HSBC 2007 Annual Report Download - page 192

HSBC HOLDINGS PLC
Report of the Directors: Financial Review (continued)
Other financial information > Off-balance sheet arrangements and SPEs
190
Total assets of HSBC’s conduits by balance sheet
classification, which are on-balance sheet
2007 2006
US$bn US$bn
Financial instruments
designated at fair value .............. 0.1 0.1
Derivative assets ............................ 0.1 –
Loans and advances to banks ........ 0.2 –
Loans and advances to
customers ................................... 14.9 9.6
Financial investments .................... 21.1 24.6
Other assets .................................... 1.0 0.7
37.4 35.0
Securitisations
HSBC uses SPEs to securitise customer loans and
advances it has originated mainly in order to
diversify its sources of funding, and for capital
efficiency. In such cases, the loans and advances are
transferred by HSBC to the SPEs for cash, and the
SPEs issue debt securities to investors. Credit
enhancements are used to obtain investment grade
ratings on the senior debt issued by the SPEs.
Except for one securitisation, with total assets
of US$0.5 billion (2006: US$0.5 billion), where the
SPE has not been consolidated because HSBC does
not have the majority of risks and rewards of
ownership, these SPEs are consolidated by HSBC.
HSBC also established term securitisation
programmes in the US and Germany where third
party loans are securitised. The majority of these
vehicles are not consolidated by HSBC as it is not
exposed to majority of risks and rewards of
ownership in the SPEs.
HSBC also uses SPEs for capital management
purposes in respect of its originated customer loans
and advances, where only the credit risk associated
with the customer loans and advances is transferred
by HSBC to the SPE using credit derivatives. These
securitisations are commonly known as synthetic
securitisations. These SPEs are consolidated where
HSBC is exposed to the majority of risks and
rewards of ownership.
Total assets of HSBC’s securitisations, by balance
sheet classification, which are on-balance sheet
2007 2006
US$bn US$bn
Trading assets ................................ 3.6 0.3
Loans and advances to
customers ................................... 70.5 68.7
Financial investments .................... 0.1 0.2
Other assets .................................... 1.5 3.0
Derivatives ..................................... 0.1 –
75.8 72.2
Total assets of HSBC’s securitisations, which are
off-balance sheet
2007 2006
US$bn US$bn
HSBC originated assets .................. 0.5 0.5
Non-HSBC originated assets –
term securitisation
programmes ................................. 17.3 17.3
17.8 17.8
HSBC’s financial investments in off-balance
sheet securitisations at 31 December 2007 amounted
to US$0.7 billion (2006: US$0.7 billion). These
assets include assets that have been securitised by
HSBC under arrangements in which HSBC retains a
continuing involvement in such assets which are
classified as available-for-sale securities and
measured at fair value. Further details are provided
in Note 20 on the Financial Statements.
Other
HSBC also establishes SPEs in the normal course of
business for a number of purposes, for example,
structured credit transactions for customers to
provide finance to public and private sector
infrastructure projects, and for asset and structured
finance (‘ASF’) transactions.
Structured credit transactions
HSBC provides structured credit transactions to third
party professional and institutional investors who
wish to obtain exposure, sometimes on a leveraged
basis, to a reference portfolio of debt instruments.
The investors obtain the risks and rewards of the
relevant reference portfolios by purchasing notes
issued by the SPEs. The SPEs enter into contracts
with HSBC, generally in the form of derivatives, in
order to pass the risks and rewards of the reference
portfolios to the SPEs. HSBC’s risk in relation to the
derivative contracts with the SPEs is managed within
HSBC’s trading market risk framework (see Market
Risk Management on page 248).
The transactions are facilitated through SPEs in
order that the notes issued to the investors can be
rated. The SPEs are not consolidated by HSBC
because the investors bear substantially all the risks
and rewards of ownership through the notes. The
exception would be in circumstances where HSBC
itself holds a majority of the notes in particular
SPEs.
The total fair value of liabilities (notes issued
and derivatives) in structured credit transaction SPEs
amounted to US$23.6 billion at 31 December 2007
(2006: US$7.9 billion). These amounts include