HSBC 2012 Annual Report Download - page 507

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Securitisations
HSBC uses SPEs to securitise customer loans and advances that it has originated in order to diversify its sources of
funding for asset origination and for capital efficiency purposes. The loans and advances are transferred by HSBC to
the SPEs for cash, and the SPEs issue debt securities to investors to fund the cash purchases.
HSBC’s maximum exposure is the aggregate of any holdings of notes issued by these vehicles and the reserve
account positions intended to provide credit support under certain pre-defined circumstances to senior note holders.
In addition, HSBC uses SPEs to mitigate the capital absorbed by some of the customer loans and advances it has
originated. Credit derivatives are used to transfer the credit risk associated with these customer loans and advances
to an SPE, using securitisations commonly known as synthetic securitisations by which the SPE writes credit default
swap protection to HSBC. The SPE is funded by the issuance of notes with the cash held as collateral against the
credit default protection. From a UK regulatory perspective, the credit protection issued by the SPE in respect of the
customer loans allows the risk weight of the loans to be replaced by the risk weight of the collateral in the SPE and as
a result mitigates the capital absorbed by the customer loans. Any notes issued by the SPE and held by HSBC attract
the appropriate risk weight under the relevant regulatory regime. These SPEs are consolidated when HSBC is
exposed to the majority of risks and rewards of ownership.
Money market funds
HSBC has established and manages a number of money market funds which provide customers with tailored
investment opportunities within narrow and well-defined objectives.
HSBC’s maximum exposure to money market funds is represented by HSBC’s investment in the units of each fund, which
at 31 December 2012 amounted to US$1.7bn (2011: US$1.1bn).
Non-money market investment funds
HSBC has established a large number of non-money market investment funds to enable customers to invest in a range
of assets, typically equities and debt securities.
HSBC’s maximum exposure to non-money market investment funds is represented by its investment in the units of
each fund which at 31 December 2012 amounted to US$16.1bn (2011: US$8.6bn).
Other
HSBC also establishes SPEs in the normal course of business for a number of purposes, for example, structured
transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and
structured finance transactions.
In certain transactions HSBC is exposed to risk often referred to as gap risk. Gap risk typically arises in transactions
where the aggregate potential claims against the SPE by HSBC pursuant to one or more derivatives could be greater
than the value of the collateral held by the SPE and securing such derivatives. HSBC often mitigates such gap risk by
incorporating in the SPE transaction features which allow for deleveraging, a managed liquidation of the portfolio,
or other mechanisms including trade restructuring or unwinding the trade. Following the inclusion of such risk
reduction mechanisms, HSBC has, in certain circumstances, retained all or a portion of the underlying exposure in the
transaction. In these circumstances, HSBC assesses whether the exposure retained causes a requirement under IFRSs
to consolidate the SPE. When this retained exposure represents ABSs, it has been included in ‘Nature of HSBC’s
exposures’ on page 259.
Third-party sponsored SPEs
Through standby liquidity facility commitments, HSBC has exposure to third-party sponsored SIVs, conduits and
securitisations under normal banking arrangements on standard market terms. These exposures are not considered
significant to HSBC’s operations.
Additional off-balance sheet arrangements and commitments
Additional off-balance sheet commitments such as financial guarantees, letters of credit and commitments to lend are
disclosed in Note 41.