HSBC 2012 Annual Report Download - page 456

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
19 – Derivatives
454
Credit derivatives are also deployed to a limited extent for the risk management of the Group’s loan portfolios.
The notional contract amount of credit derivatives of US$901,507m (2011: US$1,049,147m) consisted of protection
bought of US$446,410m (2011: US$517,737m) and protection sold of US$455,097m (2011: US$531,410m). The
credit derivative business operates within the market risk management framework described on page 265.
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been
derived had valuation techniques used for subsequent measurement been applied at initial recognition, less
subsequent releases, is as follows:
Unamortised balance of derivatives valued using models with significant unobservable inputs
2012 2011
US$m US$m
Unamortised balance at 1 January ............................................................................................................ 200 250
Deferral on new transactions .................................................................................................................... 149 234
Recognised in the income statement during the period:
– amortisation ....................................................................................................................................... (112) (143)
– subsequent to unobservable inputs becoming observable ................................................................ (1) (71)
– maturity, termination or offsetting derivative ................................................................................... (46) (60)
– risk hedged ........................................................................................................................................ (11) (8)
Exchange differences ................................................................................................................................ 2 (2)
Unamortised balance at 31 December1 ..................................................................................................... 181 200
1 This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and
liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing
debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the
maturity and other profiles of its assets and liabilities.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type of
hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow
hedges, or hedges of net investment in foreign operations. These are described under the relevant headings below.
The notional contract amounts of derivatives held for hedge accounting purposes indicate the nominal value of
transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedge accounting purposes by product type
At 31 December 2012 At 31 December 2011
Cash flow
hedge
Fair value
hedge
Cash flow
hedge
Fair value
hedge
US$m US$m US$m US$m
Foreign exchange .......................................................................... 16,716 112 12,078 1,363
Interest rate ................................................................................... 182,688 75,505 228,052 76,950
199,404 75,617 240,130 78,313
Fair value hedges
HSBC’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair
value of fixed-rate long-term financial instruments due to movements in market interest rates. For fair value hedges,
all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged are
recognised in the income statement. If the hedge relationship is terminated, the fair value adjustment to the hedged
item continues to be reported as part of the basis of the item and is amortised to the income statement as a yield
adjustment over the remainder of the hedging period.