HSBC 2015 Annual Report Download - page 218

Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
HSBC HOLDINGS PLC
216
• for non-interest bearing balances, the duration for which the balance is expected to remain under business-as-usual
conditions. This assessment is often driven by the re-investment tenors available to BSM to neutralise the risk through the
use of fixed-rate government bonds or interest rate derivatives, and for derivatives the availability of cash flow hedging
capacity.
Balance Sheet Management
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 (which usually meets on a monthly basis). It also manages the non-trading interest rate positions transferred to it within
a Markets limit structure.
In executing the management of the liquidity risk on behalf of ALCO, and managing the non-trading interest rate positions
transferred to it, BSM invests in highly-rated liquid assets in line with the Group’s liquid asset policy. The majority of the
liquidity is invested in central bank deposits and government, supranational and agency securities with most of the remainder
held in short-term interbank and central bank loans.
Withdrawable central bank deposits are accounted for as cash balances. Interbank loans, statutory central bank reserves and
loans to central banks are accounted for as loans and advances to banks. BSM’s holdings of securities are accounted for as
available-for-sale or, to a lesser extent, held-to-maturity assets.
Statutory central bank reserves are not recognised as liquid assets. The statutory reserves that would be released in line with the
Group’s stressed customer deposit outflow assumptions are reflected as stressed inflows.
BSM is permitted to use derivatives as part of its mandate to manage interest rate risk. Derivative activity is predominantly
through the use of vanilla interest rate swaps which are part of cash flow hedging and fair value hedging relationships.
Credit risk in BSM is predominantly limited to short-term bank exposure created by interbank lending, exposure to central
banks and high quality sovereigns, supranationals or agencies which constitute the majority of BSM’s liquidity portfolio. BSM
does not manage the structural credit risk of any Group entity balance sheets.
BSM is permitted to enter into single name and index credit derivatives activity, but it does so to manage credit risk on the
exposure specific to its securities portfolio in limited circumstances only. The risk limits are extremely limited and closely
monitored. At 31 December 2015, BSM had no open credit derivative index risk.
VaR is calculated on both trading and non-trading positions held in BSM. It is calculated by applying the same methodology
used for the Markets business and utilised as a tool for market risk control purposes.
BSM holds trading portfolio instruments in only very limited circumstances. Positions and the associated VaR were not
significant during 2015.
Sensitivity of net interest income
A principal part of our management of market risk in non-trading portfolios is to monitor the sensitivity of expected net
interest income under varying interest rate scenarios (simulation modelling). This monitoring is undertaken at an entity level
by local ALCOs.
Entities apply a combination of scenarios and assumptions relevant to their local businesses, and standard scenarios which are
required throughout HSBC. The latter are consolidated to illustrate the combined pro forma effect on our consolidated net
interest income.
Projected net interest income sensitivity figures represent the effect of the pro forma movements in net interest income based
on the projected yield curve scenarios and the Group’s current interest rate risk profile. This effect, however, does not incorporate
actions which would probably be taken by BSM or in the business units to mitigate the effect of interest rate risk. In reality,
BSM seeks proactively to change the interest rate risk profile to minimise losses and optimise net revenues. The net interest
income sensitivity calculations assume that interest rates of all maturities move by the same amount in the ‘up-shock’ scenario.
Rates are not assumed to become negative in the ‘down-shock’ scenario which may, in certain currencies, effectively result
in non-parallel shock. In addition, the net interest income sensitivity calculations take account of the effect on net interest
income of anticipated differences in changes between interbank interest rates and interest rates over which the entity has
discretion in terms of the timing and extent of rate changes.
Defined benefit pension schemes
Market risk arises within our defined benefit pension schemes to the extent that the obligations of the schemes are not fully
matched by assets with determinable cash flows. See ‘Pension risk’ on page 225 for additional information.
HSBC Holdings
As a financial services holding company, HSBC Holdings has limited market risk activity. Its activities predominantly involve
maintaining sufficient capital resources to support the Group’s diverse activities; allocating these capital resources across our
businesses; earning dividend and interest income on its investments in our businesses; providing dividend payments to its