HSBC 2015 Annual Report Download - page 194

Report of the Directors: Risk (continued)
Footnotes / Appendix to Risk – Policies and practices
HSBC HOLDINGS PLC
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Market risk
29 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.
30 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in
unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign
exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined
total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for
different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
31 The total VaR is non-additive across risk types due to diversification effects.
32 Investments in private equity are primarily made through managed funds that are subject to limits on the amount of investment. Potential new
commitments are subject to risk appraisal to ensure that industry and geographical concentrations remain within acceptable levels for the
portfolio as a whole. Regular reviews are performed to substantiate the valuation of the investments within the portfolio.
33 Investments held to facilitate ongoing business include holdings in government-sponsored enterprises and local stock exchanges.
34 Instead of assuming that all interest rates move together, we group our interest rate exposures into currency blocs whose rates are
considered likely to move together. See ‘Cautionary statement regarding forward-looking statements’.
Risk management of insurance operations
35 ‘Other’ includes term assurance, credit life insurance, universal life insurance and remaining non-life insurance.
36 Although investment contracts with discretionary participation features (‘DPF’) are financial investments, HSBC continues to account for
them as insurance contracts as required by IFRS 4 ‘Insurance Contracts’. The corresponding liabilities are therefore recorded as ‘liabilities
under insurance contracts’.
37 ‘Other assets and liabilities’ shows shareholder assets as well as assets and liabilities classified as held for sale. The majority of the assets for
insurance businesses classified as held for sale are reported as ‘Other assets and investment properties’ and totalled $4.1bn at 31 December
2015 (2014: $6.8bn). The majority of these assets were debt and equity securities and PVIF. All liabilities for insurance businesses classified
as held for sale are reported in ‘Other liabilities’ and totalled $3.7bn at 31 December 2015 (2014: $6.8bn). The majority of these liabilities
were liabilities under insurance contracts and liabilities under investment contracts.
38 Financial investments held to maturity (HTM) and available for sale (AFS).
39 Comprise mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities.
40 Present value of in-force long-term insurance contracts and investment contracts with DPF.
41 ‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF.
42 Does not include associated insurance company SABB Takaful Company or joint venture insurance company Canara HSBC Oriental Bank of
Commerce Life Insurance Company Limited.
43 HSBC has no insurance manufacturing subsidiaries in Middle East and North Africa or North America.
44 Comprise unit-linked life insurance contracts and linked long-term investment contracts.
45 Comprise all insurance and long-term investment contracts other than those classified as unit-linked.
46 A block of contracts in France with guaranteed nominal annual returns in the range 1.25%-3.72% are reported entirely in the 2.0%-4.0%
category in line with the average guaranteed return of 2.7% offered to policyholders by these contracts.
47 Real annual return guarantees provide the policyholder a guaranteed return in excess of the rate of inflation, and are supported by
inflation-linked debt securities with yields that are also expressed in real terms.
48 Where a –100 basis point parallel shift in the yield curve would result in a negative interest rate, the effects on profit after tax and total
equity have been calculated using a minimum rate of 0%.
49 Shareholders’ funds comprise solvency and unencumbered assets.
50 ‘Non-linked insurance’ comprises all insurance contracts other than unit-linked, including remaining non-life business.
51 In most cases, policyholders have the option to terminate their contracts at any time and receive the surrender values of their policies. These
may be significantly lower than the amounts shown.
52 Insurance contracts and investment contracts with DPF can give policyholders the contractual right to receive, as a supplement to their
guaranteed benefits, additional benefits that may be a significant portion of the total contractual benefits, but whose amount and timing
are determined by HSBC. These additional benefits are contractually based on the performance of a specified pool of contracts or assets, or
the profit of the company issuing the contracts.
53 ‘Other’ includes term assurance, universal life assurance and remaining non-life insurance.
Pension risk
54 In 2014, option overlay strategies which are expected to improve the risk/return profile of the equity allocation were implemented.
55 Alternative assets include ABSs, MBSs and infrastructure assets.
56 Whilst there is no target cash allocation, the amount of cash is expected to vary between 0%-5% depending upon the liquidity requirements
of the scheme, which will affect the actual allocation of bonds correspondingly.