liabilities, that might arise as a result of all such claims but they could be significant. In any event, HSBC considers that it has good defences to these claims and will continue to defend them vigorously.

US mortgage-related investigations

In April 2011, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller of the Currency and HSBC Finance and HNAH entered into a similar consent order with the Federal Reserve Board following completion of a broad horizontal review of industry residential mortgage foreclosure practices. These consent orders require prescribed actions to address the deficiencies noted in the joint examination and described in the consent orders. HSBC Bank USA, HSBC Finance and HNAH continue to work with the Office of the Comptroller of the Currency and the Federal Reserve Board to align their processes with the requirements of the consent orders and are implementing operational changes as required.

These consent orders require an independent review of foreclosures pending or completed between January 2009 and December 2010 (the 'Foreclosure Review Period') to determine if any customer was financially injured as a result of an error in the foreclosure process. Customer outreach efforts are required, including mailings to customers and industry media advertising, to notify borrowers with foreclosures pending or completed during the Foreclosure Review Period of the foreclosure complaint review process and their ability to request a review of their foreclosure proceeding. The costs associated with the foreclosure review include the costs of conducting the customer outreach plan and complaint process, and the cost of any resulting remediation.

These consent orders do not preclude additional enforcement actions against HSBC Bank USA, HSBC Finance or HNAH by bank regulatory, governmental or law enforcement agencies, such as the US Department of Justice ('DoJ') or State Attorneys General, which could include the imposition of civil money penalties and other sanctions relating to the activities that are the subject of the consent orders. The Federal Reserve Board has indicated in a press release relating to the financial services industry in general that it believes monetary penalties are appropriate for the enforcement actions and that it plans to announce such penalties. An increase in private litigation concerning these practices is also possible.

It has been announced that the five largest US mortgage servicers (not including HSBC) have reached a settlement with the DoJ, the US Department of Housing and Urban Development and State Attorneys General of 49 states with respect to foreclosure and other mortgage servicing practices. HNAH, HSBC Bank USA and HSBC Finance have had preliminary discussions with bank regulators and other governmental agencies regarding a potential resolution, although the timing of any settlement is not presently known. Based on discussions to date, HSBC recognised provisions of US$257m in the fourth quarter of 2011 to reflect the estimated liability associated with a proposed settlement of this matter. Any such settlement, however, may not completely preclude other enforcement actions by state or federal agencies, regulators or law enforcement bodies related to foreclosure and other mortgage servicing practices, including, but not limited to matters relating to the securitisation of mortgages for investors, including the imposition of civil money penalties, criminal fines or other sanctions. In addition, such a settlement would not preclude private litigation concerning these practices.

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, and at particular participants within these groups. As the industry's residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to an increasing number of foreclosed homes as trustee on behalf of various securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws regarding property upkeep and tenants' rights. While HSBC believes and continues to maintain that the obligations at issue and the related liability are properly those of the servicer of each trust, HSBC continues to receive significant and adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of 'HSBC, as trustee'.

HSBC Bank USA and HSBC Securities (USA) Inc. have been named as defendants in a number of actions in connection with residential mortgage-backed securities ('RMBS') offerings, which generally allege that the offering documents for securities issued by securitisation trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans. These include an action filed in September 2011 by the Federal Housing Finance Agency. This action is one of a series of similar actions filed against 17 financial institutions alleging violations of federal securities laws and state statutory and common law in connection with the sale of private-label RMBS purchased by Fannie Mae and Freddie Mac, primarily from 2005 to 2008.

HSBC Bank USA has received subpoenas from the Securities and Exchange Commission ('SEC') seeking production of documents and information relating to its involvement and the involvement of its affiliates in specified private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. HSBC Bank USA has also had preliminary contacts with other government authorities exploring the role of trustees in private label RMBS transactions. HSBC Bank USA also received a subpoena from the US Attorney's Office, Southern District of New York seeking production of documents and information relating to loss mitigation efforts with respect to residential mortgages in the State of New York and a Civil Investigative Demand from the Massachusetts State Attorney General seeking documents, information and testimony related to the sale of RMBS to public and private customers in the State of Massachusetts from January 2005 to the present.

HSBC expects this level of focus will continue and, potentially, intensify, so long as the US real estate markets continue to be distressed. As a result, HSBC Group companies may be subject to additional litigation and governmental and regulatory scrutiny related to its participation in the US mortgage securitisation market, either individually or as a member of a group. HSBC is unable to estimate reliably the financial effect of any action or litigation relating to these matters. As situations develop it is possible that any related claims could be significant.

Other US regulatory and law enforcement investigations

In October 2010, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller of the Currency and the indirect parent of that company, HNAH, entered into a consent cease and desist order with the Federal Reserve Board. These actions require improvements for an effective compliance risk management programme across the Group's US businesses, including US Bank Secrecy Act ('BSA') and Anti Money Laundering ('AML') compliance. Steps continue to be taken to address the requirements of these Orders to ensure compliance, and that effective policies and procedures are maintained.

The AML/BSA consent cease and desist orders do not preclude additional enforcement actions against HSBC Bank USA or HNAH by bank regulatory or law enforcement agencies, including the imposition of civil money penalties, criminal fines and other sanctions relating to activities that are the subject of the AML/BSA cease and desist orders. HSBC continues to cooperate in ongoing investigations by the DoJ, the Federal Reserve and the Office of the Comptroller of the Currency in connection with AML/BSA compliance including cross-border transactions involving its remittance and its former bulk cash businesses.

HSBC continues to cooperate in ongoing investigations by the DoJ, the New York County District Attorney's Office, the Office of Foreign Asset Control ('OFAC'), the Federal Reserve and the Office of the Comptroller of the Currency regarding historical transactions involving Iranian parties and other parties subject to OFAC economic sanctions.

In April 2011, HSBC Bank USA received a summons from the US Internal Revenue Service directing HSBC Bank USA to produce records with respect to US-based clients of an HSBC Group company in India. While the summons was withdrawn voluntarily, HSBC Bank USA has cooperated fully by providing responsive documents in its possession in the US to the US Internal Revenue Service, and engaging in efforts to resolve these matters.

HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain Group companies acted appropriately in relation to certain customers who had US tax reporting requirements.

In April 2011, HSBC Bank USA received a subpoena from the SEC directing HSBC Bank USA to produce records in the US related to, among other things, HSBC Private Bank Suisse SA's cross-border policies and procedures and adherence to US broker-dealer and investment adviser rules and regulations when dealing with US resident clients. HSBC Bank USA continues to cooperate with the SEC.

HSBC continues to cooperate with an investigation by the US Senate Permanent Subcommittee on Investigations related to AML/BSA compliance, OFAC sanctions and compliance with US tax and securities laws.

In each of these US regulatory and law enforcement matters, HSBC Group companies have received Grand Jury subpoenas or other requests for information from US Government or other agencies, and HSBC is cooperating fully and engaging in efforts to resolve matters. It is likely that there will be some form of formal enforcement action which may be criminal or civil in nature in respect of some or all of the ongoing investigations. Investigations of several other financial institutions in recent years for breaches of BSA, AML and OFAC requirements have resulted in settlements. Some of those settlements involved the filing of criminal charges, in some cases including agreements to defer prosecution of these charges, and the imposition of fines and penalties. Some of those fines and penalties have been significant depending on the individual circumstances of each action. The investigations are ongoing. Based on the facts currently known, it is not practicable at this time for HSBC to determine the terms on which the ongoing investigations will be resolved or the timing of such resolution or for HSBC to estimate reliably the amounts, or range of possible amounts, of any fines and/or penalties. As matters progress, it is possible that any fines and/or penalties could be significant.

Investigations into the setting of London interbank offered rates and European interbank offered rates

Various regulators and competition and enforcement authorities around the world including in the UK, the US and the EU, are conducting investigations related to certain past submissions made by panel banks in connection with the setting of London interbank offered rates ('LIBOR') and European interbank offered rates. As certain HSBC entities are members of such panels, HSBC and/or its subsidiaries have been the subject of regulatory demands for information and are cooperating with their investigations. In addition, HSBC and other panel banks have been named in putative class action lawsuits filed by private parties in the US with respect to the setting of US dollar LIBOR. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these regulatory investigations or putative class action lawsuits, including the timing and potential impact, if any, on HSBC.

45    Related party transactions

Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment benefit plans for HSBC employees, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled or jointly controlled by Key Management Personnel or their close family members.

Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of HSBC Holdings, being the Directors and Group Managing Directors of HSBC Holdings.

Compensation of Key Management Personnel

	HSBC
	2011		2010		2009
	US$m		US$m		US$m
Short-term employee benefits ......................................................................	34		39		22
Post-employment benefits ...........................................................................	2		3		3
Other long-term employee benefits ..............................................................	7		1		-
Share-based payments ...................................................................................	53		49		27
	96		92		52

Transactions, arrangements and agreements involving related parties

Particulars of advances (loans and quasi-loans), credits and guarantees entered into by subsidiaries of HSBC Holdings during 2011 with Directors, disclosed pursuant to section 413 of the Companies Act 2006, are shown below:

	At 31 December
	2011		2010
	US$m		US$m
Advances and credits ...............................................................................................................	8		9

Particulars of transactions with related parties, disclosed pursuant to the requirements of IAS 24, are shown below. The disclosure of the year-end balance and the highest amounts outstanding during the year in the table below is considered to be the most meaningful information to represent the amount of the transactions and the amount of outstanding balances during the year.

	2011				2010
	Balance at 31 December		Highest         amounts    outstanding    during year		Balance at    31 December		Highest           amounts       outstanding       during year
	US$m		US$m		US$m		US$m
Key Management Personnel1
Advances and credits .........................................................	112		120		901		1,681
Guarantees ........................................................................	12		12		27		31

1  Includes Key Management Personnel, close family members of Key Management Personnel and entities which are controlled or jointly controlled by Key Management Personnel or their close family members.

Some of the transactions were connected transactions, as defined by the Rules Governing The Listing of Securities on The Stock Exchange of Hong Kong Limited but were exempt from any disclosure requirements under the provisions of those rules. The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.

Shareholdings, options and other securities of Key Management Personnel

	At 31 December
	2011                   (000s)		2010                   (000s)
Number of options held over HSBC Holdings ordinary shares under employee share plans .......	545		602
Number of HSBC Holdings ordinary shares held beneficially and non-beneficially ....................	15,384		13,395
Number of HSBC Holdings preference shares held beneficially and non-beneficially ................	-		-
Number of HSBC Holdings 6.5% Subordinated Notes 2036 held beneficially and non-beneficially ............................................................................................................................................	300		-
	16,229		13,997

Transactions with other related parties of HSBC

Associates and joint ventures

The Group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and non-interest bearing deposits and current accounts. Details of the interests in associates and joint ventures are given in Note 23. Transactions and balances during the year with associates and joint ventures were as follows:

	2011				2010
	Highest           balance during          the year1		Balance at 31 December1		Highest   balance during            the year1		Balance at    31 December1
	US$m		US$m		US$m		US$m
Amounts due from joint ventures:
- subordinated ................................................................	6		5		5		5
- unsubordinated .............................................................	459		441		514		412
Amounts due from associates:
- subordinated ................................................................	-		-		16		-
- unsubordinated .............................................................	3,117		2,569		2,248		1,702
	3,582		3,015		2,783		2,119
Amounts due to joint ventures ...........................................	195		133		151		134
Amounts due to associates ..................................................	587		475		700		527
	782		608		851		661
Commitments ....................................................................	184		92		60		43

1  The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to represent transactions during the year.

The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

Post-employment benefit plans

At 31 December 2011, US$4.6bn (2010: US$4.7bn) of HSBC post-employment benefit plan assets were under management by HSBC companies. Fees of US$20m (2010: US$17m) were earned by HSBC companies for these management services provided to its post-employment benefit plans. HSBC's post-employment benefit plans had placed deposits of US$1.2bn (2010: US$1.8bn) with its banking subsidiaries, on which interest payable to the schemes amounted to US$3m (2010: US$4m). The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

HSBC Bank (UK) Pension Scheme entered into swap transactions with HSBC as part of the management of the inflation and interest rate sensitivity of its liabilities. At 31 December 2011, the gross notional value of the swaps was US$24.9bn (2010: US$22.9bn), the swaps had a positive fair value of US$5.6bn (2010: positive fair value of US$2.2bn) to the scheme and HSBC had delivered collateral of US$6.9bn (2010: US$3.3bn) to the scheme in respect of these swaps, on which HSBC earned no interest (2010: nil). All swaps were executed at prevailing market rates and within standard market bid/offer spreads.

In order to satisfy diversification requirements, there are special collateral provisions for the swap transactions between HSBC and the scheme. The collateral agreement stipulates that the scheme never posts collateral to HSBC. Collateral is posted to the scheme by HSBC at an amount that provides the Trustee with a high level of confidence that would be sufficient to replace the swaps in the event of default by HSBC Bank plc. With the exception of the special collateral arrangements detailed above, all other aspects of the swap transactions between HSBC and the scheme are on substantially the same terms as comparable transactions with third-party counterparties.

In June 2010 the HSBC Bank (UK) Pension Scheme used a special contribution by HSBC Bank plc of £1,760m (US$2,638m) which was made to accelerate the reduction of the deficit of the Scheme to acquire debt securities from HSBC in a transaction at an arm's length value determined by the Scheme's independent third-party advisers. In December 2011, HSBC Bank plc made a £184m (US$286m) contribution to the HSBC Bank (UK) Pension Scheme. Following the contribution the Scheme purchased asset-backed securities from HSBC at an arm's length value, determined by the Scheme's independent third-party advisers.

In December 2011 HSBC International Staff Retirements Benefits Scheme ('ISRBS') purchased asset-backed securities from HSBC at an arm's length value of US$34m, determined by the Scheme's independent third party advisers. This followed an agreement by HSBC Asia Holdings BV to make a contribution of the same amount to ISRBS. No gain or loss arose on the transaction.

ISRBS entered into swap transactions with HSBC to manage the inflation and interest rate sensitivity of the liabilities and selected assets. At 31 December 2011, the gross notional value of the swaps was US$1.7bn (2010: US$1.8bn) and the swaps had a net positive fair value of US$297m to the scheme (2010: US$77m). No gain or loss arose on the transaction, which was conducted at an arm's length value determined by the Scheme's independent third-party advisers.

HSBC Holdings

Details of HSBC Holdings' principal subsidiaries are shown in Note 26. Transactions and balances during the year with subsidiaries were as follows:

	2011				2010
	Highest           balance during          the year1		Balance at 31 December1		Highest   balance during           the year1		Balance at    31 December1
	US$m		US$m		US$m		US$m
Assets
Cash at bank ......................................................................	471		316		459		459
Derivatives ........................................................................	4,220		3,568		3,219		2,327
Loans and advances ............................................................	28,821		28,048		23,212		21,238
Financial investments ........................................................	2,093		1,078		2,606		2,025
Investments in subsidiaries .................................................	93,008		90,621		92,899		92,899
Total related party assets ...................................................	128,613		123,631		122,395		118,948
Liabilities
Amounts owed to HSBC undertakings .................................	3,129		2,479		4,580		2,932
Derivatives ........................................................................	1,181		1,067		1,677		827
Subordinated liabilities:
- at amortised cost .........................................................	2,609		2,437		3,907		2,464
- designated at fair value ................................................	4,627		3,955		4,507		4,259
Total related party liabilities ..............................................	11,546		9,938		14,671		10,482
Guarantees .........................................................................	49,527		49,402		46,988		46,988
Commitments ....................................................................	2,753		1,810		3,240		2,720

1  The disclosure of the year-end balance and the highest month-end balance during the year is considered the most meaningful information to represent transactions during the year. The above outstanding balances arose in the ordinary course of business and are on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties, with the exception of US$63m (2010: US$160m) in respect of loans to HSBC subsidiaries from HSBC Holdings and nil (2010: US$506m) in respect of loans from HSBC subsidiaries to HSBC Holdings made at an agreed zero per cent interest rate.

Some employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme, which is sponsored by a separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into the scheme on their behalf. Disclosure in relation to the scheme is made in Note 7 to the accounts.

46   Events after the balance sheet date

On 24 January 2012, we announced an agreement to sell our banking operations in Costa Rica, El Salvador and Honduras to Banco Davivienda S.A. ('Davivienda'), a Colombian-listed banking group, for a total consideration of US$801m in cash. The transaction is subject to regulatory and other approvals and is expected to complete in the fourth quarter of 2012. The assets and associated liabilities of these operations were classified as held for sale at 31 December 2011 (see Note 27).

A fourth interim dividend for 2011 of US$0.14 per ordinary share (a distribution of approximately US$2,515m) was declared by the Directors after 31 December 2011.

These accounts were approved by the Board of Directors on 27 February 2012 and authorised for issue.

 

END

 

 

ACSUBRRRURAOUAR