HSBC 2014 Annual Report Download - page 69

HSBC BANK PLC
Report of the Directors: Risk (continued)
67
Encumbered and unencumbered assets
(Unaudited)
The objective of this disclosure is to facilitate an
understanding of available and unrestricted assets that
could be used to support potential future funding and
collateral needs.
An asset is defined as encumbered if it has been pledged
as collateral against an existing liability, and as a result is
no longer available to the group to secure funding,
satisfy collateral needs or be sold to reduce the funding
requirement.
The disclosure is not designed to identify assets which
would be available to meet the claims of creditors or to
predict assets that would be available to creditors in the
event of a resolution or bankruptcy.
Summary of assets available to support potential future funding and collateral needs (on and off-balance sheet)
(Unaudited)
2014
2013
£m
£m
Total on-balance sheet assets at 31 December
797,289
811,695
Less:
– reverse repo/ stock borrowing receivables and derivative assets
(235,262)
(208,200)
– other assets that cannot be pledged as collateral
(89,250)
(83,249)
Total on-balance sheet assets that can support funding and collateral needs at 31 December
472,777
520,246
Add:off-balance sheet assets
– fair value of collateral received in relation to reverse repo/ stock borrowing / derivatives that is
available to sell or repledge
110,514
111,244
Total assets that can support future funding and collateral needs
583,291
631,490
Less:
– on-balance sheet assets pledged
(59,015)
(91,443)
– re-pledging of off-balance sheet collateral received in relation to reverse repo/ stock borrowing/
derivatives
(72,281)
(80,180)
Assets available to support funding and collateral needs at 31 December
451,995
459,867
The effect of active collateral management
Collateral is managed on an operating entity basis,
consistent with the approach adopted in managing
liquidity and funding. Available collateral held by each
operating entity is managed as a single collateral pool. In
deciding which collateral to pledge, each operating entity
seeks to optimise the use of the available collateral pool
within the confines of the LFRF, irrespective of whether
the collateral pledged is recognised on-balance sheet or
was received in respect of reverse repo, stock borrowing
or derivative transactions.
Managing collateral in this manner affects
the presentation of asset encumbrance in that we
may encumber on-balance sheet holdings while
maintaining available unencumbered off-balance sheet
holdings, even though we are not seeking to directly
finance the on-balance sheet holdings pledged.
In quantifying the level of encumbrance of negotiable
securities, the encumbrance is analysed by individual
security. When a particular security is encumbered and
we hold the security both on-balance sheet and off-
balance sheet with the right to repledge, we assume for
the purpose of this disclosure that the off-balance sheet
holding received from third party is encumbered ahead
of the on-balance sheet holding.
An on-balance sheet encumbered and off-balance sheet
unencumbered asset will occur, for example, if we
receive a specific security as a result of a reverse
repo/stock borrowing transaction, but finance the cash
lent by pledging a generic collateral basket, even if the
security received is eligible for the collateral basket
pledged. It will also occur if we receive a generic
collateral basket as a result of a reverse repo transaction
but finance the cash lent by pledging specific securities,
even if the securities pledged are eligible for the
collateral basket.
Market risk
Market risk is the risk that movements in market factors,
including foreign exchange rates and commodity prices,
interest rates, credit spreads and equity prices will
reduce the group’s income or the value of its portfolios.
Exposure to market risk is separated into two portfolios.
• Trading portfolios comprise positions arising from
market-making and warehousing of customer-derived
positions.
• Non-trading portfolios including Balance Sheet
Management comprise positions that primarily arise
from the interest rate management of the group’s
retail and commercial banking assets and liabilities,
financial investments designated as available-for-sale
and held-to-maturity, and exposures arising from the
group’s insurance operations.
For market risk arising in our insurance business, refer to
page 79.
Where appropriate, we apply similar risk management
policies and measurement techniques to both trading
and non-trading portfolios. Our objective is to manage
and control market risk exposures in order to optimise
return on risk while maintaining a market profile
consistent with the status as one of the world’s largest
banking and financial services organisations.
The nature of the hedging and risk mitigation strategies
performed across the Group corresponds to the market
risk management instruments available within each
operating jurisdiction. These strategies range from the
use of traditional market instruments, such as interest