HSBC 2003 Annual Report Download - page 173

171
Interest rate exposures
HSBC’ s interest rate exposures comprise those
originating in its Global Markets trading activities
and structural interest rate exposures: both are
managed under limits described on page 168. Interest
rate risk arises on both trading positions and accrual
books. The average daily revenue earned from these
interest rate activities in 2003 was US$13.1 million
compared with US$10.7 million for 2002.
The interest rate risk on interest rate trading positions
is set out in the trading VAR table in Note 40 in the
‘Notes on the Financial Statements’ .
Structural interest rate risk
Structural interest rate risk arises from the differing
repricing characteristics of commercial banking
assets and liabilities, including non-interest bearing
liabilities such as shareholders’ funds and some
current accounts. Each operating entity assesses the
structural interest rate risks which arise on each
product in its business and transfers the interest rate
risks to either its local treasury unit for management
or to separate books managed by the local Asset and
Liability Management Committee (‘ALCO’ ). The
aim is to ensure that all interest rate risks are
managed by either the local treasury or ALCO.
The transfer of interest rate risk is usually
achieved by a series of internal deals between the
business units and the local treasury or ALCO
managed books. When the behavioural
characteristics of a product are different from its
contractual characteristics, the behavioural
characteristics are assessed to determine the true
underlying interest rate risk. Local ALCOs regularly
monitor all such interest rate risk positions, subject to
interest rate risk limits agreed with Group
Management Board. In the course of managing
interest rate risk, quantitative techniques and
simulation models are used where appropriate to
identify and assess the potential net interest income
and market value effects of these interest rate
positions in different interest rate scenarios. Interest
rate swaps are the principal product used to manage
interest rate risk, adjust it to appropriate levels and
contain it within agreed limits. The primary objective
of this exercise is to limit potential adverse effects of
interest rate movements on net interest income.
Assuming no management action in response to
interest rate movements, an immediate hypothetical
100 basis points parallel fall in all yield curves
worldwide on 1 January 2004 would decrease
planned net interest income for the 12 months to
31 December 2004 by US$463 million while a
hypothetical 100 basis points parallel rise in all yield
curves would decrease planned net interest income
by US$819 million.
Instead of assuming that all interest rates move
together, HSBC’s interest rate exposures can be
grouped into currency blocs whose interest rates are
considered more likely to move together. The
sensitivity of projected net interest income for
January to December 2004 can then be described as
follows: