HSBC 2015 Annual Report Download - page 143

HSBC HOLDINGS PLC
141
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Other credit risk exposures
In addition to collateralised lending, other credit
enhancements are employed and methods used to
mitigate credit risk arising from financial assets. These
are described in more detail below:
• some securities issued by governments, banks and other
financial institutions benefit from additional credit
enhancement provided by government guarantees
that cover the assets.
• debt securities issued by banks and financial institutions
include ABSs and similar instruments which are supported
by underlying pools of financial assets. Credit risk
associated with ABSs is reduced through the purchase
of credit default swap (‘CDS’) protection.
Disclosure of the Group’s holdings of ABSs and associated CDS
protection is provided on page 153.
• trading assets include loans and advances held
with trading intent. These mainly consist of cash
collateral posted to satisfy margin requirements on
derivatives, settlement accounts, reverse repos and
stock borrowing. There is limited credit risk on cash
collateral posted since in the event of default of the
counterparty these would be set-off against the related
liability. Reverse repos and stock borrowing are by their
nature collateralised.
Collateral accepted as security that the Group is permitted
to sell or repledge under these arrangements is described on
page 162 on the Financial Statements.
• the Group’s maximum exposure to credit risk includes
financial guarantees and similar contracts granted, as
well as loan and other credit-related commitments.
Depending on the terms of the arrangement, we may
have recourse to additional credit mitigation in the
event that a guarantee is called upon or a loan
commitment is drawn and subsequently defaults.
For further information on these arrangements, see Note 37
on the Financial Statements.
Derivatives
HSBC participates in transactions exposing us to
counterparty credit risk. Counterparty credit risk is the
risk of financial loss if the counterparty to a transaction
defaults before satisfactorily settling it. It arises principally
from OTC derivatives and securities financing transactions
and is calculated in both the trading and non-trading books.
Transactions vary in value by reference to a market factor
such as interest rate, exchange rate or asset price.
The counterparty risk from derivative transactions is taken
into account when reporting the fair value of derivative
positions. The adjustment to the fair value is known as the
credit value adjustment (‘CVA’).
For an analysis of CVA, see Note 13 on the Financial Statements.
The table below reflects by risk type the fair values and
gross notional contract amounts of derivatives cleared
through an exchange, central counterparty and non-central
counterparty.