HSBC 2012 Annual Report Download - page 220

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Market risk > In 2012 / Trading and non-trading portfolios
218
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.
There were no material changes to our policies and
practices for the management of market risk in 2012.
A summary of our current policies and practices
regarding market risk is provided in the Appendix
to Risk on page 265.
Exposure to market risk
Exposure to market risk is separated into two portfolios:
• Trading portfolios comprise positions arising from market-
making and warehousing of customer-derived positions.
• Non-trading portfolios comprise 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 239).
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with our risk
appetite.
We use a range of tools to monitor and limit market risk
exposures, including:
• sensitivity measures include sensitivity of net interest
income and sensitivity for structural foreign exchange,
which 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
slowdown of mainland China and the potential effects of a
sovereign debt default, including its wider contagion
effects.
Market risk in 2012
(Audited)
Some credit spread and interest rate exposures to
sovereign borrowers were managed down during
2012 against the backdrop of continued concerns
around eurozone sovereigns and financial
institutions, the global economic slowdown and
uncertainty about fiscal policy in the US. The
second half of the year was characterised by
improved market sentiment, primarily because the
ECB pledged to support the euro. This led to a
more benign market environment and generally
subdued volatilities of credit spreads and other
market risk factors.
Trading and non-trading portfolios
(Audited)
The following tables provide an overview of the
types of risks within the different global businesses.
Types of risk by global business
Risk types Global businesses
Trading risk GB&M including Balance
– Foreign exchange Sheet Management (‘BSM’)
and commodities
– Interest rate
– Equities
– Credit spread
Non-trading risk GB&M including BSM,
– Foreign exchange (structural) RBWM, CMB and GPB
– Interest rate
– Credit spread
The market risk for insurance operations is
reported separately on page 239.
Market risk reporting measures
The following table provides an overview of the
reporting of risks within this section:
Overview of risk reporting
Portfolio
Trading Non-trading
Risk type
Foreign exchange and
commodity .......................... VAR VAR
Interest rate .............................. VAR VAR/
Sensitivity
Equity ...................................... VAR Sensitivity
Credit spread ........................... VAR VAR
Structural foreign exchange .... n/a Sensitivity
Structural foreign exchange risk is monitored
using sensitivity analysis (see page 268). The
reporting of commodity risk is consolidated with
foreign exchange risk. There is no commodity risk
in the non-trading portfolios. The interest rate risk
on the fixed-rate securities issued by HSBC
Holdings is not included in the Group VAR.
The management of this risk is described on
page 270.