HSBC 2009 Annual Report Download - page 184

HSBC HOLDINGS PLC
Report of the Directors: Impact of Market Turmoil (continued)
SPEs > SIVs and conduits
182
Quantitative factors – hereinafter referred to as ‘the
majority of risks and rewards of ownership’. In
substance:
• HSBC has rights to obtain the majority of the
benefits of the SPE and therefore may be
exposed to risks incidental to the activities of
the SPE; and
• HSBC retains the majority of the residual or
ownership risks related to the SPE or its assets
in order to obtain benefits from its activities.
In a number of cases, these SPEs are accounted
for off-balance sheet under IFRSs where HSBC does
not have the majority of the risks and rewards of
ownership of the SPE. However, in certain
circumstances and after careful consideration of the
facts, HSBC consolidates an SPE when the
qualitative features of its involvement indicate that,
in substance, the activities of the SPE are being
conducted on behalf of HSBC, even though HSBC
does not obtain the majority of risks and rewards of
ownership.
HSBC reassesses the required consolidation
accounting tests whenever there is a change in the
substance of the relationship between HSBC and an
SPE, for example, when the nature of HSBC’s
involvement or the governing rules, contractual
arrangements or capital structure of the SPE change.
The most significant categories of SPEs are
discussed in more detail below.
Structured investment vehicles and
conduits
Structured investment vehicles
Structured investment vehicles (‘SIV’s) are SPEs
which invest in diversified portfolios of interest-
earning assets, generally funded through issues of
commercial paper (‘CP’), medium-term notes
(‘MTN’s) and other senior debt to take advantage of
the spread differentials between the assets in the SIV
and the funding cost. Prior to the implementation of
Basel II, it was capital efficient to many bank
investors to invest in highly-rated investment
securities in this way. HSBC sponsored the
establishment of two SIVs, Cullinan Finance
Limited (‘Cullinan’) and Asscher Finance Limited
(‘Asscher’) which are now in the process of
voluntary liquidation following completion of the
transfer of their portfolios of investment securities
and derivatives to the three new structured
investment conduits (‘SIC’s) established in 2008 in
order to remove the risk of having to make forced
asset sales. Mazarin Funding Limited (‘Mazarin’),
an asset-backed CP conduit, and Barion Funding
Limited (‘Barion’), a term-funding vehicle, were set
up in respect of Cullinan; and Malachite Funding
Limited (‘Malachite’), a term-funding vehicle, was
set up in respect of Asscher. Cullinan and Asscher
retain only residual cash balances to facilitate the
voluntary liquidation process.
At 31 December 2009, all the capital notes in
Cullinan and Asscher had been redeemed and
replaced by capital notes in the new SICs (2008:
8.7 per cent of Asscher’s capital notes remained
outstanding).
Conduits
HSBC sponsors and manages two types of conduits
which issue CP: multi-seller conduits and SICs.
HSBC has consolidated these conduits from
inception because it is exposed to the majority of
risks and rewards of ownership.
Securities investment conduits
Solitaire, HSBC’s principal securities investment
conduit, purchases highly rated ABSs to facilitate
tailored investment opportunities. HSBC’s other
SICs, Mazarin, Barion and Malachite, evolved from
the restructuring of HSBC’s sponsored SIVs as
discussed above.
Multi-seller conduits
These vehicles were established for the purpose of
providing access to flexible market-based sources of
finance for HSBC’s clients, for example, to finance
discrete pools of third-party originated trade and
vehicle finance loan receivables. HSBC’s principal
multi-seller conduits are Regency Assets Limited
(‘Regency’), Bryant Park Funding Limited LLC
(‘Bryant Park’), Abington Square Funding LLC
(‘Abington Square’, inactive since March 2008)
and Performance Trust.
The multi-seller conduits purchase or fund
interests in diversified pools of third-party assets
financed by issuing CP or drawing advances from
HSBC. The cash flows received by the conduits
from the third-party assets are used to service the
funding and provide a commercial rate of return
for HSBC for structuring, for various other
administrative services, and for the liquidity and
credit support it gives to the conduits. The asset
pools acquired by the conduits are structured so that
the credit enhancement the conduits receive, which
equates to senior investment grade ratings, and the
benefit of liquidity facilities typically provided by
HSBC mean that the CP issued by the multi-seller
conduits is itself highly rated.