HSBC 2009 Annual Report Download - page 210

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Credit risk > Credit exposure > Maximum exposure / Concentration of exposure
208
Derivatives
The International Swaps and Derivatives Association
(‘ISDA’) Master Agreement is HSBC’s preferred
agreement for documenting derivatives activity. It
provides the contractual framework within which
dealing activity across a full range of over-the-
counter products is conducted, and contractually
binds both parties to apply close-out netting across
all outstanding transactions covered by an agreement
if either party defaults or another pre-agreed
termination event occurs. It is common, and HSBC’s
preferred practice, for the parties to execute a Credit
Support Annex (‘CSA’) in conjunction with the
ISDA Master Agreement. Under a CSA, collateral is
passed between the parties to mitigate the market-
contingent counterparty risk inherent in outstanding
positions.
Loans and advances
It is HSBC’s policy, when lending, to do so on the
basis of the customer’s capacity to repay, rather than
rely primarily on the value of security offered.
Depending on the customer’s standing and the type
of product, facilities may be provided unsecured.
Whenever available, collateral can be an important
mitigant of credit risk.
The guidelines applied by operating companies
in respect of the acceptability of specific classes
of collateral or credit risk mitigation and the
determination of valuation parameters are subject to
regular review to ensure that they are supported by
empirical evidence and continue to fulfil their
intended purpose. The principal collateral types
employed by HSBC are as follows:
• in the personal sector, mortgages over
residential properties;
• in the commercial and industrial sector, charges
over business assets such as premises, stock and
debtors;
• in the commercial real estate sector, charges
over the properties being financed; and
• in the financial sector, charges over financial
instruments such as cash, debt securities and
equities in support of trading facilities.
In addition, credit derivatives, including credit
default swaps and structured credit notes, and
securitisation structures are used to hedge or transfer
credit risk within the Group’s loan portfolio.
HSBC does not disclose the fair value of
collateral held as security or other credit
enhancements on loans and advances past due but
not impaired, or on individually assessed impaired
loans and advances, as it is not practicable to do so.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number
of counterparties or exposures have comparable
economic characteristics, or such counterparties are
engaged in similar activities or operate in the same
geographical areas or industry sectors, so that their
collective ability to meet contractual obligations is
uniformly affected by changes in economic, political
or other conditions. Wrong-way risk is an aggravated
form of concentration risk and arises when there is a
strong correlation between the counterparty’s
probability of default and the mark-to-market value
of the underlying transaction. Wrong-way risk can
be seen in the following examples:
• when the counterparty is resident and/or
incorporated in an emerging market and seeks to
sell a non-domestic currency in exchange for its
home currency;
• when the trade involves the purchase of an
equity put option from a counterparty whose
shares are the subject of the option;
• the purchase of credit protection from a
counterparty who is closely associated with the
reference entity of the credit default swap or
total return swap; and
• the purchase of credit protection on an asset
type which is highly concentrated in the
exposure of the counterparty selling the credit
protection.
HSBC uses a range of tools to monitor and
control wrong-way risk, including requiring entities
to obtain prior approval before undertaking wrong-
way risk transactions outside pre-agreed guidelines.
The Credit Risk Management functions undertake
control and monitoring processes and a regular
meeting of a committee comprising senior
management from Global Markets, Credit, Market
Risk Management and Finance is responsible for
reviewing and actively managing wrong-way risk,
including allocating capital.
Securities held for trading
(Unaudited)
Total securities held for trading within trading assets
were US$259 billion at 31 December 2009 (2008:
US$254 billion). The largest concentration of these
assets was government and government agency
securities, which amounted to US$135 billion, or
52 per cent of overall trading securities (2008: