HSBC 2015 Annual Report Download - page 381

HSBC HOLDINGS PLC
379
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
• the manner in which the data was sourced.
For fair values determined using valuation models, the control framework may include, as applicable, development or
validation by independent support functions of (i) the logic within valuation models; (ii) the inputs to these models; (iii) any
adjustments required outside the valuation models; and (iv) where possible, model outputs. Valuation models are subject to
a process of due diligence and calibration before becoming operational and are calibrated against external market data on
an ongoing basis.
Changes in fair value are generally subject to a profit and loss analysis process. This process disaggregates changes in fair
value into three high level categories; (i) portfolio changes, such as new transactions or maturing transactions, (ii) market
movements, such as changes in foreign exchange rates or equity prices, and (iii) other, such as changes in fair value
adjustments (see further below).
The majority of financial instruments measured at fair value are in GB&M. GB&M’s fair value governance structure is
illustrated below as an example:
Financial liabilities measured at fair value
In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the
specific instrument concerned, where available. An example of this is where own debt in issue is hedged with interest rate
derivatives. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs
for which are either based upon quoted prices in an inactive market for the instrument or are estimated by comparison with
quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit
spread which is appropriate to HSBC’s liabilities. The change in fair value of issued debt securities attributable to the Group’s
own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or
a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security
is valued using a Libor-based discount curve. The difference in the valuations is attributable to the Group’s own credit spread.
This methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instrument liabilities are included within trading liabilities and are measured
at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes.
Gains and losses arising from changes in the credit spread of liabilities issued by HSBC reverse over the contractual life of the
debt, provided that the debt is not repaid at a premium or a discount.
Fair value hierarchy
Fair values of financial assets and liabilities are determined according to the following hierarchy:
• Level 1 – valuation technique using quoted market price: financial instruments with quoted prices for identical instruments
in active markets that HSBC can access at the measurement date.
• Level 2 – valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in
active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued
using models where all significant inputs are observable.
• Level 3 – valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques
where one or more significant inputs are unobservable.
Group Finance Director
Responsible for fair value:
− Establishing accounting policies
for fair value
− Establishing procedures
governing valuation
− Ensuring compliance with all
relevant accounting standards
Consist of valuation experts from
several independent support
functions (product control,
market risk management,
quantitative risk and valuation
group and finance), in addition
to senior management
Provides
results
Overseen by and
report all valuations
considered to have
material subjectivity
Chaired by Global Head of
Product Control,
Global Markets
Consists of Heads of
Global Markets, Finance
and Risk functions
Finance Valuation Committees Valuation Committee
Review Group