Cap & Risk Mgmt Pillar 3 Disclosures 31 Dec 15 Pt1

Regulatory framework for disclosures

HSBC is supervised on a consolidated basis in the UK by the PRA, which receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, who set and monitor their local capital adequacy requirements. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.

At a consolidated group level, we calculated capital for prudential regulatory reporting purposes throughout 2015 using the Basel III framework of the Basel Committee as implemented by the EU in the amended Capital Requirements Directive, known as CRD IV, and in the PRA's Rulebook for the UK banking industry. The regulators of Group banking entities outside the EU are at varying stages of implementation of the Basel Committee's framework, so local regulation in 2015 may have been on the basis of Basel I, II or III.

The Basel Committee's framework is structured around three 'pillars': the Pillar 1 minimum capital requirements and Pillar 2 supervisory review process are complemented by Pillar 3 market discipline. The aim of Pillar 3 is to produce disclosures which allow market participants to assess the scope of application by banks of the Basel Committee's framework and the rules in their jurisdiction, their capital condition, risk exposures and risk management processes, and hence their capital adequacy. Pillar 3 requires all material risks to be disclosed, enabling a comprehensive view of a bank's risk profile.

The PRA's final rules adopted national discretions in order to accelerate significantly the transition timetable to full 'end point' CRD IV compliance. Notwithstanding this, and other major developments in regulation during 2015, important elements of the capital adequacy framework have yet to be clarified. In particular, in December 2015, the FPC published its view of the capital framework as applicable to UK banks, which set out expectations in relation to Tier 1 capital across the industry. However, requirements applicable to individual banks are subject to PRA determination. While there is emerging clarity around the interaction of capital buffers and the PRA's Pillar 2 framework, uncertainty remains around the broader capital framework, including Basel Committee's revisions to the RWA framework and capital floors. Furthermore, there remains a number of draft and unpublished EBA RTSs due in 2016. Details of the major continuing regulatory reforms are set out under 'Regulatory developments' on page 28.

Pillar 3 Disclosures 2015

The Pillar 3 Disclosures 2015 comprise all information required under Pillar 3, both quantitative and qualitative. They are made in accordance with Part 8 of the Capital Requirements Regulation within CRD IV, supplemented by any specific additional requirements of the PRA and discretionary disclosures on our part.

In our disclosures, to give insight into movements during the year, we provide comparative figures for the previous year, analytical review of variances and 'flow' tables for capital requirements. However, where disclosures have been enhanced or are new we do not generally re-state or provide prior year comparatives. The capital resources tables track the position from a CRD IV transitional to an end point basis. Specific changes to our Pillar 3 disclosures are set out below.

In 2015, the PRA adopted EBA Guidelines on frequency, materiality and the confidential or proprietary nature of Pillar 3 disclosures. HSBC implemented these guidelines by integrating them into Group policy and process for the governance of disclosures after approval by the GAC, which exercises oversight of controls over disclosures.

Information relating to the rationale for withholding certain disclosures is provided in Appendix V.

We publish comprehensive Pillar 3 disclosures annually on the HSBC internet site www.hsbc.com, simultaneously with the release of our Annual Report and Accounts 2015. Our G-SIB Indicator disclosure is also published in the same location. Our Interim Reports and Earnings Releases include regulatory information complementing the financial and risk information presented there and in line with the new requirements on the frequency of regulatory disclosures.

Pillar 3 requirements may be met by inclusion in other disclosure media. Where we adopt this approach, references are provided to the relevant pages of the Annual Report and Accounts 2015 or other location.

We continue to engage constructively in the work of the UK authorities and industry associations to improve the transparency and comparability of UK banks' Pillar 3 disclosures.

Linkage to the Annual Report and Accounts 2015

Basis of consolidation

The basis of consolidation for the purpose of financial accounting under IFRSs, described in Note 1 of the Annual Report and Accounts 2015, differs from that used for regulatory purposes as described in 'Structure of the regulatory group' on page 12. Table 4 provides a reconciliation of the balance sheet from the financial accounting basis to the regulatory scope of consolidation.

The regulatory balance sheet forms the basis for the calculation of regulatory capital requirements.

The alphabetic references in this table link to the corresponding references in table 7: 'Composition of Regulatory Capital', identifying those balances which form part of that calculation.