HSBC 2012 Annual Report Download - page 445

443
Overview
Operating & Financial Review
Corporate Governance
Financial Statements
Shareholder Information
Trading liabilities valued using a valuation technique with significant unobservable inputs principally comprised
equity-linked structured notes, which are issued by HSBC and provide the counterparty with a return that is linked to
the performance of certain equity securities, and other portfolios. The notes are classified as Level 3 due to the
unobservability of parameters such as long-dated equity volatilities and correlations between equity prices, between
equity prices and interest rates and between interest rates and foreign exchange rates.
Derivatives
OTC (i.e. non-exchange traded) derivatives are valued using valuation models. Valuation models calculate the
present value of expected future cash flows, based upon ‘no-arbitrage’ principles. For many vanilla derivative
products, such as interest rate swaps and European options, the modelling approaches used are standard across the
industry. For more complex derivative products, there may be some differences in market practice. Inputs to
valuation models are determined from observable market data wherever possible, including prices available from
exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market
directly, but can be determined from observable prices via model calibration procedures or estimated from historical
data or other sources. Examples of inputs that may be unobservable include volatility surfaces, in whole or in part, for
less commonly traded option products, and correlations between market factors such as foreign exchange rates,
interest rates and equity prices. The valuation of derivatives with monolines is discussed on page 189.
Derivative products valued using valuation techniques with significant unobservable inputs included certain types of
correlation products, such as foreign exchange basket options, equity basket options, foreign exchange interest rate
hybrid transactions and long-dated option transactions. Examples of the latter are equity options, interest rate and
foreign exchange options and certain credit derivatives. Credit derivatives include certain tranched CDS transactions.
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
The following table provides a reconciliation of the movement between opening and closing balances of Level 3
financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:
Movement in Level 3 financial instruments
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
2012
At 1 January ...................................... 9,121 4,780 716 4,449 7,827 567 3,129
Total gains/(losses) recognised in
profit or loss ................................. (414) 356 10 (974) 319 – 10
Total gains/(losses) recognised in
other comprehensive income1 ...... 472 78 (32) 92 143 – 84
Purchases .......................................... 1,738 942 113 – (368) – –
New issuances ................................... – – – – 2,852 – –
Sales .................................................. (840) (1,408) (69) – – – –
Settlements ........................................ (367) (617) (25) (14) (1,604) – 18
Transfers out ..................................... (2,944) (298) (350) (571) (1,901) (567) (291)
Transfers in ....................................... 1,745 545 50 77 202 – 55
At 31 December ................................ 8,511 4,378 413 3,059 7,470 – 3,005
Total gains/(losses) recognised in
profit or loss relating to assets and
liabilities held on 31 December: 166 339 9 (1,294) 384 – (395)
– net interest income ................... 44 – – – – – –
– trading income excluding
net interest income ................... – 326 –(1,294) 396 – (395)
– net interest income on
trading activities ....................... – 13 – – (12) – –
– net income from other
financial instruments
designated at fair value ............ – – 9 – – – –
– dividend income ....................... 122 – – – – – –