HSBC 2015 Annual Report Download - page 209

HSBC HOLDINGS PLC
207
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
– offshore, must be risk weighted 20% or lower under the Basel standardised risk weighting methodology to qualify as
Level 1 liquid assets.
• denominated in a currency other than the currency of the related sovereign (i.e. foreign currency) must be risk weighted
20% or lower under the Basel standardised risk weighting methodology and issued in a limited number of major
currencies to qualify as Level 1 liquid assets.
The treatment of eurozone countries using the euro as their domestic currency depends on whether the exposures are held
onshore in the domestic banking system or offshore. Central bank and central government exposures held onshore in the
domestic banking system qualify as Level 1 liquid assets under criteria 1, but central bank and central government
exposures held offshore are considered to be denominated in a foreign currency under criteria 3.
2. Local/regional government exposures held onshore and considered by the local regulator to be the same risk as central
government exposures can be considered central government exposures.
3. Supranationals and multilateral development banks must be 0% risk weighted under the Basel standardised risk-weighting
methodology to qualify as Level 1 liquid assets.
4. To qualify as a level 2 liquid asset, the exposure must be risk weighted 20% or lower under the Basel standardised risk-
weighting methodology.
5. To qualify as a Level 3 liquid asset, an unsecured non-financial corporate debt exposure must satisfy a minimum internal
rating requirement.
On a case-by-case basis, operating entities are permitted to treat other assets as liquid if these assets are realistically assessed
to be liquid under stress. These liquid assets are reported as ‘Other’, separately from Level 1, Level 2 and Level 3 liquid assets.
Net cash flow arising from interbank and intragroup loans and deposits
Under the LFRF, a net cash inflow within three months arising from interbank and intra-Group loans and deposits will give rise
to a lower liquid asset requirement. Conversely, a net cash outflow within three months arising from interbank and intra-
Group loans and deposits will give rise to a higher liquid assets requirement.
Net cash flow arising from reverse repo, repo, stock borrowing, stock lending and outright short positions (including
intra-Group)
A net cash inflow represents liquid resources in addition to liquid assets because any unencumbered asset held as a
consequence of a reverse repo transaction with a residual contractual maturity within the stressed coverage ratio time period
is not reflected as a liquid asset.
The impact of net cash outflow depends on whether the underlying collateral encumbered as a result will qualify as a liquid
asset when released at the maturity of the repo. The majority of the Group’s repo transactions are collateralised by liquid
assets and, as such, any net cash outflow shown is offset by the return of liquid assets, which are excluded from the liquid
asset table above.
Wholesale debt monitoring
Where wholesale debt term markets are accessed to raise funding, ALCO is required to establish cumulative rolling three-
month and 12-month debt maturity limits to ensure no concentration of maturities within these timeframes.
Liquidity behaviouralisation
Liquidity behaviouralisation is applied to reflect our assessment of the expected period for which we are confident that we will
have access to our liabilities, even under a severe liquidity stress scenario, and the expected period for which we must assume
that we will need to fund our assets. Behaviouralisation is applied when the contractual terms do not reflect the expected
behaviour. Liquidity behaviouralisation is reviewed and approved by local ALCO in compliance with policies set by the RMM.
Our approach to liquidity risk management will often mean different approaches are applied to assets and liabilities. For
example, management may assume a shorter life for liabilities and a longer-term funding requirement for assets. All core
deposits are assumed under the Group’s core/non-core and advances to core funding frameworks to have a liquidity
behaviouralised life beyond one year and to represent a homogeneous source of core funding. The behaviouralisation of
assets is far more granular and seeks to differentiate the period for which we must assume that we will need to fund the asset.
Funds transfer pricing
Our funds transfer pricing policies give rise to a two-stage funds transfer pricing approach, reflecting the fact that we
separately manage interest rate risk and liquidity and funding risk under different assumptions. They have been developed to
be consistent with our risk management frameworks. Each operating entity is required to apply the Group’s transfer pricing
policy framework to determine for each material currency the most appropriate interest rate risk transfer pricing curve, a
liquidity premium curve (which is the spread over the interest rate risk transfer pricing curve) and a liquidity recharge
assessment (which is the spread under or over the interest rate risk transfer pricing curve).