HSBC 2011 Annual Report Download - page 200

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Liquidity and funding / Market risk
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expected period for which we must conservatively assume that we will need to fund our assets. Behaviouralisation is
applied when the contractual terms do not reflect the expected behaviour. Liquidity behaviouralisation is reviewed,
approved by the ALCO in compliance with policies set by the Risk Management Meeting. A conservative approach
to liquidity risk management will often mean an asymmetric approach to assets and liabilities, being an assumed
shorter life for liabilities and a longer term funding requirement for assets.
Contingent liquidity risk
(Audited)
In the normal course of business, we provide customers with committed facilities, including committed backstop
lines to conduit vehicles we sponsor and standby facilities to corporate customers. These facilities increase our
funding requirements when customers choose to raise drawdown levels above their normal utilisation rates. The
liquidity risk consequences of increased levels of drawdown are analysed in the form of projected cash flows under
different stress scenarios. The Risk Management Meeting also sets limits for non-cancellable contingent funding
commitments for the major Group banking entities after due consideration of each entity’s ability to fund them. The
limits are split according to the borrower, the liquidity of the underlying assets and the size of the committed line.
HSBC Holdings
(Audited)
HSBC Holdings’ primary sources of cash are dividends received from subsidiaries, interest on and repayment of
intra-group loans and interest earned on its own liquid funds. HSBC Holdings also raises ancillary funds in the debt
capital markets through subordinated and senior debt issuance. Cash is primarily used for the provision of capital to
subsidiaries, interest payments to debt holders and dividend payments to shareholders.
HSBC Holdings is also subject to contingent liquidity risk by virtue of loan and other credit-related commitments and
guarantees and similar contracts issued. Such commitments and guarantees are only issued after due consideration of
HSBC Holdings’ ability to finance the commitments and guarantees and the likelihood of the need arising.
HSBC Holdings actively manages the cash flows from its subsidiaries to optimise the amount of cash held at the
holding company level. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends
on, among other things, their respective regulatory capital requirements, statutory reserves, and financial and
operating performance. The wide range of our activities means that HSBC Holdings is not dependent on a single
source of profits to fund its dividend payments to shareholders.
Market risk
Monitoring and limiting market risk exposures
(Audited)
The management of market risk is principally undertaken in Global Markets using risk limits approved by the GMB.
Limits are set for portfolios, products and risk types, with market liquidity being a primary factor in determining the
level of limits set. Group Risk, an independent unit within Group Head Office, is responsible for our market risk
management policies and measurement techniques. Each major operating entity has an independent market risk
management and control function which is responsible for measuring market risk exposures in accordance with the
policies defined by Group Risk, and monitoring and reporting these exposures against the prescribed limits on a
daily basis.
Each operating entity is required to assess the market risks arising on each product in its business and to transfer
them to either its local Global Markets unit for management, or to separate books managed under the supervision
of the local ALCO. Our aim is to ensure that all market risks are consolidated within operations that have the
necessary skills, tools, management and governance to manage them professionally. In certain cases where the
market risks cannot be fully transferred, we use simulation modelling to identify the impact of varying scenarios on
valuations and net interest income.