HSBC 2008 Annual Report Download - page 243

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Market risk
(Audited)
The objective of HSBC’s market risk management is
to manage and control market risk exposures in order
to optimise return on risk while maintaining a market
profile consistent with the Group’s status as one of
the world’s largest banking and financial services
organisations.
Market risk is the risk that movements in market
risk factors, including foreign exchange rates and
commodity prices, interest rates, credit spreads and
equity prices will reduce HSBC’s income or the
value of its portfolios.
HSBC separates exposures to market risk into
trading and non-trading portfolios. Trading portfolios
include those positions arising from market-making,
proprietary position-taking and other marked-to-
market positions so designated.
Non-trading portfolios include positions that
arise from the interest rate management of HSBC’s
retail and commercial banking assets and liabilities,
financial investments designated as available for sale
and held to maturity, and exposures arising from
HSBC’s insurance operations.
Market risk arising in HSBC’s insurance
businesses is discussed in ‘Risk management of
insurance operations’ on pages 255 to 274.
The management of market risk is principally
undertaken in Global Markets using risk limits
approved by the GMB. Limits are set for portfolios,
products and risk types, with market liquidity being
a principal factor in determining the level of limits
set. Traded Credit and Market Risk, an independent
unit within Group Management Office, develops the
Group’s market risk management policies and
measurement techniques. Each major operating
entity has an independent market risk management
and control function which is responsible for
measuring market risk exposures in accordance with
the policies defined by Traded Credit and Market
Risk, and monitoring and reporting these exposures
against the prescribed limits on a daily basis.
Each operating entity is required to assess the
market risks which arise on each product in its
business and to transfer these risks to either its local
Global Markets unit for management, or to separate
books managed under the supervision of the local
Asset and Liability Management Committee
(‘ALCO’). The aim is to ensure that all market risks
are consolidated within operations which have the
necessary skills, tools, management and governance
to manage such risks professionally. In certain cases
where the market risks cannot be adequately
captured by the transfer process, simulation
modelling is used to identify the impact of varying
scenarios on valuations and net interest income.
HSBC uses a range of tools to monitor and limit
market risk exposures. These include sensitivity
analysis, value at risk (‘VAR’) and stress testing.
Sensitivity analysis
Sensitivity measures are used to monitor the market
risk positions within each risk type, for example,
present value of a basis point movement in interest
rates, for interest rate risk. Sensitivity limits are set
for portfolios, products and risk types, with the depth
of the market being one of the principal factors in
determining the level of limits set.
Value at risk
(Audited)
VAR is a technique that estimates the potential losses
that could occur on risk positions as a result of
movements in market rates and prices over a
specified time horizon and to a given level of
confidence.
The VAR models used by HSBC are based
predominantly on historical simulation. These
models derive plausible future scenarios from past
series of recorded market rates and prices, taking
account of inter-relationships between different
markets and rates such as interest rates and foreign
exchange rates. The models also incorporate the
effect of option features on the underlying
exposures.
The historical simulation models used by HSBC
incorporate the following features:
• potential market movements are calculated with
reference to data from the past two years;
• historical market rates and prices are calculated
with reference to foreign exchange rates and
commodity prices, interest rates, equity prices
and the associated volatilities; and
• VAR is calculated to a 99 per cent confidence
level and for a one-day holding period.
HSBC routinely validates the accuracy of its
VAR models by back-testing the actual daily profit
and loss results, adjusted to remove non-modelled
items such as fees and commissions, against the
corresponding VAR numbers. Statistically, HSBC
would expect to see losses in excess of VAR only
1 per cent of the time over a one-year period. The
actual number of excesses over this period can
therefore be used to gauge how well the models are
performing.