HSBC 2010 Annual Report Download - page 156

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Operational risk > Legal risk / Compliance risk / Security risk // Risk management of insurance operations
154
Value at risk
Total foreign exchange VAR arising within HSBC
Holdings in 2010 and 2009 was as follows:
HSBC Holdings – foreign exchange VAR
(Audited)
Foreign exchange
2010
US$m
2009
US$m
At 31 December .............................. 40.4
83.2
Average ........................................... 56.6
76.6
Minimum ........................................ 40.2
55.2
Maximum ........................................ 83.2
190.8
The foreign exchange risk largely arises from
loans to subsidiaries of a capital nature that are not
denominated in the functional currency of either the
provider or the recipient and which are accounted
for as financial assets. Changes in the carrying
amount of these loans due to foreign exchange rate
differences are taken directly to HSBC Holdings’
income statement. These loans, and the associated
foreign exchange exposures, are eliminated on a
Group consolidated basis.
Operational risk
(Unaudited)
Operational risk is relevant to every aspect of our
business and covers a wide spectrum of issues.
Losses arising through fraud, unauthorised activities,
errors, omission, inefficiency, systems failure or
from external events all fall within the definition of
operational risk.
The objective of our operational risk
management is to manage and control operational
risk in a cost effective manner within targeted levels
of operational risk consistent with our risk appetite,
as defined by the GMB.
A formal governance structure provides
oversight over the management of operational risk.
A Global Operational Risk and Control Committee,
which reports to the Risk Management Meeting,
meets at least quarterly to discuss key risk issues
and review the effective implementation of our
operational risk management framework.
In each of our subsidiaries, business managers
are responsible for maintaining an acceptable level
of internal control, commensurate with the scale and
nature of operations. They are responsible for
identifying and assessing risks, designing controls
and monitoring the effectiveness of these controls.
The operational risk management framework helps
managers to fulfil these responsibilities by defining a
standard risk assessment methodology and providing
a tool for the systematic reporting of operational loss
data.
A centralised database is used to record the
results of the operational risk management process.
Operational risk self-assessments are input and
maintained by business units. To ensure that
operational risk losses are consistently reported and
monitored at Group level, all Group companies are
required to report individual losses when the net loss
is expected to exceed US$10,000.
Further details of our approach to Operational
Risk Management can be found in Pillar 3
Disclosures 2010 which is published as a separate
document on www.hsbc.com.
Legal risk
(Unaudited)
Each operating company is required to implement
procedures to manage legal risk that conform to our
standards. Legal risk falls within the definition of
operational risk and includes contractual risk,
dispute risk, legislative risk and non-contractual
rights risk.
• Contractual risk is the risk that the rights and/or
obligations of an HSBC company within a
contractual relationship are defective.
• Dispute risk consists of the risks that an HSBC
company is subject to when it is involved in or
managing a potential or actual dispute.
• Legislative risk is the risk that an HSBC
company fails to adhere to the laws of the
jurisdictions in which it operates.
• Non-contractual rights risk is the risk that an
HSBC company’s assets are not properly owned
or are infringed by others, or an HSBC company
infringes another party’s rights.
We have a global legal function to assist
management in controlling legal risk. The function
provides legal advice and support in managing
claims against our companies, as well as in respect
of non-routine debt recoveries or other litigation
against third parties.
The GMO Legal department oversees the global
legal function and is headed by the Group General
Counsel. There are legal departments in 58 of the
countries in which we operate. There are also
regional legal functions in each of Europe, North
America, Latin America, the Middle East, and
Asia-Pacific headed by Regional General Counsels.
Our operating companies must notify the
appropriate legal department immediately any
litigation is either threatened or commenced against
HSBC or an employee. Any claims which exceed
US$1.5m or equivalent must be advised to the