HSBC 2010 Annual Report Download - page 326

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
20 – Derivatives
324
Notional contract amounts of derivatives held for trading purposes by product type
HSBC HSBC Holdings
At
31 December
2010
At
31 December
2009
At
31 December
2010
At
31 December
2009
US$m US$m US$m US$m
Foreign exchange .......................................................................... 3,692,798 2,883,201 17,287 17,150
Interest rate ................................................................................... 18,104,141 13,874,355 6,804 6,804
Equity ............................................................................................ 294,587 217,828 – –
Credit ............................................................................................ 1,065,218 1,237,055 – –
Commodity and other ................................................................... 82,856 53,720 – –
23,239,600 18,266,159 24,091 23,954
Credit derivatives
HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad
range of users, structuring deals to produce risk management products for its customers, or making markets in certain
products. Risk is typically controlled through entering into offsetting credit derivative contracts with other
counterparties.
HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related
credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives
is restricted to a small number of offices within the major centres which have the control infrastructure and market
skills to manage effectively the credit risk inherent in the products.
Credit derivatives are also deployed to a limited extent for the risk management of the Group’s loan portfolios.
The notional contract amount of credit derivatives of US$1,065,218m (2009: US$1,237,055m) consisted of
protection bought of US$530,235m (2009: US$614,690m) and protection sold of US$534,983m (2009:
US$622,365m).
The credit derivative business operates within the market risk management framework described on pages 145 to 154.
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been
derived had valuation techniques used for subsequent measurement been applied at initial recognition, less
subsequent releases, is as follows:
Unamortised balance of derivatives valued using models with significant unobservable inputs
2010
2009
US$m US$m
Unamortised balance at 1 January ............................................................................................................ 260 204
Deferral on new transactions .................................................................................................................... 331 192
Recognised in the income statement during the period:
– amortisation ....................................................................................................................................... (106) (86)
– subsequent to unobservable inputs becoming observable ................................................................ (17) (19)
– maturity, termination or offsetting derivative ................................................................................... (163) (42)
Exchange differences ................................................................................................................................ (15) 11
Risk hedged .............................................................................................................................................. (40) –
Unamortised balance at 31 December1 ..................................................................................................... 250 260
1 This amount is yet to be recognised in the consolidated income statement.
Hedging instruments
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and
liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing
debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the
maturity and other profiles of its assets and liabilities.