Annual Financial Report - 36 of 41

RNS Number : 8710D

HSBC Holdings PLC

30 March 2011

15 Trading assets

	2010	2009
	US$m	US$m
Trading assets:
- not subject to repledge or resale by counterparties ...........................................................	284,940	320,155
- which may be repledged or resold by counterparties .........................................................	100,112	101,226

	385,052	421,381

Treasury and other eligible bills ...............................................................................................	25,620	22,346
Debt securities .........................................................................................................................	168,268	201,598
Equity securities ......................................................................................................................	41,086	35,311

Trading securities at fair value .................................................................................................	234,974	259,255
Loans and advances to banks ...................................................................................................	70,456	78,126
Loans and advances to customers ............................................................................................	79,622	84,000

	385,052	421,381

Trading securities valued at fair value

	Fair value¹
	2010	2009
	US$m	US$m

US Treasury and US Government agencies² .............................................................................	20,239	17,620
UK Government .....................................................................................................................	17,036	12,113
Hong Kong Government .........................................................................................................	11,053	10,649
Other government ..................................................................................................................	92,826	94,264
Asset-backed securities³ ...........................................................................................................	3,998	5,308
Corporate debt and other securities .........................................................................................	48,736	83,990
Equity securities ......................................................................................................................	41,086	35,311

	234,974	259,255

1 Included within these figures are debt securities issued by banks and other financial institutions of US$37,170m (2009: US$41,466m), of which US$8,330m (2009: US$7,280m) 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.

Trading securities listed on a recognised exchange and unlisted

	Treasury and other eligible bills	Debt securities	Equity securities	Total
	US$m	US$m	US$m	US$m
Fair value at 31 December 2010
Listed on a recognised exchange¹ .......................................	698	113,878	40,098	154,674
Unlisted .............................................................................	24,922	54,390	988	80,300

	25,620	168,268	41,086	234,974

Fair value at 31 December 2009
Listed on a recognised exchange¹ .......................................	3,107	159,030	33,428	195,565
Unlisted .............................................................................	19,239	42,568	1,883	63,690

	22,346	201,598	35,311	259,255

1 Included within listed investments are US$3,254m (2009: US$3,229m) of investments listed in Hong Kong.

Loans and advances to banks held for trading

	2010	2009
	US$m	US$m

Reverse repos ..........................................................................................................................	45,771	50,357
Settlement accounts ................................................................................................................	5,226	10,128
Stock borrowing ......................................................................................................................	6,346	4,711
Other ......................................................................................................................................	13,113	12,930

	70,456	78,126

Loans and advances to customers held for trading

	2010	2009
	US$m	US$m

Reverse repos .......................................................................................................................	46,366	42,172
Settlement accounts .............................................................................................................	7,516	12,134
Stock borrowing ...................................................................................................................	11,161	18,042
Other ...................................................................................................................................	14,579	11,652

	79,622	84,000

16 Fair values of financial instruments carried at fair value

The classification of financial instruments is determined in accordance with the accounting policies set out in Note 2. The use of assumptions and estimation in valuing financial instruments is described on page 34.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

The following table sets out the financial instruments carried at fair value.

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
	US$m	US$m	US$m	US$m
31 December 2010
Assets
Trading assets ..............................................................	224,613	154,750	5,689	385,052
Financial assets designated at fair value ........................	23,641	12,783	587	37,011
Derivatives ..................................................................	2,078	254,718	3,961	260,757
Financial investments: available for sale ......................	214,276	158,743	8,237	381,256

Liabilities
Trading liabilities .........................................................	124,874	164,436	11,393	300,703
Financial liabilities designated at fair value ...................	22,193	65,370	570	88,133
Derivatives ..................................................................	1,808	253,051	3,806	258,665

31 December 2009
Assets
Trading assets ..............................................................	272,509	142,452	6,420	421,381
Financial assets designated at fair value ........................	24,184	11,773	1,224	37,181
Derivatives ..................................................................	1,961	244,472	4,453	250,886
Financial investments: available for sale ......................	163,149	178,168	10,214	351,531

Liabilities
Trading liabilities .........................................................	119,544	139,812	8,774	268,130
Financial liabilities designated at fair value ...................	27,553	52,032	507	80,092
Derivatives ..................................................................	1,843	240,611	5,192	247,646

The reduction of Level 1 trading assets reflects the deconsolidation of CNAV funds which is discussed further on page 363. The increase in Level 1 available-for-sale instruments reflects increased investment in government and US agency securities. The rise in the size of Level 2 trading assets and liabilities reflects an increase in repo and reverse repo activity.

There were no material transfers between Level 1 and Level 2 in the period.

Control framework

Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk‑taker.

For all financial instruments where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilised. In inactive markets, direct observation of a traded price may not be possible. In these circumstances, HSBC will source alternative market information to validate the financial instrument's fair value, with greater weight given to information that is considered to be more relevant and reliable. The factors that are considered in this regard are, inter alia:

· the extent to which prices may be expected to represent genuine traded or tradeable prices;

· the degree of similarity between financial instruments;

· the degree of consistency between different sources;

· the process followed by the pricing provider to derive the data;

· the elapsed time between the date to which the market data relates and the balance sheet date; and

· the manner in which the data was sourced.

For fair values determined using a valuation model, the control framework may include, as applicable, independent development or validation of (i) the logic within valuation models; (ii) the inputs to those models; (iii) any adjustments required outside the valuation models; and (iv) where possible, model outputs. Valuation models are subject to a process of due diligence and calibration before becoming operational and are calibrated against external market data on an ongoing basis.

The fair value governance structure is as follows:

Determination of fair value

Fair values are determined according to the following hierarchy:

· Level 1 - quoted market price: financial instruments with quoted prices for identical instruments in active markets.

· Level 2 - valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.

· Level 3 - valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable.

The best evidence of fair value is a quoted price in an actively traded market. The fair values of financial instruments that are quoted in active markets are based on bid prices for assets held and offer prices for liabilities issued. Where a financial instrument has a quoted price in an active market and it is part of a portfolio, the fair value of the portfolio is calculated as the product of the number of units and quoted price and no block discounts are applied. In the event that the market for a financial instrument is not active, a valuation technique is used.

The judgement as to whether a market is active may include, but is not restricted to, the consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. The bid/offer spread represents the difference in prices at which a market participant would be willing to buy compared with the price at which they would be willing to sell. In inactive markets, obtaining assurance that the transaction price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the instrument requires additional work during the valuation process.

Valuation techniques incorporate assumptions about factors that other market participants would use in their valuations, including interest rate yield curves, exchange rates, volatilities, and prepayment and default rates. During the year, as a result of evolving market practice in the pricing of certain interest rate derivatives, HSBC has, for single currency swaps with collateralised counterparties and in significant major currencies, adopted a discounting curve that reflects the overnight interest rate ('OIS discounting'). Previously, in line with market practice, discount curves did not reflect this overnight interest rate component but were based on a term LIBOR rate. The financial effect of this change was not significant.

The majority of valuation techniques employ only observable market data. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the derivation of fair value is more judgemental. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument's carrying amount and/or inception profit ('day 1 gain or loss') is driven by unobservable inputs. 'Unobservable' in this context means that there is little or no current market data available from which to determine the price at which an arm's length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).

In certain circumstances, primarily where debt is hedged with interest rate derivatives, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument concerned, if available. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based upon quoted prices in an inactive market for the instrument, or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to HSBC's liabilities. The change in fair value of issued debt securities attributable to the Group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using a LIBOR-based discount curve. The difference in the valuations is attributable to the Group's own credit spread. This methodology is applied consistently across all securities.

Structured notes issued and certain other hybrid instrument liabilities are included within trading liabilities and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes. These market spreads are smaller than credit spreads observed for plain vanilla debt or in the credit default swap markets.

Gains and losses arising from changes in the credit spread of liabilities issued by HSBC reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.

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. The magnitude of fair value adjustments depends upon many entity-specific factors, and therefore fair value adjustments may not be comparable across the banking industry.

HSBC classifies fair value adjustments as either 'risk-related' or 'model-related'. The majority of these adjustments relate to Global Banking and Markets.

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 31 December
	2010	2009
	US$m	US$m
Type of adjustment
Risk-related .............................................................................................................................	2,171	2,955
Bid-offer .............................................................................................................................	620	528
Uncertainty .........................................................................................................................	136	223
Credit risk adjustment ..........................................................................................................	1,355	2,172
Other ..................................................................................................................................	60	32

Model-related ..........................................................................................................................	389	457
Model limitation .................................................................................................................	383	391
Other ..................................................................................................................................	6	66

Inception profit (Day 1 P&L reserves) (Note 20) ...................................................................	250	260

	2,810	3,672

The most significant fair value adjustment movement related to the release of US$490m of credit risk adjustments held for monoline insurers of which US$336m resulted from commutations. The commutations did not result in a material gain or loss. The remainder of the decrease in the credit risk adjustment derived primarily from commutations or restructures with non-monoline counterparties and internal credit rating upgrades of certain counterparties.

Risk-related adjustments

Bid-offer

IAS 39 requires that portfolios are marked at bid or offer, as appropriate. Valuation models will typically generate mid market values. The bid-offer adjustment reflects the cost that would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the actual position.

Uncertainty

Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, there exists a range of possible values that the financial instrument or market parameter may assume and an adjustment may be necessary to reflect the likelihood that in estimating the fair value of the financial instrument, market participants would adopt rather more conservative values for uncertain parameters and/or model assumptions than those used in the valuation model.

Credit risk adjustment

The credit risk adjustment is an adjustment to the valuation of OTC derivative contracts to reflect within fair value the possibility that the counterparty may default and HSBC may not receive the full market value of the transactions.

Model-related adjustments

Model limitation

Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all material market characteristics. Additionally, markets evolve, and models that were adequate in the past may require development to capture all material market characteristics in current market conditions. In these circumstances, model limitation adjustments are adopted. As model development progresses, model limitations are addressed within the valuation models and a model limitation adjustment is no longer needed.

Inception profit (Day 1 P&L reserves)

Inception profit adjustments are adopted where the fair value estimated by a valuation model is based on one or more significant unobservable inputs. The accounting for inception profit adjustments is discussed on page 254. An analysis of the movement in the deferred Day 1 P&L reserve is provided on page 324.

Credit risk adjustment methodology

HSBC calculates a separate credit risk adjustment for each HSBC legal entity, and within each entity for each counterparty to which the entity has exposure. The calculation of the monoline credit risk adjustment and sensitivity to different assumptions is described on page 137. Of the total credit risk adjustment at 31 December 2010 of US$1,355m (2009: US$2,172m), US$836m (2009: US$1,163m) relates to the credit risk adjustment taken against non-monoline counterparties. The methodology for calculating the credit risk adjustment for non‑monoline counterparties is described below.

HSBC calculates the credit risk adjustment by applying the probability of default of the counterparty to the expected positive exposure to the counterparty, and multiplying the result by the loss expected in the event of default. The calculation is performed over the life of the potential exposure.

The probability of default is based on HSBC's internal credit rating for the counterparty, taking into account how credit ratings may deteriorate over the duration of the exposure through the use of historical rating transition matrices. For most products, to calculate the expected positive exposure to a counterparty, HSBC uses a simulation methodology to incorporate the range of potential exposures across the portfolio of transactions with the counterparty over the life of an instrument. The simulation methodology includes credit mitigants such as counterparty netting agreements and collateral agreements with the counterparty. A standard loss given default assumption of 60% is generally adopted. HSBC does not adjust derivative liabilities for HSBC's own credit risk, such an adjustment is often referred to as a 'debit valuation adjustment'.

For certain types of exotic derivatives where the products are not currently supported by the simulation, or for derivative exposures in smaller trading locations where the simulation tool is not yet available, HSBC adopts alternative methodologies. These may involve mapping to the results for similar products from the simulation tool or where such a mapping approach is not appropriate, a simplified methodology is used, generally following the same principles as the simulation methodology. The calculation is applied at a trade level, with more limited recognition of credit mitigants such as netting or collateral agreements than used in the simulation methodology described previously.

The methodologies do not, in general, account for 'wrong-way risk'. Wrong-way risk arises where the underlying value of the derivative prior to any credit risk adjustment is positively correlated to the probability of default of the counterparty. Where there is significant wrong-way risk, a trade specific approach is applied to reflect the wrong-way risk within the valuation.

HSBC includes all third party counterparties in the credit risk adjustment calculation and does not net credit risk adjustments across HSBC Group entities. During 2010, there were no material changes made by HSBC to the methodologies used to calculate the credit risk adjustment.

Fair value valuation bases

Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3

	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
	US$m	US$m		US$m	US$m	US$m		US$m	US$m
At 31 December 2010
Private equity including strategic investments .............................	4,057	278		120	-	-		-	-
Asset-backed securities ................	1,949	566		-	-	-		-	-
Leveraged finance .......................	-	-		-	-	-		-	11
Loans held for securitisation .......	-	1,043		-	-	-		-	-
Structured notes ..........................	-	-		-	-	10,667		-	-
Derivatives with monolines .........	-	-		-	1,005	-		-	-
Other derivatives ........................	-	-		-	2,956	-		-	3,787
Other portfolios ..........................	2,231	3,802		467	-	726		570	8

	8,237	5,689		587	3,961	11,393		570	3,806

	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
	US$m	US$m		US$m	US$m	US$m		US$m	US$m
At 31 December 2009
Private equity and strategic investments .............................	2,949	197		345	-	-		-	-
Asset-backed securities ................	4,270	944		-	-	-		-	-
Leveraged finance .......................	-	73		-	-	-		-	25
Loans held for securitisation .......	-	1,395		-	-	-		-	-
Structured notes ..........................	-	196		-	-	5,055		-	-
Derivatives with monolines .........	-	-		-	1,305	-		-	-
Other derivatives ........................	-	-		-	3,148	-		-	5,167
Other portfolios ..........................	2,995	3,615		879	-	3,719		507	-

	10,214	6,420		1,224	4,453	8,774		507	5,192

Private equity and strategic investments

HSBC's private equity and strategic investments are generally classified as available for sale and are not traded in active markets. In the absence of an active market, an investment's fair value is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors, as well as by reference to market valuations for similar entities quoted in an active market, or the price at which similar companies have changed ownership.

Asset-backed securities

Illiquidity and a lack of transparency in the market for ABSs have resulted in less observable data being available. While quoted market prices are generally used to determine the fair value of these securities, valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For ABSs including residential MBSs, the valuation uses an industry standard model and the assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature.

Loans, including leveraged finance and loans held for securitisation

Loans held at fair value are valued from broker quotes and/or market data consensus providers when available. In the absence of an observable market, the fair value is determined using valuation techniques. These techniques include discounted cash flow models, which incorporate assumptions regarding an appropriate credit spread for the loan, derived from other market instruments issued by the same or comparable entities.

Structured notes

The fair value of structured notes valued using a valuation technique is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives.

Derivatives

OTC (i.e. non-exchange traded) derivatives are valued using valuation models. Valuation models calculate the present value of expected future cash flows, based upon 'no-arbitrage' principles. For many vanilla derivative products, such as interest rate swaps and European options, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources. Examples of inputs that may be unobservable include volatility surfaces, in whole or in part, for less commonly traded option products, and correlations between market factors such as foreign exchange rates, interest rates and equity prices. The valuation of derivatives with monolines is discussed on page 137.

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy

The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:

Movement in Level 3 financial instruments

	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
	US$m	US$m		US$m	US$m	US$m		US$m	US$m
2010
At 1 January ...............................	10,214	6,420		1,224	4,453	8,774		507	5,192
Total gains/(losses) recognised in profit or loss ...........................	345	158		63	(675)	166		(11)	(240)
Total gains/(losses) recognised in other comprehensive income¹ .	618	(101)		(36)	(110)	(157)		74	93
Purchases ....................................	3,708	858		81	-	(356)		-	-
New issuances ..............................	-	-		-	-	4,025		-	-
Sales ............................................	(2,461)	(1,543)		(8)	-	-		-	-
Settlements .................................	(1,032)	1		(22)	64	(948)		-	(820)
Transfers out ..............................	(7,065)	(629)		(894)	(669)	(1,750)		-	(1,003)
Transfers in ................................	3,910	525		179	898	1,639		-	584

At 31 December ..........................	8,237	5,689		587	3,961	11,393		570	3,806

Total gains/(losses) recognised in profit or loss relating to assets and liabilities held on 31 December:	113	116		17	268	180		(14)	361
- net interest income .............	89	-		-	-	-		-	-
- trading income excluding net interest income ...................	-	98		-	268	198		-	361
- net interest income on trading activities ..................	-	18		-	-	(18)		-	-
- net income/(expense) from other financial instruments designated at fair value ........	-	-		17	-	-		(14)	-
- dividend income ..................	24	-		-	-	-		-	-

2009
At 1 January ...............................	9,116	7,561		460	9,883	6,509		-	3,805
Total gains/(losses) recognised in profit or loss ...........................	(260)	(730)		97	(5,275)	(107)		(3)	(1,372)
Total gains recognised in other comprehensive income¹ ..........	617	85		-	119	301		10	94
Purchases ....................................	1,785	1,598		260	-	22		-	-
New issuances ..............................	-	-		-	-	2,522		500	-
Sales ............................................	(806)	(2,166)		(13)	-	-		-	-
Settlements .................................	(1,059)	(295)		(6)	(104)	(1,266)		-	(206)
Transfers out ..............................	(3,043)	(1,077)		-	(1,057)	(537)		-	(620)
Transfers in ................................	3,864	1,444		426	887	1,330		-	3,491

At 31 December ..........................	10,214	6,420		1,224	4,453	8,774		507	5,192

Total gains/(losses) recognised in profit or loss relating to assets and liabilities held on 31 December:	(371)	(596)		98	(3,753)	(136)		(3)	(135)
- net interest income .............	(364)	-		-	-	-		-	-
- trading income excluding net interest income ...................	-	(640)		98	(3,753)	(135)		-	(135)
- net interest income on trading activities ..................	-	44		-	-	(1)		-	-
- gains less losses from financial investments ..........	(9)	-		-	-	-		-	-
- net income/(expense) from other financial instruments designated at fair value ........	-	-		-	-	-		(3)	-
- dividend income ..................	2	-		-	-	-		-	-

1 Included in 'Available-for-sale investments: Fair value gains/(losses)' and 'Exchange differences' in the consolidated statement of comprehensive income.

Available-for-sale securities: Greater pricing certainty of valuations in ABS markets (particularly MBS) has resulted in the transfer of assets out of Level 3 during 2010. Transfers into Level 3 were primarily related to strategic investments in Asia.

Trading assets: Greater pricing certainty of valuations in ABS markets (particularly MBS) and certain corporate bonds has resulted in the transfer of assets out of Level 3 during 2010. Transfers into Level 3 were driven by certain other corporate bonds for which pricing certainty decreased. Sales relate to disposals of whole loans, municipal bonds and various ABSs.

Derivative assets: Transfers out of Level 3 were driven by increased observability of longer-dated equity index volatility, particularly in Asian markets. Transfers in relate primarily to quanto structured credit transactions. Commutations of monoline derivatives and the narrowing of credit spreads have led to an overall reduction in the value of Level 3 assets.

Trading liabilities: Transfers out of and in to Level 3 relate primarily to increased / decreased observability of structured notes with embedded equity derivatives. New issuances relate to structured notes particularly those with embedded equity derivatives issued in the US.

Derivative liabilities: The increased observability in certain OTC equity derivative markets primarily in Asia led to transfers out of Level 3. Transfers in were driven by structured credit transactions.

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data. The following table shows the sensitivity of these 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
	US$m	US$m	US$m	US$m
At 31 December 2010
Derivatives, trading assets and trading liabilities¹ ................	554	(444)	-	-
Financial assets and liabilities designated at fair value .........	77	(75)	-	-
Financial investments: available for sale .............................	-	-	763	(744)

	631	(519)	763	(744)

At 31 December 2009
Derivatives, trading assets and trading liabilities¹ ................	984	(577)	-	-
Financial assets and liabilities designated at fair value .........	102	(98)	-	-
Financial investments: available for sale .............................	-	-	1,161	(1,157)

	1,086	(675)	1,161	(1,157)

1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial instruments are risk-managed.

The decrease in the effect of changes in significant unobservable inputs in relation to derivatives, trading assets and trading liabilities during the year primarily reflected the decreased sensitivity to monoline credit risk adjustment assumptions as exposures have reduced. The decrease in the effect of changes in significant unobservable inputs for available-for-sale assets arose from increased pricing certainty in respect of ABSs.

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
	US$m	US$m	US$m	US$m
At 31 December 2010
Private equity investments .................................................	112	(71)	383	(383)
Asset-backed securities .......................................................	8	(8)	179	(181)
Loans held for securitisation ..............................................	8	(8)	-	-
Structured notes .................................................................	18	(16)	-	-
Derivatives with monolines ................................................	94	(8)	-	-
Other derivatives ...............................................................	256	(258)	-	-
Other portfolios .................................................................	135	(150)	201	(180)

	631	(519)	763	(744)

At 31 December 2009
Private equity investments .................................................	54	(54)	302	(299)
Asset-backed securities .......................................................	41	(41)	734	(735)
Leveraged finance ..............................................................	1	(1)	-	-
Loans held for securitisation ..............................................	16	(16)	-	-
Structured notes .................................................................	3	(3)	-	-
Derivatives with monolines ................................................	333	(25)	-	-
Other derivatives ...............................................................	309	(332)	-	-
Other portfolios .................................................................	329	(203)	125	(123)

	1,086	(675)	1,161	(1,157)

Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result of varying the levels of the unobservable parameters using statistical techniques. When parameters are not amenable to statistical analysis, quantification of uncertainty is judgemental.

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or most unfavourable change from varying the assumptions individually.

In respect of private equity investments, in many of the methodologies, the principal assumption is the valuation multiple to be applied to the main financial indicators. This may be determined with reference to multiples for comparable listed companies and includes discounts for marketability.

For ABSs, the principal assumptions in the models are based on benchmark information about prepayment speeds, default rates, loss severities and the historical performance of the underlying assets.

For leveraged finance, loans held for securitisation and derivatives with monolines the principal assumption concerns the appropriate value to be attributed to the counterparty credit risk. This requires estimation of exposure at default, probability of default and recovery in the event of default. For loan transactions, assessment of exposure at default is straightforward. For derivative transactions, a future exposure profile is generated on the basis of current market data. Probabilities of default and recovery levels are estimated using available evidence, which may include financial information, historical experience, CDS spreads and consensus recovery levels.

For structured notes and other derivatives, principal assumptions concern the value to be attributed to future volatility of asset values and the future correlation between asset values. These principal assumptions include credit volatilities and correlations used in the valuation of structured credit derivatives (including leveraged credit derivatives). For such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy method to derive a volatility or a correlation from comparable assets for which market data is more readily available, and/or an examination of historical levels.

HSBC Holdings

The following table provides an analysis of the basis for valuing financial assets and financial liabilities measured at fair value in the financial statements:

Bases of valuing HSBC Holdings' financial assets and liabilities measured at fair value

		Valuation techniques
	Quoted market price	Using observable inputs	With significant unobservable inputs
	Level 1	Level 2	Level 3	Total
	US$m	US$m	US$m	US$m
At 31 December 2010
Assets
Derivatives .....................................................................	-	2,327	-	2,327
Financial investments: available for sale .........................	-	-	2,025	2,025

Liabilities
Financial liabilities designated at fair value ......................	12,029	4,259	-	16,288
Derivatives .....................................................................	-	827	-	827

At 31 December 2009
Assets
Derivatives .....................................................................	-	2,981	-	2,981
Financial investments: available for sale .........................	-	-	2,455	2,455

Liabilities
Financial liabilities designated at fair value ......................	12,549	4,360	-	16,909
Derivatives .....................................................................	-	362	-	362

Financial instruments measured at fair value - Level 3

Financial investments measured using a valuation technique with significant unobservable inputs (Level 3) comprise fixed-rate preferred securities and senior notes purchased from HSBC undertakings. The unobservable elements of the valuation technique include the use of implied credit spreads and simplified bond pricing assumptions.

Movement in Level 3 financial instruments available for sale

	2010	2009
	US$m	US$m

At 1 January ...........................................................................................................................	2,455	2,629
Total gains or losses:
- recognised in profit or loss ..................................................................................................	(155)	(2)
- recognised in other comprehensive income .........................................................................	(275)	103
Settlements .............................................................................................................................	-	(275)

At 31 December ......................................................................................................................	2,025	2,455

Total gains or losses recognised in profit or loss relating to those assets and liabilities held on 31 December ...........................................................................................................	(1)	(2)

In certain circumstances, the fair value of financial instruments are measured using valuation models that incorporate assumptions that are not supported by prices from observable current market transactions in the same instrument and are not based on observable market data. The following table shows the sensitivity of non-derivative financial instruments to reasonably possible alternative assumptions:

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

	Reflected in equity
	Favourable changes	Unfavourable changes
	US$m	US$m
Financial investments: available for sale

At 31 December 2010 ...........................................................................................................	34	(33)
At 31 December 2009 .............................................................................................................	115	(107)

17 Fair values of financial instruments not carried at fair value

The classification of financial instruments is determined in accordance with the accounting policies set out in Note 2.

Fair values of financial instruments which are not carried at fair value on the balance sheet

	At 31 December 2010		At 31 December 2009
	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m
Assets
Loans and advances to banks ........................................................	208,271	208,311	179,781	179,658
Loans and advances to customers .................................................	958,366	934,444	896,231	855,780
Financial investments: debt securities ...........................................	19,386	20,374	17,526	18,097
Financial investments: treasury and other eligible bills ..................	113	113	101	101

Liabilities
Deposits by banks ........................................................................	110,584	110,563	124,872	124,856
Customer accounts .......................................................................	1,227,725	1,227,428	1,159,034	1,160,036
Debt securities in issue ..................................................................	145,401	145,417	146,896	145,888
Subordinated liabilities ..................................................................	33,387	33,161	30,478	30,307

Fair values of financial instruments held for sale which are not carried at fair value on the balance sheet

	At 31 December 2010		At 31 December 2009
	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m
Assets classified as held for sale
Loans and advances to banks and customers .................................	116	116	1,356	1,316

The following is a list of financial instruments whose carrying amount is a reasonable approximation of fair value because, for example, they are short-term in nature or reprice to current market rates frequently:

Assets

Cash and balances at central banks

Items in the course of collection from other banks

Hong Kong Government certificates of indebtedness

Endorsements and acceptances

Short-term receivables within 'Other assets'

Accrued income

Liabilities

Hong Kong currency notes in circulation

Items in the course of transmission to other banks

Investment contracts with discretionary participation features within 'Liabilities under insurance contracts'

Endorsements and acceptances

Short-term payables within 'Other liabilities'

Accruals

Analysis of loans and advances to customers by geographical segment

	At 31 December 2010		At 31 December 2009
	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m
Loans and advances to customers
Europe .........................................................................................	435,799	430,333	439,481	431,158
Hong Kong ..................................................................................	140,691	140,699	99,381	99,694
Rest of Asia-Pacific .....................................................................	108,731	108,582	80,043	79,972
Middle East ..................................................................................	24,626	24,539	22,844	22,538
North America .............................................................................	190,532	172,522	206,853	174,957
Latin America ..............................................................................	57,987	57,769	47,629	47,461

	958,366	934,444	896,231	855,780

Valuation

The calculation of fair value incorporates HSBC's estimate of the amount at which financial assets could be exchanged, or financial liabilities settled, between knowledgeable, willing parties in an arm's length transaction. It does not reflect the economic benefits and costs that HSBC expects to flow from the instruments' cash flows over their expected future lives. Other reporting entities may use different valuation methodologies and assumptions in determining fair values for which no observable market prices are available, so comparisons of fair values between entities may not be meaningful and users are advised to exercise caution when using this data.

Loans and advances to banks and customers

The fair value of loans and advances is based on observable market transactions, where available. In the absence of observable market transactions, fair value is estimated using discounted cash flow models.

Performing loans are grouped, as far as possible, into homogeneous pools segregated by maturity and interest rates and the contractual cash flows are generally discounted using HSBC's estimate of the discount rate that a market participant would use in valuing instruments with similar maturity, re‑pricing and credit risk characteristics.

The fair value of a loan portfolio reflects both loan impairments at the balance sheet date and estimates of market participants' expectations of credit losses over the life of the loans. For impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.

Financial investments

The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that take into consideration the prices and future earnings streams of equivalent quoted securities.

Deposits by banks and customer accounts

For the purpose of estimating fair value, deposits by banks and customer accounts are grouped by remaining contractual maturity. Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. The fair value of a deposit repayable on demand is assumed to be the amount payable on demand at the balance sheet date.

Debt securities in issue and subordinated liabilities

Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.

The fair values in this note are stated at a specific date and may be significantly different from the amounts which will actually be paid on the maturity or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to HSBC as a going concern.

HSBC Holdings

The methods used by HSBC Holdings to determine fair values of financial instruments for the purpose of measurement and disclosure are described above.

The following table provides an analysis of the fair value of financial instruments not carried at fair value on the balance sheet:

Fair values of HSBC Holdings' financial instruments not carried at fair value on the balance sheet

	At 31 December 2010		At 31 December 2009
	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m
Assets
Loans and advances to HSBC undertakings ...................................	21,238	21,798	23,212	23,871

Liabilities
Amounts owed to HSBC undertakings ...........................................	2,932	2,963	3,711	3,827
Debt securities in issue ..................................................................	2,668	2,960	2,839	3,141
Subordinated liabilities ..................................................................	13,313	14,428	14,406	15,666

18 Reclassification of financial assets

During the second half of 2008, HSBC reclassified US$15.3bn and US$2.6bn of financial assets from the held-for-trading category to the loans and receivables and available-for-sale classifications, respectively, as permitted by the relevant amendment to IAS 39 and explained in Note 2(e) on the Financial Statements. No further reclassifications were undertaken by HSBC in 2010 and 2009.

Reclassification of HSBC's financial assets

	At 31 December 2010		At 31 December 2009
	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m
Reclassification to loans and receivables
ABSs .........................................................................................	5,892	4,977	7,827	6,177
Trading loans - commercial mortgage loans .................................	522	493	553	506
Leveraged finance and syndicated loans ........................................	4,533	4,166	5,824	5,434

	10,947	9,636	14,204	12,117
Reclassification to available for sale
Corporate debt and other securities ............................................	91	91	1,408	1,408

	11,038	9,727	15,612	13,525

The following table shows the fair value gains and losses, income and expense recognised in the income statement in respect of reclassified assets and the gains and losses that would have been recognised if no reclassification had taken place.

Effect of reclassifying and not reclassifying financial assets

	Financial assets reclassified to:
	loans and receivables				available for sale
	ABSs	Trading loans - commercial mortgage loans	Leveraged finance and syndicated loans	Total	Corporate debt and other securities	Total
	US$m	US$m	US$m	US$m	US$m	US$m
2010
Recorded in the income statement¹ .....................................................	235	29	346	610	56	666
Assuming no reclassification²........	908	45	307	1,260	59	1,319

Net effect of reclassification ........	(673)	(16)	39	(650)	(3)	(653)

Attributable to:
Europe ......................................	(527)	(16)	(23)	(566)	(2)	(568)
North America .........................	(146)	-	49	(97)	(1)	(98)
Middle East ...............................	-	-	13	13	-	13

	Financial assets reclassified to:
	loans and receivables				available for sale
	ABSs	Trading loans - commercial mortgage loans	Leveraged finance and syndicated loans	Total	Corporate debt and other securities	Total
	US$m	US$m	US$m	US$m	US$m	US$m
2009
Recorded in the income statement¹ .....................................................	511	32	434	977	101	1,078
Assuming no reclassification²........	767	15	1,494	2,276	301	2,577

Net effect of reclassification ........	(256)	17	(1,060)	(1,299)	(200)	(1,499)

Attributable to:
Europe ......................................	(212)	17	(566)	(761)	(170)	(931)
North America .........................	(44)	-	(543)	(587)	(30)	(617)
Middle East ...............................	-	-	49	49	-	49

2008
Recorded in the income statement¹ .....................................................	303	17	192	512	22	534
Assuming no reclassification²........	(1,549)	(13)	(1,239)	(2,801)	(202)	(3,003)

Net effect of reclassification ........	1,852	30	1,431	3,313	224	3,537

Attributable to:
Europe ......................................	1,537	30	803	2,370	193	2,563
North America .........................	315	-	601	916	31	947
Middle East ...............................	-	-	27	27	-	27

1 'Income and expense' recorded in the income statement represents the accrual of the effective interest rate and, for 2010, includes US$6m in respect of impairment (2009: US$163m; 2008: US$26m). The effect on the income statement for 2008 shows the income and expense post-reclassification. In 2008 pre-reclassification, the assets were held at fair value and a loss of US$1,371m was recorded in the period up to reclassification.

2 Effect on the income statement during the year had the reclassification not occurred.

19 Financial assets designated at fair value

	2010	2009
	US$m	US$m
Financial assets designated at fair value:
- not subject to repledge or resale by counterparties ...........................................................	36,990	37,166
- which may be repledged or resold by counterparties .........................................................	21	15

	37,011	37,181

Treasury and other eligible bills ...............................................................................................	159	223
Debt securities .........................................................................................................................	18,248	20,718
Equity securities ......................................................................................................................	17,418	14,983

Securities designated at fair value .............................................................................................	35,825	35,924
Loans and advances to banks ...................................................................................................	315	354
Loans and advances to customers ............................................................................................	871	903

	37,011	37,181

Securities designated at fair value

	Fair value¹
	2010	2009
	US$m	US$m

US Treasury and US Government agencies² ............................................................................	78	78
UK Government ....................................................................................................................	1,304	4,799
Hong Kong Government ........................................................................................................	151	177
Other government .................................................................................................................	4,130	3,491
Asset-backed securities³ .........................................................................................................	6,128	6,463
Corporate debt and other securities ........................................................................................	6,616	5,933
Equities ..................................................................................................................................	17,418	14,983

	35,825	35,924

1 Included within these figures are debt securities issued by banks and other financial institutions of US$10,185m (2009: US$13,745m), of which US$48m (2009: US$49m) 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
	US$m	US$m	US$m	US$m
Fair value at 31 December 2010
Listed on a recognised exchange¹ .......................................	21	4,168	12,548	16,737
Unlisted .............................................................................	138	14,080	4,870	19,088

	159	18,248	17,418	35,825

Fair value at 31 December 2009
Listed on a recognised exchange¹ .......................................	78	7,168	10,549	17,795
Unlisted .............................................................................	145	13,550	4,434	18,129

	223	20,718	14,983	35,924

1 Included within listed investments are US$756m of investments listed in Hong Kong (2009: US$506m).

20 Derivatives

Fair values of derivatives by product contract type held by HSBC

	Assets			Liabilities
	Trading	Hedging	Total	Trading	Hedging	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Foreign exchange ........................................	65,905	1,304	67,209	67,564	340	67,904
Interest rate ................................................	278,364	2,764	281,128	273,222	3,909	277,131
Equity .........................................................	13,983	-	13,983	14,716	-	14,716
Credit ..........................................................	20,907	-	20,907	20,027	-	20,027
Commodity and other .................................	1,261	-	1,261	2,618	-	2,618

Gross total fair values ..................................	380,420	4,068	384,488	378,147	4,249	382,396

Netting ........................................................			(123,731)			(123,731)

Total ...........................................................			260,757			258,665

At 31 December 2009
Foreign exchange ........................................	55,036	1,695	56,731	54,502	300	54,802
Interest rate ................................................	212,102	3,506	215,608	209,351	3,274	212,625
Equity .........................................................	15,729	-	15,729	19,013	-	19,013
Credit ..........................................................	28,479	-	28,479	27,042	-	27,042
Commodity and other .................................	1,135	-	1,135	960	-	960

Gross total fair values ..................................	312,481	5,201	317,682	310,868	3,574	314,442

Netting ........................................................			(66,796)			(66,796)

Total ...........................................................			250,886			247,646

The 4% increase in the fair value of derivative assets during 2010 was driven both by this increased volume of open trades and by small net declines in yield curves of major currencies over the year. The netting adjustment increased as increasing volumes of transactions, particularly interest rate derivatives and credit derivatives, were executed through clearing houses, where the settlement arrangements satisfied the IFRS netting criteria.

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

	At 31 December 2010		At 31 December 2009
	Trading	Trading	Trading	Trading
	assets	liabilities	assets	liabilities
	US$m	US$m	US$m	US$m

Foreign exchange ...............................................................	1,407	827	2,250	362
Interest rate .......................................................................	920	-	731	-

	2,327	827	2,981	362

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 enable users to increase, reduce or alter exposure to credit or market risks. HSBC makes markets in derivatives for its customers and uses derivatives to manage its exposure to credit and market risks.

Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. A description of how the fair value of derivatives is derived is set out on page 313. Derivative assets and liabilities on different transactions are only set off if the transactions are with the same counterparty, a legal right of set-off exists and the cash flows are intended to be settled on a net basis.

Use of derivatives

HSBC transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risks arising from client business and to manage and hedge HSBC's own risks. Derivatives (except for derivatives which are designated as effective hedging instruments as defined in IAS 39) are held for trading. The held for trading classification includes two types of derivatives: those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge accounting. The second category includes derivatives managed in conjunction with financial instruments designated at fair value. These activities are described more fully below.

HSBC's derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly to ensure that they remain within acceptable risk levels, with matching deals being utilised to achieve this where necessary. When entering into derivative transactions, HSBC employs the same credit risk management procedures to assess and approve potential credit exposures that are used for traditional lending.

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 in derivatives are entered into principally for the purpose of generating profits from short-term fluctuations in price or margin. Positions may be traded actively or be held over a period of time to benefit from expected changes in exchange rates, interest rates, equity prices or other market parameters. Trading includes market-making, positioning and arbitrage activities. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume; positioning means managing market risk positions in the expectation of benefiting from favourable movements in prices, rates or indices; arbitrage involves identifying and profiting from price differentials between markets and products.

As mentioned above, other derivatives classified as held for trading include non-qualifying hedging derivatives, ineffective hedging derivatives and the components of hedging derivatives that are excluded from assessing hedge effectiveness. Non-qualifying hedging derivatives are entered into for risk management purposes but do not meet the criteria for hedge accounting. These include derivatives managed in conjunction with financial instruments designated at fair value.

Gains and losses from changes in the fair value of derivatives, including the contractual interest, that do not qualify for hedge accounting are reported in 'Net trading income', except for derivatives managed in conjunction with financial instruments designated at fair value, where gains and losses 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 in issue, the contractual interest is shown in 'interest expense' together with the interest payable on the issued debt. Substantially all of HSBC Holdings' derivatives entered into with HSBC undertakings 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. The 27% increase in the notional amounts of HSBC's derivative assets during 2010 was primarily driven by an increase in the number of open interest rate contracts, reflecting increased trading volumes in the period.

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

	HSBC		HSBC Holdings
	At 31 December 2010	At 31 December 2009	At 31 December 2010	At 31 December 2009
	US$m	US$m	US$m	US$m

Foreign exchange ...............................................................	3,692,798	2,883,201	17,287	17,150
Interest rate .......................................................................	18,104,141	13,874,355	6,804	6,804
Equity ................................................................................	294,587	217,828	-	-
Credit .................................................................................	1,065,218	1,237,055	-	-
Commodity and other ........................................................	82,856	53,720	-	-

	23,239,600	18,266,159	24,091	23,954

Credit derivatives

HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad range of users, structuring deals 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 US$1,065,218m (2009: US$1,237,055m) consisted of protection bought of US$530,235m (2009: US$614,690m) and protection sold of US$534,983m (2009: US$622,365m).

The credit derivative business operates within the market risk management framework described on pages 145 to 154.

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

	2010	2009
	US$m	US$m

Unamortised balance at 1 January ...........................................................................................	260	204
Deferral on new transactions ...................................................................................................	331	192
Recognised in the income statement during the period:
- amortisation .....................................................................................................................	(106)	(86)
- subsequent to unobservable inputs becoming observable ....................................................	(17)	(19)
- maturity, termination or offsetting derivative ..................................................................	(163)	(42)
Exchange differences ..............................................................................................................	(15)	11
Risk hedged .............................................................................................................................	(40)	-

Unamortised balance at 31 December¹ ....................................................................................	250	260

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

Hedging instruments

HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own 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 accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow hedges, or hedges in net investment of foreign operations. These are described under the relevant headings below.

The notional contract amounts of derivatives held for hedging 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 hedging purposes by product type

	At 31 December 2010		At 31 December 2009
	Cash flow hedge	Fair value hedge	Cash flow hedge	Fair value hedge
	US$m	US$m	US$m	US$m

Foreign exchange ................................................	10,599	1,392	12,359	2,469
Interest rate ........................................................	282,412	62,757	236,388	42,224

	293,011	64,149	248,747	44,693

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. For qualifying fair value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged are recognised in the income statement. If the hedge relationship is terminated, the fair value adjustment to the hedged item continues to be reported as part of the basis of the item and is amortised to the income statement as a yield adjustment over the remainder of the hedging period.

Fair value of derivatives designated as fair value hedges

	At 31 December 2010		At 31 December 2009
	Assets	Liabilities	Assets	Liabilities
	US$m	US$m	US$m	US$m

Foreign exchange ...........................................	153	-	342	-
Interest rate ...................................................	443	2,226	242	1,085

	596	2,226	584	1,085

Gains or losses arising from fair value hedges

	2010	2009	2008
	US$m	US$m	US$m
Gains/(losses):
- on hedging instruments .............................................................................	(830)	114	(296)
- on the hedged items attributable to the hedged risk ...................................	868	(159)	301

	38	(45)	5

The gains and losses on ineffective portions of fair value hedges are recognised immediately in 'Net trading income'.

Cash flow hedges

HSBC's cash flow hedges consist principally of interest rate 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. Gains and losses are initially recognised in other comprehensive income, and accumulated in the cash flow hedging reserve, and are transferred to the income statement when the forecast cash flows affect the income statement.

Fair value of derivatives designated as cash flow hedges

	At 31 December 2010		At 31 December 2009
	Assets	Liabilities	Assets	Liabilities
	US$m	US$m	US$m	US$m

Foreign exchange ...........................................	1,151	340	1,353	300
Interest rate ...................................................	2,321	1,683	3,264	2,189

	3,472	2,023	4,617	2,489

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
	US$m	US$m	US$m	US$m
At 31 December 2010
Assets ................................................................................	163,006	97,174	58,975	1,358
Liabilities ...........................................................................	(89,112)	(58,811)	(42,259)	(6,065)

Net cash inflows/(outflows) exposure .................................	73,894	38,363	16,716	(4,707)

At 31 December 2009
Assets ................................................................................	120,915	111,456	53,184	476
Liabilities ...........................................................................	(71,143)	(78,841)	(39,377)	(6,559)

Net cash inflows/(outflows) exposure .................................	49,772	32,615	13,807	(6,083)

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

The gains and losses on ineffective portions of such derivatives are recognised immediately in 'Net trading income'. During the year to 31 December 2010 a loss of US$9m (2009: gain of US$90m; 2008: loss of US$40m) 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 currency borrowings.

At 31 December 2010, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were liabilities of US$34m (2009: US$28m) and notional contract values of US$644m (2009: US$566m).

The ineffectiveness recognised in 'Net trading income' in the year ended 31 December 2010 that arose from hedges in foreign operations was nil (2009 and 2008: nil).

21 Financial investments

	2010	2009
	US$m	US$m
Financial investments:
- not subject to repledge or resale by counterparties ...........................................................	369,597	356,864
- which may be repledged or resold by counterparties .........................................................	31,158	12,294

	400,755	369,158

Carrying amount and fair value of financial investments

	2010		2009
	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m

Treasury and other eligible bills ..........................................	57,129	57,129	58,434	58,434
-. available for sale .........................................................	57,016	57,016	58,333	58,333
-. held to maturity .........................................................	113	113	101	101

Debt securities ....................................................................	335,643	336,632	301,600	302,171
-. available for sale .........................................................	316,257	316,257	284,074	284,074
-. held to maturity .........................................................	19,386	20,375	17,526	18,097

Equity securities .................................................................	7,983	7,983	9,124	9,124
-. available for sale .........................................................	7,983	7,983	9,124	9,124


Total financial investments ...............................................	400,755	401,744	369,158	369,729

Financial investments at amortised cost and fair value

	Amortised cost	Fair value¹
	US$m	US$m
At 31 December 2010
US Treasury ............................................................................................................................	37,380	37,255
US Government agencies² .......................................................................................................	20,895	21,339
US Government sponsored entities² ........................................................................................	5,029	5,267
UK Government .....................................................................................................................	31,069	31,815
Hong Kong Government .........................................................................................................	29,770	29,793
Other government ..................................................................................................................	108,947	109,806
Asset-backed securities³ ...........................................................................................................	39,845	33,175
Corporate debt and other securities .........................................................................................	124,704	125,311
Equities ...................................................................................................................................	5,605	7,983

	403,244	401,744

At 31 December 2009
US Treasury ............................................................................................................................	17,650	17,635
US Government agencies² .......................................................................................................	12,539	12,804
US Government sponsored entities² ........................................................................................	4,885	4,924
UK Government .....................................................................................................................	9,653	9,782
Hong Kong Government .........................................................................................................	37,747	37,763
Other government ..................................................................................................................	87,122	87,881
Asset-backed securities³ ...........................................................................................................	48,500	34,914
Corporate debt and other securities .........................................................................................	153,639	154,902
Equities ...................................................................................................................................	7,051	9,124

	378,786	369,729

At 31 December 2008
US Treasury ............................................................................................................................	11,528	11,755
US Government agencies² .......................................................................................................	8,131	8,307
US Government sponsored entities² ........................................................................................	15,109	15,240
UK Government .....................................................................................................................	16,077	16,217
Hong Kong Government .........................................................................................................	966	989
Other government ..................................................................................................................	60,755	61,528
Asset-backed securities³ ...........................................................................................................	55,685	36,052
Corporate debt and other securities .........................................................................................	145,269	143,940
Equities ...................................................................................................................................	5,901	7,251

	319,421	301,279

1 Included within the above figures are debt securities issued by banks and other financial institutions of US$99,733m (2009: US$133,256m; 2008: US$140,878m), of which US$38,862m (2009: US$55,324m; 2008: US$39,213m) are guaranteed by various governments. The fair value of the debt securities issued by banks and other financial institutions was US$100,070m (2009: US$133,461m; 2008: US$141,526m).

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

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

Financial investments listed on a recognised exchange and unlisted

	Treasury and other eligible bills available for sale	Treasury and other eligible bills held to maturity	Debt securities available for sale	Debt securities held to maturity	Equity securities available for sale	Total
	US$m	US$m	US$m	US$m	US$m	US$m
Carrying amount at 31 December 2010
Listed on a recognised exchange¹ .................	1,400	-	138,374	4,182	851	144,807
Unlisted² .....................................................	55,616	113	177,883	15,204	7,132	255,948

	57,016	113	316,257	19,386	7,983	400,755
Carrying amount at 31 December 2009
Listed on a recognised exchange¹ .................	2,334	-	135,653	2,743	911	141,641
Unlisted² .....................................................	55,999	101	148,421	14,783	8,213	227,517

	58,333	101	284,074	17,526	9,124	369,158

1 The fair value of listed held-to-maturity debt securities as at 31 December 2010 was US$4,332m (2009: US$2,769m). Included within listed investments were US$1,902m (2009: US$1,670m) of investments listed in Hong Kong.

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

Maturities of investments in debt securities at their carrying amount

	At 31 December
	2010	2009
	US$m	US$m
Remaining contractual maturity of total debt securities:
1 year or less .......................................................................................................................	92,961	75,782
5 years or less but over 1 year .............................................................................................	124,596	141,683
10 years or less but over 5 years ..........................................................................................	56,926	31,934
Over 10 years ......................................................................................................................	61,160	52,201

	335,643	301,600
Remaining contractual maturity of debt securities available for sale:
1 year or less .......................................................................................................................	91,939	75,160
5 years or less but over 1 year .............................................................................................	117,931	135,187
10 years or less but over 5 years ..........................................................................................	50,113	26,105
Over 10 years ......................................................................................................................	56,274	47,622

	316,257	284,074
Remaining contractual maturity of debt securities held to maturity:
1 year or less .......................................................................................................................	1,022	622
5 years or less but over 1 year .............................................................................................	6,665	6,496
10 years or less but over 5 years ..........................................................................................	6,813	5,829
Over 10 years ......................................................................................................................	4,886	4,579

	19,386	17,526

Contractual maturities and weighted average yields of investment debt securities at 31 December 2010

	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
	US$m	%	US$m	%	US$m	%	US$m	%
Available-for-sale
US Treasury ......................................	8,761	0.95	13,513	1.19	9,225	2.61	4,648	4.32
US Government agencies ...................	-	-	7	2.95	230	4.78	20,236	3.71
US Government-sponsored agencies ..	859	0.70	114	1.75	1,993	3.81	445	3.60
UK Government ................................	3,994	2.90	11,407	2.22	13,987	2.97	1,248	2.80
Hong Kong Government ...................	362	0.55	407	2.95	-	-	-	-
Other governments ...........................	28,779	2.25	44,920	4.00	6,945	4.65	2,073	4.58
Asset-backed securities ......................	392	0.77	2,311	1.73	7,773	0.66	29,178	0.64
Corporate debt and other securities ....	49,014	2.26	44,009	2.54	10,342	3.44	4,065	4.72

Total amortised cost .........................	92,161		116,688		50,495		61,893

Total carrying value ..........................	91,939		117,931		50,113		56,274

	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
	US$m	%	US$m	%	US$m	%	US$m	%

Held-to-maturity
US Treasury ......................................	-	-	32	3.13	60	6.67	62	9.68
US Government agencies ...................	-	-	-	-	6	7.65	416	6.49
US Government-sponsored agencies ..	19	5.26	28	7.14	2	6.92	1,560	6.15
Hong Kong Government ...................	2	3.02	-	-	8	5.05	-	-
Other governments ...........................	53	5.66	424	3.30	252	4.37	595	7.23
Asset-backed securities ......................	-	-	-	-	-	-	191	6.28
Corporate debt and other securities ....	948	4.01	6,181	4.29	6,485	4.52	2,062	5.92

Total amortised cost .........................	1,022		6,665		6,813		4,886

Total carrying value ..........................	1,022		6,665		6,813		4,886

The maturity distributions of asset-backed securities 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 2010 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives.

22 Transfers of financial assets not qualifying for derecognition

HSBC enters into transactions in the normal course of business by which it transfers recognised financial assets directly to third parties or to SPEs. These transfers may give rise to the full or partial derecognition of the financial assets concerned.

- Full derecognition occurs when HSBC transfers its contractual right to receive cash flows from the financial assets, or retains the right but assumes an obligation to pass on the cash flows from the asset, and transfers substantially all the risks and rewards of ownership. The risks include credit, interest rate, currency, prepayment and other price risks.

- Partial derecognition occurs when HSBC sells or otherwise transfers financial assets in such a way that some but not substantially all of the risks and rewards of ownership are transferred but control is retained. These financial assets are recognised on the balance sheet to the extent of HSBC's continuing involvement.

The majority of financial assets that do not qualify for derecognition are (i) debt securities held by counterparties as collateral under repurchase agreements or (ii) equity securities lent under securities lending agreements. The following table analyses the carrying amount of financial assets that did not qualify for derecognition and their associated financial liabilities:

Financial assets and associated financial liabilities not qualifying for derecognition

	2010		2009
	Carrying amount of transferred assets	Carrying amount of associated liabilities	Carrying amount of transferred assets	Carrying amount of associated liabilities
	US$m	US$m	US$m	US$m
Nature of transaction
Repurchase agreements ......................................................	124,625	122,455	108,518	107,525
Securities lending agreements .............................................	7,277	7,202	7,363	7,264

	131,902	129,657	115,881	114,789

A small proportion of financial assets that do not qualify for derecognition relate to loans, credit cards, debt securities and trade receivables that have been securitised under arrangements by which HSBC retains a continuing involvement in such transferred assets. Continuing involvement may entail retaining the rights to future cash flows arising from the assets after investors have received their contractual terms (for example, interest rate strips); providing subordinated interest; liquidity support; continuing to service the underlying asset; or entering into derivative transactions with the securitisation vehicles. As such, HSBC continues to be exposed to risks associated with these transactions.

The rights and obligations that HSBC retains from its continuing involvement in securitisations are initially recorded as an allocation of the fair value of the financial asset between the part that is derecognised and the part that continues to be recognised on the date of transfer. The following table analyses the carrying amount of financial assets that qualified for partial derecognition, the extent of HSBC's continuing involvement and the associated liabilities:

HSBC's continuing involvement in financial assets qualifying for partial derecognition

	Securitisations at 31 December
	2010	2009
	US$m	US$m

Carrying amount of assets (original) ........................................................................................	17,427	17,427
Carrying amount of assets (currently recognised) ....................................................................	42	139
Carrying amount of associated liabilities (currently recognised) ...............................................	21	69

23 Interests in associates and joint ventures

Associates

Principal associates of HSBC

	At 31 December 2010		At 31 December 2009
	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m
Listed
Bank of Communications Co., Limited ..............................	6,944	10,773	5,110	10,820
Industrial Bank Co., Limited ..............................................	1,769	2,799	1,084	3,774
Ping An Insurance (Group) Company of China, Limited ....	5,596	13,735	4,391	10,803
SABB Takaful Company ....................................................	28	49	29	99
The Saudi British Bank .......................................................	1,580	3,224	1,376	3,472

	15,917	30,580	11,990	28,968

	At 31 December 2010
	Country of incorporation	HSBC's interest in equity capital	Issued equity capital
Listed
Bank of Communications Co., Limited ...............................................	PRC¹	19.03%	RMB56,260m
Industrial Bank Co., Limited ...............................................................	PRC¹	12.80%	RMB5,992m
Ping An Insurance (Group) Company of China, Limited .....................	PRC¹	16.13%	RMB7,345m
SABB Takaful Company ....................................................................	Saudi Arabia	32.50%	SR340m
The Saudi British Bank .......................................................................	Saudi Arabia	40.00%	SR7,500m

Unlisted
Barrowgate Limited³ ...........................................................................	Hong Kong	24.64%	-
Vietnam Technological and Commercial Joint Stock Bank .................	Vietnam	19.79%	VND6,932,184m
Yantai Bank Co., Limited² ..................................................................	PRC¹	20.00%	RMB2,000m

1 People's Republic of China.

2 Yantai Bank Co., Limited was previously known as Yantai City Commercial Bank. The investment is held through Hang Seng Bank Limited, a 62.14% owned subsidiary of HSBC.

3 Issued equity capital is less than HK$1m.

All the above investments in associates are owned by subsidiaries of HSBC Holdings.

During 2010, HSBC disposed of its 48.92% interest in the equity capital of British Arab Commercial Bank Public Limited Company, which was previously reported as an unlisted principal associate.

Details of all HSBC associates and joint ventures, as required under Section 409 Companies Act 2006, will be annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies.

HSBC had US$12,540m (2009: US$9,501m) of investments in associates and joint ventures listed in Hong Kong.

For the year ended 31 December 2010, HSBC's share of associates and joint ventures' tax on profit was US$774m (2009: US$491m), which is included within share of profit in associates and joint ventures in the income statement.

Summarised aggregate financial information on associates

	2010	2009
	US$m	US$m
HSBC's share of:
- assets ................................................................................................................................	191,286	158,890
- liabilities ...........................................................................................................................	175,812	147,501
- revenues ...........................................................................................................................	9,274	7,514
- profit after tax .................................................................................................................	2,479	1,735

HSBC's investment in Bank of Communications Co., Limited was equity accounted with effect from August 2004. HSBC's significant influence in Bank of Communications Co., Limited was established as a result of representation on the Board of Directors, and in accordance with the Technical Support and Assistance Agreements, HSBC is assisting in the development of financial and operating policies and a number of staff have been seconded to assist in this process.

HSBC's investment in Industrial Bank Co., Limited was equity accounted with effect from May 2004, reflecting HSBC's significant influence over this associate. HSBC's significant influence was established as a result of representation on the Board of Directors, and in accordance with the Technical Support and Assistance Agreements, HSBC is assisting in the development of financial and operating policies.

HSBC's investment in Ping An Insurance (Group) Company of China, Limited was equity accounted with effect from 31 August 2005, reflecting HSBC's significant influence over this associate. HSBC's significant influence was established as a result of representation on the Board of Directors. In May 2010, following the issue of shares by the associate to a third party, HSBC's holding was diluted to 16.13% and a dilution gain of US$188m was recognised in 'Other operating income'.

The statutory accounting reference date of Bank of Communications Co., Limited, Ping An Insurance (Group) Company of China, Limited and Industrial Bank Co., Limited is 31 December. For the year ended 31 December 2010, these companies were included on the basis of financial statements made up for the twelve months to 30 September 2010, taking into account changes in the subsequent period from 1 October 2010 to 31 December 2010 that would have materially affected their results.

HSBC acquired 15% of Vietnam Technological & Commercial Joint Stock Bank in October 2007. This investment was equity accounted from that date due to HSBC's representation on the Board of Directors and involvement in the Technical Support and Assistance Agreement. In December 2007, as a result of a rights issue in which HSBC did not participate, HSBC's equity interest was diluted to 14.44%. In September 2008, HSBC increased its equity interest to 20%. HSBC's equity interest has been subsequently diluted to below 20% due to the issue of shares by the associate to its own employees.

Joint ventures

Principal interests in joint ventures

	At 31 December 2010
	Country of incorporation	Principal activity	HSBC's interest in equity capital		Issued equity capital

HSBC Saudi Arabia Limited ...............................	Saudi Arabia	Investment banking		60.00%	SR50m
Vaultex UK Limited .........................................	England	Cash management		50.00%	£10m
Hana HSBC Life Insurance Co., Ltd ..................	South Korea	Insurance manufacturing		49.99%	KRW60,201m
Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited ..................	India	Insurance manufacturing		26.00%	INR5,000m

Summarised aggregate financial information on joint ventures

	2010	2009
	US$m	US$m
HSBC's share of:
- current assets ....................................................................................................................	1,481	700
- non-current assets ............................................................................................................	97	513
- current liabilities ...............................................................................................................	706	621
- non-current liabilities .......................................................................................................	666	416
- income .............................................................................................................................	366	370
- expenses ...........................................................................................................................	328	324

Goodwill included in carrying amount of associates and joint ventures

	2010	2009
	US$m	US$m
Gross amount
At 1 January ...........................................................................................................................	1,446	1,453
Additions ................................................................................................................................	60	5
Exchange differences ..............................................................................................................	40	(12)
Other changes .........................................................................................................................	(28)	-

At 31 December¹ ....................................................................................................................	1,518	1,446

1 Includes the carrying amount of goodwill arising from joint ventures of US$32m (2009: US$32m).

24 Goodwill and intangible assets

	2010	2009
	US$m	US$m

Goodwill ..................................................................................................................................	22,406	23,241
Present value of in-force long-term insurance business ('PVIF')¹ ............................................	3,440	2,780
Other intangible assets ............................................................................................................	4,076	3,973

	29,922	29,994

1 Disclosures on PVIF are provided on page 170.

Goodwill

Reconciliation of goodwill

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
Gross amount
At 1 January 2010 ..............	15,915	123	1,053	69	12,483	4,162	33,805
Additions ............................	-	-	16	-	-	-	16
Disposals ............................	(3)	-	-	-	(17)	-	(20)
Exchange differences ..........	(1,004)	1	52	(4)	(1)	154	(802)
Other changes .....................	(23)	-	(6)	-	-	-	(29)

At 31 December 2010 ........	14,885	124	1,115	65	12,465	4,316	32,970

Accumulated impairment losses
At 1 January and 31 December 2010 ...............	-	-	-	-	(10,564)	-	(10,564)

Net carrying amount at 31 December 2010 ..........	14,885	124	1,115	65	1,901	4,316	22,406

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
Gross amount
At 1 January 2009 .................	15,511	122	364	69	12,487	3,866	32,419
Additions ...............................	-	-	570	-	-	10	580
Disposals ................................	(3)	-	-	-	-	-	(3)
Exchange differences .............	460	1	119	-	-	294	874
Other changes ........................	(53)	-	-	-	(4)	(8)	(65)

At 31 December 2009 ............	15,915	123	1,053	69	12,483	4,162	33,805

Accumulated impairment losses
At 1 January and 31 December 2009 ..................................	-	-	-	-	(10,564)	-	(10,564)

Net carrying amount at 31 December 2009 .............	15,915	123	1,053	69	1,919	4,162	23,241

During 2010, there was no impairment of goodwill (2009: nil; 2008: US$10.6bn).

Impairment testing

Timing of impairment testing

HSBC's impairment test in respect of goodwill allocated to each cash-generating unit ('CGU') is performed as at 1 July each year. In line with the accounting policy set out in Note 2p, goodwill is also retested for impairment whenever there is an indication that goodwill may be impaired. There was no indication of impairment in the period to 31 December 2010 and therefore goodwill has not been retested since 1 July 2010. For the purpose of impairment testing, the Group's CGUs are based on customer groups and global business separated by geographical region. The CGUs represent the lowest level at which goodwill is monitored for internal management purposes.

Basis of the recoverable amount - value in use or fair value less costs to sell

The recoverable amount of all CGUs to which goodwill has been allocated was equal to its value in use ('VIU') at each respective testing date for 2009 and 2010.

For each significant CGU, the VIU is calculated by discounting management's cash flow projections for the CGU. The discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the CGU operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term perspective within the Group of the business units making up the CGUs. In 2010, for most CGUs, management's cash flow projections until the end of 2011 were used. However, due to the current economic conditions in Personal Financial Services - Latin America, a 10-year cash flow projection was used to more accurately estimate the cash flows for the period.

Key assumptions in VIU calculation and management's approach to determining the values assigned to each key assumption

	2010			2009
Cash-generating unit	Goodwill at 3 1 July 2 2010	Discount rate	Nominal growth rate beyond initial cash flow projections	Goodwill at 1 July 2009	Discount rate	Nominal growth rate beyond initial cash flow projections
	US$m	%	%	US$m	%	%

Personal Financial Services - Europe ........	4,017	11.0	3.0	4,507	11.0	3.1
Commercial Banking - Europe .................	3,015	11.0	3.0	3,480	11.0	3.1
Global Private Banking - Europe ..............	4,055	11.0	3.0	4,483	11.0	3.1
Global Banking and Markets - Europe ......	2,983	12.0	3.0	3,489	11.0	3.1
Personal Financial Services - Latin America ................................................	2,385	14.3	8.6	2,350	15.0	8.0

Total goodwill in the CGUs listed above ...	16,455			18,309

At 1 July 2010, aggregate goodwill of US$4,674m (1 July 2009: US$4,475m) had been allocated to CGUs that were not considered individually significant. These CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill.

Nominal long-term growth rate: external data that reflects the market's assessment of GDP and inflation for the countries within which the CGU operates. The rates used for 2009 and 2010 are taken as an average of the last 10 years.

Discount rate: the discount rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is derived using a Capital Asset Pricing Model ('CAPM'). The CAPM depends on inputs reflecting a number of financial and economic variables including the risk-free rate in the country concerned and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market's assessment of the economic variables and management's judgement. In addition, for the purposes of testing goodwill for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM with cost of capital rates produced by external sources. HSBC uses externally-sourced cost of capital rates where, in management's judgement, those rates reflect more accurately the current market and economic conditions. For 2010 and 2009, internal costs of capital rates were consistent with externally-sourced rates.

Management's judgement in estimating the cash flows of a CGU: the cash flow projections for each CGU are based on plans approved by the Group Management Board. The key assumptions in addition to the discount rate and nominal long-term growth rate for each significant CGU are discussed below.

Personal Financial Services - Europe and Commercial Banking - Europe: the assumptions included in the cash flow projections for Personal Financial Services - Europe and Commercial Banking - Europe reflect the economic environment and financial outlook of the European countries within these two segments. Key assumptions include the level of interest rates and the level and change in unemployment rates. While current economic conditions in Europe continue to be challenging, management's cash flow projections are based primarily on these prevailing conditions. Risks include a double-dip recession in the UK and the continuation of base rates at their current low levels. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Personal Financial Services - Europe or Commercial Banking - Europe.

Global Private Banking - Europe: the revenues in Global Private Banking - Europe are predominately generated through HSBC's client relationships. The cash flow forecast reflects current economic conditions and key assumptions include the level of interest rates and client risk appetite. Further economic deterioration could result in a decrease in assets under management and a reduction in fee and trading income through increased client risk aversion. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Global Private Banking - Europe.

Global Banking and Markets - Europe: the cash flows generated by Global Banking and Markets - Europe are diversified and there is no one key assumption that drives the cash flow projection of this CGU. In line with other CGUs, Global Banking and Markets - Europe is sensitive to changes in the interest rate environment and the strength of economic recovery in Europe. One of the key factors which may impact the carrying value of this CGU is the level of impairment charges which may emerge in the future, particularly in respect of holdings of available-for-sale sub-prime and Alt-A Residential MBSs. Based on management's current assessment of the credit quality of these securities, which includes stressed scenarios for collateral defaults and house prices, and the level of credit support available, management determined that a reasonably possible change in key assumptions would not cause an impairment to be recognised in respect of Global Banking and Markets - Europe.

Personal Financial Services - Latin America: the assumptions included in the cash flow projections for Personal Financial Services - Latin America reflect the economic environment and financial outlook of the countries within this segment, with Brazil and Mexico being two of the largest countries included within this segment. Key assumptions include the growth in lending and deposit volumes and the credit quality of the loan portfolios. Mexico and Central America in particular are sensitive to economic conditions in the US which could constrain demand. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Personal Financial Services - Latin America.

Other intangible assets

Movement of intangible assets excluding goodwill and the PVIF

	Trade names	Mortgage servicing rights	Internally generated software	Purchased software	Customer/ merchant relation- ships	Other	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
Cost
At 1 January 2010 ..........................	68	689	4,400	954	1,988	502	8,601
Additions¹ .......................................	-	52	960	140	48	4	1,204
Disposals ........................................	-	(105)	(40)	(15)	(79)	-	(239)
Amount written off ........................	-	-	(70)	(2)	-	-	(72)
Exchange differences ......................	-	-	(68)	(4)	30	27	(15)
Other changes .................................	-	-	20	(8)	-	(30)	(18)

At 31 December 2010 ....................	68	636	5,202	1,065	1,987	503	9,461

Accumulated amortisation
At 1 January 2010 ..........................	(50)	(240)	(2,511)	(747)	(955)	(125)	(4,628)
Charge for the year² .......................	(5)	(105)	(596)	(97)	(243)	(30)	(1,076)
Impairment ....................................	-	-	(12)	-	-	-	(12)
Disposals ........................................	-	105	33	8	68	(1)	213
Amount written off ........................	-	-	70	2	-	-	72
Exchange differences ......................	1	-	48	1	(13)	(1)	36
Other changes .................................	2	-	10	(15)	-	13	10

At 31 December 2010 ....................	(52)	(240)	(2,958)	(848)	(1,143)	(144)	(5,385)

Net carrying amount at 31 December 2010 ...........................................	16	396	2,244	217	844	359	4,076

Cost
At 1 January 2009 ..........................	67	1,360	3,429	867	1,749	421	7,893
Additions¹ .......................................	-	116	763	65	20	10	974
Acquisition of subsidiaries ...............	-	-	-	-	58	-	58
Disposals ........................................	-	(29)	(14)	(18)	(25)	-	(86)
Amount written off ........................	-	(757)	(45)	(1)	(15)	-	(818)
Exchange differences ......................	1	-	247	53	201	9	511
Other changes .................................	-	(1)	20	(12)	-	62	69

At 31 December 2009 ....................	68	689	4,400	954	1,988	502	8,601

Accumulated amortisation
At 1 January 2009 ..........................	(45)	(1,023)	(1,992)	(631)	(681)	(52)	(4,424)
Charge for the year² .......................	(4)	(3)	(433)	(98)	(228)	(30)	(796)
Impairment ....................................	-	-	(6)	(5)	(6)	-	(17)
Disposals ........................................	-	29	6	18	15	-	68
Amount written off ........................	-	757	45	1	15	-	818
Exchange differences ......................	(1)	-	(131)	(32)	(72)	(1)	(237)
Other changes .................................	-	-	-	-	2	(42)	(40)

At 31 December 2009 ....................	(50)	(240)	(2,511)	(747)	(955)	(125)	(4,628)

Net carrying amount at 31 December 2009 ...........................................	18	449	1,889	207	1,033	377	3,973

1 At 31 December 2010, HSBC had US$0.2m (2009: US$0.2m) of contractual commitments to acquire intangible assets.

2 The amortisation charge for the year is recognised within the income statement under 'Amortisation and impairment of intangible assets', with the exception of the amortisation of mortgage servicing rights which is recognised in net fee income.

This information is provided by RNS

The company news service from the London Stock Exchange

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