HSBC 2012 Annual Report Download - page 127

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Risks Arising from Measurement, monitoring and management of risk
Market risk
The risk that movements in
market factors, including
f
oreign exchange rates and
commodity prices, interest
rates, credit spreads and
equity prices, will reduce our
income or the value of our
p
ortfolios.
Exposure to market risk is
separated into two portfolios:
• Trading portfolios comprise
positions arising from
market-making and
warehousing of customer-
derived positions
• Non-trading portfolios
comprise positions that
primarily arise from the
interest rate management of
our retail and commercial
banking assets and
liabilities, financial
investments designated as
available for sale and held
to maturity, and exposures
arising from our insurance
operations
Market risk:
• is measured in terms of value at risk, which is used to estimate
potential losses on risk positions as a result of movements in market
rates and prices over a specified time horizon and to a given level of
confidence, augmented with stress testing to evaluate the potential
impact on portfolio values of more extreme, though plausible, events
or movements in a set of financial variables;
• is monitored using measures including the sensitivity of net interest
income and the sensitivity of structural foreign exchange which are
applied to the market risk positions within each risk type; and
• is managed using risk limits approved by the GMB for HSBC
Holdings and our various global businesses. These units are allocated
across business lines and to the Group’s legal entities.
Operational risk
The risk of loss resulting from
inadequate or failed internal
p
rocesses, people and systems
or from external events,
including legal risk (along
with accounting, tax, security
and fraud, people, systems,
p
rojects, operations and
organisational change risk).
Operational risk arises from
day to day operations or
external events, and is relevant
to every aspect of our business
Operational risk:
• is measured using both the top risk analysis process and the risk
and control assessment process, which assess the level of risk and
effectiveness of controls;
• is monitored using key indicators and other internal control activities;
and
• is primarily managed by global business and functional managers.
They identify and assess risks, implement controls to manage
them and monitor the effectiveness of these controls utilising the
operational risk management framework. The Global Operational Risk
and Internal Control function is responsible for the framework and for
overseeing the management of operational risks within businesses and
functions.
Compliance risk
The risk that we fail to observe
the letter and spirit of all
relevant laws, codes, rules,
regulations and standards of
good market practice, and
incur fines and penalties and
suffer damage to our business
as a consequence.
Compliance risk is part of
operational risk, and arises
from rules, regulations, other
standards and Group policies,
including those relating to
anti-money laundering, anti-
bribery and corruption,
conduct of business, counter-
terrorist financing and
sanctions compliance.
Compliance risk:
• is measured by reference to identified metrics, incident assessments
(whether affecting HSBC or the wider industry), regulatory feedback
and the judgement and assessment of the managers of our global
businesses and functions;
• is monitored against our compliance risk assessments and metrics, the
results of the monitoring and control activities of the second line of
defence functions, including the Global Compliance function, and the
results of internal and external audits and regulatory inspections; and
• is managed by establishing and communicating appropriate policies
and procedures, training employees in them, and monitoring activity
to assure their observance. Proactive risk control and/or remediation
work is undertaken where required.
Insurance risk
The risk that over time, the
combined cost of acquiring
and administering a contract,
claims and benefits may
exceed the aggregate amount
of premiums received and
investment income.
Insurance risk arises from
mortality and morbidity
experience. Lapse and
surrender rates and if, the
policy has a savings element,
the performance of the assets
held to support the liabilities
also impact the cost of claims
and benefits. The performance
of assets supporting insurance
liabilities depends on financial
risks such as market, credit
and liquidity.
Insurance risk:
• is measured in terms of life insurance liabilities and non-life written
premiums for their respective contract types;
• is monitored by the Group Insurance Risk Management Committee,
which checks the risk profile of the insurance operations against a risk
appetite for insurance business agreed by the GMB; and
• is managed both centrally and locally using product design,
underwriting, reinsurance and claims-handling procedures.