HSBC 2015 Annual Report Download - page 169

HSBC HOLDINGS PLC
167
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Market risk is the risk that movements in market factors,
such as foreign exchange rates, interest rates, credit
spreads, equity prices and commodity prices, will
reduce our income or the value of our portfolios.
There were no material changes to our policies and
practices for the management of market risk in 2015.
Exposure to market risk
Exposure to market risk is separated into two portfolios:
• Trading portfolios comprise positions arising from
market-making and warehousing of customer-derived
positions. The interest rate risk on fixed-rate securities
issued by HSBC Holdings is not included in Group VaR.
The management of this risk is described on page 171.
• Non-trading portfolios comprise positions that primarily
arise from the interest rate management of our retail
and commercial banking assets and liabilities, financial
investments designated as available for sale and held to
maturity, and exposures arising from our insurance
operations (see page 180).
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with our risk
appetite.
We use a range of tools to monitor and limit market risk
exposures, including:
• Sensitivity analysis includes the sensitivity of net interest
income and the sensitivity of structural foreign exchange,
which are used to monitor the market risk positions within
each risk type;
• 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; and
• Stress testing: in recognition of VaR’s limitations we augment
VaR with stress testing to evaluate the potential impact on
portfolio values of more extreme, though plausible, events or
movements in a set of financial variables. Examples of
scenarios reflecting current market concerns are the
slowdown in mainland China and the potential effects of a
sovereign debt default, including its wider contagion effects.
A summary of our market risk management framework including
current policies is provided in the Appendix to Risk on page 210.
Market risk in 2015
Global economic growth remained subdued in 2015, with
a number of headwinds present. The slowdown of the
mainland Chinese economy dampened global trade flows
and caused volatility in currency and global stock markets.
Market concerns persist as to the scale of the slowdown
and the potential for further depreciation of the renminbi.
Performance among developed markets was uneven,
with the US and UK performing better than the eurozone,
where the risk of a Greek exit faded in the second half of
the year and ECB monetary policy remained supportive.
Emerging market economies were affected by falling
commodity prices as mainland Chinese demand slowed
along with the prospect of monetary policy normalisation
in the US. This led to capital outflows from emerging
markets and a significant depreciation in several key
currencies against the US dollar.
Against this backdrop, we maintained an overall defensive
risk profile in our trading businesses. Defensive positions
are characterised by low net open positions or the purchase
of volatility protection via options trades. Non-trading VaR
increased during the year as higher interest rates, especially
in US dollars, caused the duration of non-trading assets to
increase.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets.
This was lower at 31 December 2015 than at 31 December
2014 due to a decrease in interest rate trading VaR. During
the year, trading VaR remained relatively stable trading in a
tight range, with the effects of increased market volatility
on VaR offset by reduced positions.
The daily levels of total trading VaR over the last year are
set out in the graph below.