HSBC 2012 Annual Report Download - page 455

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Overview
Operating & Financial Review
Corporate Governance
Financial Statements
Shareholder Information
transactions, HSBC employs the same credit risk management framework to assess and approve potential credit
exposures that is used for traditional lending.
Trading derivatives
Most of HSBC’s derivative transactions relate to sales and trading activities. Sales activities include the structuring
and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or
expected risks. Trading activities in derivatives are entered into principally for the purpose of generating profits from
short-term fluctuations in price or margin and for the risk management of exposure arising from customer activities.
Positions may be traded actively or be held over a period of time to benefit from expected changes in exchange rates,
interest rates, equity prices or other market parameters. Trading includes market-making, positioning and arbitrage
activities. Market-making entails quoting bid and offer prices to other market participants for the purpose of
generating revenues based on spread and volume; positioning means managing market risk positions in the
expectation of benefiting from favourable movements in prices, rates or indices; arbitrage involves identifying and
profiting from price differentials between markets and products.
As mentioned above, other derivatives classified as held for trading include non-qualifying hedging derivatives,
ineffective hedging derivatives and the components of hedging derivatives that are excluded from assessing hedge
effectiveness. Non-qualifying hedging derivatives are entered into for risk management purposes but do not meet the
criteria for hedge accounting. Trading derivatives also include derivatives managed in conjunction with financial
instruments designated at fair value.
Gains and losses from changes in the fair value of derivatives, including the contractual interest, that do not qualify
for hedge accounting are reported in ‘Net trading income’ except for derivatives managed in conjunction with
financial instruments designated at fair value, where gains and losses are reported in ‘Net income from financial
instruments designated at fair value’ together with the gains and losses on the economically hedged items. Where the
derivatives are managed with debt securities in issue, the contractual interest is shown in ‘Interest expense’ together
with the interest payable on the issued debt. Substantially all of HSBC Holdings’ derivatives entered into with HSBC
undertakings are managed in conjunction with financial liabilities designated at fair value.
The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions
outstanding at the balance sheet date; they do not represent amounts at risk. The 9% increase in the notional contract
amounts of HSBC’s derivatives during 2012 was primarily driven by an increase in the trading volumes of interest
rate contracts.
Notional contract amounts of derivatives held for trading purposes by product type
HSBC HSBC Holdings
At
31 December
2012
At
31 December
2011
At
31 December
2012
At
31 December
2011
US$m US$m US$m US$m
Foreign exchange .......................................................................... 4,435,729 3,945,774 17,576 18,942
Interest rate ................................................................................... 21,355,749 19,788,710 11,554 10,954
Equity ............................................................................................ 495,668 265,577 – –
Credit ............................................................................................ 901,507 1,049,147 – –
Commodity and other ................................................................... 80,219 76,487 – –
27,268,872 25,125,695 29,130 29,896
Credit derivatives
HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad
range of users, structuring transactions to produce risk management products for its customers, or making markets in
certain products. Risk is typically controlled through entering into offsetting credit derivative contracts with other
counterparties.
HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related
credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives
is restricted to a small number of offices within the major centres which have the control infrastructure and market
skills to manage effectively the credit risk inherent in the products.