HSBC 2007 Annual Report Download - page 253

251
Trading portfolios
(Audited)
HSBC’s control of market risk is based on a policy
of restricting individual operations to trading within
a list of permissible instruments authorised for each
site by Traded Credit and Market Risk, of enforcing
rigorous new product approval procedures, and of
restricting trading in the more complex derivative
products only to offices with appropriate levels of
product expertise and robust control systems.
In addition, at both portfolio and position levels,
market risk in trading portfolios is monitored and
controlled using a complementary set of techniques.
These include VAR and, for interest rate risk, present
value of a basis point movement in interest rates,
together with stress and sensitivity testing and
concentration limits. These techniques quantify the
impact on capital of defined market movements.
Market making and proprietary position taking
is undertaken within Global Markets. The VAR for
such trading activity at 31 December 2007 was
US$48.3 million (2006: US$30.2 million). This is
analysed below by risk type:
VAR by risk type for the trading activities
(Audited)
Foreign
exchange and
commodity
Interest
rate
Equity Total
US$m US$m US$m US$m
At 31 December 2007 .................................................. 11.5 37.5 23.7 48.3
At 31 December 2006 ................................................... 7.3 27.9 11.8 30.2
Average
2007 .......................................................................... 9.9 33.1 15.1 36.7
2006 .......................................................................... 6.3 31.7 6.5 31.6
Minimum
2007 .......................................................................... 4.4 24.2 8.1 26.3
2006 .......................................................................... 2.6 18.3 2.6 19.9
Maximum
2007 .......................................................................... 23.2 47.5 28.1 56.0
2006 .......................................................................... 12.7 49.6 11.8 48.2
The risk associated with movements in credit
spreads is primarily managed through sensitivity
limits, stress testing and VAR on those portfolios
where VAR is calculated.
The Group is introducing credit spread as a
separate risk type within the VAR models and,
at 31 December 2007, credit spread VAR was
calculated for the London trading and New York
credit derivatives portfolios. At that date, the total
VAR for the trading activities, including credit
spread VAR for the above portfolios, was
US$60.1 million.
The effect of movements in credit spreads on the
Group’s trading portfolio became more significant
in 2007 as volatility in these spreads increased in
the latter half of 2007. The sensitivity of trading
income to the effect of movements in credit spreads
on the total trading activities of the Group was
US$95.4 million at 31 December 2007 (2006:
US$27.3 million). This sensitivity was calculated
using simplified assumptions based on one-day
movements in average market credit spreads over a
two-year period at a confidence level of 99 per cent.
The increase in the sensitivity at 31 December
2007, compared with 31 December 2006, was due
to the effect of higher volatility in credit spreads
observed in the latter half of 2007. The credit spread
positions within the trading portfolios were at a
similar level on 31 December 2007 compared with
31 December 2006.
Credit spread risk also arises on credit derivative
transactions entered into by Global Banking. The
purpose of these transactions is to manage the risk
concentrations within the corporate loan portfolio
and so enhance capital efficiency. The mark-to-
market of these transactions is taken through the
profit and loss account.
At 31 December 2007, the credit spread VAR
on the credit derivatives transactions entered into
by Global Banking was US$19.7 million (2006:
US$8.2 million). The VAR shows the effect on
trading income from a one-day movement in credit
spreads over a two-year period, calculated to a
99 per cent confidence level.
HSBC augments its VAR measures with a series
of stress scenarios to determine the potential loss
arising from market moves that are outside the
99 per cent confidence level measured by VAR.