HSBC 2013 Annual Report Download - page 48

HSBC BANK CANADA
46
Management’s Discussion and Analysis (continued)
Summary of future contractual payments (Audited)
Less than
1 year
$m 1 to 5 years $m After 5 years $m Total $m
At 31 December 2013
Subordinated debentures1 ............................................ – – 639 639
Operating leases .......................................................... 50 143 71 264
Committed purchase obligations .................................. 219 345 1 565
Unsecured long-term funding1 .................................... 1,041 4,753 1,355 7,149
Total contractual obligations ....................................... 1,310 5,241 2,066 8,617
1 Includes principal amounts only.
Committed purchase obligations include long-term
arrangement for the provision of technology and data
processing services by HSBC Group companies. Not
included in the table are any commitments relating
to customers utilizing undrawn portions of their loan
facilities. As a result of our ongoing funding and liquidity
management process which we monitor regularly, we
expect to be able to meet all of our funding and other
commitments in the normal course of our operations.
Market risk
Market risk is the risk that movements in market risk
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.
Market risk management
The objective of market risk management is to identify,
measure and control market risk exposures in order to
optimize return on risk and to remain within the bank’s
risk appetite.
We separate exposures to market risk into trading
and non-trading portfolios. Trading portfolios include
those positions arising from market-making, proprietary
position-taking and other positions designated as held-
for-trading.
Market risk is managed through strategies in
accordance with policies and risk limits set out by RMC
and approved by the Board as well as centrally by HSBC
Group Risk Management. We set risk limits for each of
our trading operations dependent upon the size, financial
and capital resources of the operations, market liquidity
of the instruments traded, business plan, experience and
track record of management and dealers, internal audit
ratings, support function resources and support systems.
Risk limits are reviewed and set by RMC on an annual
basis at a minimum.
We use a range of tools to monitor and limit market
risk exposures. These include: present value of a basis
point, Value at Risk (‘VaR’), foreign exchange exposure
limits, maximum loss limits, credit spread limits, and
issuer limits.
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.
The VaR models used are predominantly based on
historical simulation. These models derive plausible
future scenarios from past series of recorded market
rates and prices, taking account of inter-relationships
between different markets and rates such as interest rates
and foreign exchange rates. The models also incorporate
the effect of option features on the underlying exposures.
The historical simulation models used incorporate
the following features:
– potential market movements are calculated with
reference to data from the past two years;
– historical market rates and prices are calculated with
reference to foreign exchange rates, credit spreads,
interest rates, equity prices and the associated volatilities;
– VaR is calculated to a 99% confidence level; and
– VaR is calculated for a one-day holding period.
Statistically, we would expect to see losses in excess
of VaR only one percent of the time over a one-year
period. Although a valuable guide to risk, VaR should
always be viewed in the context of its limitations:
– the use of historical data as a proxy for estimating
future events may not encompass all potential events,
particularly those which are extreme in nature;