HSBC 2010 Annual Report Download - page 366

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
43 – Special purpose entities / 44 – Legal proceedings, investigations and regulatory matters
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letters of indemnity provided in 2008 have all expired. At all times the funds continued to be governed by their
prospectuses.
In December 2010, management determined that it would not provide similar support in the future in the light of changes in
the application of banking regulations. As a result, any presumption of ongoing support caused by past actions is no longer
valid and it is not appropriate to continue to consolidate the CNAV funds.
The effect of deconsolidating the CNAV funds on HSBC’s balance sheet was to derecognise US$44.4bn of assets and
US$43.9bn of liabilities. The deconsolidation of the CNAV funds did not have a material impact on HSBC’s consolidated
income statement for the year ended 31 December 2010.
HSBC’s maximum exposure to the CNAV funds is represented by HSBC’s investment in the units of the funds which
at 31 December 2010 amounted to US$0.5bn (2009: US$1.0bn). Investments in units of the funds are included within
‘Trading assets’. Prior to deconsolidation, the interest income from the CNAV funds and the expense payable to third-party
holders of units in the funds were presented within ‘Net interest income on trading activities’.
HSBC’s maximum exposure to money market funds is represented by HSBC’s investment in the units of each fund, which
at 31 December 2010 amounted to US$1.1bn (2009: US$1.8bn).
Non-money market investment funds
HSBC has established a large number of non-money market investment funds to enable customers to invest in a range
of assets, typically equities and debt securities.
HSBC’s maximum exposure to non-money market investment funds is represented by its investment in the units of
each fund which at 31 December 2010 amounted to US$8.6bn (2009: US$6.8bn).
Other
HSBC also establishes SPEs in the normal course of business for a number of purposes, for example, structured credit
transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and
structured finance transactions.
In certain transactions HSBC is exposed to risk often referred to as gap risk. Gap risk typically arises in transactions
where the aggregate potential claims against the SPE by HSBC pursuant to one or more derivatives could be greater
than the value of the collateral held by the SPE and securing such derivatives. HSBC often mitigates such gap risk by
incorporating in the SPE transaction features which allow for deleveraging, a managed liquidation of the portfolio, or
other mechanisms including trade restructuring or unwinding the trade. Following the inclusion of such risk reduction
mechanisms, HSBC has, in certain circumstances, retained all or a portion of the underlying exposure in the
transaction. In these circumstances, HSBC assesses whether the exposure retained causes a requirement under IFRSs
to consolidate the SPE. When this retained exposure represents ABSs, it has been included in ‘Nature of HSBC’s
exposures’ on page 129.
Third-party sponsored SPEs
Through standby liquidity facility commitments, HSBC has exposure to third-party sponsored SIVs, conduits and
securitisations under normal banking arrangements on standard market terms. These exposures are not considered
significant to HSBC’s operations.
Additional off-balance sheet arrangements and commitments
Additional off-balance sheet commitments such as financial guarantees, letters of credit and commitments to lend are
disclosed in Note 41.
Leveraged finance transactions
Loan commitments in respect of leveraged finance transactions are accounted for as derivatives where it is HSBC’s
intention to sell the loan after origination. Further information is provided on pages 138 and 139.