Interim Report - 19 of 28

RNS Number : 2053P

HSBC Holdings PLC

15 August 2014

Liquidity and funding


Liquidity and funding in the first half of 2014 ...	148
Customer deposit markets ..........................................	148
Wholesale funding markets .........................................	149
Liquidity regulation ....................................................	149

Management of liquidity and funding risk .........	149
Advances to core funding ratio ...................................	149	Advances to core funding ratios ...................................	149
Stressed coverage ratios ..............................................	149	Stressed one-month and three-month coverage ratios ..	150
Liquid assets of HSBC's principal operating entities ....	150	Liquid assets of HSBC's principal entities .....................	150
Net contractual cash flows ..........................................	151	Net cash flows for interbank and intra-Group loans and deposits and reverse repo, repo and short positions ..	151

Contingent liquidity risk arising from committed lending facilities .................................................	152	The Group's contractual undrawn exposures monitored under the contingent liquidity risk limit structure ......	152

Sources of funding ..................................................	152	Consolidated funding sources and uses ........................	153
Repos and stock lending .............................................	153
Cross-border, intra-Group and cross-currency liquidity and funding risk ......................................................	154

Wholesale term debt maturity profile .................	154	Wholesale funding principal cash flows payable by HSBC under financial liabilities by remaining contractual maturities .................................................................	155

Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due, or will have to do so at an excessive cost. The risk arises from mismatches in the timing of cash flows.

There were no material changes to our policies and practices for the management of liquidity and funding risks in the first half of 2014.

Following the change in balance sheet presentation explained on page 41, the advances to deposits ratio now excludes non-trading reverse repos and repos with customers. The change had no effect on the 31 December 2013 ratio as disclosed.

A summary of our current policies and practices regarding liquidity and funding is provided on page 276 of the Annual Report and Accounts 2013.

Our liquidity and funding risk management framework

The objective of our liquidity framework is to allow us to withstand very severe liquidity stresses. It is designed to be adaptable to changing business models, markets and regulations.

Our liquidity and funding risk management framework requires:

· liquidity to be managed by operating entities on a stand-alone basis with no implicit reliance on the Group or central banks;

· all operating entities to comply with their limits for the advances to core funding ratio; and

· all operating entities to maintain a positive stressed cash flow position out to three months under prescribed Group stress scenarios.

Further details of the metrics are provided on page 276 of the Annual Report and Accounts 2013.

Liquidity and funding in the first half of 2014

The liquidity position of the Group remained strong in the first half of 2014, as demonstrated by the key liquidity and funding metrics presented below. During the first half of 2014, customer accounts increased by 4% (US$54bn) while loans and advances to customers increased by 6% (US$55bn), leading to a small increase in our advances to deposits ratio to 74% (30 June 2013: 74%; 31 December 2013: 73%).

Customer deposit markets

Retail Banking and Wealth Management: RBWM customer balances increased by 3% in the first half of 2014, primarily reflecting strong growth in the two home markets of the UK and Hong Kong, and in the rest of Asia. This growth was partially offset by reductions in deposit balances in North America.

Commercial Banking: Customer accounts rose by 3% in the first half of 2014, notably in Asia and Europe reflecting higher balances in our Payments and Cash Management business.

Global Banking and Markets: Customer accounts increased by 10% in the first half of 2014, notably in Asia and Europe. In Europe the increase was mainly due to a rise in corporate overdraft balances in accounts which are structured to allow customer corporate treasury functions to benefit from net interest arrangements but where net settlement is not intended to occur. In Asia, customers account balances increased, reflecting growth in our Payments and Cash Management business.

Global Private Banking: GPB customer account balances decreased by 7%, in the first half of 2014, primarily due to reclassification of customer account balances of around US$4bn relating to non-strategic business to 'Liabilities of disposal groups held for sale' and around US$2bn of net outflows from the continued repositioning of our business.

Wholesale funding markets

Wholesale debt market conditions remained positive in the first half of 2014, with strong investor demand and a relatively stable economic outlook contributing to continued credit spread tightening. We retained good access to debt capital markets with Group entities issuing US$10.6bn of public transactions of which US$7.1bn was in the form of senior unsecured debt.

Liquidity regulation

The European adoption of the Basel Committee framework (legislative texts known as the Capital Requirements Regulation and Directive - CRR/CRD IV) was published in June 2013, and required the reporting of the liquidity coverage ratio ('LCR') and the net stable funding ratio ('NSFR') to European regulators from January 2014, which was subsequently delayed until 30 June 2014. A significant level of interpretation is currently required to report and calculate the LCR as defined in the CRR text due to areas still to be addressed by the LCR delegated act, now expected to be finalised in early 2015. In addition, the Basel Committee is still working on the calibration of the NSFR.

Management of liquidity and funding risk

Our liquidity and funding risk management framework ('LFRF') employs two key measures to define, monitor and control the liquidity and funding risk of each of our operating entities. The advances to core funding ratio is used to monitor the structural long-term funding position, and the stressed coverage ratio, incorporating Group-defined stress scenarios, is used to monitor the resilience to severe liquidity stresses.

The three principal entities listed in the tables below represented 67% (30 June 2013: 63%; 31 December 2013: 66%) of the Group's customer accounts. Including the other principal entities, the figure was 96% (30 June 2013: 95%; 31 December 2013: 94%).

Advances to core funding ratio

The table below shows the extent to which loans and advances to customers in the listed principal banking entities were financed by reliable and stable sources of funding.

Advances to core funding ratios³⁵

	Half-year to
	30 Jun 2014	30 Jun 2013	31 Dec 2013
	%	%	%
HSBC UK³⁶
Period-end ......................	99	104	100
Maximum .......................	102	107	104
Minimum .......................	99	103	100
Average ..........................	101	105	102

The Hongkong and Shanghai Banking Corporation³⁷
Period-end ......................	74	77	72
Maximum .......................	75	77	77
Minimum .......................	72	73	70
Average ..........................	74	74	74

HSBC USA³⁸
Period-end ......................	97	84	85
Maximum .......................	98	84	85
Minimum .......................	85	78	83
Average ..........................	93	80	84

Total of HSBC's other principal entities³⁹
Period-end ......................	93	92	93
Maximum .......................	94	92	93
Minimum .......................	93	89	90
Average ..........................	93	91	91

For footnotes, see page 172.

The advances to core funding ratio for HSBC USA increased due to strong growth in customer advances. There were no material movements in the first half of 2014 for other principal banking entities and all entities remained within their advances to core funding limits. The limits set for principal operating entities at 30 June 2014 ranged from 80% to 115%.

Stressed coverage ratios

The stressed coverage ratios tabulated below express stressed cash inflows as a percentage of stressed cash outflows over both one-month and three-month time horizons. Operating entities are required to maintain a ratio of 100% or more out to three months.

Inflows included in the numerator of the stressed coverage ratio are generated from liquid assets net of assumed haircuts, and cash inflows related to assets contractually maturing within the time period.

In general, customer advances are assumed to be renewed and as a result do not generate a cash inflow.

Stressed one-month and three-month coverage ratios³⁵

	Stressed one-month coverage ratios for the half-year to			Stressed three-month coverage ratios for the half-year to
	30 Jun	30 Jun	31 Dec	30 Jun	30 Jun	31 Dec
	2014	2013	2013	2014	2013	2013
	%	%	%	%	%	%
HSBC UK³⁶
Period-end ..............................................................	103	105	106	103	104	109
Maximum ...............................................................	106	114	106	109	104	109
Minimum ................................................................	102	103	100	103	101	101
Average ..................................................................	104	108	103	104	102	104

The Hongkong and Shanghai Banking Corporation³⁷
Period-end ..............................................................	114	113	119	111	109	114
Maximum ...............................................................	119	131	119	114	126	115
Minimum ................................................................	114	113	113	111	109	109
Average ..................................................................	115	120	117	112	114	112

HSBC USA³⁸
Period-end ..............................................................	115	111	114	108	110	110
Maximum ...............................................................	115	126	118	110	119	115
Minimum ................................................................	108	111	110	104	109	109
Average ..................................................................	112	117	113	107	113	111

Total of HSBC's other principal entities³⁹
Period-end ..............................................................	115	114	121	108	109	114
Maximum ...............................................................	121	129	121	115	119	114
Minimum ................................................................	114	114	113	108	109	109
Average ..................................................................	117	122	117	111	114	111

For footnotes, see page 172.

Liquid assets of HSBC's principal operating entities

The table below shows the estimated liquidity value (before assumed haircuts) of assets categorised as liquid used for the purposes of calculating the three-month stressed coverage ratios, as defined under the LFRF. Any unencumbered asset held as a consequence of a reverse repo transaction with a residual contractual maturity within the stressed coverage ratio time period and unsecured interbank loans maturing within three months are not included in liquid assets, as these assets are reflected as contractual cash inflows.

Liquid assets are held and managed on a standalone operating entity basis. Most of the liquid assets shown are held directly by each operating entity's Balance Sheet Management function, primarily for the purpose of managing liquidity risk, in line with the LFRF.

Liquid assets also include any unencumbered liquid assets held outside Balance Sheet Management for any other purpose. The LFRF gives ultimate control of all unencumbered assets and sources of liquidity to Balance Sheet Management.

All assets held within the liquid asset portfolio are unencumbered.

Liquid assets of HSBC's principal entities

	Estimated liquidity value⁴⁰
	30 Jun 2014	30 Jun 2013	31 Dec 2013
	US$m	US$m	US$m
HSBC UK³⁶
Level 1 .....................................................................................................	152,058	142,005	168,877
Level 2 .....................................................................................................	3,706	933	1,076
Level 3 .....................................................................................................	67,065	44,866	63,509

	222,829	187,804	233,462

The Hongkong and Shanghai Banking Corporation³⁷
Level 1 .....................................................................................................	107,127	91,742	108,713
Level 2 .....................................................................................................	5,291	5,131	5,191
Level 3 .....................................................................................................	7,624	3,861	7,106

	120,042	100,734	121,010

	Estimated liquidity value⁴⁰
	30 Jun 2014	30 Jun 2013	31 Dec 2013
	US$m	US$m	US$m
HSBC USA³⁸
Level 1 .....................................................................................................	45,955	49,715	43,446
Level 2 .....................................................................................................	12,874	12,233	12,709
Level 3 .....................................................................................................	4,593	5,359	5,044
Other ........................................................................................................	7,375	5,842	8,000

	70,797	73,149	69,199

Total of HSBC's other principal entities³⁹
Level 1 .....................................................................................................	142,147	140,529	144,774
Level 2 .....................................................................................................	11,965	12,984	12,419
Level 3 .....................................................................................................	15,812	12,693	13,663

	169,924	166,206	170,856

For footnotes, see page 172.

Net contractual cash flows

Unencumbered liquid assets are a key component of the Group's stressed coverage ratios. In addition to liquid assets, stressed coverage ratios reflect any contractual cash flows that are recognised in line with the assumptions used for the Group's operational cash flow projections. These cash flows predominately relate to the contractual cash flows resulting from maturing reverse repo (net of any short covering), repo, stock lending, stock borrowing (net of any short covering), interbank unsecured lending/borrowing and intra-Group unsecured lending/borrowing.

The following table quantifies the contractual cash flows from interbank and intra-Group loans and deposits, and reverse repo, repo (including intra- Group transactions) and short positions for the principal entities shown.

Outflows included in the denominator of the stressed coverage ratios include the principal outflows associated with the contractual maturity of wholesale debt securities reported in the table headed 'Wholesale funding principal cash flows payable by HSBC under financial liabilities by remaining contractual maturities' on page 155.

Net cash inflows/(outflows) for interbank and intra-Group loans and deposits and reverse repo, repo and short positions

	Cash flows		Cash flows		Cash flows
	at 30 June 2014		at 30 June 2013		at 31 December 2013
	within one month	from one to three months	within one month	from one to three months	within one month	from one to three months
	US$m	US$m	US$m	US$m	US$m	US$m
Interbank and intra-Group loans and deposits
HSBC UK³⁶ ................................................................	(25,546)	(1,498)	(17,173)	(3,696)	(19,033)	(5,272)
The Hongkong and Shanghai Banking Corporation³⁷ ..	(3,713)	9,619	(4,368)	8,638	2,314	7,487
HSBC USA38 ...............................................................	(22,990)	1,470	(23,320)	2,629	(24,268)	729
Total of HSBC's other principal entities39 ..................	1,433	4,653	4,500	10,894	4,295	10,149

Reverse repo, repo, stock borrowing, stock lending and outright short positions (including intra-Group)
HSBC UK³⁶ .................................................................	(25,603)	2,445	(11,569)	(8,080)	(39,064)	149
The Hongkong and Shanghai Banking Corporation37 ..	12,825	3,870	7,746	2,354	12,662	4,297
HSBC USA38 ...............................................................	(4,026)	173	(10,818)	(219)	(11,001)	-
Total of HSBC's other principal entities39 ..................	(43,095)	4,973	(42,359)	8,114	(40,223)	9,551

For footnotes, see page 172.

Net cash flow arising from interbank and intra-Group loans and deposits

Under the LFRF, a net cash inflow within three months arising from interbank and intra-Group loans and deposits will give rise to a lower liquid asset
requirement. Conversely, a net cash outflow within three months arising from interbank and intra-Group loans and deposits will give rise to a higher liquid assets requirement.

Net cash flow arising from reverse repo, repo, stock borrowing, stock lending and outright short positions (including intra-Group)

A net cash inflow represents additional liquid resources, in addition to liquid assets, because any unencumbered asset held as a consequence of a reverse repo transaction with a residual contractual maturity within the stressed coverage ratio time period is not reflected as a liquid asset.

The effect of a net cash outflow depends on whether the underlying collateral encumbered as a result will qualify as a liquid asset when released at the maturity of the repo. The majority of the Group's repo transactions are collateralised by liquid assets and, as such, any net cash outflow shown is offset by the return of liquid assets, which are excluded from the liquid asset table above.

Contingent liquidity risk arising from committed lending facilities

The Group's operating entities provide commitments to various counterparties. In terms of liquidity risk, the most significant risk relates to committed lending facilities which, whilst undrawn, give rise to contingent liquidity risk, as these could be drawn during a period of liquidity stress. Commitments are given to customers and committed lending facilities
are provided to consolidated multi-seller conduits, established to enable clients to access a flexible market-based source of finance, consolidated securities investment conduits ('SIC's) and third-party sponsored conduits.

The consolidated SICs primarily represent Solitaire and Mazarin Funding Limited ('Mazarin'). These conduits issue asset-backed commercial paper secured against the portfolio of securities held by them. At 30 June 2014, HSBC UK had undrawn committed lending facilities to these conduits of US$13bn (30 June 2013: US$16bn; 31 December 2013: US$15bn), of which Solitaire represented US$10bn (30 June 2013: US$12bn; 31 December 2013: US$11bn) and the remaining US$3bn (30 June 2013: US$4bn; 31 December 2013: US$4bn) pertained to Mazarin. At 30 June 2014, the commercial paper issued by Solitaire and Mazarin was entirely held by HSBC UK. Since HSBC controls the size of the portfolio of securities held by these conduits, no contingent liquidity risk exposure arises as a result of these undrawn committed lending facilities.

The table below shows the level of undrawn commitments to customers outstanding for the five largest single facilities and the largest market sector, and the extent to which they are undrawn.

The Group's contractual undrawn exposures monitored under the contingent liquidity risk limit structure

	HSBC UK³⁶			HSBC USA³⁷			HSBC Canada			The Hongkong and Shanghai Banking Corporation³⁸
	At 30 Jun 2014	At 30 Jun 2013	At 31 Dec 2013	At 30 Jun 2014	At 30 Jun 2013	At 31 Dec 2013	At 30 Jun 2014	At 30 Jun 2013	At 31 Dec 2013	At 30 Jun 2014	At 30 Jun 2013	At 31 Dec 2013
	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn
Conduits
Client-originated assets
- total lines .........	10.4	7.9	10.1	2.4	3.1	2.5	0.2	0.9	1.0	-	-	-
- largest individual lines ..............	0.7	0.7	0.7	0.5	0.5	0.5	0.2	0.7	0.7	-	-	-
HSBC-managed assets - total lines ............................	12.8	16.1	14.8	-	-	-	-	-	-	-	-	-
Other conduits - total lines .........	-	-	-	0.1	0.8	0.7	-	-	-	-	-	-

Single-issuer liquidity facilities
- five largest⁴¹ .....	4.6	6.6	4.4	6.4	6.2	6.3	1.6	1.4	1.5	2.9	2.8	2.4
- largest market sector⁴² .........	12.4	11.7	9.5	8.6	7.2	8.2	3.4	3.7	3.4	2.9	2.2	2.7

For footnotes, see page 172.

Sources of funding

Our primary sources of funding are customer current accounts and customer savings deposits payable on demand or at short notice. We issue wholesale securities (secured and unsecured) to supplement our customer
deposits and change the currency mix, maturity profile or location of our liabilities.

Following the change in balance sheet presentation explained on page 41, non-trading reverse repos and repos are presented as separate lines in the balance sheet.

Consolidated funding sources and uses¹

	At	At	At
	30 Jun	30 Jun	31 Dec
	2014	2013	2013
	US$m	US$m	US$m
Sources
Customer accounts .........	1,415,705	1,266,905	1,361,297

Deposits by banks .......................	92,764	92,709	86,507

Repurchase agreements - non-trading .	165,506	66,591	164,220

Debt securities issued .............	96,397	109,389	104,080

Liabilities of disposal groups held for sale ...	12,361	19,519	2,804

Subordinated liabilities ........	28,052	28,821	28,976

Financial liabilities designated at fair value ........	82,968	84,254	89,084

Liabilities under insurance contracts ........	75,223	69,771	74,181

Trading liabilities .......................	228,135	342,432	207,025
- repos .............	5,189	134,506	17,421
- stock lending .	15,252	10,097	12,218
- settlement accounts ........	41,240	41,092	17,428
- other trading liabilities ........	166,454	156,737	159,958

Total equity ......	198,722	182,361	190,459


	2,395,833	2,262,752	2,308,633

	At	At	At
	30 Jun	30 Jun	31 Dec
	2014	2013	2013
	US$m	US$m	US$m
Uses
Loans and advances to customers ..	1,047,241	938,294	992,089

Loans and advances to banks ........	127,387	127,810	120,046

Reverse repurchase agreements - non-trading ...	198,301	88,400	179,690

Assets held for sale ................	10,248	20,377	4,050

Trading assets ..	347,106	432,601	303,192
- reverse repos .	4,484	104,273	10,120
- stock borrowing ......	13,903	17,372	10,318
- settlement accounts ........	48,139	53,749	19,435
- other trading assets .............	280,580	257,207	263,319

Financial investments ...	423,710	404,214	425,925

Cash and balances with
central banks .	132,137	148,285	166,599

Net deployment in other balance sheet assets and liabilities .	109,703	102,771	117,042


	2,395,833	2,262,752	2,308,633

For footnote, see page 172.

Previously, non-trading reverse repos were included within 'Loans and advances to banks' and 'Loans and advances to customers' and non-trading repos were included within 'Deposits by banks' and 'Customer accounts'. Comparative data have been re-presented accordingly.

The level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed into liquid assets, cash and balances with central banks and financial investments, as required by the LFRF.

Loans and other receivables due from banks continued to exceed deposits taken from banks. The Group remained a net unsecured lender to the banking sector.

Repos and stock lending

GB&M provides collateralised security financing services to its clients, providing them with cash financing or specific securities. When cash is lent against collateral in the form of securities, the cash provided is recognised on the balance sheet as a reverse repo. When cash is borrowed against collateral in the form of securities, the cash received is recognised on the balance sheet as a repo. In cases where specific securities are lent/borrowed against cash collateral the cash collateral received/provided is recognised on balance sheet as stock lending/ borrowing.

Each operating entity manages its collateral through a central collateral pool, in line with the LFRF. When specific securities need to be delivered and the entity does not have them available within the central collateral pool, they are borrowed on a collateralised basis.

Operating entities may also borrow cash against collateral in the form of securities, using those available in the central collateral pool. Repos and stock lending can be used in this way to fund the cash requirement arising from securities owned outright by Global Markets to facilitate client business, and the net cash requirement arising from financing client securities activity.

Reverse repos, stock borrowing, repos and stock lending are reported net when the IFRSs offsetting criteria are met. In some cases transactions to borrow or lend securities are collateralised using securities. These transactions are off-balance sheet.

Securities reflected on the balance sheet that are pledged as collateral against an existing liability or lent are treated as encumbered for the duration of the transaction. When securities are received as collateral or borrowed, and when we have the right to sell or re-pledge them, they are reflected as available and unencumbered for the duration of the transaction, unless re-pledged or sold.

In the normal course of business we do not seek to utilise repo financing as a source of funding to finance customer assets, beyond the collateralised security financing activities within Global Markets described above.

The original contractual maturity of reverse repo, stock borrowing, repo and stock lending is short term with the vast majority of transactions being for less than 90 days.

The residual contractual maturity profile of the balance sheet is set out on in Note 17 on the Financial Statements.

Any security accepted as collateral for a reverse repo or stock borrowing transaction must be of very high quality and its value subject to an appropriate haircut. Securities borrowed under reverse repo or stock borrowing transactions can only be recognised as part of the liquidity asset buffer for the duration of the transactions and only if the security received is eligible under the liquid asset policy within the LFRF.

Credit controls are in place to ensure that the fair value of any collateral received remains appropriate to collateralise the cash or fair value of securities given.

In the second half of 2013, GB&M changed the way it managed repo and reverse repo activities in the Credit and Rates businesses. Previously, they were managed in the trading environment; during the second half of 2013, they were organised into trading and non-trading portfolios, with separate risk management procedures. This resulted in an increase in the amount of 'Non-trading reverse repos' and a decline in the amount classified as 'Trading assets', and an increase in the amount of 'Non-trading repos' and a decline in the amount classified as 'Trading liabilities' at 31 December 2013 compared with previous period-ends.

Cross-border, intra-Group and cross-currency liquidity and funding risk

The stand-alone operating entity approach to liquidity and funding mandated by the LFRF restricts the exposure of our operating entities to the risks that can arise from extensive reliance on cross-border funding. Operating entities manage their funding sources locally, focusing predominantly on the local customer deposit base. The RBWM, CMB and GPB customer relationships that give rise to core deposits within an operating entity generally reflect a local customer relationship with that operating entity. Access to public debt markets is co-ordinated globally by the Global Head of Balance Sheet Management and the Group Treasurer with Group ALCO monitoring all planned public debt issuance on a monthly basis. As a general principle, operating entities are only permitted to issue in their local currencies and are encouraged to focus on local private placements. The public issuance of debt instruments in foreign currency is tightly controlled and generally restricted to HSBC Holdings and HSBC Bank plc.

A central principle of LFRF is that operating entities place no future reliance on other Group entities. However, operating entities may, at their discretion, utilise their respective committed facilities from other Group entities if necessary. In addition, intra-Group large exposure limits are applied by national regulators to individual legal entities locally, restricting the unsecured exposures of legal entities to the rest of the Group to a percentage of the lender's regulatory capital.

Our LFRF also considers the ability of each entity to continue to access foreign exchange markets under stress when a surplus in one currency is used to meet a deficit in another currency, for example, by using the foreign currency swap markets. Where appropriate, operating entities are required to monitor stressed coverage ratios and advance to core funding ratios for non-local currencies and set limits for them. Foreign currency swap markets in currency pairs settled through the Continuous Link Settlement Bank are considered to be extremely deep and liquid and it is assumed that capacity to access these markets is not exposed to idiosyncratic risks.

For the majority of operating entities within the Group, the only significant non-local currency (i.e. exceeding 10% of balance sheet liabilities) is the US dollar. The euro is an additional significant non-local currency for HSBC UK and offshore renminbi is significant for The Hongkong and Shanghai Banking Corporation. Singapore dollars and Indian rupees are also material currencies for The Hongkong and Shanghai Banking Corporation, but these currencies are managed onshore within the local country branch operations on a stand-alone branch basis.

Wholesale term debt maturity profile

The maturity profile of the Group's wholesale term debt obligations is set out below in the table headed 'Wholesale funding principal cash flows payable by HSBC under financial liabilities by remaining contractual maturities'.

The balances in the table will not agree directly with those in our consolidated balance sheet as the table presents gross cash flows relating to principal payments and not the balance sheet carrying value, which includes debt securities and subordinated liabilities measured at fair value.

Wholesale funding principal cash flows payable by HSBC under financial liabilities by remaining contractual maturities

	Due within 1 month	Due between 1 and 3 months	Due between 3 and 6 months	Due between 6 and 9 months	Due between 9 months and 1 year	Due between 1 and 2 years	Due between 2 and 5 years	Due after 5 years	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2014
Debt securities issued .............................................	18,445	11,619	13,118	13,213	13,420	32,033	43,054	33,534	178,436
- unsecured certificates of deposit ('CD's) and commercial paper ('CP') ...............................	5,582	7,205	7,883	2,845	2,647	5,855	4,130	208	36,355
- unsecured senior medium-term notes ('MTN's) ...........................................................................	1,489	2,414	2,663	6,766	7,873	20,563	25,806	22,656	90,230
- unsecured senior structured notes ...................	521	797	2,153	2,069	2,819	4,225	8,179	6,478	27,241
- secured covered bonds ....................................	1,250	-	-	-	-	225	2,957	3,079	7,511
- secured asset-backed commercial paper ('ABCP') .......................................................	9,338	-	-	-	-	-	-	-	9,338
- secured ABSs ..................................................	174	1,202	413	1,379	81	1,165	1,982	-	6,396
- others ............................................................	91	1	6	154	-	-	-	1,113	1,365

Subordinated liabilities ...........................................	16	114	26	183	-	307	6,202	42,399	49,247
- subordinated debt securities ............................	16	114	26	183	-	307	6,202	36,332	43,180
- preferred securities .........................................	-	-	-	-	-	-	-	6,067	6,067


	18,461	11,733	13,144	13,396	13,420	32,340	49,256	75,933	227,683

At 30 June 2013
Debt securities issued .............................................	25,197	16,162	18,123	14,894	9,158	30,335	44,591	27,194	185,654
- unsecured CDs and CP ....................................	9,228	9,146	9,505	3,578	3,664	2,584	2,326	-	40,031
- unsecured senior MTNs ..................................	2,636	3,570	6,947	8,745	3,607	19,219	31,828	18,708	95,260
- unsecured senior structured notes ...................	435	705	646	1,164	1,344	2,936	4,868	6,059	18,157
- secured covered bonds ....................................	-	397	667	939	287	3,179	3,459	425	9,353
- secured ABCP ................................................	12,725	2,159	-	-	-	-	-	495	15,379
- secured ABSs ..................................................	70	142	315	461	181	1,384	1,517	92	4,162
- others ............................................................	103	43	43	7	75	1,033	593	1,415	3,312

Subordinated liabilities ...........................................	-	10	-	26	1,170	336	4,349	39,084	44,975
- subordinated debt securities ............................	-	10	-	26	1,170	336	3,349	32,560	37,451
- preferred securities .........................................	-	-	-	-	-	-	1,000	6,524	7,524


	25,197	16,172	18,123	14,920	10,328	30,671	48,940	66,278	230,629

Wholesale funding principal cash flows payable by HSBC under financial liabilities by remaining contractual maturities (continued)

	Due within 1 month	Due between 1 and 3 months	Due between 3 and 6 months	Due between 6 and 9 months	Due between 9 months and 1 year	Due between 1 and 2 years	Due between 2 and 5 years	Due after 5 years	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2013
Debt securities issued .............................................	25,426	9,752	17,942	11,659	10,587	31,839	46,934	31,066	185,205
- unsecured CDs and CP ....................................	7,589	7,206	9,867	3,239	5,043	4,449	2,749	−	40,142
- unsecured senior MTNs ..................................	6,284	71	5,448	4,221	3,062	21,428	33,091	21,433	95,038
- unsecured senior structured notes ...................	987	1,423	1,952	1,689	1,718	3,712	6,036	5,021	22,538
- secured covered bonds ....................................	−	−	−	1,250	−	225	2,747	3,317	7,539
- secured ABCP ................................................	10,383	−	−	−	−	−	−	−	10,383
- secured ABSs ..................................................	74	1,052	675	1,260	764	1,861	2,311	−	7,997
- others ............................................................	109	−	−	−	−	164	−	1,295	1,568

Subordinated liabilities ...........................................	−	28	1,171	144	6	1,460	3,374	41,801	47,984
- subordinated debt securities ............................	−	28	1,171	144	6	460	3,374	34,899	40,082
- preferred securities .........................................	−	−	−	−	−	1,000	−	6,902	7,902


	25,426	9,780	19,113	11,803	10,593	33,299	50,308	72,867	233,189

Market risk


Market risk in the first half of 2014 .....................	158


Trading portfolios ....................................................	158
Value at risk of the trading portfolios .........................	158	Trading value at risk ....................................................	158
		Daily VaR (trading portfolios) ......................................	158
		VaR by risk type for trading activities ...........................	158
		Backtesting of trading VaR against hypothetical profit and loss for the Group .............................................	159
Stressed value at risk of the trading portfolio ..............	159	Stressed value at risk (1-day equivalent) ......................	160

Non-trading portfolios ............................................	160
Value at risk of the non-trading portfolios ..................	160	Non-trading value at risk .............................................	160
		Daily VaR (non-trading portfolios) ..............................	160
		VaR by risk type for non-trading activities ....................	160
Credit spread risk for available-for-sale debt securities	161

Equity securities classified as available for sale .	161	Fair value of equity securities ......................................	161

Structural foreign exchange exposures ...............	161

Non-trading interest rate risk ...............................	161

Balance Sheet Management ..................................	161	Third-party assets in Balance Sheet Management ........	162

Sensitivity of net interest income ........................	162	Sensitivity of projected net interest income ...................	163
		Sensitivity of reported reserves to interest rate movements .................................................................................	163

Defined benefit pension schemes .........................	164	HSBC's defined benefit pension schemes ......................	164

Additional market risk measures applicable only to the parent company ............................................	164
Foreign exchange risk .................................................	164	HSBC Holdings - foreign exchange VaR ......................	164
Interest rate repricing gap table ..................................	164	Repricing gap analysis of HSBC Holdings ...................	164

Market risk is the risk that movements in market factors will reduce our income or the value of our portfolios including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices.

There have been no significant changes to our policies and practices for the management of market risk as described in the Annual Report and Accounts 2013.

Exposure to market risk

Exposure to market risk is separated into two portfolios:

· Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions. The interest rate risk on fixed-rate securities issued by HSBC Holdings is not included in Group VaR. The management of this risk is described on page 164.

· Non-trading portfolioscomprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments designated as available for sale and held to maturity, and exposures arising from our insurance operations (see page 169).

Monitoring and limiting market risk exposures

Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite.

We use a range of tools to monitor and limit market risk exposures, including:

· sensitivity measures include sensitivity of net interest income and sensitivity for structural foreign exchange, which are used to monitor the market risk positions within each risk type;

· value at risk ('VaR')is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence; and

· in recognition of VaR's limitations we augment VaR with stress testing to evaluate the potential impact on portfolio values of more extreme, though plausible, events or movements in a set of financial variables. Examples of scenarios reflecting current market concerns are the slowdown in mainland China and the potential effects of a sovereign debt default, including its wider contagion effects.

A summary of our current policies and practices regarding market risk is provided on page 281 of the Annual Report and Accounts 2013.

Market risk in the first half of 2014

Central banks continued to maintain accommodative monetary policies in developed markets, with measures including low central bank rates and purchases. The FRB in the US continued its asset purchase programme, albeit at a slower pace (tapering), and the ECB introduced a range of measures to address deflationary pressures, which included a negative rate on deposits.

These actions by central banks supported a rally in riskier assets such as emerging and peripheral European markets. The search for higher yields led many equity markets to touch all-time highs and interest rate curves to rally and flatten at the long end.

Paradoxically, while geopolitical and idiosyncratic risks remain high, volatility indices are at or near their lows across all asset classes. Against the backdrop of an uncertain market outlook, we maintained a defensive risk profile that resulted in a continued reduction in trading and non-trading VaR.
Trading portfolios

Value at risk of the trading portfolios

Our Group trading VaR for the year is shown in the table below.

Trading value at risk

	Half-year to
	30 June 2014	30 June 2013	31 December 2013
	US$m	US$m		US$m

At period-end ......	49.2	52.9		52.1
Average ..............	51.3	50.1		49.7
Minimum ............	38.5	41.4		38.6
Maximum ...........	63.4	71.5		81.3

The daily levels of total trading over the last year are set out in the graph below.

Daily VaR (trading portfolios)

Almost all trading VaR resides within Global Markets. The VaR for trading activity at 30 June 2014 was lower than at 31 December 2013 due primarily to the benefit of the defensive contribution from the Equity and Foreign Exchange businesses.

VaR by risk type for trading activities⁴³

	Foreign exchange and commodity	Interest rate	Equity	Credit spread	Portfolio diversification⁴⁴	Total⁴⁵
	US$m	US$m	US$m	US$m	US$m	US$m

Half-year to 30 June 2014 ...........	13.6	41.7	9.1	12.7	(27.9)	49.2
Average ........................	15.8	37.1	5.9	15.0	(22.5)	51.3
Minimum ......................	8.7	26.9	3.2	9.3	-	38.5
Maximum .....................	28.0	50.5	12.4	20.9	-	63.4

	Foreign exchange and commodity	Interest rate	Equity	Credit spread	Portfolio diversification⁴⁴	Total⁴⁵
	US$m	US$m	US$m	US$m	US$m	US$m

Half-year to 30 June 2013 .............	14.9	35.5	4.2	18.1	(19.7)	52.9
Average ........................	15.2	33.0	5.1	17.6	(20.9)	50.1
Minimum ......................	8.8	22.8	2.2	11.9	-	41.4
Maximum .....................	25.8	52.3	14.1	25.5	-	71.5

Half-year to 31 December 2013 ....	16.0	33.4	9.2	14.2	(20.7)	52.1
Average ........................	15.1	33.7	5.0	15.5	(19.7)	49.7
Minimum ......................	6.5	24.7	2.4	11.2	-	38.6
Maximum .....................	26.4	71.9	13.6	21.3	-	81.3

For footnotes, see page 172.

We routinely validate the accuracy of our VaR models by testing the daily VaR against the hypothetical profit and loss (footnote 46). The VaR (and hypothetical profit and loss) presented below is used for internal management purposes and differs from that used for managing our regulatory exposures.

There were no loss exceptions for the Group in the first half of 2014 (second half of 2013: no loss exceptions). However, there was one profit exception (second half of 2013: one profit exception).

This exception was due primarily to gains from exposures to major foreign exchange and interest rates in some emerging markets. It is important to
note that profits in excess of VaR are only considered when backtesting the accuracy of our models and are not used to calculate the VaR numbers used for risk management or capital purposes. There is no evidence of model errors or control failures.

The graph below shows the daily trading VaR against hypothetical profit and loss for the Group during the first half of 2014. On a case by case basis, the PRA may allow loss exceptions to be exempted for regulatory capital purposes.

A summary of our market risk backtesting is provided on page 283 of the Annual Report and Accounts 2013.

Backtesting of trading VaR against hypothetical profit and loss⁴⁶ for the Group (US$m)

For footnote, see page 172.

Stressed value at risk of the trading portfolios

Stressed VaR is primarily used for regulatory capital purposes but is also integrated into the risk management process. Stressed VaR significantly reduced during the first half of 2014 following the defensive positions taken by the Equity and Foreign Exchange businesses. These defensive positions
minimised the losses sustained from high volatility included within the stressed period used to calculate stressed VaR.

A summary of our Stress Value at Risk framework is provided on page 283 of the Annual Report and Accounts 2013.

Stressed value at risk (1-day equivalent)

	At	At
	30 Jun 2014	31 Dec 2013
	US$m	US$m

At period-end ..........................................................................................................................	60.3	92.7

Non-trading portfolios

Value at risk of the non-trading portfolios

Non-trading value at risk

	Half-year to
	30 Jun 2014	30 Jun 2013	31 Dec 2013
	US$m	US$m	US$m

At period-end ...............................................................................................	151.0	194.9	154.6
Average ........................................................................................................	154.5	141.4	197.9
Minimum .....................................................................................................	122.5	114.7	145.8
Maximum .....................................................................................................	189.0	212.7	252.3

The daily levels of non-trading VaR over the last year are set out in the graph below. There was no material change in non-trading VaR between 31 December 2013 and 30 June 2014. In this period, a gradual decline in non-trading interest rate VaR was offset by a decrease in diversification benefit.

Daily VAR (non-trading portfolios)

VaR by risk type for non-trading activities

	Interest rate	Credit spread	Portfolio diversification⁴⁴	Total⁴⁵
	US$m	US$m	US$m	US$m

Half-year to 30 June 2014 .............................................	103.6	75.1	(27.7)	151.0
Average .............................................................................	116.1	79.3	(40.9)	154.5
Minimum ...........................................................................	99.1	69.0	-	122.5
Maximum ..........................................................................	147.7	91.9	-	189.0

Half-year to 30 June 2013 .................................................	191.1	105.6	(101.8)	194.9
Average .............................................................................	112.5	109.7	(80.8)	141.4
Minimum ...........................................................................	84.6	98.3	-	114.7
Maximum ..........................................................................	195.2	130.3	-	212.7

Half-year to 31 December 2013 .........................................	150.6	80.4	(76.4)	154.6
Average .............................................................................	177.6	103.6	(83.3)	197.9
Minimum ...........................................................................	136.3	80.3	-	145.8
Maximum ..........................................................................	221.7	135.7	-	252.3

For footnotes, see page 172.

Most of the Group non-trading VaR relates to Balance Sheet Management or local treasury management functions. Contributions to Group non-trading VaR are driven by interest rates and credit spread risks arising from all global businesses. There is no commodity risk in the non-trading portfolios. The decrease of non-trading VaR during the first half of 2014 was due mainly to the effect of lower levels of volatility in interest rates utilized in the VaR calculations.

A summary of our non-trading framework is provided on page 285 of the Annual Report and Accounts 2013.

The management of interest rate risk in the banking book is described further in 'Non-trading interest rate risk' below, including the role of Balance Sheet Management.

Non-trading VaR excludes equity risk on available-for-sale securities, structural foreign exchange risk and interest rate risk on fixed rate securities issued by HSBC Holdings, the management of which is described in the relevant sections below. These sections together describe the scope of HSBC's management of market risks in non-trading books.

Credit spread risk for available-for-sale debt securities

Credit spread VaR for available-for-sale debt securities, excluding those held in insurance operations, is included in the Group non‑trading VaR. However, SICs are not included.

At 30 June 2014, the sensitivity of equity capital to the effect of movements in credit spreads on our available-for-sale debt securities based on credit spread VaR was US$114m (30 June 2013: US$126m; 31 December 2013: US$113m) including the gross exposure for the SICs consolidated within our balance sheet. This sensitivity was calculated before taking into account losses which would have been absorbed by the capital note holders.

At 30 June 2014, the capital note holders would absorb the first US$1.8bn (30 June 2013: US$2.2bn; 31 December 2013: US$2.3bn) of any losses incurred by the SICs before we incur any losses on the senior notes held.

Equity securities classified as available for sale

Fair values of equity securities

	At 30 Jun 2014	At 30 Jun 2013	At 31 Dec 2013
	US$bn	US$bn	US$bn

Private equity holdings⁴⁷ ............	2.4	2.9	2.7
Funds invested for short- term cash management .......	-	0.1	-
Investment to facilitate ongoing business⁴⁸ ............................	1.2	1.1	1.2
Other strategic investments ........	5.1	5.3	5.2

	8.7	9.4	9.1

For footnotes, see page 172.

The fair values of the equity securities classified as available for sale can fluctuate considerably. The table above sets out the maximum possible loss on shareholders' equity from available-for-sale equity securities. The decrease in private equity is due to the disposal of direct investments and private equity fund holdings.

Structural foreign exchange exposures

Our policies and procedures for managing structural foreign exchange exposures are described on page 285 in the Annual Report and Accounts 2013.

Non-trading interest rate risk

Our policies and procedures for managing non-trading interest rate risk are described on page 285 in the Annual Report and Accounts 2013.

Balance Sheet Management

Our Balance Sheet Management framework is described on page 238 in the Annual Report and Accounts 2013.

Balance Sheet Management ('BSM') invests in highly-rated liquid assets in line with the Group's liquid asset policy. The majority of the liquidity is invested in central bank deposits and government, supranational and agency securities with most of the remainder held in short-term interbank and central bank loans.

Third-party assets in BSM decreased by 3% during the first half of 2014. Deposits with central banks reduced by US$26bn, predominantly in Europe due to a combination of reduced repo activity and a reduction in balances with the ECB as deposit rates became negative. Deployment of commercial surplus via reverse repurchase agreements increased by US$11bn, mainly through Asia.

Third-party assets in Balance Sheet Management

	At 30 Jun 2014	At 30 Jun 2013	At 31 Dec 2013
	US$m	US$m	US$m

Cash and balances at central banks ..............	107,698	118,139	134,086
Trading assets .................	5,673	7,830	5,547
Financial assets designated at fair value ................	70	73	72
Loans and advances¹
- to banks ...................	61,277	59,548	59,355
- to customers ............	1,871	17,792	2,146
Reverse repurchase agreements .................	69,844	21,660	58,968
Financial investments .....	311,333	279,051	314,427
Other .............................	1,420	3,284	3,700

	559,186	507,377	578,301

For footnote, see page 172.

Withdrawable central bank deposits are accounted for as cash balances. Interbank loans, statutory central bank reserves and loans to central banks are accounted for as loans and advances to banks. BSM's holdings of securities are accounted for as available-for-sale or, to a lesser extent, held-to- maturity assets.

Statutory central bank reserves are not recognised as liquid assets. The statutory reserves that would be released in line with the Group's stressed customer deposit outflow assumptions are reflected as stressed inflows.

BSM is permitted to use derivatives as part of its mandate to manage interest rate risk. Derivative activity is predominantly through the use of vanilla interest rate swaps which are part of cash flow hedging and fair value hedging relationships.

Credit risk in BSM is predominantly limited to short-term bank exposure created by interbank lending, and exposure to central banks and high quality sovereigns, supranationals or agencies which constitute the majority of BSM's liquidity portfolio. BSM does not manage the structural credit risk of any Group entity balance sheets.

BSM is permitted to enter into single name and index credit derivatives activity, but it does so to manage credit risk on the exposure specific to its securities portfolio in limited circumstances only.

The risk limits are extremely restricted and closely monitored. At 30 June 2014 and 31 December 2013 BSM had no open credit derivative index risk.

VaR is calculated on both trading and non-trading positions held in BSM by applying the same methodology used in the Global Markets business and for market risk control purposes.

BSM holds trading portfolio instruments in only very limited circumstances. Positions and the associated VaR were not significant during the first half of 2014.

Sensitivity of net interest income

The table below sets out the effect on our future net interest income of an incremental 25 basis points parallel rise or fall in all yield curves worldwide at the beginning of each quarter during the 12 months from 1 July 2014. The sensitivities shown represent the change in the base case projected net interest income that would be expected under the two rate scenarios assuming that all other non-interest rate risk variables remain constant, and there are no management actions. In deriving our base case net interest income projections the re-pricing rate of assets and liabilities used is derived from current yield curves.

These figures incorporate the effect of any option features in the underlying exposures. Assuming no management response, a sequence of such rises would increase planned net interest income for the 12 months to 30 June 2015 by US$979m (to 31 December 2014: US$938m), while a sequence of such falls would decrease planned net interest income by US$1,746m (31 December 2014: US$1,734m).

Sensitivity of projected net interest income⁴⁹

	US dollar bloc	Rest of Americas bloc	Hong Kong dollar bloc	Rest of Asia bloc	Sterling bloc	Euro bloc	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
Change in July 2014 to June 2015 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:

+ 25 basis points ..........................	54	26	293	252	451	(97)	979
- 25 basis points ..........................	(308)	(37)	(450)	(235)	(691)	(25)	(1,746)

Change in January 2014 to December 2014 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:

+ 25 basis points ..........................	(107)	12	327	236	598	(128)	938
- 25 basis points ..........................	(291)	(23)	(412)	(233)	(761)	(14)	(1,734)

Change in July 2013 to June 2014 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:

+ 25 basis points ..........................	112	56	283	152	593	(41)	1,155
- 25 basis points ..........................	(351)	(65)	(399)	(181)	(524)	(24)	(1,544)

For footnote, see page 172.

The interest rate sensitivities set out in the table above are indicative and based on simplified scenarios. The limitations of this analysis are discussed on page 286 of the Annual Report and Accounts 2013. Net interest income and its associated sensitivity as reflected above include the expense of funding trading assets, while related revenue is reported in 'Net trading income'.

We monitor the sensitivity of reported reserves to interest rate movements on a monthly basis by assessing the expected reduction in valuation of available-for-sale portfolios and cash flow hedges
due to parallel movements of plus or minus 100bps in all yield curves. These particular exposures form only a part of our overall interest rate exposures. The accounting treatment of our remaining interest rate exposures, while economically largely offsetting the exposures shown in the above table, does not require revaluation movements to go to reserves.

The table below describes the sensitivity of our reported reserves to the stipulated movements in yield curves and the maximum and minimum month‑end figures during the period. The sensitivities are indicative and based on simplified scenarios.

Sensitivity of reported reserves to interest rate movements⁴⁹

		Impact in the preceding 6 months
	US$m	Maximum US$m	Minimum US$m
At 30 June 2014
+ 100 basis point parallel move in all yield curves ........................................	(5,157)	(5,212)	(5,066)
As a percentage of total shareholders' equity ................................................	(2.7%)	(2.7%)	(2.7%)

- 100 basis point parallel move in all yield curves ........................................	4,730	4,915	4,730
As a percentage of total shareholders' equity ................................................	(2.5%)	(2.6%)	(2.5%)

At 30 June 2013
+ 100 basis point parallel move in all yield curves ........................................	(5,991)	(5,991)	(5,507)
As a percentage of total shareholders' equity ................................................	(3.4%)	(3.4%)	(3.2%)

- 100 basis point parallel move in all yield curves ........................................	5,752	5,752	4,910
As a percentage of total shareholders' equity ................................................	3.3%	3.3%	2.8%

At 31 December 2013
+ 100 basis point parallel move in all yield curves ........................................	(5,762)	(5,992)	(5,762)
As a percentage of total shareholders' equity ................................................	(3.2%)	(3.3%)	(3.2%)

- 100 basis point parallel move in all yield curves ........................................	5,634	5,786	5,633
As a percentage of total shareholders' equity ................................................	3.1%	3.2%	3.1%

For footnote, see page 172.

Defined benefit pension schemes

Market risk arises within our defined benefit pension schemes to the extent that the obligations of the schemes are not fully matched by assets with determinable cash flows.

HSBC's defined benefit pension schemes

	At 30 Jun 2014	At 30 Jun 2013	At 31 Dec 2013
	US$bn	US$bn	US$bn

Liabilities (present value).................................	42.7	37.1	40.5

	%	%	%
Assets:
Equity investments .....	18	19	18
Debt securities ............	71	71	70
Other (including property) ................	11	10	12

	100	100	100

For details of the latest actuarial valuation of the HSBC Bank (UK) Pension Scheme and other defined benefit plans, see page 457 in the Annual Report and Accounts 2013.

Additional market risk measures applicable only to the parent company

The principal tools used in the management of market risk are VaR for foreign exchange rate risk and the projected sensitivity of HSBC Holdings' net interest income to future changes in yield curves and interest rate gap repricing for interest rate risk.

Foreign exchange risk

Total foreign exchange VaR arising within HSBC Holdings in the first half of 2014 was as follows:

HSBC Holdings - foreign exchange VaR

	Half-year to
	30 Jun 2014	30 Jun 2013	31 Dec 2013
	US$m	US$m	US$m

At period end ..............	51.3	46.9	54.1
Average ......................	47.0	52.6	49.8
Minimum ....................	42.5	46.6	47.5
Maximum ...................	51.5	64.1	54.1

The foreign exchange risk largely arises from loans to subsidiaries of a capital nature that are not denominated in the functional currency of either the provider or the recipient and which are accounted for as financial assets. Changes in the carrying amount of these loans due to foreign exchange rate differences are taken directly to HSBC Holdings' income statement. These loans, and most of the associated foreign exchange exposures, are eliminated on consolidation.

Interest rate repricing gap table

The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VaR but is managed on a repricing gap basis. The interest rate repricing gap table below analyses the full-term structure of interest rate mismatches within HSBC Holdings' balance sheet.

Repricing gap analysis of HSBC Holdings

	Total	Up to 1 year	1 to 5 years	5 to 10 years	More than 10 years	Non- interest bearing
	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2014
Total assets .................................................	145,891	45,396	591	1,961	665	97,278
Total liabilities and equity ...........................	(145,891)	(9,503)	(10,348)	(8,509)	(14,891)	(102,640)
Off-balance sheet items attracting interest rate sensitivity .........................................	-	(20,597)	7,137	7,400	6,042	18

Net interest rate risk gap .............................	-	15,296	(2,620)	852	(8,184)	(5,344)

Cumulative interest rate gap ........................	-	15,296	12,676	13,528	5,344	-

At 30 June 2013
Total assets .................................................	142,080	43,355	310	2,183	594	95,638
Total liabilities and equity ...........................	(142,080)	(11,716)	(7,215)	(7,681)	(13,838)	(101,630)
Off-balance sheet items attracting interest rate sensitivity .........................................	-	(16,799)	3,977	7,681	4,079	1,062

Net interest rate risk gap .............................	-	14,840	(2,928)	2,183	(9,165)	(4,930)

Cumulative interest rate gap ........................	-	14,840	11,912	14,095	4,930	-

	Total	Up to 1 year	1 to 5 years	5 to 10 years	More than 10 years	Non- interest bearing
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2013
Total assets .................................................	150,836	50,636	290	1,970	645	97,295
Total liabilities and equity ...........................	(150,836)	(14,515)	(7,685)	(9,876)	(14,306)	(104,454)
Off-balance sheet items attracting interest rate sensitivity .........................................	-	(18,620)	4,382	9,876	4,421	(59)

Net interest rate risk gap .............................	-	17,501	(3,013)	1,970	(9,240)	(7,218)
						-
Cumulative interest rate gap ........................	-	17,501	14,488	16,458	7,218	-

Operational risk

Operational risk is relevant to every aspect of our business and covers a wide spectrum of issues, in particular legal, compliance, security and fraud. Losses arising from breaches of regulation and law, unauthorised activities, error, omission, inefficiency, fraud, systems failure or external events all fall within the definition of operational risk.

Activity to embed the use of our operational risk management framework continued in the first half of 2014. At the same time, we are streamlining operational risk management processes and harmonising framework components and risk management processes. This is expected to lead to a stronger operational risk management culture and more forward-looking risk insights to enable businesses to determine whether material risks are being managed within the Group's risk appetite and whether further action is required. In addition, the Security and Fraud Risk and Financial Crime Compliance functions have built a Financial Intelligence Unit ('FIU') which provides intelligence on the potential risks of financial crime posed by customers and business prospects to enable better risk management decision-making. The FIU provides context and expertise to identify, assess and understand financial crime risks holistically in clients, sectors and markets.

The diagrammatic representation of our operational risk management framework ('ORMF') is provided on page 245 of the Annual Report and Accounts 2013.

A summary of our current policies and practices regarding operational risk is provided on page 287 of the Annual Report and Accounts 2013.

Operational risk profile in the first half of 2014

During the first half of 2014, our operational top and emerging risk profile continued to be dominated by compliance and legal risks. Additional losses were
recorded from the events of previous years, including the historical mis-selling of PPI, albeit at a level much lower than seen in the past.

The Group also continues to be involved in investigations and reviews by various regulators and competition enforcement authorities related to certain past submissions made by panel banks and the process for making submissions in connection with the setting of Libor, Euribor and other benchmark interest rates, along with investigations into currency benchmarks and credit default swaps.

HSBC has undertaken a review of compliance with the fixed-sum unsecured loan agreement requirements of the UK Consumer Credit Act ('CCA'). A liability has been recognised as at 30 June 2014 within 'Other liabilities' for the repayment of interest to customers where annual statements did not remind them of their right to partially prepay the loan, notwithstanding that the customer loan documentation did include this right. There is uncertainty as to whether other technical requirements of the CCA have been met, for which we have assessed an additional contingent liability. For further details see Note 16 on the Financial Statements.

The regulatory environment in which we operate is increasing the cost of doing business and could reduce our future profitability. We continue to invest in new initiatives in the areas of financial crime compliance and regulatory compliance. The implementation of Global Standards remains one of the key strategic priorities for the Group and is ongoing.

Other operational risks include:

· fraud risks: the threat of fraud perpetrated by or against our customers, especially in retail and commercial banking, may grow during adverse economic conditions. We increased monitoring, analysed root causes and reviewed internal controls to enhance our defences against external attacks and reduce the level of loss in these areas. In addition, Group Security and Fraud Risk worked closely with the global businesses to

continually assess these threats as they evolved and adapt our controls to mitigate these risks;

· level of change creating operational complexity: The Global Risk function is engaged with business management in business transformation initiatives to ensure robust internal controls are maintained, including through participation in all relevant management committees. The Global Transactions Team has developed an enhanced risk management framework to be applied to the management of disposal risks;

· information security: the security of our information and technology infrastructure is crucial for maintaining our banking applications and processes while protecting our customers and the HSBC brand. A failure of our defences against such attacks could result in financial loss and the loss of customer data and other sensitive information which could undermine both our reputation and our ability to retain the trust of our customers. In common with other banks and multinational organisations, we continue to be a target of distributed denial of service ('DDoS') attacks which impact the availability of customer-facing websites. No evidence of customer data being breached was discovered in the first half of 2014 as a result of these attacks.

This area will continue to be a focus of ongoing initiatives to strengthen the control environment. Significant investment has already been made in enhancing controls, including increased training to raise staff awareness of the requirements, improved controls around data access and heightened monitoring of potential DDoS attacks.

The Cyber Intelligence and Threat team continued to develop our intelligence-driven responses to these attacks based on lessons learnt from previous attacks and through information sharing with other financial institutions, government agencies and external intelligence providers. We continued to refine our operational processes and contingency plans; and

· vendor risk management: we remain focused on the management of vendor risks and the roll out of a global performance tracking process with our most important suppliers is ongoing.

Other operational risks are also monitored and managed through the use of the ORMF, including investments made to further improve the resilience of our payments infrastructure.

Legal proceedings are discussed in Note 25 on the Financial Statements and further details regarding compliance risk are set out below.

Compliance risk

Compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice, and incur fines and penalties and suffer damage to our business as a consequence.

All Group companies and employees are required to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice.

In line with our ambition to be the world's leading international bank, we have committed to adopt and adhere to industry-leading compliance standards across the Group. One of the ways to achieve this is to ensure that we put in place a robust compliance risk management infrastructure.

We have now completed the restructuring of our previous Compliance sub-function within Global Risk into two new sub-functions: Financial Crime Compliance and Regulatory Compliance, jointly supported by Compliance Shared Services. The new structure allows us to:

· manage different types of regulatory and financial crime compliance risk more effectively;

· focus our efforts appropriately in addressing the issues highlighted by regulatory investigations and reviews, internal audits and risk assessments of past business activities; and

· ensure we have in place clear, robust accountability and appropriate expertise and processes for all areas of compliance risk.

Financial Crime Compliance sets policy and manages risks in the following areas:

· anti-money laundering, counter terrorist financing and proliferation finance;

· sanctions; and

· anti-bribery and corruption.

Regulatory Compliance sets policy and manages risks in the following areas:

· conduct of business;

· market conduct; and

· other applicable laws, rules and regulations.

A Financial Crime Risk Appetite Statement was approved by the Board in October 2013. A financial crime-based component has been embedded in Group Strategy, determining what business HSBC does, with whom and in which markets. An enhanced global AML policy, incorporating risk appetite, was approved by the Board in January 2014. The policy adopts and enforces the highest or most effective standards globally, including a globally consistent approach to knowing and retaining our customers.

The AML policy is being implemented in phases through the development and application of minimum standards of procedure to manage AML compliance in our global businesses. The overriding policy objective is for every employee to conduct 'the right kind of business', which will be a recurring theme across all pillars of the AML programme and engagement campaign.

Conducting customer due diligence is one of the fundamental ways in which we understand and manage financial crime risk. Enhanced minimum standards for customer due diligence procedures covering the majority of our customer types were completed and approved in 2013. Implementation of these procedures began in February 2014 in the UAE.

Similarly, in January 2014, the Board approved an enhanced global sanctions policy, which is informed by the sanctions laws and regulations of the EU, Hong Kong, the UK and the US. The policy defines the Group's risk appetite in dealing with sanctioned individuals, entities and countries over and above compliance with applicable sanctions laws and regulations.

The policy will be implemented through the development and maintenance of global business operating procedures. To assist in this, an analysis is being conducted to understand where there are gaps in current business operating procedures and processes compared with new policy requirements or where local laws or regulations conflict with or exceed global policy requirements.

In May 2014, the Board approved a globally consistent approach to the risk management of conduct which defines how we will deliver fair outcomes for our customers and undertake orderly and transparent operations in financial markets. Implementation of our conduct approach will be managed through the global lines of business and functions, which will perform a gap analysis to determine where current policy, processes and practices may require enhancement to meet our required outcomes.

We continue to invest in the Compliance sub-functions to ensure that, through their operation and the execution of the Group strategy, including measures to implement Global Standards, we are well positioned to meet increased levels of regulation and scrutiny from regulators and law enforcement agencies. In addition, the measures we have put in place are designed to ensure we have the appropriate people, processes and procedures to manage evolving markets, emerging risks and new products and business.

Our focus on compliance issues is reinforced by the Financial System Vulnerabilities Committee, which reports to the Board on matters relating to financial crime and financial system abuse and provides a forward-looking perspective on financial crime risk. In addition, the Conduct & Values Committee reports to the Board on matters relating to responsible business conduct and adherence to HSBC's Values.

It is clear that the level of inherent compliance risk that we face will continue to remain high for the foreseeable future. However, we consider that good progress is being made and will continue to be made in ensuring that we are well placed to effectively manage those risks.

Whistleblowing

The HSBC Group operates a global Compliance Disclosure Line (telephone and email) which is available to allow employees to make disclosures when the normal channels for airing grievances or concerns are unavailable or inappropriate.

The Compliance Disclosure Line is available to capture employee concerns on a number of matters, including breaches of law or regulation, allegations of bribery and corruption, failure to comply with Group policies, suspicions of money laundering, breaches of internal controls and fraud or deliberate error in the financial records of any Group company. Global Regulatory Compliance is responsible for the operation of the Compliance Disclosure Line and the handling of disclosure cases. Each case is reviewed and referred for appropriate investigation. The disclosure is acknowledged (when contact details are provided) and the employee is advised when the investigation has been concluded. Global Regulatory Compliance may also be made aware of whistleblowing cases raised directly with senior executives, line managers, Human Resources and Security and Fraud, and will investigate accordingly.

Additional local whistleblowing lines are in place in several countries, operated by Security and Fraud, Human Resources and Regulatory Compliance. When such lines are established, processes are put in place to escalate relevant disclosures made on the local whistleblowing lines to Global Regulatory Compliance or Financial Crime Compliance. Global Regulatory Compliance also monitors an external email address for complaints regarding accounting and internal financial controls or auditing matters (accountingdisclosures@hsbc.com highlighted under Investor Relations and Governance on www.hsbc.com). Cases received are escalated to the Group Chief Accounting Officer, Group Finance Director and Group Chief Executive as appropriate.

Reputational risk

Reputational risk can arise from issues, activities and associations that might pose a threat to the reputation of the Group, locally, regionally or internationally.

We continue to take steps to tackle the root causes of the deficiencies that, amongst other things, led to the Group entering into DPAs with various US authorities in relation to investigations regarding inadequate compliance with AML and sanctions law in December 2012.

A number of measures to address the requirements of the DPAs and otherwise to enhance our AML and sanctions compliance framework have been taken and/or are ongoing. These measures, which should also serve over time to enhance our reputational risk management, include the following:

· simplifying our business through the ongoing implementation of our Group strategy, including the adoption of a global financial crime risk filter, which should help to standardise our approach to doing business in higher risk countries;

· a substantial increase in resources and investment allocated to the two Compliance sub-functions (see 'Compliance risk' above);

·
an increase in dedicated reputational risk resources in each region in which we operate and the introduction of a central case management and tracking process for reputational risk and client relationship matters;

· the creation of combined Reputational Risk and Client Selection committees within the global businesses with a clear process to escalate and address matters at the appropriate level;

· the continued provision of training and communication about the HSBC Values programme that defines the way everyone in the Group should act and seeks to ensure that the Values are embedded into our business as usual operations; and

· the ongoing development and implementation of Global Standards around financial crime compliance, which underpin our business. This includes ensuring globally consistent application of policies that govern AML and sanctions compliance provisions.

We have a zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational damage has not been considered and mitigated. There must be no barriers to open discussion and the escalation of issues that could impact negatively on HSBC. While there is a level of risk in every aspect of business activity, appropriate consideration of potential harm to HSBC's good name must be a part of all business decisions.

Detecting and preventing illicit actors' access to the global financial system calls for constant vigilance and we will continue to cooperate closely with all governments to achieve success. This is integral to the execution of our strategy, to HSBC Values and to preserving and enhancing our reputation.

The reputational risk policies and practices remain materially unchanged from those reported on page 294 of the Annual Report and Accounts 2013.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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