HSBC 2015 Annual Report Download - page 212

Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
HSBC HOLDINGS PLC
210
Additional information
The amount of assets pledged to secure liabilities reported in Note 18 on the Financial Statements may be greater than the
book value of assets reported as being encumbered in the table on page 163. Examples of where such differences occur are:
• ABSs and covered bonds, where the amount of liabilities issued plus the required mandatory over-collateralisation is lower
than the book value of assets pledged to the pool. Any difference is categorised in the table above as ‘Unencumbered –
readily realisable assets’;
• negotiable securities held by custodians or settlement agents, where a floating charge has been given over the entire
holding to secure intra-day settlement liabilities, are only reported as encumbered to the extent that we have a liability to
the custodian or settlement agent at the reporting date, with the balance reported as ‘Unencumbered – readily realisable
assets’; and
• assets pre-positioned with central banks or government agencies are only reported as encumbered to the extent that we
have secured funding with the collateral. The unutilised pre-positioned collateral is reported as ‘Unencumbered – readily
realisable assets’.
Securities reflected on the balance sheet that are pledged as collateral against an existing liability or lent are reflected as
encumbered for the duration of the transaction. When securities are received as collateral or borrowed, and when we have
the right to sell or re-pledge these securities, they are reflected as available and unencumbered for the duration of the
transaction, unless re-pledged or sold. Further analysis regarding the encumbrance of securities resulting from repos and stock
lending and available unencumbered assets arising from reverse repos and stock borrowing is provided under the heading
‘Encumbered and unencumbered assets’ on page 162.
In the normal course of business we do not seek to utilise repo financing as a source of funding to finance customer assets,
beyond the collateralised security financing activities within Markets described above.
The original contractual maturity of reverse repo, stock borrowing, repo and stock lending is short term with the vast majority
of transactions being for less than 90 days.
Management of cross-currency liquidity and funding risk
Our liquidity and funding risk framework also considers the ability of each entity to continue to access foreign exchange
markets under stress when a surplus in one currency is used to meet a deficit in another currency, for example, by the use of
the foreign currency swap markets. Where appropriate, operating entities are required to monitor stressed coverage ratios
and advances to core funding ratios for non-local currencies.
HSBC Holdings
HSBC Holdings’ primary sources of cash are dividends received from subsidiaries, interest on and repayment of intra-group
loans and securities with interest earned on its own liquid funds. HSBC Holdings also raises ancillary funds in the debt capital
markets through subordinated and senior debt issuance. Cash is primarily used for the provision of capital and TLAC funding to
subsidiaries, interest payments to debt holders and dividend payments to shareholders.
HSBC Holdings is also subject to contingent liquidity risk by virtue of credit-related commitments and guarantees and similar
contracts issued. Such commitments and guarantees are only issued after due consideration of HSBC Holdings’ ability to
finance the commitments and guarantees and the likelihood of the need arising.
HSBC Holdings actively manages the cash flows from its subsidiaries to optimise the amount of cash held at the holding
company level. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other
things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial
and operating performance. During 2015, none of the Group’s subsidiaries experienced significant restrictions on paying
dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged by our subsidiaries on paying
dividends or repaying loans and advances, with the exception of HSBC North America Holdings Inc. None of the subsidiaries
which are excluded from our regulatory consolidation has capital resources below its minimum regulatory requirement.
Market risk
Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity
prices and commodity prices, will reduce our income or the value of our portfolios.