HSBC 2015 Annual Report Download - page 210

Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
HSBC HOLDINGS PLC
208
The interest rate risk transfer pricing policy seeks to ensure that all market interest rate risk arising structurally from non-
trading (banking book) assets and liabilities which is capable of being neutralised externally in the market or neutralised
internally by off-setting transfers, is transferred to BSM to be managed centrally as non-trading market risk. For each material
currency each operating entity employs a single interest rate risk transfer pricing curve. The transfer price curve used for this
purpose reflects how BSM in each operating entity is best able to neutralise the interest rate risk in the market at the point of
transfer. Where basis risk can be identified between the re-pricing basis of an external asset or external liability and the re-
pricing basis of the interest rate risk transfer pricing curve, this basis risk may be transferred to BSM provided it can neutralise
the basis risk in the market.
Liquidity and funding risk is transfer priced independently from interest rate risk because the liquidity and funding risk of an
operating entity is transferred to ALCO to be managed centrally. ALCO monitors and manages the advances to core funding
ratio and delegates the management of the liquid asset portfolio and execution of the wholesale term debt funding plan to
BSM. This assists ALCO in ensuring the Group’s stressed coverage ratios remain above 100% out to three months.
The liquidity and funding risk transfer price consists of two components:
• Liquidity recharge: the cost of holding the benchmark liquid asset (the yield under the transfer price) to meet stressed cash
outflows. The benchmark liquid asset is decided by ALCO and based on the weighted average duration that can be achieved
by investing in level 1 liquid assets, with a residual duration of up to one year.
• Liquidity premium: the assessed cost/value of term funding (the yield over the transfer price) to pay for term debt and core
deposits.
The assessed cost of holding liquid assets is allocated to the outflows modelled by the Group’s internal stressed coverage ratio
framework.
Liquidity premium is charged to any asset that affects our three-month stressed coverage ratios based on the assessed
behaviouralised liquidity life of the asset, with any asset affecting the Group’s advances to core funding metric required to
have a minimum behaviouralised life of at least one year, and the prevailing liquidity premium curve rate set by ALCO and
calibrated in line with Group’s calibration principles. Core deposits therefore share equally in the liquidity premiums charged
to the assets they support, after deducting the cost of any term funding.
Repos and stock lending
GB&M provides collateralised security financing services to its clients, providing them with cash financing or specific securities.
When cash is provided to clients against collateral in the form of securities, the cash provided is recognised on the balance
sheet as a reverse repo. When securities are provided to clients against cash collateral the cash received is recognised on the
balance sheet as a repo or, if the securities are equity securities, as stock lending.
Each operating entity manages its collateral through a central collateral pool, in line with the LFRF. When specific securities
need to be delivered and the entity does not have them currently available within the central collateral pool, the securities are
borrowed on a collateralised basis. When securities are borrowed against cash collateral the cash provided is recognised on
the balance sheet as a reverse repo or, if the securities are equity securities, as stock borrowing.
Operating entities may also borrow cash against collateral in the form of securities, using the securities available in the central
collateral pool. Repos and stock lending can be used in this way to fund the cash requirement arising from securities owned
outright by Markets to facilitate client business, and the net cash requirement arising from financing client securities activity.
Reverse repos, stock borrowing, repos and stock lending are reported net when the IFRSs offsetting criteria are met. In some
cases transactions to borrow or lend securities are collateralised using securities. These transactions are off-balance sheet.
Any security accepted as collateral for a reverse repo or stock borrowing transaction must be of very high quality and its value
subject to an appropriate haircut. Securities borrowed under reverse repo or stock borrowing transactions can only be
recognised as part of the liquidity asset buffer for the duration of the transactions and only if the security received is eligible
under the liquid asset policy within the LFRF.
Credit controls are in place to ensure that the fair value of any collateral received remains appropriate to collateralise the cash
or fair value of securities given.