HSBC 2009 Annual Report Download - page 256

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Market risk > Trading portfolios / Non-trading portfolios
254
VAR by risk type for the trading activities (excluding credit spread VAR)
(Audited)
Foreign
exchange and
commodity
Interest
rate
Equity Total48
US$m US$m US$m US$m
At 31 December 2009 .................................................. 19.5 42.6 17.5 45.3
At 31 December 2008 ................................................... 29.8 63.4 13.9 72.5
Average
2009 .......................................................................... 20.6 51.3 11.3 53.8
2008 .......................................................................... 19.0 50.7 15.2 53.1
Minimum
2009 .......................................................................... 11.1 35.6 4.9 35.6
2008 .......................................................................... 8.7 21.4 8.2 22.6
Maximum
2009 .......................................................................... 46.7 78.0 21.2 86.6
2008 .......................................................................... 54.9 147.4 39.0 104.4
For footnote, see page 291.
The VAR for overall trading activity as at
31 December 2009 was lower than in 2008 and
remained within a narrower band. The decrease was
driven primarily by the interest rate component due
to reduced levels of underlying exposure in the
trading book.
Credit spread risk
The risk associated with movements in credit
spreads is primarily managed through sensitivity
limits, stress testing, and VAR for those portfolios
where VAR is calculated. The Group has introduced
credit spread as a separate risk type within its VAR
models on a global basis. 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.
Increased market liquidity helped dampen
volatility of credit spreads and decrease
credit VAR in 2009.
At 31 December 2009, the credit VAR for
trading activities was US$72.7 million (2008:
US$218.4 million, calculated on a comparable
basis). The decrease in the credit VAR in 2009 was
due to the effect of a reduction in the volatility of
credit spreads observed during the year, in part
reflecting increased market liquidity. Also, the actual
positions within the trading portfolios exposed to
credit spread risk were lower on 31 December 2009
than on 31 December 2008. In addition to the above
measure, certain portfolios are also managed using
default risk measures where appropriate.
Credit spread risk also arises on credit derivative
transactions entered into by Global Banking in order
to manage the risk concentrations within the
corporate loan portfolio and so enhance capital
efficiency. The mark-to-market of these transactions
is reflected in the income statement.
At 31 December 2009, the credit VAR on the
credit derivatives transactions entered into by
Global Banking was US$13.8 million (2008:
US$23.0 million).
Gap risk
For certain transactions that are structured so that the
risk to HSBC is negligible under a wide range of
market conditions or events, there exists a remote
possibility that a significant gap event could lead
to loss. A gap event could arise from a change in
market price from one level to another with no
accompanying trading opportunity, where the price
change breaches the threshold beyond which the risk
profile changes from having no open risk to having
full exposure to the underlying structure. Such
movements may occur, for example, when there are
adverse news announcements and the market for a
specific investment becomes illiquid, making
hedging impossible.
Given the characteristics of these transactions,
they will make little or no contribution to VAR or to
traditional market risk sensitivity measures. HSBC
captures the risks of such transactions within its
stress testing scenarios and monitors gap risk arising
on an ongoing basis. HSBC regularly considers the
probability of gap loss and fair value adjustments are
booked against this risk. HSBC has not incurred any
material gap loss in respect of such transactions in
the 12 months ended 31 December 2009.
ABSs/MBSs positions
The ABSs/MBSs exposures within the trading
portfolios are managed within sensitivity and VAR
limits, as described on page 251, and are included