HSBC 2009 Annual Report Download - page 32

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Net income from financial instruments at FV / Gains less losses from financial instruments
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transactions HSBC had entered into with
institutional clients.
The decline in non-qualifying hedges related to
mark-to-market losses on cross-currency swaps as
the US dollar appreciated and on interest rate swaps
as interest rates fell in late 2008.
Widening credit spreads led to further gains on
credit default swap transactions in parts of the
Global Banking portfolio.
Net income from financial instruments designated at fair value
2009
US$m
2008
US$m
2007
US$m
Net income/(expense) arising from:
– financial assets held to meet liabilities under insurance and
investment contracts ........................................................................................ 3,793 (5,064) 2,056
– liabilities to customers under investment contracts ........................................ (1,329) 1,751 (940)
– HSBC’s long-term debt issued and related derivatives .................................. (6,247) 6,679 2,812
Change in own credit spread on long-term debt ........................................ (6,533) 6,570 3,055
Other changes in fair value25 ...................................................................... 286 109 (243)
– other instruments designated at fair value and related derivatives ................. 252 486 155
Net income/(expense) from financial instruments designated at fair value ........... (3,531) 3,852 4,083
Financial assets designated at fair value at 31 December ....................................... 37,181 28,533 41,564
Financial liabilities designated at fair value at 31 December ................................. 80,092 74,587 89,939
For footnote, see page 149.
HSBC designates certain financial instruments at fair
value to remove or reduce accounting mismatches in
measurement or recognition, or where financial
instruments are managed and their performance is
evaluated together on a fair value basis. All income
and expense from financial instruments designated at
fair value are included in this line except for interest
arising from HSBC’s issued debt securities and
related derivatives managed in conjunction with
those debt securities, which is recognised in ‘Interest
expense’.
HSBC principally uses the fair value
designation in the following instances (for which
all numbers are ‘reported’):
• for certain fixed-rate long-term debt issues
whose rate profile has been changed to floating
through interest rate swaps as part of a
documented interest rate management strategy.
Approximately US$63 billion (2008:
US$59 billion) of the Group’s debt issues have
been accounted for using the fair value option.
The movement in fair value of these debt issues
includes the effect of own credit spread changes
and any ineffectiveness in the economic
relationship between the related swaps and
own debt. As credit spreads widen or narrow,
accounting profits or losses, respectively, are
booked. The size and direction of the accounting
consequences of changes in own credit spread
and ineffectiveness can be volatile from year to
year, but do not alter the cash flows envisaged
as part of the documented interest rate
management strategy. As a consequence, gains
and losses arising from changes in own credit
spread on long-term debt are not regarded
internally as part of managed performance and
are excluded from underlying results. Similarly,
such gains and losses are ignored in the
calculation of regulatory capital;
• for US$15 billion (2008: US$11 billion) of
financial assets held to meet liabilities under
insurance contracts, and certain liabilities under
investment contracts with discretionary
participation features; and
• for US$8 billion (2008: US$7 billion) of
financial assets held to meet liabilities under
unit-linked and other investment contracts, as
well as the associated liabilities.
2009 compared with 2008
A net expense from financial instruments designated
at fair value of US$3.5 billion was reported
compared with income of US$3.9 billion in 2008.
A significant change in credit spread on
HSBC’s own debt in 2009 reversed the
movement in 2008.
On an underlying basis, HSBC reported income
of US$3.0 billion in 2009 compared with an expense
of US$2.6 billion in 2008. The large difference
between the reported and underlying results is due to
the exclusion of the effect of credit spread-related