HSBC 2007 Annual Report Download - page 261

259
Principal1
Carrying
amount
Unrealised
gains
and losses2
Realised
gains
and losses2
Fair value
movements
recognised3
US$m US$m US$m US$m US$m
Year ended 31 December 2006
US sub-prime mortgage-related assets
Direct lending ............................................................................... 4,947 4,997 (11) 227 –
MBSs5 ........................................................................................... 2,986 2,944 (41) 5 2
– high grade (AA or AAA rated) ............................................. 2,640 2,641 1 2
– rated C to A ........................................................................... 155 146 (1) –
– not publicly rated ................................................................... 191 157 (41) –
MBS CDOs5 .................................................................................. 326 325 – – –
– high grade (AA or AAA rated) ............................................. 326 325 – –
– rated C to A ........................................................................... – – – –
– not publicly rated ................................................................... – – – –
8,259 8,266 (52) 232 2
Other US mortgage-related assets
Direct lending ............................................................................... 1,317 1,322 2 45 –
MBSs5 ........................................................................................... 40,001 38,691 (72) 70 (42)
– high grade (AA or AAA rated) ............................................. 39,825 38,531 (59) (42)
– rated C to A ........................................................................... 136 132 – –
– not publicly rated ................................................................... 40 28 (13) –
41,318 40,013 (70) 115 (42)
1 The principal is the redemption amount on maturity or, in the case of an amortising instrument, the sum of the future redemption
amounts through the residual life of the security.
2 Recognised during the year in the income statement.
3 Fair value gains and losses recognised during the year in equity.
4 HSBC has primarily utilised loan counterparty credit scores as the basis for determining whether an asset is classified as sub-prime.
5 Mortgage-backed securities (‘MBSs’) and collateralised debt obligations (‘CDOs’).
In addition to the exposure detailed above,
HSBC also holds long positions in MBSs with
a carrying value of US$1,633 million (2006:
US$963 million) and MBS CDOs with a carrying
value of US$349 million (2006: US$608 million)
where the exposure has been matched by specific
credit derivatives with monolines and other financial
institutions. The counterparty credit risk arising
from the derivative transactions undertaken with
monolines is included in the monoline exposure
analysis detailed on page 260.
HSBC’s exposure to derivative transactions
entered into directly with monoline insurers
(Audited)
HSBC’s principal exposure to monoline insurers is
through a number of OTC derivative transactions,
primarily credit default swaps (‘CDSs’). HSBC has
entered into CDSs to purchase credit protection
against securities held within the trading portfolio.
During the second half of 2007, the market value of
the securities declined, with offsetting increases in
the mark-to-market value of the CDS transactions,
thereby increasing OTC counterparty credit risk to
the monoline insurers. The table below sets out the
mark-to-market value of the derivative contracts at
31 December 2007, and hence the amount at risk,
based on 31 December 2007 security prices, if the
CDS protection purchased were to be wholly
ineffective because, for example, the monoline
insurer was unable to meet its obligations. In order to
assess that risk, protection purchased is sub-divided
between those monoline insurers that had external
investment grade ratings at 25 February 2008, and
those that did not. The ‘Credit Risk Adjustment’
column indicates the valuation adjustment taken
against the mark-to-market exposures, and reflects
the deterioration in creditworthiness of the monoline
insurers during 2007. These adjustments have been
charged to the income statement.