HSBC 2012 Annual Report Download - page 39

37
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
movements on foreign currency debt which are
reported in ‘Net expense from financial instruments
designated at fair value’.
Net interest income on trading activities also
declined. This was driven by a significant reduction
in average trading assets, notably holdings of debt
securities in Europe, in the latter part of 2011 and the
first quarter of 2012 as eurozone sovereign debt
concerns dominated the market. In addition, yields
fell as a result of both price appreciation in a low
interest rate environment and an increase in the
proportion of the portfolio invested in relatively
lower-yielding treasury bills and government debt
securities. This was partly offset by a reduction in
funding costs, reflecting both the decline in the size
of the portfolio and the low rate environment.
There were also adverse fair value movements
of US$553m on the contingent forward sale contract
relating to Ping An (see page 472).
Net income/(expense) from financial instruments designated at fair value
2012
US$m
2011
US$m
2010
US$m
Net income/(expense) arising from:
– financial assets held to meet liabilities under insurance and
investment contracts ........................................................................................... 2,980 (933) 2,349
– liabilities to customers under investment contracts ........................................... (996) 231 (946)
– HSBC’s long-term debt issued and related derivatives ..................................... (4,327) 4,161 (258)
Change in own credit spread on long-term debt ........................................... (5,215) 3,933 (63)
Other changes in fair value51 ......................................................................... 888 228 (195)
– other instruments designated at fair value and related derivatives .................... 117 (20) 75
Net income/(expense) from financial instruments designated at fair value .............. (2,226) 3,439 1,220
Assets and liabilities from which net income/(expense) from financial instruments designated at fair value arose
2012
US$m
2011
US$m
2010
US$m
Financial assets designated at fair value at 31 December .......................................... 33,582 30,856 37,011
Financial liabilities designated at fair value at 31 December .................................... 87,720 85,724 88,133
Including:
Financial assets held to meet liabilities under:
– insurance contracts and investment contracts with DPF52 .................................. 8,376 7,221 7,167
– unit-linked insurance and other insurance and investment contracts ................. 23,655 20,033 19,725
Long-term debt issues designated at fair value .......................................................... 74,768 73,808 69,906
For footnotes, see page 120.
The accounting policies for the designation of
financial instruments at fair value and the treatment
of the associated income and expenses are described
in Notes 2i and 2b on the Financial Statements,
respectively.
The majority of the financial liabilities designated
at fair value are fixed-rate long-term debt issues, the
rate profile of which has been changed to floating
through interest rate swaps as part of a documented
interest rate management strategy. The movement
in fair value of these long-term debt issues and the
related hedges includes the effect of our credit spread
changes and any ineffectiveness in the economic
relationship between the related swaps and own
debt. As credit spreads widen or narrow, accounting
profits or losses, respectively, are booked. The size
and direction of the changes in the credit spread on
our debt and ineffectiveness, which are recognised
in the income statement, can be volatile from year to
year, but do not alter the cash flows expected as part
of the documented interest rate management strategy.
As a consequence, fair value movements arising
from changes in our own credit spread on long-term
debt and other fair value movements on the debt
and related derivatives are not regarded internally as
part of managed performance and are therefore not
allocated to global businesses, but are reported in
‘Other’. Credit spread movements on own debt
designated at fair value are excluded from underlying
results, and related fair value movements are not
included in the calculation of regulatory capital.
We reported net expense from financial
instruments designated at fair value of US$2.2bn
in 2012 compared with net income of US$3.4bn
in 2011. This included the credit spread-related
movements in the fair value of our own long-term
debt, on which we reported adverse fair value
movements of US$5.2bn in 2012 and favourable