HSBC 2011 Annual Report Download - page 204

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Market risk / Operational risk
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The sensitivity analysis reflects the fact that our deposit taking businesses generally benefit from rising rates which
are partially offset by increased funding costs in Balance Sheet Management given our simplifying assumption of
unchanged Balance Sheet Management positioning. The benefit to deposit taking businesses of rising rates is also
offset by the increased funding cost of trading assets, which is recorded in ‘Net interest income’ and therefore
captured in the sensitivity analysis, whereas the income from such assets is recorded in ‘Net trading income’.
Defined benefit pension schemes
(Audited)
Market risk arises within our 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 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 our businesses; earning dividend and interest income on its investments in our
businesses; providing dividend payments to HSBC Holdings’ 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 HSBC Holdings ALCO.
HSBC Holdings has entered into a number of cross-currency swaps to manage the market risk arising on certain
long-term debt capital issues for which hedge accounting has not been applied. Changes in the market values of these
swaps are recognised directly in the income statement. HSBC Holdings expects that these swaps will be held to final
maturity with the accumulated changes in market value consequently trending to zero.
Certain loans to subsidiaries of a capital nature that are not denominated in the functional currency of either the
provider or the recipient are accounted for as financial assets. Changes in the carrying amount of these assets due to
exchange differences are taken directly to the income statement. These loans, and the associated foreign exchange
exposures, are eliminated on a Group consolidated basis.
Operational risk
(Unaudited)
The objective of our operational risk management is to manage and control operational risk in a cost effective
manner within targeted levels of operational risk consistent with our risk appetite, as defined by the GMB.
A formal governance structure provides oversight over the management of operational risk. A Global Operational
Risk and Control Committee, which reports to the Risk Management Meeting, meets at least quarterly to discuss key
risk issues and review the effective implementation of our operational risk management framework.
In each of our subsidiaries, business managers are responsible for maintaining an acceptable level of internal control,
commensurate with the scale and nature of operations. They are responsible for identifying and assessing risks,
designing controls and monitoring the effectiveness of these controls. The operational risk management framework
helps managers to fulfil these responsibilities by defining a standard risk assessment methodology and providing a
tool for the systematic reporting of operational loss data.