HSBC 2012 Annual Report Download - page 444

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
15 – Fair values of financial instruments carried at fair value
442
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs –
Level 3
Assets Liabilities
Available
for sale
Held for
trading
Designated
at fair value
through
profit or loss Derivatives
Held for
trading
Designated
at fair value
through
profit or loss Derivatives
US$m US$m US$m US$m US$m US$m US$m
At 31 December 2012
Private equity including strategic
investments ................................... 3,582 92 377 – – – –
Asset-backed securities .................... 2,288 652 – – – – –
Loans held for securitisation ............ – 547 – – – – –
Structured notes ................................ – 23 – – 6,987 – –
Derivatives with monolines .............. – – – 630 – – –
Other derivatives ............................... – – – 2,429 – – 3,005
Other portfolios ................................. 2,641 3,064 36 – 483 – –
8,511 4,378 413 3,059 7,470 – 3,005
At 31 December 2011
Private equity including strategic
investments ................................... 4,565 88 432 – – – –
Asset-backed securities .................... 2,584 710 – – – – –
Loans held for securitisation ............ – 682 – – – – 7
Structured notes ................................ – 92 – – 7,340 – –
Derivatives with monolines .............. – – – 940 – – –
Other derivatives ............................... – – – 3,509 – – 3,122
Other portfolios ................................. 1,972 3,208 284 – 487 567 –
9,121 4,780 716 4,449 7,827 567 3,129
Private equity and strategic investments
HSBC’s private equity and strategic investments are generally classified as available for sale and are not traded in
active markets. In the absence of an active market, an investment’s fair value is estimated on the basis of an analysis
of the investee’s financial position and results, risk profile, prospects and other factors, as well as by reference to
market valuations for similar entities quoted in an active market, or the price at which similar companies have
changed ownership.
Asset-backed securities
While quoted market prices are generally used to determine the fair value of these securities, valuation models are
used to substantiate the reliability of the limited market data available and to identify whether any adjustments to
quoted market prices are required. For ABSs including residential MBSs, the valuation uses an industry standard
model and the assumptions relating to prepayment speeds, default rates and loss severity based on collateral type,
and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for
securities of a similar nature.
Loans, including leveraged finance and loans held for securitisation
Loans held at fair value are valued from broker quotes and/or market data consensus providers when available. In the
absence of an observable market, the fair value is determined using valuation techniques. These techniques include
discounted cash flow models, which incorporate assumptions regarding an appropriate credit spread for the loan,
derived from other market instruments issued by the same or comparable entities.
Structured notes
The fair value of structured notes valued using a valuation technique is derived from the fair value of the underlying
debt security, and the fair value of the embedded derivative is determined as described in the paragraph below
on derivatives.