HSBC 2008 Annual Report Download - page 185

183
Structured credit transactions
HSBC provides structured credit transactions to
third-party professional and institutional investors
who wish to obtain exposure, sometimes on a
leveraged basis, to a reference portfolio of debt
instruments. In such structures, the investor receives
returns referenced to the underlying portfolio by
purchasing notes issued by the SPEs. HSBC enters
into contracts with the SPEs, generally in the form of
derivatives, in order to pass the required risks and
rewards of the reference portfolios to the SPEs.
HSBC’s risk in relation to the derivative contracts
with the SPEs is managed within HSBC’s trading
market risk framework (see ‘Market risk’ on
page 241). In certain transactions HSBC is exposed
to risk often referred to as gap risk. Gap risk
typically arises in transactions where the aggregate
potential claims against the SPE by HSBC pursuant
to one or more derivatives could be greater than the
value of the collateral held by the SPE and securing
such derivatives. HSBC often mitigates such gap risk
by incorporating in the SPE transaction features
which allow for deleveraging, a managed liquidation
of the portfolio, or other mechanisms. Following the
inclusion of such risk reduction mechanisms, HSBC
has, in certain circumstances, retained all or a
portion of the underlying exposure in the transaction.
When this retained exposure represents ABSs, it has
been included in ‘Nature and extent of HSBC’s
exposures’ on page 150.
Often, transactions are facilitated through SPEs
to enable the notes issued to the investors to be rated.
The SPEs are not consolidated by HSBC because the
investors bear substantially all the risks and rewards
of ownership through the notes.
The total fair value of liabilities (notes issued
and derivatives) in structured credit transaction
SPEs was US$21.2 billion at 31 December 2008
(2007: US$23.6 billion). These amounts included
US$0.3 billion (2007: US$0.1 billion) in SPEs that
were consolidated by HSBC.
Other uses of SPEs
HSBC participates in Public-Private Partnerships to
provide financial support for infrastructure projects
initiated by government authorities. The funding
structure is commonly achieved through the use of
SPEs. HSBC consolidates these SPEs when it is
exposed to the majority of risks and rewards of the
vehicles.
HSBC’s ASF business specialises in leasing and
arranging finance for aircraft and other physical
assets, which it is customary to ring-fence through
the use of SPEs, and in structured loans and deposits,
where SPEs introduce cost efficiencies. HSBC
consolidates these SPEs when the substance of the
relationship indicates that HSBC controls the SPE.
HSBC’s risks and rewards of ownership in these
SPEs are in respect of its on-balance sheet assets and
liabilities.
HSBC’s maximum exposures to SPEs
The following tables show the total assets of the
various types of SPEs, and the amount and types of
funding provided by HSBC to these SPEs. The
tables also show HSBC’s maximum exposure to the
SPEs and, within that exposure, the types of liquidity
and credit enhancements provided by HSBC. The
maximum exposures to SPEs represent HSBC’s
maximum possible risk exposure that could occur as
a result of the Group’s arrangements and
commitments to SPEs. The maximum amounts are
contingent in nature, and may arise as a result of
drawdowns under liquidity facilities, where these
have been provided, and any other funding
commitments, or as a result of any loss protection
provided by HSBC to the SPEs. The conditions
under which such exposure might arise differ
depending on the nature of each SPE and HSBC’s
involvement with it. The aggregation of such
maximum exposures across the different forms of
SPEs results in a theoretical total maximum
exposure number. The elements of the maximum
exposure to an SPE are not necessarily additive and
a detailed explanation of how maximum exposures
are determined is provided under each category of
SPE.