HSBC 2012 Annual Report Download - page 268

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Market risk
266
Market risk is managed and controlled through limits approved by the GMB for HSBC Holdings and our
various global businesses. These limits are allocated across business lines and to the Group’s legal entities.
The management of market risk is principally undertaken in Global Markets, where 85% of the total value at risk of
HSBC Holdings (excluding Insurance) and almost all trading VAR resides, 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. The risk appetite is governed according to the framework illustrated below.
Chairman / CEO
Group Management Board
Risk Management Meeting
HSBC Holdings Board
Entity Risk
Management Committee
Principal Office Manager
Business / Desk / Trader
Group Traded Risk
General measures
Specific measures
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 identify the impact of
varying scenarios on valuations or on net interest
income resulting from any residual risk positions.
Further details on the control and management
process for residual risks are provided on pages 268
to 269.
Sensitivity analysis
(Unaudited)
We use sensitivity measures to monitor the market
risk positions within each risk type, for example, the
present value of a basis point movement in interest
rates for interest rate risk. Sensitivity limits are set for
portfolios, products and risk types, with the depth of
the market being one of the principal factors in
determining the level of limits set.
Value at risk and stressed value at risk
(Audited)
VAR is a technique that estimates the potential losses on risk positions as a result of movements in market rates and
prices over a specified time horizon and to a given level of confidence. Stressed VAR is primarily used for
Regulatory Capital purposes but is integrated into the risk management process to facilitate efficient capital
management and to highlight possible high-risk positions based on previous market volatility.
Both the VAR and Stressed VAR models we use are based predominantly on historical simulation. These models
derive plausible future scenarios from past series of recorded market rates and prices, taking into account inter-
relationships between different markets and rates such as interest rates and foreign exchange rates. The models also
incorporate the effect of option features on the underlying exposures.
The historical simulation models used incorporate the following features:
• historical market rates and prices are calculated with reference to foreign exchange rates and commodity prices,
interest rates, equity prices and the associated volatilities;
• potential market movements utilised for VAR are calculated with reference to data from the past two years,
• (unaudited) potential market movements employed for stressed VAR calculations are based on a continuous one-
year period of stress for the trading portfolio; the choice of period (March 2008 to February 2009) is based on
the assessment at the Group level of the most volatile period in recent history; and