HSBC 2011 Annual Report Download - page 165

163
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Market risk
(Audited)
Market risk in 2011 ......................................................... 163
Trading and non-trading portfolios ................................ 163
Structural foreign exchange exposures .......................... 166
Sensitivity of net interest income ................................... 166
Defined benefit pension schemes ................................... 167
Additional market risk measures applicable only to
the parent company .................................................... 167
Market risk is the risk that movements in
market factors, including foreign exchange
rates and commodity prices, interest rates,
credit spreads and equity prices, will reduce
our income or the value of our portfolios.
Exposure to market risk
Exposure to market risk is separated into two portfolios:
• Trading portfolios include positions arising from market-
making and position-taking and others designated as
marked to market.
• Non-trading portfolios include positions that primarily
arise from the interest rate management of our retail and
commercial banking assets and liabilities, financial
investments designated as available for sale and held to
maturity, and exposures arising from our insurance
operations (see page 165).
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
in order to optimise return on risk while maintaining a
market profile consistent with our status as one of the world’s
largest banking and financial services organisations.
We use a range of tools to monitor and limit market risk
exposures, including:
• sensitivity measures are used to monitor the market risk
positions within each risk type;
• value at risk (‘VAR’) is a technique that estimates the
potential losses that could occur on risk positions as a
result of movements in market rates and prices over a
specified time horizon and to a given level of confidence;
and
• in recognition of VAR’s limitations we augment VAR with
stress testing to evaluate the potential impact on portfolio
values of more extreme, though plausible, events or
movements in a set of financial variables. Examples of
scenarios reflecting current market concerns are the US
treasuries downgrade and the potential effects of a
sovereign debt default, including its wider contagion
effects.
The major contributor to the trading and non-trading VAR for
the Group is Global Markets. Market risk arising in our
insurance business is discussed in ‘Risk management of
insurance operations’ on page 171.
There were no material changes to our policies and
practices for the management of market risk in
2011.
A summary of our current policies and practices
regarding market risk is provided in the Appendix
to Risk on page 188.
Market risk in 2011
(Audited)
Market risk in 2011 was managed against a
backdrop of global economic slowdown, the fiscal
deficit of the US and concerns over European
sovereign debt and its contagion effects. Funding
and capital concerns relating to financial
institutions also dominated in Europe. All these
factors triggered high levels of volatility in the
financial markets. In addition, the transition to
CRD III at the end of 2011, with its increased
capital requirements for certain market risk
exposures, also affected the environment in which
market risk appetite was managed over the year. In
response to these challenges, we managed down
our market risk exposures within the eurozone and
in our securitisation books. We proactively tested
contingency plans intended to respond to potential
adverse scenarios.
In 2011, our European Credit and Rates
business reported significantly lower trading
revenue as turmoil in eurozone sovereign debt
markets escalated, particularly in the second half of
the year. Increased risk aversion and limited client
activity, led to a significant widening of credit
spreads on certain eurozone sovereign and
corporate bonds, resulting in trading losses and an
increase in days of negative revenue.
Trading and non-trading portfolios
(Audited)
The following table provides an overview of the
reporting of risks within this section:
Portfolio
Trading Non-trading
Risk type
Foreign exchange and
commodity ...................... VAR VAR54
Interest rate .......................... VAR VAR55
Equity .................................. VAR Sensitivity
Credit spread ....................... VAR VAR56
For footnotes, see page 185.