HSBC 2012 Annual Report Download - page 442

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
15 – Fair values of financial instruments carried at fair value
440
Global Banking and Markets fair value adjustments
At 31 December
2012 2011
US$m US$m
Type of adjustment
Risk-related ............................................................................................................................................... 2,013 1,899
Bid-offer ............................................................................................................................................... 638 695
Uncertainty ........................................................................................................................................... 142 154
Credit valuation adjustment ................................................................................................................. 1,747 1,050
Debit valuation adjustment .................................................................................................................. (518) –
Other ..................................................................................................................................................... 4 –
Model-related ............................................................................................................................................ 162 567
Model limitation ................................................................................................................................... 161 567
Other ..................................................................................................................................................... 1 –
Inception profit (Day 1 P&L reserves) (Note 19) .................................................................................... 181 200
2,356 2,666
The increase in credit valuation adjustment and debit valuation adjustment reflects a refinement in methodology,
described on page 441. The decrease in model limitation adjustments reflects the inclusion of OIS discounting within
the modelled value of many interest rate derivatives such that an adjustment is no longer required outside the model,
in addition to market movements and the unwind or maturity of certain legacy credit structures.
Risk-related adjustments
Bid-offer
IAS 39 requires that financial instruments 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 more conservative values for uncertain
parameters and/or model assumptions than those used in the valuation model.
Credit valuation adjustment
The credit valuation adjustment is an adjustment to the valuation of OTC derivative contracts to reflect within fair
value the possibility that the counterparty may default and that HSBC may not receive the full market value of the
transactions.
Debit valuation adjustment
The debit valuation adjustment is an adjustment to the valuation of OTC derivative contracts to reflect within fair
value the possibility that HSBC may default, and that HSBC may not pay 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.