RNS Announcement
20 Notes on the statement of cash flows
Half-year to
30 June 2014
30 June
2013
31 December
US$m
Other non-cash items included in profit before tax
Depreciation, amortisation and impairment .................................................
1,119
1,214
1,116
(Gains)/losses arising from dilution/reclassification of interests in associates .
32
(1,089)
38
Revaluations on investment property ...........................................................
(71)
(110)
(3)
Share-based payment expense .......................................................................
333
355
275
Loan impairment losses gross of recoveries and other credit risk provisions .
2,611
3,837
3,519
Provisions ....................................................................................................
370
1,053
1,525
Release of impairment of financial investments ...........................................
(191)
(36)
-
Charge/(credit) for defined benefit plans .......................................................
258
(126)
247
Accretion of discounts and amortisation of premiums ..................................
(177)
(7)
187
4,284
5,091
6,904
Change in operating assets
Change in prepayments and accrued income .................................................
(530)
(341)
(1,227)
Change in net trading securities and net derivatives ......................................
(15,790)
13,398
(38,268)
Change in loans and advances to banks .........................................................
2,481
5,002
29,434
Change in loans and advances to customers ..................................................
(60,076)
6,693
(53,244)
Change in reverse repurchase agreements - non-trading ...............................
(8,776)
(18,287)
(91,291)
Change in financial assets designated at fair value .........................................
(8)
(1,585)
(3,337)
Change in other assets ..................................................................................
(3,567)
16,041
(11,887)
(86,266)
20,921
(169,820)
Change in operating liabilities
Change in accruals and deferred income ........................................................
(1,189)
(1,803)
4,888
Change in deposits by banks .........................................................................
6,310
(1,966)
(5,815)
Change in customer accounts ........................................................................
59,287
(29,128)
86,494
Change in repurchase agreements - non-trading ...........................................
1,286
26,023
97,629
Change in debt securities in issue ...................................................................
(7,683)
(10,072)
(5,309)
Change in financial liabilities designated at fair value ....................................
(3,562)
(3,466)
4,460
Change in other liabilities .............................................................................
4,659
(658)
3,480
59,108
(21,070)
185,827
Interest and dividends
Interest paid .................................................................................................
(7,775)
(8,789)
(8,473)
Interest received ...........................................................................................
24,725
25,767
25,056
Dividends received ........................................................................................
630
587
546
At 30 June 2014
At 30 June
At 31 December
Cash and cash equivalents
Cash and balances at central banks ................................................................
132,137
148,285
166,599
Items in the course of collection from other banks .......................................
8,144
8,416
6,021
Loans and advances to banks of one month or less .......................................
112,078
131,082
96,583
Reverse repurchase agreements with banks of one month or less ..................
77,842
39,938
68,008
Treasury bills, other bills and certificates of deposit less than three months ..
14,233
25,014
15,980
Less: items in the course of transmission to other banks ...............................
(9,936)
(9,364)
(6,910)
334,498
343,371
346,281
Disposal of significant subsidiaries and businesses
Proceeds from the disposal of Ping An arose from the sale of our remaining investment in Ping An during the first half of 2013, as described on page 521 of the Annual Report and Accounts 2013.
21 Interests in associates and joint ventures
Associates
At 30 June 2014, the carrying amount of HSBC's interests in associates was US$17,236m (30 June 2013: US$15,429m; 31 December 2013: US$16,417m).
Principal associates of HSBC
At 30 June 2013
At 31 December 2013
Carrying amount
Fair
value1
Listed
Bank of Communications Co., Limited ........
14,113
9,757
12,394
9,092
13,412
9,954
The Saudi British Bank ................................
2,579
5,205
2,242
3,957
2,437
4,693
16,692
14,962
14,636
13,049
15,849
14,647
1 Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).
Country of
incorporation
and principal
place of
business
Principal
activity
HSBC's
interest
in equity
capital
Issued
equity
Bank of Communications Co., Limited ..............................
PRC1
Banking
services
19.03%
RMB74,263m
The Saudi British Bank .......................................................
Saudi
Arabia
40.00%
SR10,000m
1 People's Republic of China.
Bank of Communications Co., Limited ('BoCom')
HSBC's investment in BoCom was equity accounted with effect from August 2004. HSBC's significant influence in BoCom was established as a result of representation on the Board of Directors and, in accordance with the Technical Cooperation and Exchange Programme, HSBC is assisting in the maintenance of financial and operating policies and a number of staff have been seconded to assist in this process.
For the period ended 30 June 2014, HSBC included the associate's results on the basis of financial statements made up for the six months to 31 March 2014, taking into account the financial effect of significant transactions or events in the subsequent period from 1 April 2014 to 30 June 2014.
Impairment testing
As at 30 June 2014, the fair value of HSBC's investment in BoCom had been below the carrying amount for approximately 26 months, apart from a short period in 2013. As a result, we performed an impairment test on the carrying amount of the investment in BoCom. The test confirmed that there was no impairment as at 30 June 2014.
VIU
Carrying value
Fair value
US$bn
BoCom ........................................................
14.6
14.1
9.8
14.0
13.4
10.0
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a value-in-use ('VIU') calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's estimates. Cash flows beyond the short to medium-term are then extrapolated in perpetuity using a long-term growth rate. An imputed capital maintenance charge ('CMC') is calculated as a deduction from forecast cash flows. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted
assets to total assets, and the expected regulatory capital requirements. Management judgement is required in estimating the future cash flows of BoCom.
During 2014, the ratio of risk-weighted assets to total assets and the cost-income ratio were further identified as key assumptions to which the VIU is sensitive.
Key assumptions in VIU calculation
Long-term growth rate: the growth rate used was 5% (2013: 5%) for periods after 2018 and does not exceed forecast GDP growth in China.
Discount rate: the discount rate of 13% (2013: 13%) was based on an internal cost of capital rate used to evaluate investments in mainland China and was adjusted upwards to reflect a degree of risk and uncertainty. We corroborated this against a range of rates derived by applying a Capital Asset Pricing Model ('CAPM') calculation for BoCom, using market data inputs. These data inputs consist of a number of financial and economic variables including the risk-free rate and a market premium to reflect the inherent risk of BoCom. The discount rate of 13% was further benchmarked against a range of estimates made by external analysts. The discount rate used was within the range of 11.2% to 15.3% (2013: 10.5% to 15.0%) indicated by the CAPM and external sources.
Loan impairment charge as a percentage of customer advances: the ratio increased from 0.63% to 1% (2013: 0.64% to 1%) in the short to medium term. The long-term ratio was assumed to revert to a historical rate of 0.65% (2013: 0.64%). The rates were within the medium-term range forecasts of 0.52% to 1.11% (2013: 0.55% to 1.20%) disclosed by external analysts.
Risk-weighted assets as a percentage of total assets: the ratio used was 70.2% for periods from 2014 onwards to perpetuity (2013: 68.7%).
Cost-income ratio: the ratio used increased from 40.8% to 43.0% (2013: 39.7% to 43.2%) in the short to medium term. The ratios were within the short to medium-term range forecasts of 39.8% to 44.3% (2013: 38.0% to 44.2%) disclosed by external analysts.
Sensitivity analyses were performed on each key assumption to ascertain the impact of reasonably possible changes in assumptions. The following changes to the key assumptions used in the VIU calculation would be necessary to reduce headroom to nil:
Key assumption
Changes to key assumption to reduce headroom to nil
· Long-term growth rate
· Discount rate
· Loan impairment charge as a percentage of customer advances
· Risk-weighted assets as a percentage of total assets
· Cost-income ratio
· Decrease by 13 basis points
· Increase by 12 basis points
· Increase by 2.5 basis points
· Increase by 1%
· Increase by 55 basis points
The following table illustrates the effect on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change will occur at the same time.
Favourable change
Current model
Unfavourable change
Carrying value: US$14.1bn
Long-term growth rate ...........................................
+50bp
+100bp
5%
-50bp
-100bp
VIU .....................................................................
16.0
17.7
13.3
12.1
Increase/(decrease) in VIU ...................................
1.4
3.1
(1.3)
(2.5)
Discount rate ..........................................................
13%
16.2
18.1
13.1
11.9
1.6
3.5
(1.5)
(2.7)
Loan impairment charge as a percentage ofcustomer advances ..............................................
0.65% throughout
2014-18: 0.63%-1.00%
2019 onwards: 0.65%
1.00% from 2014-18
15.0
13.6
0.4
(1.0)
Risk-weighted assets as a percentage oftotal assets ..........................................................
-200bp
70.2% throughout
+200bp
14.9
15.3
14.2
13.8
0.3
0.7
(0.4)
(0.8)
Cost income ratio ...................................................
2014-18: 40.8%-43.0%
2019 onwards: 43.0%
15.2
13.9
0.6
(0.7)
Carrying value: US$13.4bn
15.4
16.9
12.9
11.8
2.9
(1.1)
(2.2)
15.6
17.3
12.7
11.6
3.3
(2.4)
0.64% throughout
2013-18: 0.64%-1.00%
2019 onwards: 0.64%
14.8
13.5
0.8
(0.5)
68.7% throughout
14.4
14.7
13.7
(0.3)
(0.6)
2013-18: 39.7%-43.2%
2019 onwards: 43.2%
14.3
Joint ventures
At 30 June 2014, the carrying amount of HSBC's interests in joint ventures was US$261m (30 June 2013: US$247m; 31 December 2013: US$223m).
Principal joint ventures of HSBC
place of business
Principal activity
HSBC's interest
in equity capital
Issued equity
HSBC Saudi Arabia Limited .......................
Saudi Arabia
Investment banking
49.00%
SR500m
Vaultex UK Limited ..................................
England
Cash management
50.00%
£10m
22 Contingent liabilities, contractual commitments and guarantees
At
Guarantees and contingent liabilities
Guarantees ................................................................................................
87,800
80,600
84,554
Other contingent liabilities .......................................................................
394
228
182
88,194
80,828
84,736
Commitments
Documentary credits and short-term trade-related transactions .................
12,986
13,078
12,154
Forward asset purchases and forward deposits placed .................................
2,353
710
1,005
Undrawn formal standby facilities, credit lines and other commitments to lend ......................................................................................................
626,729
574,158
574,444
642,068
587,946
587,603
The above table discloses the nominal principal amounts of commitments (excluding capital commitments, which are separately discussed below), guarantees and other contingent liabilities which are mainly credit-related instruments including both financial and non-financial guarantees and commitments to extend credit. Contingent liabilities arising from legal proceedings and regulatory matters against the Group are disclosed in Note 25. Nominal principal amounts represent the amounts at risk should contracts be fully drawn upon and clients default. The amount of the loan commitments shown above reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. As a significant proportion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements.
Capital commitments
In addition to the commitments disclosed above, at 30 June 2014 HSBC had US$513m (30 June 2013: US$401m; 31 December 2013: US$401m) of capital commitments contracted but not provided for and US$232m (30 June 2013: US$196m; 31 December 2013: US$112m) of capital commitments authorised but not contracted for.
23 Segmental analysis
HSBC operates a matrix management structure which includes geographical regions and global businesses. HSBC considers that geographical operating segments represent the most appropriate information for users of the financial statements to best evaluate the nature and financial effects of HSBC's business activities and the economic environment in which it operates. HSBC's operating segments are Europe, Asia, Middle East and North Africa, North America and Latin America.
Previously, HSBC's operating segments were reported as Europe, Hong Kong, Rest of Asia-Pacific, Middle East and North Africa, North America and Latin America. Hong Kong and Rest of Asia-Pacific are no longer regarded as separate reportable operating segments, having considered the geographical financial information presented to the chief operating decision maker ('CODM'). From 1 January 2014, they have been replaced by a new operating segment, 'Asia', which better aligns with internal management information used for evaluation when making business decisions and resource allocations. The CODM continues to be the Group Management Board and the
basis for measuring segmental results has not changed. Comparative financial information has been re-presented accordingly.
There has been no change in the underlying business operations comprising the Asia segment, which were previously reported in Hong Kong and Rest of Asia-Pacific. Reported net operating income in Asia for the half-year to 30 June 2014 was US$12,107m (30 June 2013: US$13,291m; 31 December 2013: US$11,141m). This was US$346m lower (30 June 2013: US$355m lower; 31 December 2013: US$394m lower) than would be calculated by adding net operating income reported for Hong Kong and Rest of Asia-Pacific on an individual basis. The reduction in net operating income is offset by an equal decrease in operating expenses. The difference relates to shared service recharges and business activity undertaken between the two regions which form revenue or expense on an individual basis, but are eliminated as 'inter-segment' activity when reported as Asia. There is no difference between profit before tax reported for Asia and that which would be calculated by adding the profit before tax of Hong Kong and Rest of Asia-Pacific on an individual basis.
Europe
Asia
MENA
North
America
Latin
Intra-
HSBC
items
Total
Net operating income1
Half-year to 30 June 2014
Net operating income .....................
10,873
12,107
1,294
4,067
4,265
(1,439)
31,167
External ......................................
10,335
11,343
1,271
3,948
4,270
Inter-segment .............................
538
764
23
119
(5)
Half-year to 30 June 2013
11,474
13,291
1,253
4,632
4,958
(1,236)
34,372
11,092
12,507
1,262
4,534
4,977
382
784
(9)
98
(19)
Half-year to 31 December 2013
9,493
11,141
1,250
4,171
5,610
(1,392)
30,273
9,016
10,346
1,235
4,035
5,641
477
795
15
136
(31)
Profit/(loss) before tax
Half-year to:
30 June 2014 ............................
2,258
7,894
989
825
374
12,340
30 June 2013 ..............................
2,768
9,262
909
666
466
−
14,071
31 December 2013 ......................
(943)
6,591
785
555
1,506
8,494
Balance sheet information
Total assets ....................................
1,430,863
874,334
61,289
437,706
125,630
(176,229)
2,753,593
Total liabilities ...............................
1,362,091
807,906
51,619
398,776
110,708
2,554,871
1,365,534
799,842
63,292
473,218
123,032
(179,602)
2,645,316
1,304,260
742,802
53,801
434,361
107,333
2,462,955
1,392,959
831,791
60,810
432,035
113,999
(160,276)
2,671,318
1,326,537
770,938
50,706
393,635
99,319
2,480,859
1 Net operating income before loan impairment charges and other credit risk provisions.
Financial information presented on previous geographical operating segments
The following information is presented in accordance with our previous operating segmentation as set out in the Annual Report and Accounts 2013 on page 472.
Hong
Kong
Rest of
Asia-
Pacific
Net operating income ......
7,221
5,232
(1,785)
External .......................
6,628
4,715
Inter-segment ..............
593
517
6,643
7,003
(1,591)
6,098
6,409
545
594
6,560
4,975
(1,786)
5,933
4,413
627
562
30 June 2014 ..............
4,549
3,345
30 June 2013 ................
4,205
5,057
31 December 2013 .......
3,884
2,707
Total assets ......................
574,679
357,721
(234,295)
Total liabilities .................
547,402
318,570
528,712
325,271
(233,743)
498,691
298,252
555,413
335,937
(219,835)
523,579
306,918
24 Goodwill impairment
As described on page 513 of the Annual Report and Accounts 2013, HSBC tests goodwill for impairment as at 1 July each year and whenever there is an indication that goodwill may be impaired. At 30 June 2014, we reviewed the inputs used in our most recent impairment test in the light of current economic and market conditions and there was no indication of goodwill impairment.
25 Legal proceedings and regulatory matters
HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters are material, either individually or in the aggregate. The recognition of provisions is determined in accordance with the accounting policies set out in Note 2. Where an individual provision is material, the fact that a provision has been made is stated and quantified. Any provision recognised does not constitute an admission of wrongdoing or legal liability. While the outcome of these matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of legal proceedings and regulatory matters as at 30 June 2014 (see Note 16). It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Securities litigation
As a result of an August 2002 restatement of previously reported consolidated financial statements and other corporate events, including the 2002 settlement with 46 states and the District of Columbia relating to real estate lending practices, Household International and certain former officers were named as defendants in a class action lawsuit, Jaffe v. Household International, Inc., et al. (N.D. Ill. No. 02 C5893), filed on 19 August 2002 in the US District Court for the Northern District of Illinois (the 'Illinois District Court'). The complaint asserted claims under § 10 and § 20 of the Securities Exchange Act of 1934 and alleged that the defendants knowingly or recklessly made false and misleading statements of material fact relating to Household International's Consumer Lending operations, including collections, sales and lending practices, some of which ultimately led to the 2002 state settlement agreement, and facts relating to accounting practices evidenced by the restatement. Ultimately, a class was certified on behalf of all persons who acquired and disposed of Household International common stock between 30 July 1999 and 11 October 2002.
A jury trial concluded in April 2009, which was decided partly in favour of the plaintiffs. Various legal challenges to the verdict were raised in post-trial briefing.
In December 2011, following the submission of claim forms by class members, the Court-appointed claims administrator to the Illinois District Court reported that the total number of claims that generated an allowed loss was 45,921, and that the aggregate amount of these claims was approximately US$2.2bn. The defendants filed legal challenges regarding the presumption of reliance as to the class and compliance with the claim form requirements, which the Illinois District Court, in September 2012, rejected for the most part. The Illinois District Court directed further proceedings before a court-appointed Special Master to address certain claims submission issues.
On 4 October 2013, the Illinois District Court denied the defendants' additional post-trial motions for judgement as a matter of law or, in the alternative, for a new trial, and granted plaintiffs' motions for a partial final judgement and awarded pre-judgement interest at the prime rate, compounded annually. Subsequently, on 17 October 2013, the Illinois District Court entered a partial final judgement against the defendants in the amount of approximately US$2.5bn. In addition to the partial judgement that has been entered, there also remain approximately US$625m in claims, prior to imposition of pre-judgement interest, that still are subject to objections that have not yet been ruled upon by the Illinois District Court.
The defendants have filed a Notice of Appeal of the partial final judgement, and oral argument was heard by the US Court of Appeals for the Seventh Circuit on 29 May 2014. We await a decision from the appellate court. The defendants have also filed a Supersedeas Bond in the approximate amount of the judgement (US$2.5bn) in order to stay execution on the judgement pending appeal. Despite the jury verdict, the various rulings of the Illinois District Court, and the partial final judgement, we continue to believe that we have meritorious grounds for relief on appeal. The timing and outcome of the ultimate resolution of this matter is uncertain.
Given the complexity and uncertainties associated with the actual determination of damages, including the outcome of any appeals, there is a wide range of possible damages. If the Court of Appeals rejects or only partially accepts our arguments, the amount of damages, based upon that partial final judgement, and other pending claims and the application of pre-judgement interest on those pending claims, may lie in a range from a relatively insignificant amount to an amount up to or exceeding US$3.6bn. Once a judgement is entered (such as the approximately US$2.5bn partial final judgement entered on 17 October 2013), post-judgement interest accrues on the judgement at a rate equal to the weekly average of the one-year constant maturity treasury yield as published by the Federal Reserve System. A provision has been made based on management's best estimate of probable outflows.
Bernard L. Madoff Investment Securities LLC
In December 2008, Bernard L. Madoff ('Madoff') was arrested for running a Ponzi scheme, and a trustee was appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC ('Madoff Securities'), an SEC-registered broker-dealer and investment adviser. Since his appointment, the trustee has been recovering assets and processing claims of Madoff Securities customers. Madoff subsequently pleaded guilty to various charges and is serving a 150-year prison sentence. He has acknowledged, in essence, that while purporting to invest his customers' money in securities and, upon request, return their profits and principal, he in fact never invested in securities and used other customers' money to fulfil requests for the return of profits and principal. Other individuals associated with Madoff Securities have also pleaded guilty, and several former employees of Madoff Securities were recently convicted at trial in the US and are awaiting sentencing.
Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was US$8.4bn, an amount that includes fictitious profits reported by Madoff. Based on information available to HSBC, we have estimated that the funds' actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time that HSBC serviced the funds totalled approximately US$4bn.
Plaintiffs (including funds, fund investors, and the Madoff Securities trustee) have commenced Madoff-related proceedings against numerous defendants in a multitude of jurisdictions. Various HSBC companies have been named as defendants in suits in the US, Ireland, Luxembourg and other jurisdictions. Certain suits (which include US putative class actions) allege that the HSBC defendants knew or should have known of Madoff's fraud and breached various duties to the funds and fund investors.
In December 2011, claims against HSBC and other defendants by fund investors in three related putative class actions pending in the US District Court for the Southern District of New York (the 'New York District Court') were dismissed on grounds of forum non conveniens. In September 2013, the US Court of Appeals for the Second Circuit affirmed the dismissal of the claims. The plaintiffs filed a petition for panel rehearing, and rehearing en banc. In May 2014, the Court of Appeals denied the request for panel rehearing. The request for rehearing en banc remains pending.
The Madoff Securities trustee has commenced suits against various HSBC companies in the US Bankruptcy Court and in the English High Court. The US action (which also names certain funds, investment managers, and other non-HSBC companies and individuals) sought US$9bn in damages and additional recoveries from HSBC and the various non-HSBC co-defendants and alleged that HSBC aided and abetted Madoff's fraud and breach of fiduciary duty. In July 2011, the New York District Court dismissed the trustee's various common law claims on the grounds that the trustee lacks standing to assert them, and that dismissal was affirmed in a decision issued by the US Court of Appeals for the Second Circuit in June 2013. On 30 June 2014, the US Supreme Court denied the trustee's petition for writ of certiorari, rendering final the dismissal of the trustee's common law claims.
The trustee's remaining US claims seek, pursuant to US bankruptcy law, recovery of unspecified amounts received by HSBC from funds invested with Madoff, including amounts that HSBC received when it redeemed units HSBC held in the various funds in connection with financing transactions HSBC had entered into with various clients, as well as fees earned by HSBC for providing custodial, administrative and similar services to the funds. These claims were withdrawn from the US Bankruptcy Court to the New York District Court in order to decide certain preliminary legal questions. The last of those questions was decided by the New York District Court on 7 July 2014, when the New York District Court ruled that the US Bankruptcy Code does not provide the trustee with a right to recover money that was transferred between foreign entities, even if that money is ultimately traceable to Madoff Securities. This decision, as well as the other New York District Court rulings, are subject to appeal and have not been applied to the facts of the trustee's cases against HSBC, so their impact on the trustee's remaining claims is uncertain.
The trustee's English action seeks recovery of unspecified transfers of money from Madoff Securities to or through HSBC, on the ground that the HSBC defendants actually or constructively knew of Madoff's fraud. HSBC has not been served with the trustee's English action.
Between October 2009 and April 2012, Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (collectively, 'Fairfield'), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands ('BVI') and the US against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC's private banking business and other clients who invested in the Fairfield funds. The Fairfield actions seek restitution of amounts paid to the defendants in connection with share redemptions, on the ground that such payments were made by mistake, based on inflated net asset values resulting from Madoff's fraud, and some actions also seek recovery of the share redemptions under BVI insolvency law. The UK Privy Council on 16 April 2014 issued a decision that the funds' net asset values were binding despite Madoff Securities' fraud and dismissed the BVI common law claims. An application seeking to remove the foreign representative's authority to pursue the US actions is pending with the BVI court. The Fairfield actions in the US remain stayed in the US Bankruptcy Court pending action on the part of the foreign representative to lift the stay and further developments in the BVI litigation.
There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings, including but not limited to the circumstances of the fraud, the multiple jurisdictions in which the proceedings have been brought and the number of different plaintiffs and defendants in
such proceedings. For these reasons, among others, it is not practicable at this time for HSBC to estimate reliably the aggregate liabilities, or ranges of liabilities, that might arise as a result of all such claims, but they could be significant. In any event, HSBC considers that it has good defences to these claims and will continue to defend them vigorously.
US mortgage-related investigations
In April 2011, following completion of a broad horizontal review of industry residential mortgage foreclosure practices, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller of the Currency ('OCC'), and HSBC Finance and HSBC North America Holdings Inc. ('HNAH') entered into a similar consent order with the Federal Reserve Board ('FRB') (together with the OCC order, the 'Servicing Consent Orders'). These consent orders require prescribed actions to address the deficiencies noted in the joint examination and described in the consent orders. HSBC Bank USA, HSBC Finance and HNAH continue to work with the OCC and the FRB to align their processes with the requirements of the consent orders and are implementing operational changes as required.
The Servicing Consent Orders required an independent review of foreclosures pending or completed between January 2009 and December 2010 (the 'Independent Foreclosure Review') to determine if any borrower was financially injured as a result of an error in the foreclosure process. As required by the Servicing Consent Orders, an independent consultant was retained to conduct that review.
On 28 February 2013, HSBC Bank USA entered into an agreement with the OCC, and HSBC Finance and HNAH entered into an agreement with the FRB (together, the 'IFR Settlement Agreements'), pursuant to which the Independent Foreclosure Review has ceased and been replaced by a broader framework under which HSBC and 12 other participating servicers will, in the aggregate, provide in excess of US$9.3bn in cash payments and other assistance to help eligible borrowers. Pursuant to the IFR Settlement Agreements, HNAH has made a cash payment of US$96m into a fund used to make payments to borrowers that were in active foreclosure during 2009 and 2010, and in addition, is providing other assistance (e.g. loan modifications) to help eligible borrowers. Borrowers who receive compensation will not be required to execute a release or waiver of rights and will not be precluded from pursuing litigation concerning foreclosure or other mortgage servicing practices. For participating servicers, including HSBC Bank USA and HSBC Finance, fulfilment of the terms of the IFR Settlement Agreements will satisfy the Independent Foreclosure Review requirements of the Servicing Consent Orders, including the wind-down of the Independent Foreclosure Review.
The Servicing Consent Orders do not preclude additional enforcement actions against HSBC Bank USA, HSBC Finance or HNAH by bank regulatory, governmental or law enforcement agencies, such as the US Department of Justice ('DoJ') or State Attorneys General, which could include the imposition of civil money penalties and other sanctions relating to the activities that are the subject of the Servicing Consent Orders. Pursuant to the IFR Settlement Agreement with the OCC, however, the OCC has agreed that it will not assess civil money penalties or initiate any further enforcement action with respect to past mortgage servicing and foreclosure-related practices addressed in the Servicing Consent Orders, provided the terms of the IFR Settlement Agreement are fulfilled. The OCC's agreement not to assess civil money penalties is further conditioned on HNAH making payments or providing borrower assistance pursuant to any agreement that may be entered into with the DoJ in connection with the servicing of residential mortgage loans within two years. The FRB has agreed that any assessment of civil money penalties by the FRB will reflect a number of adjustments, including amounts expended in consumer relief and payments made pursuant to any agreement that may be entered into with the DoJ in connection with the servicing of residential mortgage loans. In addition, the IFR Settlement Agreements do not preclude private litigation concerning these practices.
Separate from the Servicing Consent Orders and the settlement related to the Independent Foreclosure Review discussed above, in February 2012, five of the largest US mortgage servicers (not including any HSBC companies) reached a settlement with the DoJ, the US Department of Housing and Urban Development and State Attorneys General of 49 states with respect to foreclosure and other mortgage servicing practices. Following this settlement, these government agencies initiated discussions with other mortgage industry servicers. HNAH, HSBC Bank USA and HSBC Finance have had discussions with US bank regulators and other governmental agencies regarding a potential resolution. Any such settlement, however, may not completely preclude other enforcement actions by state or federal agencies, regulators or law enforcement bodies related to foreclosure and other mortgage servicing practices including, but not limited to, matters relating to the securitisation of mortgages for investors. These
practices have in the past resulted in private litigation, and such a settlement would not preclude further private litigation concerning these practices.
US mortgage securitisation activity and litigation
HSBC Bank USA has been involved as a sponsor/seller of loans used to facilitate whole loan securitisations underwritten by HSBC Securities (USA) Inc. ('HSI'). During 2005-2007, HSBC Bank USA purchased and sold US$24bn of such loans to HSI which were subsequently securitised and sold by HSI to third parties. The outstanding principal balance on these loans was approximately US$6.5bn and US$6bn as at 31 December 2013 and 30 June 2014, respectively.
Participants in the US mortgage securitisation market that purchased and repackaged whole loans have been the subject of lawsuits and governmental and regulatory investigations and inquiries, which have been directed at groups within the US mortgage market such as servicers, originators, underwriters, trustees or sponsors of securitisations, and at particular participants within these groups. As the industry's residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to an increasing number of foreclosed homes as trustee on behalf of various securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws regarding property upkeep and tenants' rights. While HSBC believes and continues to maintain that the obligations at issue and the related liability are properly those of the servicer of each trust, HSBC continues to receive significant and adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of 'HSBC, as trustee'.
In June 2014, a lawsuit was filed in New York State court against HSBC Bank USA as trustee of 264 trusts (the 'Trusts'). Similar lawsuits were filed simultaneously against other non-HSBC financial institutions that served as mortgage securitisation pool trustees. The plaintiffs are investors in the trusts and include, among others, BlackRock and PIMCO funds. The lawsuits are brought derivatively on behalf of the trusts. The complaint against HSBC Bank USA alleges that the Trusts have sustained losses in collateral value of over US$32bn. The lawsuit seeks unspecified damages resulting from an alleged breach of the US Trust Indenture Act, breach of fiduciary duties, and negligence. This action is at an early stage.
Various HSBC companies have also been named as defendants in a number of actions in connection with residential mortgage-backed securities ('RMBS') offerings, which generally allege that the offering documents for securities issued by securitisation trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans. These include an action filed in September 2011 by the Federal Housing Finance Agency ('FHFA'), acting in its capacity as conservator for the Federal National Mortgage Association ('Fannie Mae') and the Federal Home Loan Mortgage Corporation ('Freddie Mac') in the New York District Court against HSBC Bank USA, HNAH, HSI and HSI Asset Securitization ('HASCO') and five former and current officers and directors of HASCO, seeking damages or rescission of mortgage-backed securities purchased by Fannie Mae and Freddie Mac that were either underwritten or sponsored by HSBC companies. The aggregate unpaid principal balance of the securities was approximately US$1.5bn as at 30 June 2014.
This action, captioned Federal Housing Finance Agency, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation v. HSBC North America Holdings Inc., et al. (S.D.N.Y. No. CV 11-6189-LAK), is one of a series of similar actions filed against 17 financial institutions alleging violations of federal and state securities laws in connection with the sale of private-label RMBS purchased by Fannie Mae and Freddie Mac, primarily from 2005 to 2008. These actions were transferred to a single judge, who directed the defendant in the first-filed matter, UBS, to file a motion to dismiss. In May 2012, the New York District Court issued its decision denying the motion to dismiss FHFA's securities law claims and granting the motion to dismiss FHFA's negligent misrepresentation claims. The New York District Court's ruling formed the basis for rulings on the other matters, including the action filed against HSBC Bank USA and its affiliates. On 5 April 2013, the US Court of Appeals for the Second Circuit affirmed the ruling of the New York District Court. In January 2013, the FHFA parties met with the Magistrate Judge to discuss how to structure mediation. Since that time, a number of the FHFA defendants have resolved their lawsuits.
Discovery in HSBC's case continues. Factual discovery closed in December 2013. Expert discovery is scheduled to continue through August 2014. Various defendants' motions for summary judgement and other applications have been fully briefed and are currently pending before the court. A trial is currently scheduled to begin on 29 September 2014. These dates are subject to change by the court.
The timing and outcome of this matter are uncertain. It is possible that HSBC could be found liable to pay damages; and based upon the information currently available, it is possible that those damages could be as high as US$1.6bn.
HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC (a subsidiary of HSBC Finance) have been named as defendants in a number of mortgage loan repurchase actions brought by trustees of securitisation trusts. In the aggregate, these actions seek to have the HSBC defendants repurchase mortgage loans, or pay compensatory damages in lieu of repurchase, totalling at least US$1bn. Motions to dismiss are fully briefed and pending in two of the actions. HSBC Finance was dismissed, on motion, as a defendant in the third action but the case remains pending against Decision One Mortgage Company LLC.
In December 2010 and February 2011, HSBC Bank USA received subpoenas from the SEC seeking production of documents and information relating to its involvement and the involvement of its affiliates in specified private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. HSBC Bank USA has also had preliminary contacts with other governmental authorities in February 2012 exploring the role of trustees in private-label RMBS transactions. In February 2011, HSBC Bank USA also received a subpoena from the US Attorney's Office for the Southern District of New York seeking production of documents and information relating to loss mitigation efforts with respect to residential mortgages in the State of New York. In January 2012, HSI was served with a Civil Investigative Demand from the Massachusetts State Attorney General seeking documents, information and testimony related to the sale of RMBS to public and private customers in the State of Massachusetts from January 2005 to the present.
HSBC expects this level of focus on mortgage securitisations to continue. As a result, HSBC companies may be subject to additional claims, litigation and governmental and regulatory scrutiny related to its participation in the US mortgage securitisation market, either individually or as a member of a group.
The timing and outcome of the ultimate resolution of these matters, and the amount of any possible obligations, are highly uncertain.
Anti-money laundering and sanctions-related
In October 2010, HSBC Bank USA entered into a consent cease and desist order with the OCC, and HNAH entered into a consent cease and desist order with the FRB (the 'Orders'). These Orders required improvements to establish an effective compliance risk management programme across HSBC's US businesses, including risk management related to US Bank Secrecy Act ('BSA') and anti-money laundering ('AML') compliance. Steps continue to be taken to address the requirements of the Orders to ensure compliance, and that effective policies and procedures are maintained.
In addition, in December 2012, HSBC Holdings, HNAH and HSBC Bank USA entered into agreements with US and UK government agencies regarding past inadequate compliance with the BSA and AML and sanctions laws. Among those agreements, HSBC Holdings and HSBC Bank USA entered into a five-year deferred prosecution agreement with the DoJ, the US Attorney's Office for the Eastern District of New York, and the US Attorney's Office for the Northern District of West Virginia (the 'US DPA'); HSBC Holdings entered into a two-year deferred prosecution agreement with the New York County District Attorney (the 'DANY DPA'); and HSBC Holdings consented to a cease and desist order and HSBC Holdings and HNAH consented to a civil money penalty order with the FRB. In addition, HSBC Bank USA entered into a civil money penalty order with FinCEN and a separate civil money penalty order with the OCC. HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control ('OFAC') regarding historical transactions involving parties subject to OFAC sanctions and an undertaking with the UK Financial Conduct Authority ('FCA'), to comply with certain forward-looking AML- and sanctions-related obligations.
Under these agreements, HSBC Holdings and HSBC Bank USA made payments totalling US$1.9bn to US authorities and are continuing to comply with ongoing obligations. On 1 July 2013, the US District Court for the Eastern District of New York approved the US DPA and retained authority to oversee implementation of that agreement. Under the agreements with the DoJ, FCA, and FRB, an independent monitor (who is, for FCA purposes, a 'skilled person' under Section 166 of the Financial Services and Markets Act) will evaluate and regularly assess the effectiveness of HSBC's AML and sanctions compliance function and HSBC's progress in implementing its remedial obligations under the agreements. The monitorship, which began on 22 July 2013, is proceeding as anticipated.
If HSBC Holdings and HSBC Bank USA fulfil all of the requirements imposed by the US DPA, the DoJ charges against those entities will be dismissed at the end of the five-year period of that agreement. Similarly, if HSBC Holdings fulfils all of the requirements imposed by the DANY DPA, DANY's charges against it will be dismissed at the end of the two-year period of that agreement. The DoJ may prosecute HSBC Holdings or HSBC Bank USA in relation to the matters that are the subject of the US DPA if HSBC Holdings or HSBC Bank USA breaches the terms of the US DPA, and DANY may prosecute HSBC Holdings in relation to the matters which are subject of the DANY DPA if HSBC Holdings violates the terms of the DANY DPA.
HSBC Bank USA also entered into a separate consent order with the OCC requiring it to correct the circumstances and conditions as noted in the OCC's then most recent report of examination, and imposing certain restrictions on HSBC Bank USA directly or indirectly acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, unless it receives prior approval from the OCC. HSBC Bank USA also entered into a separate consent order with the OCC requiring it to adopt an enterprise-wide compliance programme.
The settlement with US and UK authorities does not preclude private litigation relating to, among other things, HSBC's compliance with applicable AML, BSA and sanctions laws or other regulatory or law enforcement actions for AML, BSA or sanctions matters not covered by the various agreements.
On 7 May 2014, a shareholder derivative action was filed by a shareholder of HSBC Holdings purportedly on behalf of HSBC Holdings, HSBC Bank USA, HNAH and HSBC USA Inc. in New York State Supreme Court against the directors, certain officers and certain former directors and officers of those HSBC companies, alleging that those directors and officers breached their fiduciary duties to the companies and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the US DPA. This action is at an early stage.
Tax and broker-dealer investigations
HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain HSBC companies and employees acted appropriately in relation to certain customers who had US tax reporting requirements. In connection with these investigations, HSBC Private Bank Suisse SA, with due regard for Swiss law, has produced records and other documents to the DoJ and is cooperating with its investigation. In August 2013, the DoJ informed HSBC Private Bank Suisse SA that it is not eligible for the 'Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks' since a formal investigation had been authorised. The DoJ also requested additional information from HSBC Private Bank Suisse SA and other Swiss banks regarding the transfer of assets to and from US person-related accounts and employees who serviced those accounts. HSBC Private Bank Suisse SA is preparing this data, in a manner consistent with Swiss law.
Other HSBC companies are also cooperating with the relevant US authorities, including with respect to US-based clients of an HSBC company in India. In April 2011, HSBC Bank USA received a summons from the US Internal Revenue Service directing HSBC Bank USA to produce records with respect to US-based clients of an HSBC company in India. HSBC Bank USA has cooperated fully by providing responsive documents in its possession in the US to the US Internal Revenue Service.
Also in April 2011, HSBC Bank USA received a subpoena from the SEC directing HSBC Bank USA to produce records in the US related to, among other things, HSBC Private Bank Suisse SA's cross-border policies and procedures and adherence to US broker-dealer and investment adviser rules and regulations when dealing with US resident clients. HSBC Bank USA continues to cooperate with the SEC. In addition, HSBC Private Bank Suisse SA, with due regard for Swiss law, has produced records and other documents to the SEC and is cooperating with the SEC's investigation.
In addition, HSBC has been informed that magistrates in Belgium and France are conducting inquiries regarding whether HSBC Private Bank Suisse SA acted appropriately in relation to certain customers who had Belgian and French tax reporting requirements, respectively.
Based on the facts currently known, with respect to each of these investigations, there is a high degree of uncertainty as to the terms on which the ongoing investigations will be resolved and the timing of such resolution, including the amounts of fines and/or penalties. As matters progress, it is possible that the fines and/or penalties imposed could be significant.
London interbank offered rates, European interbank offered rates and other benchmark interest rate investigations and litigation
Various regulators and competition and enforcement authorities around the world, including in the UK, the US, the EU, Switzerland, Thailand, South Korea, Australia and elsewhere, are conducting investigations and reviews related to certain past submissions made by panel banks and the processes for making submissions in connection with the setting of London interbank offered rates ('Libor'), European interbank offered rates ('Euribor') and other benchmark interest rates. As certain HSBC companies are members of such panels, HSBC has been the subject of regulatory demands for information and is cooperating with those investigations and reviews.
On 4 December 2013, the European Commission (the 'Commission') announced that it had imposed fines on eight financial institutions under its cartel settlement procedure for their participation in illegal activity related to euro interest rate derivatives and/or yen interest rate derivatives. Although HSBC was not one of the financial institutions fined, the Commission announced that it had opened proceedings against HSBC in connection with its Euribor-related investigation of euro interest rate derivatives only. This investigation will continue under the standard Commission cartel procedure. On 20 May 2014, HSBC received a Statement of Objections from the Commission, alleging anti-competitive practices in connection with the pricing of euro interest rate derivatives. The Statement of Objections sets out the Commission's preliminary views and does not prejudge the final outcome of its investigation. HSBC intends to respond to the Commission's Statement of Objections in due course.
Based on the facts currently known, with respect to each of these ongoing regulatory investigations, reviews and proceedings, there is a high degree of uncertainty as to the terms on which the ongoing investigations, reviews or proceedings will be resolved and the timing of such resolution, including the amounts of fines and/or penalties. As matters progress, it is possible that the fines and/or penalties imposed could be significant.
In addition, HSBC and other panel banks have been named as defendants in a number of private lawsuits filed in the US with respect to the setting of US dollar Libor. These lawsuits include individual and putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the New York District Court. The complaints in those actions assert claims against HSBC and other US dollar Libor panel banks under various US laws, including US antitrust and racketeering laws, the US Commodity Exchange Act ('CEA'), and state law.
In March 2013, the New York District Court overseeing the consolidated proceedings that encompass a number of pending actions related to US dollar Libor issued an opinion and order in the six oldest actions, dismissing the plaintiffs' federal and state antitrust claims, racketeering claims, and unjust enrichment claims in their entirety, but allowing certain of their CEA claims that were not barred by the applicable statute of limitations to proceed. Some of those plaintiffs appealed the New York District Court's decision to the US Court of Appeals for the Second Circuit, which later dismissed those appeals on the ground that they were premature. The Court of Appeals also denied the plaintiffs' subsequent motion for reconsideration. On 30 June 2014, the US Supreme Court agreed to hear the plaintiffs' appeal from the Court of Appeals' decision.
Other plaintiffs sought to file amended complaints in the New York District Court to assert additional allegations, and the defendants filed motions to dismiss those amended complaints. On 23 June 2014, the New York District Court issued an opinion and order that, among other things, denied the plaintiffs' request for leave to amend their complaints to assert additional theories of Libor manipulation against HSBC and certain banks, but granted leave to assert such manipulation claims against two other banks; and granted defendants' motion to dismiss certain additional claims under the CEA as barred by the applicable statute of limitations. Proceedings with respect to all other actions in the consolidated proceedings were stayed pending this decision, and the New York District Court has not yet ruled on whether and to what extent those other actions may now proceed.
Separately, HSBC and other panel banks have also been named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in euroyen futures and options contracts related to the euroyen Tokyo interbank offered rate ('Tibor'). The complaint alleges, amongst other things, misconduct related to euroyen Tibor, although HSBC is not a member of the Japanese Bankers Association's euroyen Tibor panel, as well as Japanese yen Libor, in violation of US antitrust laws, the CEA, and state law. In April 2013, the plaintiff filed a second amended complaint, which the defendants moved to dismiss. On 29 March 2014, the New York District Court issued an opinion dismissing the plaintiffs' claims under the US antitrust laws and state law and sustaining their claims under the CEA. HSBC has moved for reconsideration of that aspect of the opinion sustaining the CEA claims, and that motion remains pending. On 17 June 2014, the plaintiffs moved for leave to file a third amended complaint. HSBC expects to respond to the plaintiffs' motion in due course.
In November 2013, HSBC and other panel banks were named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in euro futures contracts and other financial instruments related to Euribor. The complaint alleges, amongst other things, misconduct related to Euribor in violation of US antitrust laws, the CEA, and state law. On 2 May 2014, the plaintiffs filed a second amended complaint, and subsequently sought and received leave to file a third amended complaint. By order of the court, the deadline for filing the third amended complaint has been stayed until 9 September 2014 or subsequent order of the court.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these private lawsuits, including the timing and potential impact on HSBC.
Foreign exchange rate investigations and litigation
Various regulators and competition and enforcement authorities around the world, including in the UK, the US, the EU, Hong Kong and elsewhere, are conducting investigations and reviews into a number of firms, including HSBC, related to trading on the foreign exchange markets. HSBC and its affiliates in relevant jurisdictions are cooperating with these investigations and reviews. These investigations and reviews are ongoing, and based on the facts currently known there is a high degree of uncertainty as to the terms on which they will be resolved and the timing of such resolutions, including the amounts of fines and/or penalties. As matters progress, it is possible that the fines and/or penalties imposed could be significant.
In addition, in late 2013 and early 2014, HSBC and a number of other banks were named as defendants in various putative class actions filed in the New York District Court on behalf of persons who executed foreign currency trades that settled on the basis of foreign exchange rates published by WM/Reuters or that otherwise occurred during the time periods when the WM/Reuters rates were being set. The complaints allege, amongst other things, that the defendants conspired to manipulate the WM/Reuters foreign exchange rates in violation of US antitrust laws. In February 2014, the New York District Court appointed interim lead class counsel on behalf of putative class members in the US, and such counsel filed a consolidated amended complaint on 31 March 2014. A separate putative class action is also pending on behalf of a putative class comprised of Norwegian citizens. HSBC and other defendants filed motions to dismiss both actions on 30 May 2014. Those motions remain pending.
Gold and silver fix-related litigation
Since March 2014, numerous putative class actions have been filed in the US District Courts for the Southern District of New York, the District of New Jersey and the Northern District of California naming HSBC and a number of other members of The London Gold Market Fixing Ltd as defendants. The complaints allege that, from January 2004 to the present, defendants conspired to manipulate the price of gold and gold derivatives during the afternoon London gold fix in order to reap profits on proprietary trades. Plaintiffs have filed a motion for transfer with the Judicial Panel on Multi-District Litigation requesting assignment to and consolidation in the New York District Court. That motion is pending.
In July 2014, putative class actions were filed in the US District Court for the Southern and Eastern Districts of New York naming HSBC and the other members of The London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 2007 to the present, defendants conspired to manipulate the price of physical silver and silver derivatives for their collective benefit in violation of the US Commodity Exchange Act and US antitrust laws. These actions are at a very early stage.
Credit default swap regulatory investigation and litigation
In July 2013, HSBC received a Statement of Objections from the Commission relating to its ongoing investigation of alleged anti-competitive activity by a number of market participants in the credit derivatives market between 2006 and 2009. The Statement of Objections sets out the Commission's preliminary views and does not prejudge the final outcome of its investigation. HSBC has submitted a response and attended an oral hearing in May 2014 at which the other defendants were also present. Following the oral hearing, the Commission decided to conduct a further investigation phase before deciding whether or how to proceed with the case. HSBC is cooperating with this further investigation. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or potential impact on HSBC.
In addition, HSBC Bank USA, HSBC Holdings and HSBC Bank have been named as defendants, among others, in numerous putative class actions filed in the New York District Court and the Illinois District Court. These class actions allege that the defendants, which include ISDA, Markit and several financial institutions, conspired to restrain trade in violation of the federal antitrust laws by, among other things, restricting access to credit default swap pricing exchanges and blocking new entrants into the exchange market, with the purpose and effect of artificially inflating the bid/ask spread paid to buy and sell credit default swaps in the US. The plaintiffs in these suits purport to represent a class of all persons who purchased credit default swaps from or sold credit default swaps to defendants primarily in the US.
On 16 October 2013, the Judicial Panel on Multi-District Litigation ordered that all cases be consolidated in the New York District Court as In re Credit Default Swaps Antitrust Litigation (MDL No. 2476). On 5 December 2013, the New York District Court held its initial pre-trial conference, at which time it selected lead interim class counsel and set a schedule for the filing of an amended consolidated complaint and motions to dismiss that complaint. The amended consolidated complaint was filed on 31 January 2014, naming HSBC Bank USA and HSBC Bank as defendants, among others. Following the filing of defendants' motions to dismiss in March 2014, plaintiffs filed a second amended consolidated complaint on 11 April 2014. Defendants moved to dismiss that second amended consolidated complaint on 23 May 2014. That motion remains pending.
Economic plans: HSBC Bank Brasil S.A.
In the mid-1980s and early 1990s, certain economic plans were introduced by the government of Brazil to reduce escalating inflation. The implementation of these plans adversely impacted savings account holders, thousands of which consequently commenced legal proceedings against financial institutions in Brazil, including HSBC Bank Brasil S.A. ('HSBC Brazil'), alleging, among other things, that savings account balances were adjusted by a different price index than that contractually agreed, which caused them a loss of income. Certain of these cases have reached the Brazilian Supreme Court (the 'Supreme Court'). The proceedings in the Supreme Court were due to commence in February 2014 but have since been postponed without a scheduled start date. The Supreme Court has suspended all cases pending before lower courts until it delivers a final judgement on the constitutionality of the changes resulting from the economic plans. It is anticipated that the outcome of the Supreme Court's final judgement will set a precedent for all cases pending before the lower courts. Separately, the Brazilian Superior Civil Court (the 'Superior Civil Court') is considering matters relating to, among other things, contractual and punitive interest rates to be applied to calculate any loss of income.
There is a high degree of uncertainty as to the terms on which the proceedings in the Supreme Court and Superior Civil Court will be resolved and the timing of such resolutions, including the amount of losses HSBC Brazil may be liable to pay in the event of an unfavourable judgement. Such losses may lie in a range from a relatively insignificant amount to an amount up to US$838m, although the upper end of this range is considered unlikely.
26 Events after the balance sheet date
A second interim dividend for the financial year ending 31 December 2014 was declared by the Directors on 4 August 2014, as described in Note 3.
27 Interim Report 2014 and statutory accounts
The information in this Interim Report 2014 is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The Interim Report 2014 was approved by the Board of Directors on 4 August 2014. The statutory accounts for the year ended 31 December 2013 have been delivered to the Registrar of Companies in England and Wales in accordance with section 447 of the Companies Act 2006. The auditor has reported on those accounts. Its report was unqualified; did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
The Directors, who are required to prepare the financial statements on a going concern basis unless it is not appropriate, are satisfied that the Group has the resources to continue in business for the foreseeable future and that the financial statements continue to be prepared on a going concern basis.
The Directors, the names of whom are set out on pages 199 to 203 of this Interim Report1, confirm that to the best of their knowledge:
· the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU;
· the Interim Report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year ending 31 December 2014 and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
(b) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being (i) related party transactions that have taken place in the first six months of the financial year ending 31 December 2014 which have materially affected the financial position or performance of HSBC during that period; and (ii) any changes in the related parties transactions described in the Annual Report and Accounts 2013 that could materially affect the financial position or performance of HSBC during the first six months of the financial year ending 31 December 2014.
On behalf of the Board
D J Flint
Group Chairman
4 August 2014
1 O ther than Marvin Cheung who was not a Director at the date of approval of the Interim Report 2014.
Introduction
We have been engaged by HSBC Holdings plc ('the Company') to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 set out on pages 206 to 268 which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash flows, consolidated statement of changes in equity and related notes. We have read the other information contained in the Interim Report 2014 and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure Rules and Transparency Rules ('DTR') of the UK's Financial Conduct Authority ('the UK FCA'). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The Interim Report 2014 is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Report 2014 in accordance with the DTR of the UK FCA. As disclosed in Note 1, the annual financial statements of the Company are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in the Interim Report 2014 has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the Interim Report 2014 based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Interim Report 2014 for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.
Guy Bainbridge
For and on behalf of KPMG Audit Plc
Chartered Accountants
London, England
Interim Report - 25 of 28
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15 Aug 2014
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