HSBC 2015 Annual Report Download - page 383

HSBC HOLDINGS PLC
381
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Global Banking and Markets fair value adjustments
2015 2014
$m $m
Type of adjustment
Risk-related 1,402 1,958
–
bid-offer 477 539
–
uncertainty 95 357
–
credit valuation adjustment 853 871
–
debit valuation adjustment (465) (270)
–
funding fair value adjustment 442 460
–
other 0 1
Model-related 97 57
–
model limitation 92 52
–
other 5 5
Inception profit (Day 1 P&L reserves) (Note 16) 97 114
At 31 December 1,596 2,129
Fair value adjustments declined by $533m during the year. The most significant movement was a decline of $262m in respect
of the uncertainty category, driven by the reclassification to model limitation of an adjustment relating to derivative
discounting assumptions. This adjustment reduced significantly following contract renegotiations with certain counterparties.
The debit valuation adjustment increased by $195m as a result of the widening of HSBC’s credit spreads.
Risk-related adjustments
Bid-offer
IFRS 13 ‘Fair value measurement’ requires use of the price within the bid-offer spread that is most representative of fair value.
Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer
costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments
or by disposing of or unwinding the position.
Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more
subjective. In these circumstances, there exists a range of possible values that the financial instrument or market parameter
may assume and an adjustment may be necessary to reflect the likelihood that in estimating the fair value of the financial
instrument, market participants would adopt more conservative values for uncertain parameters and/or model assumptions
than those used in the valuation model.
Credit valuation adjustment
The CVA is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect within fair value the
possibility that the counterparty may default and that HSBC may not receive the full market value of the transactions (see
below).
Debit valuation adjustment
The DVA is an adjustment to the valuation of OTC derivative contracts to reflect within fair value the possibility that HSBC may
default, and that HSBC may not pay full market value of the transactions (see below).
Funding fair value adjustment
The funding fair value adjustment (‘FFVA’) is calculated by applying future market funding spreads to the expected future
funding exposure of any uncollateralised component of the OTC derivative portfolio. This includes the uncollateralised
component of collateralised derivatives in addition to derivatives that are fully uncollateralised. The expected future funding
exposure is calculated by a simulation methodology, where available. The expected future funding exposure is adjusted for
events that may terminate the exposure such as the default of HSBC or the counterparty. The FFVA and DVA are calculated
independently.
Model-related adjustments
Model limitation
Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all
material market characteristics. Additionally, markets evolve, and models that were adequate in the past may require
development to capture all material market characteristics in current market conditions. In these circumstances, model
limitation adjustments are adopted. As model development progresses, model limitations are addressed within the valuation
models and a model limitation adjustment is no longer needed.