HSBC 2004 Annual Report Download - page 171

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potential events, particularly those which are
extreme in nature;
• the use of a 10-day holding period assumes that
all positions can be liquidated or hedged in 10
days. This may not fully reflect the market risk
arising at times of severe illiquidity, when a
10-day holding period may be insufficient to
liquidate or hedge all positions fully;
• the use of a 99 per cent confidence level, by
definition, does not take into account losses that
might occur beyond this level of confidence;
• VAR is calculated on the basis of exposures
outstanding at the close of business and
therefore does not necessarily reflect intra-day
exposures.
HSBC recognises these limitations by
augmenting its VAR limits with other position and
sensitivity limit structures. Additionally, HSBC
applies a wide range of stress testing, both on
individual portfolios and on the Group’ s
consolidated positions. HSBC’ s stress-testing regime
provides senior management with an assessment of
the impact of identified extreme events on the
market risk exposures of HSBC.
Trading VAR for HSBC is summarised in
Note 39(a) in the ‘Notes on the Financial
Statements’ on page 308.
The daily revenue earned from market risk-
related treasury activities includes accrual book net
interest income and funding related to dealing
positions. The histogram below illustrates the
frequency of daily revenue arising from such market
risk-related activities.
The average daily revenue earned from market
risk-related treasury activities in 2004 was
US$18.3 million, compared with US$17.1 million
for 2003. The standard deviation of these daily
revenues was US$8.0 million compared with
US$12.5 million for 2003. The standard deviation
measures the variation of daily revenues about the
mean value of those revenues.
An analysis of the frequency distribution of
daily revenue shows that there were two days with
negative revenues during 2004 compared with 12
days in 2003. The most frequent result was a daily
revenue of between US$16 million and
US$20 million with 70 occurrences.
Daily distribution of market risk revenues in 2004
Number of days
<
<<
< Profit and loss frequency
Daily distribution of market risk revenues in 2003
Number of days
< Profit and loss frequency
Non-trading
The principal objective of market risk management
of non-trading portfolios is to optimise net interest
income.
Market risk in non-trading portfolios arises
principally from mismatches between the future
yield on assets and their funding cost as a result of
interest rate changes. Analysis of this risk is
complicated by having to make assumptions on
optionality in certain product areas, for example,
mortgage prepayments, and from behavioural
assumptions regarding the economic duration of
liabilities which are contractually repayable on
demand, for example, current accounts. This
prospective change in future net interest income
from non-trading portfolios will be reflected in the
current realisable value of these positions should
they be sold or closed prior to maturity. In order to
manage this risk optimally, market risk in non-
trading portfolios is transferred to Global Markets or
to separate books managed under the auspices of the
local ALCO.
The transfer of market risk to trading books
managed by Global Markets or ALCO is usually
achieved by a series of internal deals between the
business units and these trading books. When the
Revenues (US$m)
Revenues (US$m)
0 1 0 0 02121
5
7
32
49
66
45
24
16
5
110010
0
10
20
30
40
50
60
70
80
-90 -85 -80 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60 85 90
2
0
810
25
54
70
41
19
17
12
02
01
0
10
20
30
40
50
60
70
80
-8 -4 0 4 8 12 16 2024283236 404448 52