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Annual Financial Report - 50b of 56

RNS Announcement

RNS Number : 6457S

HSBC Holdings PLC

18 March 2016

15 Financial assets designated at fair value

Accounting policy

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below, and are so designated irrevocably at inception. HSBC may designate financial instruments at fair value when the designation:

· eliminates or significantly reduces measurement or recognition inconsistencies that would otherwise arise from measuring financial instruments or recognising gains and losses on different bases from related positions. Under this criterion, the main class of financial assets designated by HSBC are financial assets under unit-linked insurance and unit-linked investment contracts. Liabilities to customers under linked contracts are determined based on the fair value of the assets held in the linked funds. If no fair value designation was made for the related assets, the assets would be classified as available for sale, with changes in fair value recorded in other comprehensive income. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows the changes in fair values to be recorded in the income statement and presented in the same line;

· applies to groups of financial instruments that are managed, and their performance evaluated, on a fair value basis in accordance with a documented risk management or investment strategy, and where information about the groups of financial instruments is reported to management on that basis. For example, certain financial assets are held to meet liabilities under non-linked insurance contracts. HSBC has documented risk management and investment strategies designed to manage and monitor the market risk of those assets on a net basis, after considering non-linked liabilities. Fair value measurement is also consistent with the regulatory reporting requirements under the appropriate regulations for those insurance operations; and

· relates to financial instruments containing one or more non-closely related embedded derivatives.

Designated financial assets are recognised at fair value when HSBC enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when sold. Subsequent changes in fair values are recognised in the income statement in 'Net income from financial instruments designated at fair value'.

Financial assets designated at fair value

	2015	2014
	$m	$m
Financial assets designated at fair value:
- not subject to repledge or resale by counterparties	23,852	28,357
- which may be repledged or resold by counterparties	-	680

At 31 December	23,852	29,037

Treasury and other eligible bills	396	56
Debt securities	4,341	8,891
Equity securities	18,995	20,006

Securities designated at fair value	23,732	28,953
Loans and advances to banks and customers	120	84

At 31 December	23,852	29,037

Securities designated at fair value¹

	2015	2014
	$m	$m

US Treasury and US Government agencies²	145	8
UK Government	103	140
Hong Kong Government	33	40
Other government	1,020	4,088
Asset-backed securities³	25	18
Corporate debt and other securities	3,411	4,653
Equities	18,995	20,006

At 31 December	23,732	28,953

1 Included within these figures are debt securities issued by banks and other financial institutions of $1,536m (2014: $1,388m), of which $35m (2014: $24m) are guaranteed by various governments.

2 Includes securities that are supported by an explicit guarantee issued by the US Government.

3 Excludes asset-backed securities included under US Treasury and US Government agencies.

Securities listed on a recognised exchange and unlisted

	Treasury and other eligible bills	Debt securities	Equity securities	Total
	$m	$m	$m	$m

Fair value
Listed¹	-	2,458	11,690	14,148
Unlisted	396	1,883	7,305	9,584

At 31 December 2015	396	4,341	18,995	23,732

Securities listed on a recognised exchange and unlisted (continued)

	Treasury and other eligible bills	Debt securities	Equity securities	Total
	$m	$m	$m	$m

Fair value
Listed¹	5	2,731	13,837	16,573
Unlisted	51	6,160	6,169	12,380

At 31 December 2014	56	8,891	20,006	28,953

1 Included within listed investments are $1,181m of investments listed on a recognised exchange in Hong Kong (2014: $1,361m).

16 Derivatives

Accounting policy

Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives are recognised initially, and are subsequently measured, at fair value. Fair values of derivatives are obtained either from quoted market prices or by using valuation techniques. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative.

Embedded derivatives are bifurcated from the host contract when their economic characteristics and risks are not clearly and closely related to those of the host non-derivative contract, their terms would otherwise meet the definition of a stand-alone derivative and the combined contract is not held for trading or designated at fair value. The bifurcated embedded derivatives are measured at fair value with changes therein recognised in the income statement.

Derivative assets and liabilities arising from different transactions are only offset for accounting purposes if the offsetting criteria presented in Note 32 are met.

Gains and losses from changes in the fair value of derivatives, that do not qualify for hedge accounting are reported in 'Net trading income'. Gains and losses on derivatives managed in conjunction with financial instruments designated at fair value are reported in 'Net income from financial instruments designated at fair value' together with the gains and losses on the economically hedged items. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.

Hedge accounting

When derivatives are designated in hedge relationships, HSBC classifies them as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments ('fair value hedges'); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction ('cash flow hedges'); or (iii) a hedge of a net investment in a foreign operation ('net investment hedges').

HSBC formally designates and documents each hedge relationship from inception, setting out the risk management objective and strategy for undertaking the hedge along with the specifically identified hedging instrument, hedged item or transaction, the nature of the risk being hedged and the method for assessing hedge effectiveness. The method selected to assess hedge effectiveness will depend on the risk management strategy.

To qualify for hedge accounting, HSBC requires that a hedge must be expected to be highly effective at inception and on an ongoing basis for the duration of the hedge relationship with each hedge relationship subject to an ongoing retrospective and prospective hedge effectiveness assessment.

Fair value hedge

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, along with changes in the fair value of the hedged assets or liabilities attributable to the hedged risk.

If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued; the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.

Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income; the ineffective portion of the change in fair value is recognised immediately in the income statement within 'Net trading income'.

The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. In hedges of forecast transactions that result in recognition of a non-financial asset or liability, previous gains and losses recognised in other comprehensive income are included in the initial measurement of the asset or liability.

When a hedge relationship is discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.

Net investment hedge

Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain or loss on the effective portion of the hedging instrument is recognised in other comprehensive income; the residual change in fair value is recognised immediately in the income statement. Gains and losses previously recognised in other comprehensive income are reclassified to the income statement on the disposal, or part disposal, of the foreign operation.

Derivatives that do not qualify for hedge accounting

Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.

Fair values of derivatives by product contract type held by HSBC

	Assets			Liabilities
	Trading	Hedging	Total	Trading	Hedging	Total
	$m	$m	$m	$m	$m	$m

Foreign exchange	95,201	1,140	96,341	94,843	755	95,598
Interest rate	277,496	1,658	279,154	267,609	3,758	271,367
Equities	8,732	-	8,732	10,383	-	10,383
Credit	6,961	-	6,961	6,884	-	6,884
Commodity and other	3,148	-	3,148	2,699	-	2,699

Gross total fair values	391,538	2,798	394,336	382,418	4,513	386,931

Offset (Note 32)			(105,860)			(105,860)

At 31 December 2015			288,476			281,071

Foreign exchange	95,584	1,728	97,312	95,187	572	95,759
Interest rate	471,379	1,864	473,243	463,456	4,696	468,152
Equities	11,694	-	11,694	13,654	-	13,654
Credit	9,340	-	9,340	10,061	-	10,061
Commodity and other	3,884	-	3,884	3,508	-	3,508

Gross total fair values	591,881	3,592	595,473	585,866	5,268	591,134

Offset (Note 32)			(250,465)			(250,465)

At 31 December 2014			345,008			340,669

Derivative assets and liabilities decreased during 2015, primarily driven by 'portfolio compression' exercises, with a corresponding decrease in the offset amount.

Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries

	Assets			Liabilities
	Trading	Hedging	Total	Trading	Hedging	Total
	$m	$m	$m	$m	$m	$m

Foreign exchange	390	-	390	2,065	213	2,278
Interest rate	1,600	477	2,077	-	-	-

At 31 December 2015	1,990	477	2,467	2,065	213	2,278

Foreign exchange	680	-	680	1,066	103	1,169
Interest rate	1,607	484	2,091	-	-	-

At 31 December 2014	2,287	484	2,771	1,066	103	1,169

Use of derivatives

For details regarding use of derivatives, see page 171 under Market Risk.

Trading derivatives

Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.

Substantially all of HSBC Holdings' derivatives entered into with subsidiaries are managed in conjunction with financial liabilities designated at fair value.

The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

Notional contract amounts of derivatives held for trading purposes by product type

	HSBC		HSBC Holdings
	2015	2014	2015	2014
	$m	$m	$m	$m

Foreign exchange	5,658,030	5,548,075	19,036	15,595
Interest rate	14,462,113	22,047,278	10,150	8,650
Equities	501,834	568,932	-	-
Credit	463,344	550,197	-	-
Commodity and other	51,683	77,565	-	-

At 31 December	21,137,004	28,792,047	29,186	24,245

Credit derivatives

HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad range of users, structuring transactions to produce risk management products for its customers or making markets in certain products. Risk is typically controlled through entering into offsetting credit derivative contracts with other counterparties.

HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products.

Credit derivatives are also deployed to a limited extent for the risk management of the Group's loan portfolios. The notional contract amount of credit derivatives of $463bn (2014: $550bn) consisted of protection bought of $237bn (2014: $272bn) and protection sold of $226bn (2014: $278bn). The credit derivative business operates within the market risk management framework described on page 211.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:

Unamortised balance of derivatives valued using models with significant unobservable inputs

	2015	2014
	$m	$m

Unamortised balance at 1 January	114	167
Deferral on new transactions	196	177
Recognised in the income statement during the year:	(207)	(234)
- amortisation	(121)	(114)
- subsequent to unobservable inputs becoming observable	(2)	(13)
- maturity, termination or offsetting derivative	(84)	(107)
- risk hedged	-	-

Exchange differences	(6)	4

Unamortised balance at 31 December¹	97	114

1 This amount is yet to be recognised in the consolidated income statement.

Hedge accounting derivatives

HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its asset and liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities.

The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

Notional contract amounts of derivatives designated in qualifying hedge accounting relationships by product type

	HSBC				HSBC Holdings
	2015		2014		2015	2014
	Cash flow hedge	Fair value hedge	Cash flow hedge	Fair value hedge	Fair value hedge	Fair value hedge
	$m	$m	$m	$m	$m	$m

Foreign exchange	32,128	196	25,340	-	1,120	1,120
Interest rate	107,796	105,127	190,902	90,338	5,132	5,477

At 31 December	139,924	105,323	216,242	90,338	6,252	6,597

Fair value hedges

HSBC's fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates.

Fair values of derivatives designated as fair value hedges

	2015		2014
	Assets	Liabilities	Assets	Liabilities
	$m	$m	$m	$m
HSBC
Foreign exchange	2	-	-	-
Interest rate	672	3,395	387	4,012

At 31 December	674	3,395	387	4,012

HSBC Holdings
Foreign exchange	-	213	-	103
Interest rate	477	-	484	-

At 31 December	477	213	484	103

Gains or losses arising from fair value hedges

	2015	2014	2013
	$m	$m	$m
HSBC
Gains/(losses):
- on hedging instruments	40	(2,542)	1,997
- on the hedged items attributable to the hedged risk	(51)	2,561	(1,932)

Year ended 31 December	(11)	19	65

HSBC Holdings
Gains/(losses):
- on hedging instruments	(4)	423	14
- on the hedged items attributable to the hedged risk	6	(422)	(21)

Year ended 31 December	2	1	(7)

Cash flow hedges

HSBC's cash flow hedges consist principally of interest rate swaps, futures and cross-currency swaps that are used to protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast transactions.

Fair values of derivatives designated as cash flow hedges

	2015		2014
	Assets	Liabilities	Assets	Liabilities
	$m	$m	$m	$m

Foreign exchange	1,027	748	1,673	572
Interest rate	986	363	1,477	684

At 31 December	2,013	1,111	3,150	1,256

Forecast principal balances on which interest cash flows are expected to arise

	3 months or less	More than 3 months but less than 1 year	5 years or less but more than 1 year	More than 5 years
	$m	$m	$m	$m
Net cash inflows/(outflows) exposure
Assets	94,256	93,528	62,664	971
Liabilities	(16,241)	(17,179)	(11,681)	(3,326)

At 31 December 2015	78,015	76,349	50,983	(2,355)

Net cash inflows/(outflows) exposure
Assets	131,694	122,728	79,529	959
Liabilities	(60,814)	(46,582)	(36,371)	(8,169)

At 31 December 2014	70,880	76,146	43,158	(7,210)

This table reflects the interest rate repricing profile of the underlying hedged items.

During the year to 31 December 2015 a gain of $15m (2014: gain of $34m; 2013: gain of $22m) was recognised due to hedge ineffectiveness.

Hedges of net investments in foreign operations

The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with foreign currency borrowings.

At 31 December 2015, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of $111m (2014: $55m), liabilities of $12m (2014: $1m) and notional contract values of $4,210m (2014: $3,525m).

Ineffectiveness recognised in 'Net trading income' in the year ended 31 December 2015 was nil (2014 and 2013: nil).

17 Financial investments

Accounting policy

Treasury bills, debt securities and equity securities intended to be held on a continuing basis, other than those designated at fair value, are classified as available for sale or held to maturity. They are recognised on the trade date when HSBC enters into contractual arrangements to purchase those instruments, and are normally derecognised when either the securities are sold or redeemed.

(i) Available-for-sale financial assets are initially measured at fair value plus direct and incremental transaction costs. They are subsequently remeasured at fair value, and changes therein are recognised in other comprehensive income until the assets are either sold or become impaired. When available-for-sale financial assets are sold, cumulative gains or losses previously recognised in other comprehensive income are recognised in the income statement as 'Gains less losses from financial investments'.

Interest income is recognised over a debt security's expected life. Premiums and/or discounts arising on the purchase of dated debt securities are included in the interest recognised. Dividends from equity assets are recognised in the income statement when the right to receive payment is established.

(ii) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that HSBC positively intends and is able to hold to maturity. Held-to-maturity investments are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost, less any impairment losses.

The accounting policy relating to impairments of available-for-sale securities is presented in Note 1.

Available-for-sale financial assets are reclassified to held to maturity if there is a change in intention or ability to hold those assets to maturity due to a change in the way they are managed. The fair value on reclassification becomes the new amortised cost and the assets are subsequently carried at amortised cost rather than fair value.

Financial investments

	2015	2014
	$m	$m
Financial investments:
- not subject to repledge or resale by counterparties	420,905	380,419
- which may be repledged or resold by counterparties	8,050	35,048

At 31 December	428,955	415,467

Carrying amount and fair value of financial investments

	2015		2014
	Carrying amount	Fair value	Carrying amount	Fair value
	$m	$m	$m	$m

Treasury and other eligible bills	104,551	104,551	81,517	81,517
- available for sale	104,551	104,551	81,517	81,517

Debt securities	318,569	319,725	323,256	324,668
- available for sale	274,467	274,467	285,505	285,505
- held to maturity	44,102	45,258	37,751	39,163

Equity securities	5,835	5,835	10,694	10,694
- available for sale	5,835	5,835	10,694	10,694


At 31 December	428,955	430,111	415,467	416,879

Financial investments at amortised cost and fair value

	Amortised cost¹	Fair value²
	$m	$m

US Treasury	61,585	61,779
US Government agencies³	22,910	22,843
US Government sponsored entities³	10,365	10,627
UK Government	27,250	27,316
Hong Kong Government	53,676	53,674
Other government	141,329	143,370
Asset-backed securities⁴	14,239	13,375
Corporate debt and other securities	89,860	91,292
Equities	4,057	5,835

At 31 December 2015	425,271	430,111

US Treasury	33,931	34,745
US Government agencies³	18,326	18,516
US Government sponsored entities³	9,339	9,761
UK Government	28,680	29,758
Hong Kong Government	43,573	43,574
Other government	159,846	163,402
Asset-backed securities⁴	20,911	19,177
Corporate debt and other securities	84,387	87,252
Equities	7,421	10,694
		416,879
At 31 December 2014	406,414	416,879

US Treasury	50,369	50,421
US Government agencies³	19,211	18,771
US Government sponsored entities³	5,263	5,445
UK Government	23,565	23,580
Hong Kong Government	49,570	49,579
Other government	153,619	156,208
Asset-backed securities⁴	25,961	24,115
Corporate debt and other securities	87,469	88,999
Equities	8,081	9,140

At 31 December 2013	423,108	426,258

1 Represents the amortised cost or cost basis of the financial investment.

2 Included within 'Fair value' figures are debt securities issued by banks and other financial institutions of $61bn (2014: $54bn; 2013: $55bn), of which $18bn (2014: $9bn; 2013: $9bn) are guaranteed by various governments.

3 Includes securities that are supported by an explicit guarantee issued by the US Government.

4 Excludes asset-backed securities included under US Government agencies and sponsored entities.

Financial investments listed and unlisted

	Treasury and other eligible bills available for sale	Debt securities available for sale	Debt securities held to maturity	Equity securities available for sale	Total
	$m	$m	$m	$m	$m
Carrying amount
Listed¹	6,151	170,271	9,565	842	186,829
Unlisted²	98,400	104,196	34,537	4,993	242,126
	104,551
At 31 December 2015	104,551	274,467	44,102	5,835	428,955

Carrying amount
Listed¹	4,101	168,879	6,037	5,928	184,945
Unlisted²	77,416	116,626	31,714	4,766	230,522

At 31 December 2014	81,517	285,505	37,751	10,694	415,467

1 The fair value of listed held-to-maturity debt securities as at 31 December 2015 was $10bn (2014: $6bn). Included within listed investments were $5bn (2014: $4bn) of investments listed on a recognised exchange in Hong Kong.

2 Unlisted treasury and other eligible bills available for sale primarily comprise treasury bills not listed on an exchange but for which there is a liquid market.

Maturities of investments in debt securities at their carrying amount

	1 year or less	5 years or less but over 1 year	10 years or less but over 5 years	Over 10 years	Total
	$m	$m	$m	$m	$m

Available for sale	61,664	131,023	42,140	39,640	274,467
Held to maturity	2,428	10,242	8,881	22,551	44,102

At 31 December 2015	64,092	141,265	51,021	62,191	318,569

Available for sale	68,344	134,815	44,938	37,408	285,505
Held to maturity	1,396	9,622	7,087	19,646	37,751

At 31 December 2014	69,740	144,437	52,025	57,054	323,256

Contractual maturities and weighted average yields of investment debt securities

	Within one year		After one year but within five years		After five years but within ten years		After ten years
	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield
	$m	%	$m	%	$m	%	$m	%
Available for sale
US Treasury	9,316	0.5	20,352	1.2	12,805	2.1	3,594	3.3
US Government agencies	-	-	6	4.2	33	3.9	13,575	2.5
US Government-sponsored agencies	8	5.3	3,029	3.0	911	2.2	1,716	3.0
UK Government	2,479	1.7	8,005	1.3	8,518	1.4	1,215	0.1
Hong Kong Government	674	0.5	1,408	1.1	-	-	-	-
Other governments	37,197	2.0	60,899	2.4	10,312	2.9	2,543	3.0
Asset-backed securities	18	1.4	657	1.4	2,530	1.3	11,027	1.3
Corporate debt and other securities	12,285	1.5	35,210	1.4	5,937	1.9	6,287	3.0

Total amortised cost at 31 December 2015	61,977		129,566		41,046		39,957

Total carrying value	61,664		131,023		42,140		39,640

Held to maturity
US Treasury	2	0.9	76	4.9	46	4.8	119	4.2
US Government agencies	-	-	13	1.4	30	4.0	9,254	2.4
US Government-sponsored agencies	-	-	112	1.3	597	2.7	3,991	2.9
Hong Kong Government	4	0.7	44	1.4	16	1.8	9	1.4
Other governments	59	5.5	217	4.7	184	5.3	725	4.6
Asset-backed securities	-	-	-	-	-	-	7	6.5
Corporate debt and other securities	2,363	3.0	9,780	3.5	8,008	3.7	8,446	4.1

Total amortised cost at 31 December 2015	2,428		10,242		8,881		22,551

Total carrying value	2,428		10,242		8,881		22,551

The maturity distributions of ABSs are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2015 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives.

This information is provided by RNS

The company news service from the London Stock Exchange

END

ACSAKFDNABKDKND

RNS metadata

Title: Annual Financial Report - 50b of 56
Time: 17:04:02
Date: 18 Mar 2016
Category: Results
ID: 6457S