HSBC 2012 Annual Report Download - page 272

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Market risk / Operational risk
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HSBC Holdings
(Audited)
As a financial services holding company, HSBC Holdings has limited market risk activity. Its activities
predominantly involve maintaining sufficient capital resources to support the Group’s diverse activities; allocating
these capital resources across our businesses; earning dividend and interest income on its investments in our
businesses; providing dividend payments to HSBC Holdings’ equity shareholders and interest payments to providers
of debt capital; and maintaining a supply of short-term cash resources. It does not take proprietary trading positions.
The main market risks to which HSBC Holdings is exposed are interest rate risk and foreign currency risk. Exposure
to these risks arises from short-term cash balances, funding positions held, loans to subsidiaries, investments in long-
term financial assets and financial liabilities including debt capital issued. The objective of HSBC Holdings’ market
risk management strategy is to reduce exposure to these risks and minimise volatility in economic income, cash flows
and distributable reserves. Market risk for HSBC Holdings is monitored by HSBC Holdings ALCO, which reviews
foreign exchange VAR, repricing gap and net interest income and EVE sensitivities on a monthly basis.
HSBC Holdings has entered into a number of cross-currency swaps to manage the market risk arising on certain
long-term debt capital issues for which hedge accounting has not been applied. Changes in the market values of these
swaps are recognised directly in the income statement. HSBC Holdings expects that these swaps will be held to final
maturity with the accumulated changes in market value consequently trending to zero.
Certain loans to subsidiaries of a capital nature that are not denominated in the functional currency of either the
provider or the recipient are accounted for as financial assets. Changes in the carrying amount of these assets due to
exchange differences are taken directly to the income statement. These loans, and the associated foreign exchange
exposures, are eliminated on a Group consolidated basis.
Operational risk
(Unaudited)
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.
Operational risk is organised as a specific risk discipline within Group Risk, and a formal governance structure
provides oversight over its management. The Group Operational Risk function reports to the Group Chief Risk
Officer and supports the Global Operational Risk and Control Committee. It is responsible for establishing and
maintaining the operational risk management framework (‘ORMF’), monitoring the level of operational losses and
the effectiveness of the control environment. It is also responsible for operational risk reporting at Group level,
including the preparation of reports for consideration by the Risk Management Meeting and Group Risk Committee.
The Global Operational Risk and Control Committee meets at least quarterly to discuss key risk issues and review
the effective implementation of the ORMF.
The ORMF defines minimum standards and processes and the governance structure for the management of
operational risk and internal control in our geographical regions, global businesses and global functions. The ORMF
has been codified in a high level standards manual supplemented with detailed policies, which describe our approach
to identifying, assessing, monitoring and controlling operational risk and give guidance on mitigating action to be
taken when weaknesses are identified.
Business managers throughout the Group are responsible for maintaining an acceptable level of internal control,
commensurate with the scale and nature of operations, and for identifying and assessing risks, designing controls and
monitoring the effectiveness of these controls. The ORMF 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 and
control self-assessments are input and maintained by business units. Business and functional management and
Business Risk and Control Managers monitor the progress of documented action plans to address shortcomings. 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, and to aggregate all other
operational risk losses under US$10,000. Losses are entered into the operational risk system and are reported to the
Group Operational Risk function quarterly.
For further details, see the Pillar 3 Disclosures 2012 report, page 61.