HSBC 2015 Annual Report Download - page 211

HSBC HOLDINGS PLC
209
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
The effect of active collateral management
Collateral is managed on an operating entity basis, consistent with the approach adopted in managing liquidity and funding.
Available collateral held by each operating entity is managed as a single collateral pool. In deciding which collateral to pledge,
each operating entity seeks to optimise the use of the available collateral pool within the confines of the LFRF, irrespective of
whether the collateral pledged is recognised on-balance sheet or was received in respect of reverse repo, stock borrowing or
derivative transactions.
Managing collateral in this manner affects the presentation of asset encumbrance in that we may encumber on-balance sheet
holdings while maintaining available unencumbered off-balance sheet holdings, even though we are not seeking to directly
finance the on-balance sheet holdings pledged.
In quantifying the level of encumbrance of negotiable securities, the encumbrance is analysed by individual security. When
a particular security is encumbered and we hold the security both on-balance sheet and off-balance sheet with the right to
repledge, we assume for the purpose of this disclosure that the off-balance sheet holding received from the third party is
encumbered ahead of the on-balance sheet holding.
An on-balance sheet encumbered and off-balance sheet unencumbered asset will occur, for example, if we receive a specific
security as a result of a reverse repo/stock borrowing transaction, but finance the cash lent by pledging a generic collateral
basket, even if the security received is eligible for the collateral basket pledged. It will also occur if we receive a generic
collateral basket as a result of a reverse repo transaction but finance the cash lent by pledging specific securities, even if the
securities pledged are eligible for the collateral basket.
Encumbered and unencumbered assets
Definitions of the categories included in the table ‘Analysis of on-balance sheet encumbered and unencumbered assets’:
• Assets encumbered as a result of transactions with counterparties other than central banks as a result of covered bonds are any assets on
our balance sheet pledged against our covered bonds issuance with a counterparty which is not central bank and as a result the assets are
unavailable to the bank to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.
• Assets encumbered as a result of transactions with counterparties other than central banks as a result of securitisation are any assets on our
balance sheet pledged against securitisations with a counterparty which is not central bank including asset-backed commercial paper, CDOs,
residential mortgage-backed securities, or structured investment vehicles paper and as a result the assets are unavailable to the bank to
secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.
• Assets encumbered as a result of transactions with counterparties other than central banks – Other are assets on our balance sheet (other
than covered bonds and securitisation above) which have been pledged with a counterparty which is not central bank as a collateral against
an existing liability, and as a result are assets which are unavailable to the bank to secure funding, satisfy collateral needs or be sold to
reduce potential future funding requirements. Examples include assets pledged for sale and repurchase and stock lending transactions and
certain property assets.
• Assets positioned at central banks (i.e. pre-positioned plus encumbered) are any assets that are eligible for emergency central bank
liquidity/funding or under central bank pre-existing arrangements for funding without further due diligence work required. Any transferable
customer loan that is central bank eligible such as pre-positioned central bank UK mortgages and US mortgages accepted by FHLB and
assets on our balance sheet which have been pledged with central bank as collateral against an existing liability, and as a result are assets
which are unavailable to the bank to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.
• Unencumbered – readily available assets are assets regarded by the bank to be readily available in the normal course of business to secure
funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their
use for these purposes.
• Unencumbered – other assets capable of being encumbered are assets where there are no restrictions on their use to secure funding, meet
collateral needs, or be sold to reduce potential future funding requirements, but they are not readily realisable in the normal course of
business in their current form.
• Unencumbered – reverse repo/stock borrowing receivables and derivative assets are assets related specifically to reverse repo, stock
borrowing and derivative transactions. They are shown separately as these on-balance sheet assets cannot be pledged but often give rise to
the receipt of non-cash assets which are not recognised on the balance sheet, and can additionally be used to raise secured funding, meet
additional collateral requirements or be sold.
• Unencumbered – cannot be encumbered are assets that have not been pledged and which we have assessed could not be pledged and
therefore could not be used to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements. An
example is assets held by the Group’s insurance subsidiaries that back liabilities to policyholders and support the solvency of these entities.
Historically, the Group has not recognised any contingent liquidity value for assets other than those assets defined under the LFRF as being
liquid assets, and any other negotiable instruments that under stress are assumed to be realisable after three months, even though they may
currently be realisable. This approach has generally been driven by our risk appetite not to place any reliance on central banks. In a few cases,
we have recognised the contingent value of discrete pools of assets, but the amounts involved are insignificant. As a result, we have reported
the majority of our loans and advances to customers and banks in the category ‘Other realisable assets’ as management would need to
perform additional actions in order to make the assets transferable and readily realisable.