HSBC 2012 Annual Report Download - page 454

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
19 – Derivatives
452
19 Derivatives
Fair values of derivatives by product contract type held by HSBC
Assets Liabilities
Trading Hedging Total Trading Hedging Total
US$m US$m US$m US$m US$m US$m
At 31 December 2012
Foreign exchange ................................................ 68,277 1,227 69,504 70,944 239 71,183
Interest rate ......................................................... 628,162 2,417 630,579 618,808 6,491 625,299
Equity .................................................................. 15,413 – 15,413 19,889 – 19,889
Credit .................................................................. 12,740 – 12,740 13,508 – 13,508
Commodity and other ......................................... 1,443 – 1,443 1,236 – 1,236
Gross total fair values ......................................... 726,035 3,644 729,679 724,385 6,730 731,115
Netting ................................................................ (372,229) (372,229)
Total .................................................................... 357,450 358,886
At 31 December 2011
Foreign exchange ................................................ 74,958 1,026 75,984 75,077 371 75,448
Interest rate ......................................................... 510,652 2,439 513,091 502,906 6,221 509,127
Equity .................................................................. 15,262 – 15,262 19,363 – 19,363
Credit .................................................................. 25,694 – 25,694 25,800 – 25,800
Commodity and other ......................................... 2,198 – 2,198 1,492 – 1,492
Gross total fair values ......................................... 628,764 3,465 632,229 624,638 6,592 631,230
Netting ................................................................ (285,850) (285,850)
Total .................................................................... 346,379 345,380
The 3% increase in the fair value of derivative assets during 2012 was driven by increased interest rate derivative fair
values as major currency yield curves continued to decline, in particular, the euro. This drove both the increase in
gross fair values and the increase in the netting adjustment.
Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries
At 31 December 2012 At 31 December 2011
Trading Trading Trading Trading
assets liabilities assets liabilities
US$m US$m US$m US$m
Foreign exchange .......................................................................... 1,636 760 1,546 1,067
Interest rate ................................................................................... 2,132 – 2,022 –
3,768 760 3,568 1,067
Derivatives are financial instruments that derive their value from the price of underlying items such as equities,
bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives enable
users to increase, reduce or alter exposure to credit or market risks.
Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. A
description of how the fair value of derivatives is derived is set out on page 443. Derivative assets and liabilities on
different transactions are only set off (netted) if the transactions are with the same counterparty, a legal right of set-
off exists and the cash flows are intended to be settled on a net basis.
Use of derivatives
HSBC transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the
portfolio risks arising from client business and to manage and hedge HSBC’s own risks. Derivatives (except for
derivatives which are designated as effective hedging instruments as defined in IAS 39) are held for trading. Within
the held-for-trading classification are two types of derivatives: those used in sales and trading activities, and those
used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge
accounting. The second category includes derivatives managed in conjunction with financial instruments designated
at fair value. These activities are described more fully below.
HSBC’s derivative activities give rise to significant open positions in portfolios of derivatives. These positions
are managed constantly to ensure that they remain within acceptable risk levels. When entering into derivative