HSBC 2009 Annual Report Download - page 175

173
Financial instruments measured at fair value using a valuation technique with significant unobservable
inputs – Level 3
Assets Liabilities
Available
for sale
Held for
trading
Designated
at fair value
through
profit or loss Derivatives
Held for
trading
Designated
at fair value
through
profit or loss Derivatives
US$m US$m US$m US$m US$m US$m US$m
At 31 December 2009
Private equity investments ........... 2,949 197 345 – – – –
Asset-backed securities ............... 4,270 944 – – – – –
Leveraged finance ....................... – 73 – – – – 25
Loans held for securitisation ....... – 1,395 – – – – –
Structured notes ........................... – 196 – – 5,055 – –
Derivatives with monolines ......... – – – 1,305 – – –
Other derivatives .......................... – – – 3,148 – – 5,167
Other portfolios ............................ 2,995 3,615 879 – 3,719 507 –
10,214 6,420 1,224 4,453 8,774 507 5,192
At 31 December 2008
Private equity investments ........... 2,689 54 225 – – – –
Asset-backed securities ............... 4,264 882 – 95 – – 565
Leveraged finance ....................... – 266 – – – – 33
Loans held for securitisation ........ – 2,133 – – – – –
Structured notes ........................... – 87 – – 5,294 – –
Derivatives with monolines ......... – – – 2,441 – – –
Other derivatives .......................... – – – 7,347 – – 3,207
Other portfolios ............................ 2,163 4,139 235 – 1,215 – –
9,116 7,561 460 9,883 6,509 – 3,805
At 31 December 2009, available-for-sale ABSs
valued using a valuation technique with significant
unobservable inputs principally comprised
commercial property-related securities, leveraged
finance-related securities and Alt-A securities with
no particular concentration in any one category.
Assets in other portfolios valued using a valuation
technique with significant unobservable inputs were
principally holdings in an Asian bond portfolio
where the credit spreads are not directly observable.
Trading assets valued using a valuation
technique with significant unobservable inputs
principally comprised ABSs, loans held for
securitisation and other portfolios. The ABSs
are classified in Level 3 as a result of the
unobservability of the underlying price of the assets.
Loans held for securitisations are valued using a
proprietary model which utilises inputs relating to
the credit spread of the obligor. Other portfolios
include holdings in various bonds, preference shares
and debentures where the unobservability relates to
the prices of the underlying securities. The decrease
during the year was due to a reduction in the fair
value of loans held for securitisation and disposals
of positions within other portfolios.
Derivative products with monolines valued
using techniques with unobservable inputs decreased
during the year as a result of a decrease in exposure
to the monoline counterparties, primarily as a result
of decreasing credit spreads and from commutations
undertaken. The primary unobservable input relates
to the probability of default of the counterparty.
Further details of the transactions with monoline
counterparties are shown on page 163.
Derivative products valued using valuation
techniques with significant unobservable inputs
included certain correlation products, such as foreign
exchange basket options, equity basket options,
foreign exchange-interest rate hybrid transactions
and long-dated option transactions. Examples of the
latter are equity options, interest rate and foreign
exchange options and certain credit derivatives.
Credit derivatives include certain tranched CDS
transactions. The decrease in Level 3 derivative
assets during the year was mainly due to a decrease
in the fair value of structured credit transactions.
Trading liabilities valued using a valuation
technique with significant unobservable inputs
principally comprised equity-linked structured notes
which are issued by HSBC and provide the
counterparty with a return that is linked to the
performance of certain equity securities, and other
portfolios. The notes are classified as Level 3 due to
the unobservability of parameters such as long-dated
equity volatilities and correlations between equity
prices, between equity prices and interest rates and