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Fair values of financial instruments carried at fair value
 6 Months Ended
Jun. 30, 2018
Fair Value Measurement [Abstract]  
Fair values of financial instruments carried at fair value
5
Fair values of financial instruments carried at fair value
The accounting policies, control framework and hierarchy used to determine fair values at 30 June 2018 are consistent with those applied for the Annual Report and Accounts 2017, amended as per IFRS 9.
Financial instruments carried at fair value and bases of valuation
 
 
Valuation techniques
 
 
Quoted
market price
 Level 1

Using
observable
inputs
Level 2

With significant
unobservable
inputs
Level 3

Total

 
$m

$m

$m

$m

Recurring fair value measurements
 
 
 
 
At 30 Jun 2018
 
 
 
 
Assets
 
 
 
 
Trading assets
173,848

67,497

6,547

247,892

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
25,021

10,651

5,006

40,678

Derivatives
1,756

223,746

2,470

227,972

Financial investments
244,816

76,637

2,228

323,681

Liabilities
 
 
 
 
Trading liabilities
62,875

20,895

75

83,845

Financial liabilities designated at fair value
5,549

142,081

4,355

151,985

Derivatives
1,558

219,533

1,870

222,961

 
At 31 Dec 2017
 
 
 
 
Assets
 
 
 
 
Trading assets
181,168

101,775

5,052

287,995

Financial assets designated at fair value
24,622

3,382

1,460

29,464

Derivatives
1,017

216,357

2,444

219,818

Financial investments
227,943

104,692

3,432

336,067

Liabilities
 
 
 
 
Trading liabilities
62,710

117,451

4,200

184,361

Financial liabilities designated at fair value
4,164

90,265

—

94,429

Derivatives
1,635

213,242

1,944

216,821

Transfers between Level 1 and Level 2 fair values
 
Assets
Liabilities
 
Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 
$m

$m

$m

$m

$m

$m

$m

At 30 Jun 2018
 
 
 
 
 
 
 
Transfers from Level 1 to Level 2
12

233

2

1

42

—

—

Transfers from Level 2 to Level 1
13,163

5,143

—

128

2,261

—

138

 
 
 
 
 
 
 
 
 
Assets
Liabilities
 
Available
for sale

Held for trading

Designated
at fair value
through profit
or loss

Derivatives

Held for trading

Designated
at fair value through profit or loss

Derivatives

 
$m

$m

$m

$m

$m

$m

$m

At 31 Dec 2017
 
 
 
 
 
 
 
Transfers from Level 1 to Level 2
2,231

1,507

—

—

35

—

—

Transfers from Level 2 to Level 1
11,173

1,384

—

—

683

—

—


Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.
Fair value adjustments
Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant that are not incorporated within the valuation model. HSBC classifies fair value adjustments as either ‘risk-related’ or ‘model-related’. The majority of these adjustments relate to GB&M. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.
Global Banking and Markets fair value adjustments
 
At
 
30 Jun 2018
31 Dec 2017
 
GB&M

Corporate Centre

GB&M

Corporate Centre

 
$m

$m

$m

$m

Type of adjustment
 
 
 
 
Risk-related
1,062

57

1,078

79

– bid-offer
439

3

413

5

– uncertainty
112

3

91

8

– credit valuation adjustment
410

46

420

59

– debit valuation adjustment
(144
)
—

(82
)
—

– funding fair value adjustment
226

5

233

7

– other
19

—

3

—

Model-related
(21
)
3

92

13

– model limitation
(28
)
3

92

6

– other
7

—

—

7

Inception profit (Day 1 P&L reserves)1 
80

—

106

—

 
1,121

60

1,276

92

1
See Note 7 on the Financial Statements on page 98.
Fair value adjustments decreased by $187m during 1H18. The most significant movement was an absolute reduction of $123m in respect of the model limitation adjustments following model enhancements and new positions which gave rise to an offsetting adjustment.
A description of HSBC’s risk-related and model-related adjustments is provided on pages 208 and 209 of the Annual Report and Accounts 2017.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3
 
Assets
Liabilities
 
Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Total

Trading liabilities

Designated at fair value1

Derivatives

Total

 
$m

$m

$m

$m

$m

$m

$m

$m

$m

Private equity including strategic investments
457

27

4,388

—

4,872

17

—

—

17

Asset-backed securities
1,022

1,223

4

—

2,249

—

—

—

—

Loans held for securitisation
—

—

50

—

50

—

—

—

—

Structured notes
—

3

—

—

3

58

4,355

—

4,413

Derivatives with monolines
—

—

—

75

75

—

—

—

—

Other derivatives
—

—

—

2,395

2,395

—

—

1,869

1,869

Other portfolios
749

5,294

564

—

6,607

—

—

1

1

At 30 Jun 2018
2,228

6,547

5,006

2,470

16,251

75

4,355

1,870

6,300

Private equity including strategic investments
2,012

38

1,458

—

3,508

20

—

—

20

Asset-backed securities
1,300

1,277

—

—

2,577

—

—

—

—

Loans held for securitisation
—

24

—

—

24

—

—

—

—

Structured notes
—

3

—

—

3

4,180

—

—

4,180

Derivatives with monolines
—

—

—

113

113

—

—

—

—

Other derivatives
—

—

—

2,331

2,331

—

—

1,944

1,944

Other portfolios
120

3,710

2

—

3,832

—

—

—

—

At 31 Dec 2017
3,432

5,052

1,460

2,444

12,388

4,200

—

1,944

6,144

1
Designated at fair value through profit or loss.
The basis for determining the fair value of the financial instruments in the table above is explained on page 210 of the Annual Report and Accounts 2017.
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
Movement in Level 3 financial instruments
 
 
Assets
Liabilities
 
 
Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 
Footnote
$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2018
 
1,767

5,080

3,957

2,444

93

4,107

1,949

 
 
 
 
 
 
 
 
 
Total gains/(losses) recognised in profit or loss
 
253

228

245

126

(2
)
(460
)
(185
)
– net income from financial instruments held for trading or managed on a fair value basis
 
—

228

—

126

(2
)
—

(185
)
– net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss

 
—

—

—

—

—

(460
)
—

– changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
 
—

—

245

—

—

—

—

– gains less losses from financial investments at fair value through other comprehensive income
 
253

—

—

—

—

—

—

– expected credit loss charges and other credit impairment charges

 
—

—

—

—

—

—

—

–
fair value gains transferred to the income statement on disposal
 
—

—

—

—

—

—

—

Total gains/(losses) recognised in other comprehensive income
1
64

(201
)
(92
)
(56
)
(2
)
(72
)
(34
)
– financial investments: fair value gains/(losses)
 
57

—

—

—

—

—

—

– cash flow hedges: fair value gains/(losses)
 
—

—

6

6

—

—

2

– fair value gains transferred to the income statement on disposal
 
—

—

—

—

—

—

—

– exchange differences
 
7

(201
)
(98
)
(62
)
(2
)
(72
)
(36
)
Purchases
 
242

4,032

1,202

—

2

46

—

New issuances
 
—

975

—

—

5

1,309

—

Sales
 
(24
)
(1,212
)
(98
)
—

(4
)
—

—

Settlements
 
(70
)
(1,682
)
(213
)
137

—

(172
)
317

Transfers out
 
(373
)
(941
)
(31
)
(199
)
(17
)
(479
)
(235
)
Transfers in
 
369

268

36

18

—

76

58

At 30 Jun 2018
 
2,228

6,547

5,006

2,470

75

4,355

1,870

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 Jun 2018
 
—

(47
)
177

44

(5
)
82

(111
)
– net income from financial instruments held for trading or managed on a fair value basis

 
—

(47
)
—

44

(5
)
—

(111
)
– net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss

 
—

—

—

—

—

82

—

– changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

 
—

—

177

—

—

—

—

– loan impairment recoveries and other credit risk provisions
 
—

—

—

—

—

—

—

Movement in Level 3 financial instruments (continued)
 
 
Assets
Liabilities
 
 
Available
for sale

Held for
trading

Designated
at fair value
through profit
or loss

Derivatives

Held for
trading

Designated
at fair value
through profit
or loss

Derivatives

 
Footnote
$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2017
 
3,476

6,489

730

2,752

3,582

37

2,300

Total gains/(losses) recognised in profit or loss
 
329

(78
)
43

(50
)
103

(4
)
39

– trading income/(expense) excluding net interest income

 
—

(78
)
—

(50
)
103

—

39

– net income/(expense) from other financial instruments designated at fair value

 
—

—

43

—

—

(4
)
—

– gains less losses from financial investments
 
306

—

—

—

—

—

—

– loan impairment charges and other credit risk provisions
 
23

—

—

—

—

—

—

Total gains/(losses) recognised in other comprehensive income
1
(84
)
62

4

99

82

1

62

– available-for-sale investments: fair value gains
 
(150
)
—

—

—

—

—

—

– cash flow hedges: fair value gains
 
—

—

—

(30
)
—

—

(38
)
– exchange differences
 
66

62

4

129

82

1

100

Purchases
 
50

635

321

—

—

—

—

New issuances
 
—

—

—

—

977

—

—

Sales
 
(536
)
(2,161
)
(1
)
—

(12
)
—

—

Settlements
 
(10
)
(297
)
(28
)
(53
)
(433
)
—

67

Transfers out
 
(470
)
(35
)
(2
)
(164
)
(271
)
(33
)
(425
)
Transfers in
 
694

189

—

85

22

—

20

At 30 Jun 2017
 
3,449

4,804

1,067

2,669

4,050

1

2,063

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 Jun 2017
 
23

28

23

(48
)
228

—

106

– trading income/(expense) excluding net interest income

 
—

28

—

(48
)
228

—

106

– net income/(expense) from other financial instruments designated at fair value
 
—

—

23

—

—

—

—

– loan impairment recoveries and other credit risk provisions

 
23

—

—

—

—

—

—

At 1 Jul 2017
 
3,449

4,804

1,067

2,669

4,050

1

2,063

Total gains/(losses) recognised in profit or loss
 
22

(110
)
(150
)
202

51

(1
)
361

– trading income/(expense) excluding net interest income

 
—

(110
)
—

202

51

—

361

– net income/(expense) from other financial instruments designated at fair value

 
—

—

(150
)
—

—

(1
)
—

– gains less losses from financial investments
 
7

—

—

—

—

—

—

– loan impairment charges and other credit risk provisions
 
15

—

—

—

—

—

—

Total gains/(losses) recognised in other comprehensive income
1
155

44

3

89

87

—

58

– available-for-sale investments: fair value gains
 
120

—

—

—

—

—

—

– cash flow hedges: fair value gains
 
—

(1
)
3

7

—

—

3

– exchange differences
 
35

45

—

82

87

—

55

Purchases
 
150

868

806

2

5

—

23

New issuances
 
—

—

—

1

938

—

—

Sales
 
(403
)
(1,060
)
(129
)
(8
)
—

—

(12
)
Settlements
 
(59
)
(34
)
(138
)
(7
)
(565
)
—

(190
)
Transfers out
 
(95
)
(114
)
(1
)
(721
)
(407
)
—

(605
)
Transfers in
 
213

654

2

217

41

—

246

At 31 Dec 2017
 
3,432

5,052

1,460

2,444

4,200

—

1,944

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2017
 
(7
)
(138
)
(169
)
266

(345
)
—

(503
)
– trading income/(expense) excluding net interest income

 
—

(138
)
—

266

(345
)
—

(503
)
– net income/(expense) from other financial instruments designated at fair value
 
—

—

(169
)
—

—

—

—

– loan impairment recoveries and other credit risk provisions

 
(7
)
—

—

—

—

—

—

1
Included in ‘Available-for-sale investments: fair value gains/(losses)’ for prior years and ‘financial investments: fair value gains/(losses)’ in the current year and ‘Exchange differences’ in the consolidated statement of comprehensive income.
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of Levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
The following table shows the sensitivity of Level 3 fair values to reasonably possible alternative assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
 
 
Reflected in
profit or loss
Reflected in other
comprehensive income
 
 
Favourable
changes

Unfavourable
changes

Favourable
changes

Unfavourable
changes

 
Footnote
$m

$m

$m

$m

Derivatives, trading assets and trading liabilities
1
320

(270
)
—

—

Financial assets and liabilities designated and otherwise mandatorily measured at fair value
 
344

(279
)
—

—

Financial investments
 
48

(51
)
15

(10
)
At 30 Jun 2018
 
712

(600
)
15

(10
)
 
Derivatives, trading assets and trading liabilities
1
249

(202
)
—

—

Financial assets and liabilities designated at fair value
 
68

(54
)
—

—

Financial investments: available for sale
 
76

(40
)
166

(132
)
At 30 Jun 2017
 
393

(296
)
166

(132
)
 
Derivatives, trading assets and trading liabilities
1
372

(253
)
—

—

Financial assets and liabilities designated at fair value
 
89

(74
)
—

—

Financial investments: available for sale
 
53

(30
)
128

(149
)
At 31 Dec 2017
 
514

(357
)
128

(149
)
1
Derivatives, ‘trading assets and trading liabilities’ are presented as one category to reflect the manner in which these financial instruments are risk-managed.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
 
Reflected in
profit or loss
Reflected in other
comprehensive income
 
Favourable
changes

Unfavourable
changes

Favourable
changes

Unfavourable
changes

 
$m

$m

$m

$m

Private equity including strategic investments
357

(288
)
—

—

Asset-backed securities
71

(40
)
15

(10
)
Loans held for securitisation
1

(1
)
—

—

Structured notes
15

(12
)
—

—

Derivatives with monolines
—

—

—

—

Other derivatives
200

(166
)
—

—

Other portfolios
68

(93
)
—

—

At 30 Jun 2018
712

(600
)
15

(10
)
 
Private equity including strategic investments
133

(91
)
116

(86
)
Asset-backed securities
38

(24
)
41

(38
)
Loans held for securitisation
1

(1
)
—

—

Structured notes
10

(7
)
—

—

Derivatives with monolines
1

(1
)
—

—

Other derivatives
171

(127
)
—

—

Other portfolios
39

(45
)
9

(8
)
At 30 Jun 2017
393

(296
)
166

(132
)
 
Private equity including strategic investments
142

(105
)
117

(102
)
Asset-backed securities
66

(39
)
3

(39
)
Loans held for securitisation
1

(1
)
—

—

Structured notes
12

(9
)
—

—

Derivatives with monolines
—

—

—

—

Other derivatives
249

(150
)
—

—

Other portfolios
44

(53
)
8

(8
)
At 31 Dec 2017
514

(357
)
128

(149
)

The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval.
Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable
proxy and historical data.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the table above reflects the most
favourable or the most unfavourable change from varying the assumptions individually.
Key unobservable inputs to Level 3 financial instruments
The table below lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs at 30 June 2018. The core range of inputs is the estimated range within which 90% of the inputs fall.
There has been no change to the key unobservable inputs to Level 3 financial instruments and inter-relationships therein, which are detailed on pages 213 and 214 of the Annual Report and Accounts 2017.
Quantitative information about significant unobservable inputs in Level 3 valuations
 
 
Fair value
Valuation technique
Key unobservable inputs
 
 
 
 
Assets

Liabilities

Full range of inputs
Core range of inputs
 
Footnotes
$m

$m

Lower
Higher

Lower

Higher

Private equity including strategic investments
 
4,872

17

See footnote 3
See footnote 3







Asset-backed securities
 
2,249

—

 
 
 
 
 
 
– CLO/CDO
1
336

—

Market proxy
Prepayment rate
2%
7%

2%

7%

 
 
 
—

Market proxy
Bid quotes
0
102

72

100

– other ABSs
 
1,913

—

Market proxy
Bid quotes
0
107

56

97

Loans held for securitisation
 
50

—

 
 
 
 
 
 
Structured notes
 
3

4,413

 
 
 
 
 
 
– equity-linked notes
 
—

4,268

Model – option model
Equity volatility
7%
59%

11%

37%

 
 
 


Model – option model
Equity correlation
19%
93%

34%

79%

– fund-linked notes
 
—

26

Model – option model
Fund volatility
5%
17%

5%

17%

– FX-linked notes
 
—

100

Model – option model
FX volatility
4%
21%

4%

11%

– other
 
3

19

 
 
 
 
 
 
Derivatives with monolines
 
75

—

Model – discounted cash flow
Credit spread
1%
4%

1%

4%

Other derivatives
 
2,395

1,869

 
 
 
 
 
 
– interest rate derivatives:
 
 
 
 
 
 
 
 
 
securitisation swaps
 
281

652

Model – discounted
cash flow
Prepayment rate
6%
7%

6%

7%

long-dated swaptions
 
1,074

28

Model – option model
IR volatility
12%
35%

13%

33%

other
 
266

135

 
 
 
 
 
 
– FX derivatives
 
 
 
 
 
 
 
 
 
FX options
 
158

122

Model – option model
FX volatility
1%
26%

6%

10%

other
 
85

84

 
 
 
 
 
 
– equity derivatives
 
 
 
 
 
 
 
 
 
long-dated single stock options
 
305

380

Model – option model
Equity volatility
5%
82%

6%

60%

other
 
187

298

 
 
 
 
 
 
– credit derivatives
 
 
 
 
 
 
 
 
 
other
 
39

170

 
 
 
 
 
 
Other portfolios
 
6,607

1

 
 
 
 
 
 
– structured certificates
 
3,013

—

Model – discounted
cash flow
Credit volatility
2%
4%

2%

4%

– EM corporate debt
 
39

—

 
 







– other
2
3,555

1

 
 
 
 
 
 
At 30 Jun 2018
 
16,251

6,300

 
 
 
 
 
 

Quantitative information about significant unobservable inputs in Level 3 valuations (continued)
 
 
Fair value
Valuation technique
 
 
 
 
 
Assets

Liabilities

Key unobservable inputs
Full range of inputs
Core range of inputs
 
Footnotes
$m

$m

Lower
Higher
Lower
Higher
Private equity including strategic investments
 
3,508

20

See footnote 3
See footnote 3
n/a
n/a
n/a
n/a
Asset-backed securities
 
2,577

 
 
 
 
 
 
 
– CLO/CDO
1
520

 
Market proxy
Prepayment rate
2%
7%
2%
7%
 
 
 
 
Market proxy
Bid quotes
0
101
6
53
– other ABSs
 
2,057

 
Market proxy
Bid quotes
0
103
34
98
Loans held for securitisation
 
24

—

 
 
 
 
 
 
Structured notes
 
3

4,180

 
 
 
 
 
 
– equity-linked notes
 
—

4,077

Model – option model
Equity volatility
7%
47%
14%
30%
 
 
—

 
Model – option model
Equity correlation
33%
95%
45%
72%
– fund-linked notes
 
—

7

Model – option model
Fund volatility
6%
15%
6%
15%
– FX-linked notes
 
—

76

Model – option model
FX volatility
3%
20%
4%
13%
– other
 
3

20

 
 
 
 
 
 
Derivatives with monolines
 
113

—

Model – discounted
cash flow
Credit spread
0.4%
3%
1%
3%
Other derivatives
 
2,331

1,944

 
 
 
 
 
 
– interest rate derivatives
 
 
 
 
 
 
 
 
 
securitisation swaps
 
285

806

Model – discounted
cash flow
Prepayment rate
20%
90%
20%
90%
long-dated swaptions
 
1,244

66

Model – option model
IR volatility
8%
41%
15%
31%
other
 
302

145

 
 
 
 
 
 
– FX derivatives
 
 
 
 
 
 
 
 
 
FX options
 
86

83

Model – option model
FX volatility
0.7%
50%
5%
11%
other
 
135

129

 
 
 
 
 
 
– equity derivatives
 
 
 
 
 
 
 
 
 
long-dated single stock options
 
158

359

Model – option model
Equity volatility
7%
84%
15%
44%
other
 
96

329

 
 
 
 
 
 
– Credit derivatives
 
 
 
 
 
 
 
 
 
Other
 
25

27

 
 
 
 
 
 
Other portfolios
 
3,832

—

 
 
 
 
 
 
– structured certificates
 
3,014

—

Model – discounted
cash flow
Credit volatility
2%
4%
2%
4%
– EM corporate debt
 
85

—

Market proxy
Bid quotes
100
100
100
100
– other
2
733

—

 
 
 
 
 
 
At 31 Dec 2017
 
12,388

6,144

 
 
 
 
 
 
1
Collateralised loan obligation/collateralised debt obligation.
2
’Other’ includes a range of smaller asset holdings.
3
See notes on page 213 of the Annual Report and Accounts 2017.
6
Fair values of financial instruments not carried at fair value
The bases for measuring the fair values of loans and advances to banks and customers, financial investments, deposits by banks, customer accounts, debt securities in issue, subordinated liabilities and non-trading repurchase and reverse repurchase agreements are explained on pages 215 and 216 of the Annual Report and Accounts 2017.
Fair values of financial instruments not carried at fair value on the balance sheet
 
At 30 Jun 2018
At 31 Dec 2017
 
Carrying
amount

Fair
value

Carrying
amount

Fair
value

 
$m

$m

$m

$m

Assets
 
 
 
 
Loans and advances to banks
83,924

83,902

90,393

90,391

Loans and advances to customers
973,443

974,646

962,964

964,205

Reverse repurchase agreements – non-trading
208,104

208,156

201,553

201,538

Financial investments – at amortised cost
62,755

61,930

52,919

54,087

Liabilities
 
 
 
 
Deposits by banks
64,792

64,791

69,922

69,892

Customer accounts
1,356,307

1,356,275

1,364,462

1,364,625

Repurchase agreements – non-trading
158,295

158,303

130,002

129,996

Debt securities in issue
81,708

81,970

64,546

65,138

Subordinated liabilities
22,604

26,417

19,826

24,095


Other financial instruments not carried at fair value are typically short term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value.