HSBC 2009 Annual Report Download - page 260

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Market risk > Structural FX exposure / Defined benefit schemes / HSBC Holdings
258
dollar and currencies linked to it form the major
currency bloc in which HSBC transacts and funds
its business. HSBC’s consolidated balance sheet is,
therefore, affected by exchange differences
between the US dollar and all the non-US dollar
functional currencies of underlying subsidiaries.
HSBC hedges structural foreign exchange
exposures only in limited circumstances. HSBC’s
structural foreign exchange exposures are managed
with the primary objective of ensuring, where
practical, that HSBC’s consolidated capital ratios
and the capital ratios of individual banking
subsidiaries are largely protected from the effect of
changes in exchange rates. This is usually achieved
by ensuring that, for each subsidiary bank, the ratio
of structural exposures in a given currency to risk-
weighted assets denominated in that currency is
broadly equal to the capital ratio of the subsidiary
in question.
HSBC may also transact hedges where a
currency in which it has structural exposures is
considered to be significantly overvalued and it is
possible in practice to transact a hedge. Any
hedging is undertaken using forward foreign
exchange contracts which are accounted for under
IFRSs as hedges of a net investment in a foreign
operation, or by financing with borrowings in the
same currencies as the functional currencies
involved. No forward foreign exchange hedges
were in place during 2009 or at the end of 2008.
Defined benefit pension schemes
(Audited)
Market risk arises within HSBC’s defined benefit
pension schemes to the extent that the obligations
of the schemes are not fully matched by assets
with determinable cash flows. Pension scheme
obligations fluctuate with changes in long-term
interest rates, inflation, salary levels and the
longevity of scheme members. Pension scheme
assets include equities and debt securities, the cash
flows of which change as equity prices and interest
rates vary. There is a risk that market movements in
equity prices and interest rates could result in asset
values which, taken together with regular ongoing
contributions, are insufficient over time to cover
the level of projected obligations and these, in turn,
could increase with a rise in inflation and members
living longer. Management, together with the
trustees who act on behalf of the pension scheme
beneficiaries, assess these risks using reports
prepared by independent external actuaries, take
action and, where appropriate, adjust investment
strategies and contribution levels accordingly.
HSBC’s defined benefit pension schemes
(Audited)
2009 2008
US$bn US$bn
Liabilities (present value) ....... 30.6 24.0
% %
Assets:
Equity investments ................. 21 20
Debt securities ........................ 67 68
Other (including property) ..... 12 12
100 100
Lower corporate bond yields in the UK in
2009 resulted in a decrease of 160 basis points in
the real discount rate (net of the increase in
expected inflation) used to value the accrued
benefits payable under the HSBC Bank (UK)
Pension Scheme, the Group’s largest plan. There
was an increase in the liabilities of the scheme
which was partially offset by an increase in the
fair values of the scheme’s plan assets. As a
consequence, the deficit on the HSBC Bank (UK)
Pension Scheme increased to US$3,822 million
from US$392 million. For details of the latest
actuarial valuation of the HSBC Bank (UK) pension
scheme, see Note 8 on the Financial Statements.
HSBC Holdings
(Audited)
As a financial services holding company, HSBC
Holdings has limited market risk activity. Its
activities predominantly involve maintaining
sufficient capital resources to support the Group’s
diverse activities; allocating these capital resources
across the Group’s businesses; earning dividend
and interest income on its investments in the
Group’s businesses; providing dividend payments
to HSBC Holding’s equity shareholders and interest
payments to providers of debt capital; and
maintaining a supply of short-term cash resources.
It does not take proprietary trading positions.
The main market risks to which HSBC
Holdings is exposed are interest rate risk and
foreign currency risk. Exposure to these risks arises
from short-term cash balances, funding positions
held, loans to subsidiaries, investments in long-
term financial assets and financial liabilities
including debt capital issued. The objective of
HSBC Holdings’ market risk management strategy
is to reduce exposure to these risks and minimise
volatility in economic income, cash flows and
distributable reserves. Market risk for HSBC
Holdings is monitored by its Structural Positions
Review Group.
A number of cross-currency interest rate
swaps entered into as part of HSBC Holdings’