HSBC 2009 Annual Report Download - page 177

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similar factors as derivative assets, also relating to
embedded derivatives within issued structured notes.
For derivative liabilities, the unobservability of
prepayment rates on securitisation swaps was the
main reason for transfers into Level 3. Transfers out
of Level 3 were driven by similar factors as
derivative assets.
During 2009, there were no significant transfers
between Levels 1 and 2.
For assets and liabilities classified as held for
trading, realised and unrealised gains and losses are
presented in the income statement under ‘Trading
income excluding net interest income’.
Fair value changes on long term debt designated
at fair value and related derivatives are presented
in the income statement under ‘Changes in fair
value of long-term debt issued and related
derivatives’. The income statement line item ‘Net
income/(expense) from other financial instruments
designated at fair value’ captures fair value
movements on all other financial instruments
designated at fair value and related derivatives.
Realised gains and losses from available-for-
sale securities are presented under ‘Gains less losses
of financial investments’ in the income statement
while unrealised gains and losses are presented in
‘Fair value gains/(losses) within ‘Available-for-sale
investments’ in other comprehensive income/
(expense).
Effect of changes in significant unobservable
assumptions to reasonably possible
alternatives
As discussed above, the fair value of financial
instruments are, in certain circumstances, measured
using valuation techniques that incorporate
assumptions that are not evidenced by prices from
observable current market transactions in the same
instrument and are not based on observable market
data. The following table shows the sensitivity of
these fair values to reasonably possible alternative
assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
Reflected in profit or loss Reflected in equity
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
US$m US$m US$m US$m
At 31 December 2009
Derivatives, trading assets and trading liabilities23 ...... 984 (577) – –
Financial assets and liabilities designated at fair value 102 (98) – –
Financial investments: available for sale ..................... – – 1,161 (1,157)
At 31 December 2008
Derivatives, trading assets and trading liabilities23 ...... 1,266 (703) – –
Financial assets and liabilities designated at fair value 30 (30) – –
Financial investments: available for sale ..................... – – 984 (1,005)
For footnote, see page 195.
The decrease in the effect of changes in
significant unobservable inputs in relation to
derivatives, trading assets and trading liabilities
during the year primarily reflected the decreased
sensitivity to the assumptions for the derivative
portfolios. The increase in the effect of changes in
significant unobservable inputs for available-for-sale
assets arose from the increase in private equity
holdings in Level 3 and from increased sensitivity
to the assumptions for ABSs.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
Reflected in profit or loss Reflected in equity
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
US$m US$m US$m US$m
At 31 December 2009
Private equity investments ............................................ 54 (54) 302 (299)
Asset-backed securities ................................................ 41 (41) 734 (735)
Leveraged finance ........................................................ 1 (1) – –
Loans held for securitisation ........................................ 16 (16) – –
Structured notes ............................................................ 3 (3) – –
Derivatives with monolines .......................................... 333 (25) – –
Other derivatives ........................................................... 309 (332) – –
Other portfolios ............................................................. 329 (203) 125 (123)