HSBC 2012 Annual Report Download - page 448

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
15 – Fair values of financial instruments carried at fair value / 16 – Fair values of financial instruments not carried at fair value
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Probabilities of default and recovery levels are estimated using available evidence, which may include financial
information, historical experience, CDS spreads and consensus recovery levels.
For structured notes and other derivatives, principal assumptions concern the value to be attributed to future volatility
of asset values and the future correlation between asset values. These principal assumptions include credit volatilities
and correlations used in the valuation of structured credit derivatives (including leveraged credit derivatives). For
such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy
method to derive a volatility or a correlation from comparable assets for which market data is more readily available,
and/or an examination of historical levels.
HSBC Holdings
The following table provides an analysis of the basis for valuing financial assets and financial liabilities measured at
fair value in the financial statements:
Bases of valuing HSBC Holdings’ financial assets and liabilities measured at fair value
Valuation techniques
Quoted
market
price
Using
observable
inputs
With
significant
unobservable
inputs
Level 1 Level 2 Level 3 Total
US$m US$m US$m US$m
At 31 December 2012
Assets
Derivatives ................................................................................ – 3,768 – 3,768
Available for sale ..................................................................... – 1,208 – 1,208
Liabilities
Designated at fair value ............................................................ – 23,195 – 23,195
Derivatives ................................................................................ – 760 – 760
At 31 December 2011
Assets
Derivatives ................................................................................ – 3,568 – 3,568
Available for sale ..................................................................... – – 1,078 1,078
Liabilities
Designated at fair value ............................................................ 17,196 3,955 – 21,151
Derivatives ................................................................................ – 1,067 – 1,067
Liabilities designated at fair value: Transfers out of Level 1 were to bring these instruments in line with the
classification methodology adopted for other corporate bonds within the Group.
Available for sale securities: Transfers out of Level 3 reflect increased observability in prices and improved market
liquidity for these financial investments.
Financial instruments measured at fair value – Level 3
Financial investments measured using a valuation technique with significant unobservable inputs (Level 3) comprise
fixed-rate preferred securities and senior notes purchased from HSBC undertakings. The unobservable elements of
the valuation technique include the use of implied credit spreads and simplified bond pricing assumptions.