HSBC 2014 Annual Report Download - page 72

HSBC BANK PLC
Report of the Directors: Risk (continued)
70
Daily VaR (trading portfolios), 99% 1 day (£m)
(Unaudited)
HSBC Bank Plc’s trading VaR for the year is shown in the table below.
Trading value at risk, 99% 1 day
(Audited)
Foreign
exchange and
commodity
Interest
rate
Equity
Credit
spread
Portfolio
Diversification
incl. RNIV
1
Total
2
£m
£m
£m
£m
£m
£m
At 31 December 2014
4.7
24.9
4.4
5.1
(4.5)
34.6
Average
7.7
19.7
4.0
6.8
(6.0)
32.2
Maximum
16.9
26.6
9.8
11.1
44.1
At 31 December 2013
7.8
17.7
4.9
7.6
(11.3)
26.7
Average
7.2
19.2
3.1
9.1
(10.3)
28.3
Maximum
13.4
37.0
8.9
13.5
45.2
1 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the
reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity
and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type
and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum occurs on different
days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for this measure. For presentation
purposes, portfolio diversification within the trading portfolio includes VaR-based RNIV.
2 The total VaR is non-additive across risk types due to diversification effect, and includes VaR RNIV.
Gap risk
(Unaudited)
Certain products are structured in such a way that they
give rise to enhanced gap risk, being the risk that loss is
incurred upon occurrence of a gap event. A gap event is
a significant and sudden change in market price with no
accompanying trading opportunity. Such movements
may occur, for example, when, in reaction to an adverse
event or unexpected news announcement, some parts of
the market move far beyond their normal volatility range
and become temporarily illiquid. In 2014 gap risk
principally arose from non-recourse loan transactions,
mostly for corporate clients, where the collateral against
the loan is limited to the posted shares. Upon occurrence
of a gap event, the value of the equity collateral could
fall below the outstanding loan amount.
Given their characteristics, these transactions make little
or no contribution to VaR nor to traditional market risk
sensitivity measures. We capture their risks within our
stress testing scenarios and monitor gap risk on an
ongoing basis. We did not incur any material gap loss in
2014.
De-peg risk
(Unaudited)
HSBC has a lot of experience in managing fixed and
managed currency regimes. Using stressed scenarios on
spot rates, we are able to analyse how de-peg events
would impact the positions held by HSBC. We monitor
such scenarios to pegged or managed currencies, such as
the Hong Kong dollar, renminbi, Middle Eastern
currencies and the Swiss franc, the appreciation of which
was capped against the euro during 2014, and seek to
limit any potential losses that would occur. This
complements traditional market risk metrics, such as
historical VaR, which may not fully capture the risk
involved in holding positions in pegged or managed
currencies. Historical VaR relies on past events to
determine the likelihood of potential profits or losses.
However, pegged or managed currencies may not have
experienced a de-peg event during the historical
timeframe being considered.