HSBC 2014 Annual Report Download - page 144

HSBC BANK PLC
Notes on the Financial Statements (continued)
142
The bank
Assets
Liabilities
Available-
for-sale
Held for
trading
At fair
value
Derivatives
Held for
trading
At fair
value
Derivatives
£m
£m
£m
£m
£m
£m
£m
Private equity investments
415
68
–
–
–
–
–
Asset-backed securities
1,946
275
–
–
–
–
–
Structured notes
–
7
–
–
1,236
–
–
Derivatives
–
–
–
1,621
–
–
1,377
Other portfolios
–
1,782
–
–
–
–
–
At 31 December 2014
2,361
2,132
–
1,621
1,236
–
1,377
Private equity investments
457
56
–
–
–
–
–
Asset-backed securities
2,260
265
–
–
–
–
–
Structured notes
–
–
–
–
1,290
–
–
Derivatives
–
–
–
1,083
–
–
1,367
Other portfolios
–
1,242
–
–
–
–
–
At 31 December 2013
2,717
1,563
–
1,083
1,290
–
1,367
Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, certain derivatives
and all Level 3 asset-backed securities are legacy. The group has the capability to hold these positions.
Private equity including strategic investments
The group’s private equity and strategic investments are generally classified as available for sale and are not traded in
active markets. In the absence of an active market, an investment’s fair value is estimated on the basis of an analysis of
the investee’s financial position and results, risk profile, prospects and other factors, as well as by reference to market
valuations for similar entities quoted in an active market, or the price at which similar companies have changed
ownership.
Asset-backed securities
While quoted market prices are generally used to determine the fair value of these securities, valuation models are used
to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted
market prices are required. For ABSs including residential MBSs, the valuation uses an industry standard model and the
assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance,
as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar
nature.
Loans, including leveraged finance and loans held for securitisation
Loans held at fair value are valued from broker quotes and/or market data consensus providers when available. In the
absence of an observable market, the fair value is determined using alternative valuation techniques. These techniques
include discounted cash flow models, which incorporate assumptions regarding an appropriate credit spread for the loan,
derived from other market instruments issued by the same or comparable entities.
Structured notes
The fair value of structured notes valued using a valuation technique with significant unobservable inputs is derived from
the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in
the paragraph below on derivatives.
Trading liabilities valued using a valuation technique with significant unobservable inputs principally comprised equity-
linked structured notes which are issued by HSBC and provide the counterparty with a return that is linked to the
performance of certain equity securities, and other portfolios. The notes are classified as Level 3 due to the
unobservability of parameters such as long-dated equity volatilities and correlations between equity prices, between
equity prices and interest rates and between interest rates and foreign exchange rates.
Derivatives
OTC (i.e. non-exchange traded) derivatives are valued using valuation models. Valuation models calculate the present
value of expected future cash flows, based upon ‘no-arbitrage’ principles. For many vanilla derivative products, such as
interest rate swaps and European options, the modelling approaches used are standard across the industry. For more
complex derivative products, there may be some differences in market practice. Inputs to valuation models are
determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers
or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined
from observable prices via model calibration procedures or estimated from historical data or other sources. Examples of
inputs that may be unobservable include volatility surfaces, in whole or in part, for less commonly traded option products,
and correlations between market factors such as foreign exchange rates, interest rates and equity prices.