HSBC 2012 Annual Report Download - page 224

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Market risk > Structural FX exposures / Non-trading interest rate risk / BSM / Sensitivity of NII
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calculated before taking into account losses which
would have been absorbed by the capital note
holders. Excluding the gross exposure for SICs
consolidated in our balance sheet, this exposure
reduced to US$119m (2011: US$325m).
The decrease in this sensitivity at 31 December
2012 compared with 31 December 2011 was due
mainly to the effect of the lower volatility in credit
spreads observed during 2012.
At 31 December 2012, the capital note holders
would absorb the first US$2.3bn (2011: US$2.3bn)
of any losses incurred by the SICs before we incur
any equity losses.
Equity securities classified as available
for sale
Fair value of equity securities
(Audited)
2012 2011
US$bn US$bn
Private equity holdings53 ............ 2.9 3.0
Funds invested for short-term
cash management ................... 0.2 0.2
Investment to facilitate
ongoing business54 .................. 1.1 1.1
Other strategic investments ........ 1.6 2.9
5.8 7.2
For footnotes, see page 249.
The fair value of the constituents of equity securities
classified as available for sale can fluctuate
considerably. The table above sets out maximum
possible loss on shareholder’s equity from available-
for-sale equity securities.
For details of the impairment incurred on
available-for-sale equity securities, see
‘Securitisation exposures and other structured
products’ on page 184.
Structural foreign exchange exposures
(Unaudited)
Our policies and procedures for managing structural
foreign exchange exposures are described on
page 268. For details of structural foreign exchange
exposures see Note 35 on the Financial Statements.
Non-trading interest rate risk
(Unaudited)
Asset, Liability and Capital Management (‘ALCM’)
is responsible for measuring and controlling non-
trading interest rate risk under the supervision of the
Risk Management Meeting (‘RMM’). Its primary
responsibilities are:
• to define the rules governing the transfer of
interest rate risk from the global businesses to
BSM;
• to ensure that all market interest rate risk
that can be hedged is transferred from the global
businesses to BSM; and
• to define the rules and metrics for monitoring
the residual interest rate risk in the global
businesses.
The different types of non-trading interest
rate risk and the controls which we use to quantify
and limit exposure to these risks can be categorised
as follows:
• risk which is transferred to BSM and managed
by BSM within a defined risk mandate (see
below);
• risk which remains outside BSM because it
cannot be hedged or which arises due to our
behaviouralised transfer pricing assumptions.
This risk is captured by our net interest income
or Economic Value of Equity (‘EVE’) sensitivity
and corresponding limits are part of our global
and regional risk appetite statements for non-
trading interest rate risk. A typical example
would be margin compression created by
unusually low rates in key currencies;
• basis risk which is transferred to BSM when
it can be hedged. Any residual basis risk
remaining in the global businesses is reported to
ALCO. A typical example would be a managed
rate savings product transfer-priced using a
Libor-based interest rate curve; and
• model risks which cannot be captured by net
interest income or EVE sensitivity, but are
controlled by our stress testing framework. A
typical example would be prepayment risk on
residential mortgages or pipeline risk.
Balance Sheet Management
(Unaudited)
Effective governance across BSM is supported by
the dual reporting lines it has to the CEO of GB&M
and to the Group Treasurer. In each operating entity,
BSM is responsible for managing liquidity and
funding under the supervision of the local ALCO. It
also manages the non-trading interest rate positions
transferred to it within a Global Markets limit
structure.
BSM reinvests excess liquidity into highly-
rated liquid assets. The majority of the liquidity is
invested in central bank deposits and government,
supranational and agency securities with most of