HSBC 2012 Annual Report Download - page 300

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Capital > Appendix to Capital > CRD IV end point
298
Market risk drivers – definitions and quantification
The RWA movement by key driver for market risk combines the credit risk drivers 5 and 6 into a single driver called
‘Movements in risk levels’. The market risk RWA driver called ‘Foreign exchange movements and other’ includes
foreign exchange movements and additional items which can not be reasonably assigned to any of the other drivers.
Basis of preparation of the estimated effect of the CRD IV end point applied to the 31 December
2012 position.
(Unaudited)
The table on page 289 presents a reconciliation of our reported core tier 1 and RWA position at 31 December 2012 to
the pro-forma estimated CET1 and estimated RWAs based on the Group’s interpretation of the draft July 2011
CRD IV legislation and/or guidance provided by the FSA and, in lieu of guidance, our current expectation of how
these draft 2011 rules will be updated by subsequent EU deliberations.
CRD IV has not yet become law and its provisions are subject to on-going negotiation and amendment. In addition,
formal Implementing Technical Standards (‘ITS’) due for issue by the EBA are still to be drafted and finalised,
leaving the CRD IV rules subject to significant interpretation. Despite the uncertainty around a number of areas
in the rules, our disclosures are based on the draft July 2011 CRD IV text. Pending finalisation of CRD IV, we have
not definitively upgraded the models and systems used to calculate capital numbers in a CRD IV environment which,
as a consequence, are subject to change. Consequently, the final CRD IV impact on the Group’s CET1 and RWAs
may be different from our current estimates.
The detailed basis of preparation is described below for items that are different from our current treatment under
Basel II. For individual immaterial holdings in banks, financial institutions and insurance that are, in aggregate,
above 10% of the Group’s CET1 capital, we have included specific short term management actions that could be
taken to negate the capital deduction. For other CRD IV proposals, additional management actions could also be
taken dependent upon the finalised rules and timing of implementation but, as such, have not been included.
Regulatory adjustments applied to core tier 1 in respect of amounts subject to CRD IV treatment
Investments in own shares through the holding of composite products of which HSBC is a component
(exchange traded funds, derivatives, and index stock): the value of our holdings of own CET1 instruments,
where it is not already deducted under IFRSs, is deducted from CET1. Under CRD IV, deduction comprises not only
direct but also indirect, actual and contingent, banking and trading book gross long positions. Trading book positions
are calculated net of short positions only where there is no counterparty credit risk on these short positions (this
restriction does not apply to index positions). We have not recognised the benefit of non-index short positions, even
where they are executed with central counterparties or are fully collateralised. Under current rules, there is no
regulatory adjustment made on the amounts already deducted under IFRS rules.
Surplus non-controlling interest disallowed in CET1: non-controlling interests arising from the issue of common
shares by our banking subsidiaries receive limited recognition. The excess over a minimum of 7% of the CET1 of the
relevant subsidiary is not allowable in the Group’s CET1 to the extent it is attributable to minority shareholders.
Under current rules, there is no regulatory restriction applied to these items.
Unrealised gains/(losses) on available-for-sale debt securities: under CRD IV, there is no adjustment to remove
from CET1 capital unrealised gains and losses on available-for-sale debt securities. Under current FSA rules, these
are removed from capital (net of tax).
Unrealised gains on available-for-sale equities and reserves arising from revaluation of property: there is no
adjustment for unrealised gains and losses on reserves arising from the revaluation of property and on available-for-
sale equities. Under current FSA rules, unrealised net gains on these items are included in tier 2 capital (net of
deferred tax) and net losses are deducted from tier 1 capital.
Defined benefit pension fund liabilities: the amount of retirement benefit liabilities as reported on the balance sheet
is fully recognised in CET1 rather than being replaced by any committed funding plans as current FSA rules permit.
Excess of expected losses over impairment allowances deducted 100% from CET1: the amount of excess
expected loss over impairment allowance is deducted 100% from CET1. Under current FSA rules, this amount is
deducted 50% from core tier 1 (‘CT1’) and 50% from total capital.