HSBC 2007 Annual Report Download - page 262

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Residual value risk management / Operational risk management > Legal risk
260
HSBC’s exposure to derivative transactions entered into directly with monoline insurers
(Audited)
Net exposure
before credit
risk adjustment1
Credit risk
adjustment2
Net exposure
after credit
risk adjustment
US$m US$m US$m
At 31 December 2007
Derivative transactions with monoline counterparties:
– Monoline – investment grade ................................................................... 1,342 (133) 1,209
– Monoline – below investment grade ........................................................ 214 (214) –
1,556 (347) 1,209
At 31 December 2006
Derivative transactions with monoline counterparties:
– Monoline – investment grade ................................................................... 9 – 9
1 Net exposure after legal netting and any other relevant credit mitigation prior to deduction of credit risk adjustment.
2 Fair value adjustment recorded against over-the-counter derivative counterparty exposures to reflect the credit worthiness of the
counterparty.
HSBC’s exposure to debt securities which benefit
from guarantees provided by monoline insurers
(Audited)
Within both the trading and available-for-sale
portfolios, HSBC holds bonds that are ‘wrapped’
with a credit enhancement from a monoline insurer.
Any deterioration in the credit profile of the
monoline insurer is reflected in market prices and
therefore in the carrying value of these securities in
HSBC’s balance sheet at 31 December 2007. For
wrapped bonds held in the trading portfolio, the
mark-to-market loss has been reflected through the
income statement. For wrapped bonds held in the
available-for-sale portfolio, the mark-to-market
deterioration is reflected in equity unless the
impairment is regarded as permanent, in which case
it is reflected in the income statement. There was no
permanent impairment recognised in respect of these
assets at 31 December 2007.
HSBC’s exposure to direct lending and
irrevocable commitments to lend to monoline
insurers
(Audited)
HSBC has extended liquidity facilities totalling
US$158 million to monoline insurers, none of which
was drawn at 31 December 2007 (31 December
2006: US$145 million, none of which was drawn).
Residual value risk management
(Unaudited)
A significant part of a lessor’s return from operating
leases is dependent upon its management of residual
value risk. This arises from operating lease
transactions to the extent that the values recovered
from disposing of leased assets or re-letting them at
the end of the lease terms (the ‘residual values’)
differ from those projected at the inception of the
leases. The business regularly monitors residual
value exposure by reviewing the recoverability of
the residual value projected at lease inception. This
entails considering the potential of re-letting of
operating lease assets and their projected disposal
proceeds at the end of their lease terms. Provision is
made to the extent that the carrying values of leased
assets are impaired through residual values not being
fully recoverable.
The net book value of equipment leased to
customers on operating leases by the Group includes
projected residual values at the end of current lease
terms, to be recovered through re-letting or disposal
in the following periods:
Residual values
(Unaudited)
2007 2006
US$m US$m
Within 1 year ............................ 155 200
Between 1-2 years .................... 243 414
Between 2-5 years .................... 713 379
More than 5 years .................... 1,892 1,996
Total exposure .......................... 3,003 2,989
Operational risk management
(Unaudited)
Operational risk is the risk of loss arising from fraud,
unauthorised activities, error, omission, inefficiency,
systems failure or external events. It is inherent in
every business organisation and covers a wide
spectrum of issues.
HSBC manages this risk through a controls-
based environment in which processes are
documented, authorisation is independent and
transactions are reconciled and monitored. In each
of HSBC’s subsidiaries, local management is
responsible for the review and supervision of the
operation of these controls. The control environment