HSBC 2007 Annual Report Download - page 185

183
Off-balance sheet arrangements and
special purpose entities
(Audited)
This section contains disclosures about off-balance
sheet arrangements and special purpose entities
(‘SPEs’) that have been included in HSBC’s
consolidated balance sheet.
Special purpose entities (including on and
off-balance sheet arrangements)
HSBC enters into certain transactions with
customers in the ordinary course of business which
involve the establishment of SPEs to facilitate
customer transactions.
HSBC structures that utilise SPEs are authorised
centrally upon establishment to ensure appropriate
purpose and governance. The activities of SPEs
administered by HSBC are closely monitored by
senior management. The use of SPEs is not a
significant part of HSBC’s activities and HSBC is
not reliant on the use of SPEs for any material part
of its business operations or profitability. HSBC’s
involvements with SPE transactions are described
below.
HSBC-sponsored vehicles
HSBC sponsors the formation of entities to
accomplish certain narrow and well-defined
objectives, such as securitisations of financial assets
or to effect a lease. HSBC consolidates these SPEs
when the substance of the relationship indicates that
HSBC controls the SPE. In assessing control, all
relevant factors need to be considered. Such factors
may have qualitative and quantitative aspects. For
example:
Qualitative factors. In substance:
• the activities of the SPE are being conducted on
behalf of HSBC according to HSBC’s specific
business needs so that it obtains benefit from the
SPE’s operation. This might be evidenced, for
example, by HSBC providing a significant level
of support to the SPE; and
• HSBC has the decision-making powers to obtain
the majority of the benefits of the activities of
the SPE.
Quantitative factors – hereinafter referred to as
‘the majority of risks and rewards of ownership’. In
substance:
• HSBC has rights to obtain the majority of the
benefits of the SPE and therefore may be
exposed to risks incidental to the activities
of the SPE; and
• HSBC retains the majority of the residual or
ownership risks related to the SPE or its assets
in order to obtain benefits from its activities.
In a number of cases, these SPEs are accounted
for off-balance sheet under IFRSs where HSBC does
not have the majority of the risks and rewards of
ownership of the SPE. However in certain
circumstances, after careful consideration of the
facts, HSBC consolidates an SPE where, although it
does not obtain the majority of risks and rewards of
ownership, the qualitative features of HSBC’s
involvement indicate that, in substance, the activities
of the SPE are being conducted on behalf of HSBC.
HSBC reassesses the required consolidation
accounting tests whenever there is a change in the
substance of a relationship between HSBC and an
SPE, for example, when there is a change in HSBC’s
involvement or there is a change in the governing
rules, contractual arrangements or capital structure
of the SPE. The most significant categories of SPEs
are discussed in more detail below.
Structured investment vehicles
Structured investment vehicles (‘SIVs’) are SPEs
which are established to invest in diversified
portfolios of interest-earning assets, generally
comprising asset-backed debt securities and other
debt securities issued by financial institutions or
corporates. SIVs are typically funded through the
issue of CP, medium-term notes or other senior debt
(collectively referred to as ‘senior debt’), repo
financing, and subordinated income or mezzanine
notes (commonly referred to as ‘capital notes’).
The sponsor of the SIV would typically provide only
limited liquidity support to the senior debt investors
through committed liquidity facilities.
SIVs are structured to provide investors with the
opportunity to invest in a range of assets depending
on their risk preference. Senior debt issued by SIVs
is structured to be highly rated and the SIVs are
managed within strict operating criteria. Liquidity in
SIVs is primarily managed by rolling over debt at
maturity or, if that is not possible, by the sale of
assets to provide protection to senior debt holders.
SIVs are typically subject to market value and net
asset value triggers which underpin the external
credit ratings of the senior debt. The liquidity risk in
SIVs is managed by controlling the maximum
cumulative cash outflow occurring in defined time
periods.
HSBC sponsored the establishment of two SIVs,
Cullinan and Asscher in August 2005 and May 2007,
respectively, which were successful in obtaining
funding from investors, who subscribed for senior