HSBC 2012 Annual Report Download - page 447

445
Overview
Operating & Financial Review
Corporate Governance
Financial Statements
Shareholder Information
Reflected in profit or loss
Reflected in other
comprehensive income
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
US$m US$m US$m US$m
At 31 December 2011
Derivatives, trading assets and trading liabilities1 ........................ 369 (436) – –
Financial assets and liabilities designated at fair value ................ 72 (72) – –
Financial investments: available for sale ..................................... – – 814 (818)
441 (508) 814 (818)
1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial
instruments are risk-managed.
In derivatives, trading assets and trading liabilities greater pricing certainty has arisen during the year in respect of
legacy structured credit assets, as narrowing credit spreads have reduced exposures. This has been offset by greater
pricing uncertainty in some other areas, most notably in certain interest rate derivative products and the pricing of the
derivative representing the forward sale of Ping An.
The reduction in pricing uncertainty in available-for-sale securities reflects greater liquidity in the ABS market.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
Reflected in profit or loss
Reflected in other
comprehensive income
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
US$m US$m US$m US$m
At 31 December 2012
Private equity investments ............................................................ 62 (62) 353 (353)
Asset-backed securities ................................................................ 41 (27) 143 (139)
Loans held for securitisation ........................................................ 3 (3) – –
Structured notes ............................................................................ 4 (5) – –
Derivatives with monolines .......................................................... 36 (20) – –
Other derivatives ........................................................................... 320 (267) – –
Other portfolios ............................................................................. 40 (41) 184 (218)
506 (425) 680 (710)
At 31 December 2011
Private equity investments ............................................................ 123 (83) 451 (451)
Asset-backed securities ................................................................ 3 (3) 183 (175)
Loans held for securitisation ........................................................ 4 (4) – –
Structured notes ............................................................................ 6 (6) – –
Derivatives with monolines .......................................................... 76 (178) – –
Other derivatives ........................................................................... 145 (154) – –
Other portfolios ............................................................................. 84 (80) 180 (192)
441 (508) 814 (818)
Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result
of varying the levels of the unobservable parameters using statistical techniques. When parameters are not amenable
to statistical analysis, quantification of uncertainty is judgemental.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table
reflects the most favourable or most unfavourable change from varying the assumptions individually.
In respect of private equity investments, in many of the methodologies, the principal assumption is the valuation
multiple to be applied to the main financial indicators. This may be determined with reference to multiples for
comparable listed companies and includes discounts for marketability.
For ABSs, the principal assumptions in the models are based on benchmark information about prepayment speeds,
default rates, loss severities and the historical performance of the underlying assets.
For leveraged finance, loans held for securitisation and derivatives with monolines, the principal assumption concerns
the appropriate value to be attributed to the counterparty credit risk. This requires estimation of exposure at default,
probability of default and recovery in the event of default. For loan transactions, assessment of exposure at default is
straightforward. For derivative transactions, a future exposure profile is generated on the basis of current market data.