HSBC 2009 Annual Report Download - page 159

157
• holding MBSs or other ABSs in the trading
portfolio hedged through credit derivative
protection, typically purchased from monolines,
with the intention of earning the spread
differential over the life of the instruments; and
• originating leveraged finance loans for the
purposes of syndicating or selling them down in
order to generate a trading profit and holding
them in order to earn interest margin over their
lives.
These activities are not a significant part of
Global Banking and Markets’ business, and Global
Banking and Markets is not reliant on them for any
material aspect of its business operations or
profitability.
The purchase and securitisation of US mortgage
loans and the secondary trading of US MBSs, which
was conducted in HSBC’s US MBSs business, was
discontinued in 2007.
Special purpose entities
HSBC enters into certain transactions with
customers in the ordinary course of business which
involve the establishment of SPEs to facilitate
customer transactions. SPEs are used in HSBC’s
business in order to provide structured investment
opportunities for customers, facilitate the raising
of funding for customers’ business activities, or
diversify HSBC’s sources of funding and/or
improve capital efficiency.
The use of SPEs in this way is not a significant
part of HSBC’s activities and HSBC is not reliant on
the use of SPEs for any material part of its business
operations or profitability. Detailed disclosures of
HSBC’s sponsored SPEs are provided on page 181.
Risk management
(Audited)
The effect of the recent market turmoil on HSBC’s
risk exposures, the way in which HSBC has
managed risk exposures in this context, and any
changes made in HSBC’s risk management polices
and procedures in response to the market conditions
are set out in the following sections:
• Credit risk – ‘Credit exposure’ (see page 206);
• Liquidity risk – ‘The impact of market turmoil
on the Group’s liquidity risk position’ (see
page 248); and
• Market risk – ‘The impact of market turmoil
on market risk’ (see page 252).
Accounting policies
(Audited)
HSBC’s accounting policies regarding the
classification and valuation of financial instruments
are in accordance with the requirements of IAS 32
‘Financial Instruments: Presentation’ and IAS 39
‘Financial Instruments: Recognition and
Measurement’, as described in Note 2 on the
Financial Statements, and the use of assumptions and
estimation in respect of valuation of financial
instruments as described on page 63.
Nature and extent of HSBC’s
exposures
(Audited)
This section contains information on HSBC’s
exposures to the following:
• direct lending held at fair value through profit or
loss;
• ABSs including MBSs and CDOs;
• monolines;
• credit derivative product companies (‘CDPC’s);
and
• leveraged finance transactions.
MBSs are securities that represent interests in a
group of mortgages. Investors in these securities
have the right to cash received from future mortgage
payments (interest and/or principal). Where an MBS
references mortgages with different risk profiles, the
MBS is classified according to the highest risk class.
Consequently, an MBS with both sub-prime and
Alt-A exposures is classified as sub-prime.
CDOs are securities in which ABSs and/or other
related assets have been purchased and securitised
by a third party, or securities which pay a return
which is referenced to those assets. CDOs may
include exposure to sub-prime mortgage assets
where these are part of the underlying assets or
reference assets. As there is often uncertainty
surrounding the precise nature of the underlying
collateral supporting CDOs, all CDOs supported by
residential mortgage-related assets, irrespective of
the level of sub-prime assets referenced or contained
therein, are classified as sub-prime.
HSBC’s holdings of ABSs and CDOs, and its
direct lending positions, include the following
categories of collateral and lending activity: