HSBC 2010 Annual Report Download - page 313

311
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Global Banking and Markets fair value adjustments
At 31 December
2010 2009
US$m US$m
Type of adjustment
Risk-related ............................................................................................................................................... 2,171 2,955
Bid-offer ............................................................................................................................................... 620 528
Uncertainty ........................................................................................................................................... 136 223
Credit risk adjustment .......................................................................................................................... 1,355 2,172
Other ..................................................................................................................................................... 60 32
Model-related ............................................................................................................................................ 389 457
Model limitation ................................................................................................................................... 383 391
Other ..................................................................................................................................................... 6 66
Inception profit (Day 1 P&L reserves) (Note 20) .................................................................................... 250 260
2,810 3,672
The most significant fair value adjustment movement related to the release of US$490m of credit risk adjustments
held for monoline insurers of which US$336m resulted from commutations. The commutations did not result
in a material gain or loss. The remainder of the decrease in the credit risk adjustment derived primarily from
commutations or restructures with non-monoline counterparties and internal credit rating upgrades of certain
counterparties.
Risk-related adjustments
Bid-offer
IAS 39 requires that portfolios are marked at bid or offer, as appropriate. Valuation models will typically generate
mid market values. The bid-offer adjustment reflects the cost that would be incurred if substantially all residual net
portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the actual
position.
Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be
more subjective. In these circumstances, there exists a range of possible values that the financial instrument or market
parameter may assume and an adjustment may be necessary to reflect the likelihood that in estimating the fair value
of the financial instrument, market participants would adopt rather more conservative values for uncertain parameters
and/or model assumptions than those used in the valuation model.
Credit risk adjustment
The credit risk adjustment is an adjustment to the valuation of OTC derivative contracts to reflect within fair value
the possibility that the counterparty may default and HSBC may not receive the full market value of the transactions.
Model-related adjustments
Model limitation
Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture
all material market characteristics. Additionally, markets evolve, and models that were adequate in the past may
require development to capture all material market characteristics in current market conditions. In these
circumstances, model limitation adjustments are adopted. As model development progresses, model limitations are
addressed within the valuation models and a model limitation adjustment is no longer needed.
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted where the fair value estimated by a valuation model is based on one or more
significant unobservable inputs. The accounting for inception profit adjustments is discussed on page 254. An
analysis of the movement in the deferred Day 1 P&L reserve is provided on page 324.