HSBC 2010 Annual Report Download - page 99

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
We do 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.
Derivatives
The International Swaps and Derivatives Association
(‘ISDA’) Master Agreement is our preferred
agreement for documenting derivatives activity. It
provides the contractual framework within which
dealing activity across a full range of OTC 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 our 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 counterparty risk
inherent in outstanding positions. The majority of
our CSAs are with financial institutional clients.
The derivative offset amount in the above table
relates to exposures where the counterparty has an
offsetting derivative exposure with HSBC, a master
netting arrangement is in place and the credit risk
exposure is managed on a net basis, or the position is
specifically collateralised, normally in the form of
cash. At 31 December 2010, the total amount of such
offsets was US$197.5bn (2009: US$189.6bn), of
which US$178.3bn (2009: US$168.5bn) were offsets
under a master netting arrangement, US$19.0bn
(2009: US$21.0bn) were collateral received in cash
and US$0.2bn (2009: US$0.1bn) were other
collateral. These amounts do not qualify for net
presentation for accounting purposes, as settlement
may not actually be made on a net basis.
Treasury, other eligible bills and debt securities
Debt securities, treasury and other eligible bills are
generally unsecured except for asset-backed
securities (‘ABS’) and similar instruments, which
are secured by pools of financial assets.
Items in the course of collection from other banks
Settlement risk arises in any situation where a
payment in cash, securities or equities is made in the
expectation of a corresponding receipt of cash,
securities or equities. Daily settlement limits are
established for counterparties to cover the aggregate
of our transactions with each one on any single day.
We substantially mitigate settlement risk on
many transactions, particularly those involving
securities and equities, by settling through assured
payment systems or on a delivery-versus-payment
basis.
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. We use a number of controls
and measures to minimise undue concentration of
exposure in our portfolios across industry, country
and customer groups. These include portfolio and
counterparty limits, approval and review controls,
and stress testing.
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. We use a range of procedures
to monitor and control wrong-way risk, including
requiring entities to obtain prior approval before
undertaking wrong-way risk transactions outside
pre-agreed guidelines.
Securities held for trading
(Unaudited)
A detailed analysis of securities held for trading is
set out in Note 15 on the Financial Statements and an
analysis of credit quality is provided on page 114.
Debt securities, treasury and other eligible bills
(Unaudited)
HSBC’s holdings of corporate debt, ABS and other
securities were spread across a wide range of issuers
and geographical regions, with 25% invested in
securities issued by banks and other financial
institutions. A more detailed analysis of financial
investments is set out in Note 21 on the Financial
Statements and an analysis by credit quality is
provided on page 114.
At 31 December 2010, our insurance businesses
held diversified portfolios of debt and equity
securities designated at fair value (2010: US$28bn;
2009: US$25bn) and debt securities classified as
financial investments (2010: US$38bn; 2009:
US$35bn). A more detailed analysis of securities
held by the insurance businesses is set out on
page 162.