HSBC 2015 Annual Report Download - page 173

HSBC HOLDINGS PLC
171
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Market risk linkages to the accounting balance sheet
Trading assets and liabilities
The Group’s trading assets and liabilities are in almost all cases
originated by GB&M. The assets and liabilities are classified as
held for trading if they have been acquired or incurred principally
for the purpose of selling or repurchasing in the near term, or
form part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent
pattern of short-term profit-taking. These assets and liabilities
are treated as traded risk for the purposes of market risk
management, other than a limited number of exceptions,
primarily in Global Banking where the short-term acquisition
and disposal of the assets are linked to other non-trading related
activities such as loan origination.
Financial assets designated at fair value
Financial assets designated at fair value within HSBC are
predominantly held within the Insurance entities. The majority
of these assets are linked to policyholder liabilities for either
unit-linked or insurance and investment contracts with DPF. The
risks of these assets largely offset the market risk on the liabilities
under the policyholder contracts, and are risk managed on a
non-trading basis.
Financial liabilities designated at fair value
Financial liabilities designated at fair value within HSBC are
primarily fixed-rate securities issued by HSBC entities for
funding purposes. An accounting mismatch would arise if the
debt securities were accounted for at amortised cost because
the derivatives which economically hedge market risks on the
securities would be accounted for at fair value with changes
recognised in the income statement. The market risks of these
liabilities are treated as non-traded risk, the principal risks being
interest rate and/or foreign exchange risks. We also incur
liabilities to customers under investment contracts, where the
liabilities on unit-linked contracts are based on the fair value of
assets within the unit-linked funds. The exposures on these funds
are treated as non-traded risk and the principal risks are those of
the underlying assets in the funds.
Derivative assets and liabilities
We undertake derivative activity for three primary purposes;
to create risk management solutions for clients, to manage the
portfolio risks arising from client business and to manage and
hedge our own risks. Most of our derivative exposures arise
from sales and trading activities within GB&M and are treated
as traded risk for market risk management purposes.
Within derivative assets and liabilities there are portfolios of
derivatives which are not risk managed on a trading intent basis
and are treated as non-traded risk for VaR measurement
purposes. These arise when the derivative was entered into in
order to manage risk arising from non-traded exposures. They
include non-qualifying hedging derivatives and derivatives
qualifying for fair value and cash flow hedge accounting. The use
of non-qualifying hedges whose primary risks relate to interest
rate and foreign exchange exposure is described on page 171.
Details of derivatives in fair value and cash flow hedge accounting
relationships are given in Note 16 on the Financial Statements.
Our primary risks in respect of these instruments relate to
interest rate and foreign exchange risks.
Loans and advances to customers
The primary risk on assets within loans and advances to
customers is the credit risk of the borrower. The risk of
these assets is treated as non-trading risk for market risk
management purposes.
Financial investments
Financial investments include assets held on an available-for-sale
and held-to-maturity basis. An analysis of the Group’s holdings
of these securities by accounting classification and issuer type is
provided in Note 17 on the Financial Statements and by business
activity on page 398. The majority of these securities are mainly
held within Balance Sheet Management in GB&M. The positions
which are originated in order to manage structural interest rate
and liquidity risk are treated as non-trading risk for the purposes
of market risk management. Available-for-sale security holdings
within insurance entities are treated as non-trading risk and are
largely held to back non-linked insurance policyholder liabilities.
The other main holdings of available-for-sale assets are the
ABSs within GB&M’s legacy credit business, which are treated
as non-trading risk for market risk management purposes, the
principal risk being the credit risk of the obligor.
The Group’s held-to-maturity securities are principally held
within the Insurance business. Risks of held-to-maturity assets
are treated as non-trading for risk management purposes.
Repurchase (repo) and reverse repurchase (reverse repo)
agreements non-trading
Reverse repo agreements, classified as assets, are a form of
collateralised lending. HSBC lends cash for the term of the reverse
repo in exchange for receiving collateral (normally in the form of
bonds).
Repo agreements, classified as liabilities, are the opposite of
reverse repos, allowing HSBC to obtain funding by providing
collateral to the lender.
Both transaction types are treated as non-trading risk for market
risk management and the primary risk is counterparty credit risk.
For information on the accounting policies applied to financial
instruments at fair value, see Note 13 on the Financial Statements.
Structural foreign exchange exposures
For our policies and procedures for managing structural foreign
exchange exposures, see page 215 of the Appendix to Risk.
For details of structural foreign exchange exposures see Note 33
on the Financial Statements.
Non-trading interest rate risk
For our policies regarding the funds transfer pricing process for
non-trading interest rate risk and liquidity and funding risk, see
page 207 of the Appendix to Risk.
Asset, Liability and Capital Management (‘ALCM’)
is responsible for measuring and controlling non-trading
interest rate risk under the supervision of the RMM. Its
primary responsibilities are:
• to define the rules governing the transfer of non-trading
interest rate risk from the global businesses to BSM;
• to define the rules governing the interest rate risk
behaviouralisation applied to non-trading assets/
liabilities (see below);
• to ensure that all market interest rate risk that can be
neutralised is transferred from the global businesses to
BSM; and