HSBC 2006 Annual Report Download - page 220

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Market risk > Value at risk / Trading portfolios / Non-trading portfolios
218
Fair value and price verification control
(Audited)
Where certain financial instruments are carried on
the Group’s balance sheet at fair values, the
valuation and the related price verification processes
are subject to independent validation across the
Group. Financial instruments which are accounted
for on a fair value basis include assets held in the
trading portfolio, financial instruments designated at
fair value, obligations related to securities sold short,
all derivative financial instruments and available-for-
sale securities.
The determination of fair values is therefore a
significant element in the reporting of the Group’s
Global Markets activities.
Responsibility for determining accounting
policies and procedures governing valuation and
validation ultimately rests with independent finance
functions which report functionally to the Group
Finance Director. All significant valuation policies,
and any changes thereto, must be approved by senior
finance management. HSBC’s governance of
financial reporting requires that Financial Control
departments across the Group are independent of the
risk-taking businesses, with the Finance functions
having ultimate responsibility for the determination
of fair values included in the financial statements,
and for ensuring that the Group’s policies comply
with all relevant accounting standards.
Trading portfolios
(Audited)
HSBC’s control of market risk is based on a policy
of restricting individual operations to trading within
a list of permissible instruments authorised for each
site by Traded Credit and Market Risk, enforcing
rigorous 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.
In addition, at both portfolio and position levels,
market risk in trading portfolios is monitored and
controlled using a complementary set of techniques.
These include VAR and, for interest rate risk, present
value of a basis point movement in interest rates,
together with stress and sensitivity testing and
concentration limits. These techniques quantify the
impact on capital of defined market movements.
Total trading VAR for Global Markets at
31 December 2006 was US$32.6 million (2005:
US$32.7 million). The VAR from positions taken
without trading intent was US$4.7 million (2005:
US$6.9 million), the principal components of which
were hedges that failed to meet the strict
documentation and testing requirements of IAS 39
(i.e. ‘non-qualifying’ hedges) and other positions
transacted as economic hedges but which also did
not qualify for hedge accounting. HSBC’s policy on
hedging is to manage economic risk in the most
appropriate way without regard as to whether hedge
accounting is available, within limits regarding the
potential volatility of reported earnings.
Trading VAR is further analysed below by risk
type, by positions taken with trading intent and by
positions taken without trading intent:
Total trading VAR by risk type
(Audited)
Foreign
exchange and
commodity
Interest
rate
Equity Total
US$m US$m US$m US$m
At 31 December 2006 .................................................. 7.3 26.0 11.8 32.6
At 31 December 2005 ................................................... 4.6 33.8 4.7 32.7
Average
2006 .......................................................................... 6.3 33.9 6.5 33.3
2005 .......................................................................... 6.9 37.3 5.5 37.3
Minimum
2006 .......................................................................... 2.6 18.3 2.6 20.9
2005 .......................................................................... 2.9 24.3 2.3 23.5
Maximum
2006 .......................................................................... 12.7 53.6 11.8 52.3
2005 .......................................................................... 12.4 76.9 10.9 73.2