HSBC 2010 Annual Report Download - page 154

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Market risk > HSBC Holdings
152
HSBC Holdings
(Audited)
As a financial services holding company, HSBC
Holdings has limited market risk activity. Its
activities predominantly involve maintaining
sufficient capital resources to support the Group’s
diverse activities; allocating these capital resources
across our businesses; earning dividend and interest
income on its investments in our businesses;
providing dividend payments to HSBC Holdings’
equity shareholders and interest payments to
providers of debt capital; and maintaining a supply
of short-term cash resources. It does not take
proprietary trading positions.
The main market risks to which HSBC Holdings
is exposed are interest rate risk and foreign currency
risk. Exposure to these risks arises from short-term
cash balances, funding positions held, loans to
subsidiaries, investments in long-term financial
assets and financial liabilities including debt capital
issued. The objective of HSBC Holdings’ market
risk management strategy is to reduce exposure to
these risks and minimise volatility in economic
income, cash flows and distributable reserves.
Market risk for HSBC Holdings is monitored by the
Holdings ALCO (formerly the Structural Positions
Review Group).
HSBC Holdings has entered into a number of
cross-currency swaps to manage the market risk
arising on certain long-term debt capital issues for
which hedge accounting has not been applied.
Changes in the market values of these swaps are
recognised directly in the income statement. HSBC
Holdings expects that these swaps will be held to
final maturity with the accumulated changes in
market value consequently trending to zero.
Certain loans to subsidiaries of a capital nature
that are not denominated in the functional currency
of either the provider or the recipient are accounted
for as financial assets. Changes in the carrying
amount of these assets due to exchange differences
are taken directly to the income statement. These
loans, and the associated foreign exchange exposures,
are eliminated on a Group consolidated basis.
The principal tools used in the management of
market risk are the projected sensitivity of HSBC
Holdings’ net interest income to future changes in
yield curves and interest rate gap re-pricing tables
for interest rate risk, and VAR for foreign exchange
rate risk.
Sensitivity of net interest income
(Unaudited)
HSBC Holdings monitors net interest income
sensitivity over a 5-year time horizon reflecting
the longer-term perspective on interest rate risk
management appropriate to a financial services
holding company. The table below sets out the effect
on HSBC Holdings’ future net interest income over a
5-year time horizon of incremental 25 basis point
parallel falls or rises in all yield curves worldwide at
the beginning of each quarter during the 12 months
from 1 January 2011.
Sensitivity of HSBC Holdings’ net interest income to interest rate movements73
(Unaudited)
US dollar
bloc
Sterling
bloc
Euro
bloc Total
Change in projected net interest income as at 31 December
arising from a shift in yield curves
US$m US$m US$m US$m
2010
of + 25 basis points at the beginning of each quarter
0-1 year ................................................................................. (6) 19 11 24
2-3 years ............................................................................... (56) 75 62 81
4-5 years ............................................................................... (79) 71 58 50
of – 25 basis points at the beginning of each quarter
0-1 year ................................................................................. 6 (19) (11) (24)
2-3 years ............................................................................... 56 (75) (62) (81)
4-5 years ............................................................................... 79 (71) (58) (50)
2009
of + 25 basis points at the beginning of each quarter
0-1 year ................................................................................. (13) 18 11 16
2-3 years ............................................................................... (172) 75 19 (78)
4-5 years ............................................................................... (165) 105 6 (54)
of – 25 basis points at the beginning of each quarter
0-1 year ................................................................................. 12 (18) (11) (17)
2-3 years ............................................................................... 172 (75) (19) 78
4-5 years ............................................................................... 165 (105) (6) 54
For footnote, see page 174.