HSBC 2010 Annual Report Download - page 139

137
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Student loan-related assets
Our holdings in student loan-related assets were
US$5.5bn (2009: US$5.1bn). No impairments were
recorded on student loan-related assets in 2010
(2009: nil).
Transactions with monoline insurers
(Audited)
HSBC’s exposure to derivative transactions
entered into directly with monolines
Our principal exposure to monolines is through a
number of OTC derivative transactions, mainly
credit default swaps (‘CDS’s). We entered into these
CDSs primarily to purchase credit protection against
securities held at the time within the trading
portfolio.
During 2010, the notional value of derivative
contracts with monolines and our overall credit
exposure to monolines decreased as a number of
transactions were commuted, others matured, and
credit spreads narrowed. The table below sets out the
fair value, essentially the replacement cost, of the
remaining derivative transactions at 31 December
2010, and hence the amount at risk if the CDS
protection purchased were to be wholly ineffective
because, for example, the monoline insurer was
unable to meet its obligations. In order to further
analyse that risk, the value of protection purchased
is shown subdivided between those monolines
that were rated by S&P at ‘BBB- or above’ at
31 December 2010, and those that were ‘below
BBB–’ (BBB– is the S&P cut-off for an investment
grade classification). The ‘Credit risk adjustment’
column indicates the valuation adjustment taken
against the net exposures, and reflects our best
estimate of the likely loss of value on purchased
protection arising from the deterioration in
creditworthiness of the monolines. These valuation
adjustments, which reflect a measure of the
irrecoverability of the protection purchased, have
been charged to the income statement. During 2010,
the credit risk adjustment on derivative contracts
with monolines decreased as a number of
transactions commuted and others matured.
HSBC’s exposure to derivative transactions entered into directly with monoline insurers
(Audited)
Notional
amount
Net exposure
before credit
risk adjustment51
Credit risk
adjustment52
Net exposure
after credit
risk adjustment
US$m US$m US$m US$m
At 31 December 2010
Derivative transactions with monoline counterparties
Monoline – investment grade (BBB– or above) .............. 5,179 876 (88) 788
Monoline – sub-investment grade (below BBB–) ........... 2,290 648 (431) 217
7,469 1,524 (519) 1,005
At 31 December 2009
Derivative transactions with monoline counterparties
Monoline – investment grade (BBB– or above) .............. 5,623 997 (100) 897
Monoline – sub-investment grade (below BBB–) ........... 4,400 1,317 (909) 408
10,023 2,314 (1,009) 1,305
For footnotes, see page 174.
The above table can be analysed as follows.
HSBC has derivative transactions referenced to
underlying securities with a notional value of
US$7.5bn (2009: US$10.0bn), whose value at
31 December 2010 indicated a potential claim
against the protection purchased from the
monolines of some US$1.5bn (2009: US$2.3bn).
On the basis of a credit assessment of the
monolines, a provision of US$519m has been taken
(2009: US$1.0bn), leaving US$1.0bn exposed
(2009: US$1.3bn), of which US$788m is
recoverable from monolines rated investment grade
at 31 December 2010 (2009: US$897m). The
provisions taken imply in aggregate that 90 cents in
the dollar will be recoverable from investment
grade monolines and 33 cents in the dollar from
non-investment grade monolines (2009: 90 cents
and 31 cents, respectively).
For the CDSs, market prices are generally not
readily available. Therefore the CDSs are valued on
the basis of market prices of the referenced
securities.
The credit risk adjustment against monolines is
determined by one of a number of methodologies,
dependent upon the internal credit rating of the
monoline. Our assignment of internal credit ratings
is based upon detailed credit analysis, and may
differ from external ratings.