HSBC 2011 Annual Report Download - page 366

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
20 – Derivatives / 21 – Financial investments
364
Hedging instruments
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and
liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing
debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the
maturity and other profiles of its assets and liabilities.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type
of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash
flow hedges, or hedges of net investment in foreign operations. These are described under the relevant headings
below.
The notional contract amounts of derivatives held for hedging purposes indicate the nominal value of transactions
outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedging purposes by product type
At 31 December 2011 At 31 December 2010
Cash flow
hedge
Fair value
hedge
Cash flow
hedge
Fair value
hedge
US$m US$m US$m US$m
Foreign exchange .......................................................................... 12,078 1,363 10,599 1,392
Interest rate ................................................................................... 228,052 76,950 282,412 62,757
240,130 78,313 293,011 64,149
Fair value hedges
HSBC’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair
value of fixed-rate long-term financial instruments due to movements in market interest rates. For qualifying fair
value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk
being hedged are recognised in the income statement. If the hedge relationship is terminated, the fair value
adjustment to the hedged item continues to be reported as part of the basis of the item and is amortised to the income
statement as a yield adjustment over the remainder of the hedging period.
Fair value of derivatives designated as fair value hedges
At 31 December 2011 At 31 December 2010
Assets Liabilities Assets Liabilities
US$m US$m US$m US$m
Foreign exchange .......................................................................... 77 1 153 –
Interest rate ................................................................................... 369 4,331 443 2,226
446 4,332 596 2,226
Gains or losses arising from fair value hedges
2011
2010 2009
US$m US$m US$m
Gains/(losses):
– on hedging instruments .......................................................................................... (4,082) (830) 114
– on the hedged items attributable to the hedged risk ............................................... 3,858 868 (159)
(224) 38 (45)
The gains and losses on ineffective portions of fair value hedges are recognised immediately in ‘Net trading income’.
Cash flow hedges
HSBC’s cash flow hedges consist principally of interest rate and cross-currency swaps that are used to protect against
exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at
variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future
cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and
liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and