Interim Report - 22 of 26

RNS Number : 1386M

HSBC Holdings PLC

12 August 2011

Footnotes to Financial Statements

1 The following tables also form an integral part of these financial statements: 'Maximum exposure to credit risk' (page 92), 'Gross loans and advances by industry sector' (page 93), 'Gross loans and advances to customers by industry sector and by geographical region', (page 93), 'Movement in impairment allowances on loans and advances to customers and banks' (page 117), and Composition of regulatory capital within 'Capital structure'(page 161).

2 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.

3 The movement in reserves relating to equity-settled share-based payment arrangements is recognised in 'Retained earnings' in the 'Consolidated statement of change in equity', with effect from 1 January 2011. Previously, it was disclosed separately in a 'Share-based payment reserve' within 'Other reserves'. Comparative data have been restated accordingly. The adjustment reduced 'Other reserves' and increased 'Retained earnings' by US$1,765m at 30 June 2011 (30 June 2010: US$1,268m; 31 December 2010; US$1,755m). There was no effect on basic or diluted earnings per share following this change.

4 No deduction (30 June 2010: US$1m; 31 December 2010: nil) in respect of issue costs incurred during the period is included in share premium.

5 Cumulative goodwill amounting to US$5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including US$3,469m charged against the merger reserve arising on the acquisition of HSBC Bank. The balance of US$1,669m was charged against retained earnings.

6 Retained earnings include 77,926,453 (US$968m) of own shares held within HSBC's insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets (30 June 2010: 127,950,817 (US$1,578m); 31 December 2010: 123,331,979 (US$1,799m)).

7 Amounts transferred to the income statement in respect of cash flow hedges include US$345m gain (30 June 2010: US$129m loss; 31 December 2010: US$734m gain) taken to 'Net interest income' and US$149m loss (30 June 2010: US$1,515m loss; 31 December 2010: US$1,074m gain) taken to 'Net trading income'.

8 Statutory share premium relief under Section 131 of the Companies Act 1985 (the 'Act') was taken in respect of the acquisition of HSBC Bank in 1992, HSBC France in 2000 and HSBC Finance in 2003 and the shares issued were recorded at their nominal value only. In HSBC's consolidated financial statements the fair value differences of US$8,290m in respect of HSBC France and US$12,768m in respect of HSBC Finance were recognised in the merger reserve. The merger reserve created on the acquisition of HSBC Finance subsequently became attached to HSBC Overseas Holdings (UK) Limited ('HOHU'), following a number of intra-Group reorganisations. At 30 June 2011, nil (30 June 2010: nil; 31 December 2010: nil) was transferred from this reserve to retained earnings as a result of impairment in HSBC Holdings' investment in HOHU. During 2009, pursuant to Section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and US$15,796m was recognised in the merger reserve. The merger reserve includes the deduction of US$614m in respect of costs relating to the rights issue, of which US$149m was subsequently transferred to the income statement. Of this US$149m, US$121m was a loss arising from accounting for the agreement with the underwriters as a contingent forward contract. The merger reserve excludes the loss of US$344m on a forward foreign exchange contract associated with hedging the proceeds of the rights issue.

9 During June 2010, HSBC Holdings issued US$3,800m of Perpetual Subordinated Capital Securities, Series 2 ('capital securities'), on which there were US$82m of external issuance costs and US$23m of intra-Group issuance costs which are classified as equity under IFRSs. The capital securities are exchangeable at HSBC Holdings' option into non-cumulative US dollar preference shares on any coupon payment date. Interest on the capital securities is paid quarterly and may be deferred at the discretion of HSBC Holdings. The capital securities may only be redeemed at the option of HSBC Holdings.

Note
1	Basis of preparation .................................	179
2	Accounting policies ..................................	181
3	Dividends .................................................	182
4	Earnings per share ....................................	182
5	Post-employment benefits .......................	183
6	Tax expense ............................................	185
7	Trading assets ..........................................	187
8	Fair values of financial instruments carried at fair value ..........................................	188
9	Fair values of financial instruments not carried at fair value ...............................	196
10	Reclassification of financial assets ............	198
11	Financial assets designated at fair value ....	199
12	Derivatives ..............................................	200
13	Financial investments ..............................	203

Note
14	Assets held for sale ...................................	205
15	Trading liabilities .....................................	206
16	Financial liabilities designated at fair value .............................................................	206
17	Provisions ................................................	206
18	Maturity analysis of assets and liabilities ..	207
19	Notes on the statement of cash flows .......	208
20	Contingent liabilities, contractual commitments and guarantees ................	209
21	Special purpose entities ............................	209
22	Segmental analysis ...................................	214
23	Goodwill impairment ................................	214
24	Legal proceedings, investigations and regulatory matters ................................	214
25	Events after the balance sheet date...........	218
26	Interim Report 2011 and statutory accounts .............................................................	218

1 Basis of preparation

(a) Compliance with International Financial Reporting Standards

The interim consolidated financial statements of HSBC have been prepared in accordance with the Disclosure Rules and Transparency Rules of the Financial Services Authority and IAS 34 'Interim Financial Reporting' ('IAS 34') as issued by the International Accounting Standards Board ('IASB') and as endorsed by the EU.

The consolidated financial statements of HSBC at 31 December 2010 were prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the IASB and as endorsed by the EU. EU‑endorsed IFRSs may differ from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU. At 31 December 2010, there were no unendorsed standards effective for the year ended 31 December 2010 affecting the consolidated financial statements at that date, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC's financial statements for the year ended 31 December 2010 were prepared in accordance with IFRSs as issued by the IASB.

At 30 June 2011, there were no unendorsed standards effective for the period ended 30 June 2011 affecting these interim consolidated financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC.

IFRSs comprise accounting standards issued by the IASB and its predecessor body as well as interpretations issued by the IFRS Interpretations Committee ('IFRIC') and its predecessor body.

During the period ended 30 June 2011, HSBC adopted a number of interpretations and amendments to standards which had an insignificant effect on these interim consolidated financial statements.

(b) Presentation of information

In accordance with HSBC's policy to provide meaningful disclosures that help investors and other stakeholders understand the Group's performance, financial position and changes thereto, the information provided in the Notes on the Financial Statements and the Interim Management Report goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements and listing rules. In particular, HSBC has adopted the British Bankers' Association Code for Financial Reporting Disclosure ('the BBA Code'). The BBA Code aims to increase the quality and comparability of banks' disclosures and sets out five disclosure principles together with supporting guidance. In line with the principles of the BBA Code, HSBC assesses the applicability and relevance of good practice recommendations issued from time to time by relevant regulators and standard setters, enhancing disclosures where appropriate.

HSBC's consolidated financial statements are presented in US dollars which is also HSBC Holdings' functional currency. HSBC Holdings' functional currency is the US dollar because the US dollar and currencies linked to it are the most significant currencies relevant to the underlying transactions, events and conditions of its subsidiaries, as well as representing a significant proportion of its funds generated from financing activities. HSBC uses the US dollar as its presentation currency in its consolidated financial statements because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business.

These interim consolidated financial statements include comparative information as required by IAS 34, the UK Disclosure Rules and Transparency Rules and the Hong Kong Listing Rules.

(d) Use of estimates and assumptions

The preparation of financial information requires the use of estimates and assumptions about future conditions. The use of available information and the application of judgement are inherent in the formation of estimates; actual results in the future may differ from those reported. Management believes that HSBC's critical accounting policies where judgement is necessarily applied are those which relate to impairment of loans and advances, goodwill impairment, the valuation of financial instruments, the impairment of available-for-sale financial assets and deferred tax assets. These critical accounting policies are described on pages 33 to 36 of the Annual Report and Accounts 2010.

(e) Consolidation

The interim consolidated financial statements of HSBC comprise the financial statements of HSBC Holdings and its subsidiaries. The method adopted by HSBC to consolidate its subsidiaries is described on pages 251 to 252 of the Annual Report and Accounts 2010.

(f) Future accounting developments

At 30 June 2011, a number of standards and interpretations, and amendments thereto, had been issued by the IASB which are not yet effective for these consolidated financial statements, the most significant of which are described below. The IASB is continuing to work on projects on insurance, revenue recognition and lease accounting, which together with IFRS 9 and the standards described below, represent widespread and significant changes to accounting requirements from 2013.

IFRS 9 'Financial Instruments' is described on pages 252 and 253 of the Annual Report and Accounts 2010, including the second and third phases in the IASB's project to replace IAS 39, which address the impairment of financial assets measured at amortised cost and hedge accounting. The IASB did not finalise the replacement of IAS 39 by its stated target of June 2011, and the IASB and the US Financial Accounting Standards Board have agreed to extend the timetable beyond this date to permit further work and consultation with stakeholders. As a consequence, the IASB is consulting on its proposal to change the effective date of IFRS 9 to 1 January 2015 to facilitate the adoption of the entire replacement of IAS 39. The EU is not expected to endorse IFRS 9 until the completed standard is available. Therefore, HSBC remains unable to provide a date by which it plans to apply IFRS 9 and it remains impracticable to quantify the impact of IFRS 9 as at the date of publication of these consolidated financial statements.

Standards issued by the IASB but not endorsed by the EU

In May 2011, the IASB issued IFRS 10 'Consolidated Financial Statements' ('IFRS 10'), IFRS 11 'Joint Arrangements' ('IFRS 11') and IFRS 12 'Disclosure of Interests in Other Entities' ('IFRS 12'). The standards are effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. IFRSs 10 and 11 are to be applied retrospectively.

Under IFRS 10, there will be one approach for determining consolidation for all entities, based on the concept of power, variability of returns and their linkage. This will replace the current approach which emphasises legal control or exposure to risks and rewards, depending on the nature of the entity. IFRS 11 places more focus on rights and obligations than on legal form, and introduces the concept of a joint operation. IFRS 12 includes the disclosure requirements for subsidiaries, joint arrangements and associates and introduces new requirements for unconsolidated structured entities.

HSBC is currently assessing the impact of these new IFRSs, but it is impracticable to quantify their effect as at the date of publication of these consolidated financial statements.

In May 2011, the IASB also issued IFRS 13 'Fair Value Measurement' ('IFRS 13'). This standard is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. IFRS 13 is required to be applied prospectively from the beginning of the first annual period in which it is applied. The disclosure requirements of IFRS 13 do not require comparative information to be provided for periods prior to initial application.

IFRS 13 establishes a single source of guidance for all fair value measurements required or permitted by IFRSs. The standard clarifies the definition of fair value as an exit price, which is defined as a price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions, and enhances disclosures about fair value measurement.

HSBC is currently assessing the impact of this new IFRS but it is impracticable to quantify its effect as at the date of publication of these consolidated financial statements.

In June 2011, the IASB issued amendments to IAS 19 'Employee Benefits' ('IAS 19 revised'). The revised standard is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. IAS 19 revised must be applied retrospectively.

The most significant amendment for HSBC is the replacement of interest cost and expected return on plan assets by a finance cost component comprising the net interest on the net defined benefit liability or asset. This finance cost component is determined by applying the same discount rate used to measure the defined benefit obligation to the net defined benefit liability or asset. The difference between the actual return on plan assets and the return included in the finance cost component in the income statement will be presented in other comprehensive income. The effect of this change is to increase the pension expense by the difference between the current expected return on plan assets and the return calculated by applying the relevant discount rate.

Based on an initial estimate of the impact of this particular amendment on the 2010 consolidated financial statements, the change would decrease pre-tax profit, with no effect on the pension liability. The effect on total operating expenses and pre-tax profit is not expected to be material. The effect at the date of adoption will depend on market interest rates, rates of return and the actual mix of scheme assets at that time.

(g) Changes in composition of the Group

There were no material changes in the composition of the Group.

2 Accounting policies

The accounting policies adopted by HSBC for these interim consolidated financial statements are consistent with those described on pages 253 to 270 of the Annual Report and Accounts 2010, with the exception of the presentation of the consolidated statement of changes in equity which no longer includes a separate 'Share-based payment reserve' which has now been incorporated into retained earnings. The methods of computation applied by HSBC for these interim consolidated financial statements are consistent with those applied for the Annual Report and Accounts 2010.

3 Dividends

The Directors declared after the end of the period a second interim dividend in respect of the financial year ending 31 December 2011 of US$0.09 per ordinary share, a distribution of approximately US$1,604m which will be payable on 6 October 2011. No liability is recorded in the financial statements in respect of this dividend.

Dividends to shareholders of the parent company

	Half-year to
	30 June 2011			30 June 2010			31 December 2010
	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m
Dividends declared on ordinary shares
In respect of previous year:
- fourth interim dividend .....................	0.12	2,119	1,130	0.10	1,733	838	-	-	-
In respect of current year:
- first interim dividend ........................	0.09	1,601	204	0.08	1,394	746	-	-	-
- second interim dividend ....................	-	-	-	-	-	-	0.08	1,402	735
- third interim dividend .......................	-	-	-	-	-	-	0.08	1,408	205

	0.21	3,720	1,334	0.18	3,127	1,584	0.16	2,810	940

Quarterly dividends on preference shares classified as equity
March dividend ....................................	15.50	22		15.50	22		-	-
June dividend .......................................	15.50	23		15.50	23		-	-
September dividend ..............................	-	-		-	-		15.50	22
December dividend ...............................	-	-		-	-		15.50	23

	31.00	45		31.00	45		31.00	45

Quarterly coupons on capital securities classified as equity¹
January coupon ....................................	0.508	44		0.508	44		-	-
March coupon .....................................	0.500	76		-	-		-	-
April coupon .......................................	0.508	45		0.508	45		-	-
June coupon .........................................	0.500	76		-	-		-	-
July coupon .........................................	-	-		-	-		0.508	45
September coupon ...............................	-	-		-	-		0.450	68
October coupon ...................................	-	-		-	-		0.508	45
December coupon ................................	-	-		-	-		0.500	76

	2.016	241		1.016	89		1.966	234

1 HSBC Holdings issued Perpetual Subordinated Capital Securities of US$3,800m in June 2010.

On 15 July 2011, HSBC paid a further coupon on the capital securities of US$0.508 per security, a distribution of US$45m. No liability is recorded in the financial statements in respect of this coupon payment.

4 Earnings per share

Basic earnings per ordinary share was calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share was calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares.

Profit attributable to ordinary shareholders of the parent company

	Half-year to
	30 June	30 June	31 December
	2011	2010	2010
	US$m	US$m	US$m

Profit attributable to shareholders of the parent company .............................	9,215	6,763	6,396
Dividend payable on preference shares classified as equity ..............................	(45)	(45)	(45)
Coupon payable on capital securities classified as equity .................................	(241)	(89)	(234)

Profit attributable to ordinary shareholders of the parent company ...............	8,929	6,629	6,117

Basic and diluted earnings per share

	Half-year to 30 June 2011			Half-year to 30 June 2010			Half-year to 31 December 2010
	Profit US$m	Number of shares (millions)	Amount per share US$	Profit US$m	Number of shares (millions)	Amount per share US$	Profit US$m	Number of shares (millions)	Amount per share US$

Basic¹ .............................	8,929	17,631	0.51	6,629	17,310	0.38	6,117	17,496	0.35
Effect of dilutive potential ordinary shares ...........		266			202			256

Diluted² ..........................	8,929	17,897	0.50	6,629	17,512	0.38	6,117	17,752	0.34

1 Weighted average number of ordinary shares outstanding.

2 Weighted average number of ordinary shares outstanding assuming dilution.

5 Post-employment benefits

Included within 'Employee compensation and benefits' are components of net periodic benefit cost related to HSBC's defined benefit pension plans and other post-employment benefits, as follows:

	Half-year to
	30 June 2011	30 June 2010	2005	31 December 2010
	US$m	US$m		US$m

Current service cost .......................................................................................	287	291		273
Interest cost ..................................................................................................	892	811		835
Expected return on plan assets .......................................................................	(919)	(717)		(825)
Past service cost ............................................................................................	(581)	8		3
Gains on curtailments ....................................................................................	-	(148)		(3)
(Gains)/losses on settlements .........................................................................	-	1		(3)

Total (income)/expense .................................................................................	(321)	246		280

HSBC revalues its defined benefit post-employment plans each year at 31 December, in consultation with the plans' local actuaries. The assumptions underlying the calculations are used to determine the expected income statement charge for the year going forward. At 30 June each year, HSBC revalues all plan assets to current market prices. HSBC also reviews the assumptions used to calculate the defined benefit obligations (the liabilities of the plans) and updates the carrying amount of the obligations if there have been significant changes as a consequence of changes in assumptions.

Retirement benefit liabilities for the Group have reduced from US$3.9bn at 31 December 2010 to US$3.0bn at 30 June 2011, US$0.7bn of this reduction being in respect of the HSBC Bank (UK) Pension Scheme funded defined benefit plan ('the principal plan'). A small net retirement benefit asset was recognised for the principal plan as at 30 June 2011 as a result of this reduction, which was mainly due to the change in indexation of deferred pensions, discussed below, and changes in actuarial assumptions.

Changes in actuarial assumptions increased the defined benefit obligation for the principal plan by US$36m, recognised directly in other comprehensive income as an actuarial loss. The net increase resulted from an increase in inflation assumptions and the effect of changes to assumed commutation factors, less the effect of an increase in the nominal discount rate. However, the actual return on the plan assets of the principal plan was higher than the expected return by US$179m, recognised as an actuarial gain directly in other comprehensive income.

A change in indexation for deferred pensions was one of the most significant reasons for the reduction in the defined benefit of the principal plan. The expected cash flows of the principal plan were historically projected by reference to the Retail Prices Index ('RPI') swap curve in calculating the liability recognised. The Occupational Pensions (Revaluation) Order 2010 confirmed the UK government's intention to move to using the Consumer Prices Index ('CPI') rather than RPI as the inflation measure for determining the minimum pension increases to be applied to the statutory index-linked features of retirement benefits. Historical annual CPI increases have generally been lower than annual RPI increases. The rules of the principal plan prescribe that annual increases for pensions in payment are in line with RPI, but for deferred pensions, i.e. pensions for members of the scheme who have left HSBC employment but whose pensions are yet to commence, are linked to the statutory index prior to retirement. However, consistent with communications to Scheme members, HSBC has historically used RPI in calculating the pension liability for deferred pensions.

In May 2011, the trustee of the principal plan communicated to scheme members the impact on scheme benefits of the UK government's announcement. At 30 June 2011, HSBC used CPI in calculating the pension liability recognised, which resulted in a reduction of the principal plan's liabilities in respect of deferred pensioners of US$587m. A corresponding gain was recognised as a credit to past service cost and is included within 'Employee compensation and benefits' in the income statement.

The discount rates used to calculate HSBC's obligations under its defined benefit pension and post-employment healthcare plans were as follows:

Discount rates

	At 30 June 2011	At 30 June 2010	2005	At 31 December 2010
	%	%		%

UK ...............................................................................................................	5.60	5.40		5.40
Hong Kong ...................................................................................................	2.28	2.29		2.85
US ................................................................................................................	5.35	5.45		5.41
Jersey ...........................................................................................................	5.40	5.70		5.40
Mexico .........................................................................................................	7.50	7.50		7.50
Brazil ...........................................................................................................	11.00	11.25		10.51
France ..........................................................................................................	5.00	4.50		4.75
Canada .........................................................................................................	5.75	5.75		5.45
Switzerland ...................................................................................................	2.60	2.60		2.60
Germany ......................................................................................................	5.00	4.50		5.00

The inflation rate used to calculate the principal plan obligation at 30 June 2011 was 3.8%. (30 June 2010: 3.5%; 31 December 2010: 3.7%). Other than described above, there were no material changes to other assumptions.

Actuarial gains and losses

	Half-year to
	30 June 2011	30 June 2010	2005	31 December 2010
	US$m	US$m		US$m

Experience losses on plan liabilities ..............................................................	(36)	(17)		(410)
Experience gains on plan assets ....................................................................	162	956		1,216
Losses from changes in actuarial assumptions ...............................................	(128)	(1,038)		(773)
Other movements¹ .......................................................................................	(16)	17		(11)

Total net actuarial gains/(losses) ...................................................................	(18)	(82)		22

1 Other movements include changes in the effect of the limit on plan surpluses.

Actuarial gains and losses comprise experience adjustments on plan assets and liabilities as well as adjustments arising from changes in actuarial assumptions. The experience gains and losses on plan assets arise as a result of the difference between the expected returns on the plan assets and the actual movement in the value of the plan assets during the period. The changes in actuarial assumptions arise as a result of changes in the plan assumptions, primarily discount rates and inflation rates, as previously described.

Total cumulative net actuarial losses, including the cumulative effect of the limit on plan surpluses recognised in equity at 30 June 2011, were US$4,738m (30 June 2010: US$4,742m cumulative losses; 31 December 2010: US$4,720m cumulative losses). Of this the cumulative effect of the limit on plan surpluses was US$65m (30 June 2010: US$29m; 31 December 2010: US$47m).

On 17 June 2010, HSBC Bank plc agreed with the Trustee to accelerate the reduction of the deficit of the plan with a special contribution of £1,760m (US$2,638m) in June 2010 followed by a revised payment schedule in the following years, as shown below:

	Revised	Revised
	plan	plan
	US$m¹	£m

2016 .......................................................................................................................................	792	495
2017 .......................................................................................................................................	1,008	630
2018 .......................................................................................................................................	1,008	630

1 The payment schedule was agreed with the Trustee in pounds sterling and the equivalent US dollar amounts are shown at the exchange rate effective as at 30 June 2011.

The next actuarial valuation of the principal plan is due to be made as at 31 December 2011.

As disclosed in 'Related party transactions' on page 368 in the Annual Report and Accounts 2010, the principal plan entered into collateralised swap transactions with HSBC to manage the inflation and interest rate sensitivity of the Scheme's pension obligations. At 30 June 2011, the swaps had a positive fair value of US$2,457m to the Scheme (30 June 2010: US$1,891m positive to the Scheme; 31 December 2010: US$2,173m positive to the Scheme). All swaps were executed at prevailing market rates and within standard market bid-offer spreads.

6 Tax expense

	Half-year to
...		30 June	30 June	31 December
		2011	2010	2010
		US$m	US$m	US$m
Current tax
UK corporation tax charge ..........................................................................		230	609	(226)
Overseas tax¹ ...............................................................................................		1,694	2,439	889

		1,924	3,048	663
Deferred tax
Origination and reversal of temporary differences ........................................		(212)	808	327

Tax expense ................................................................................................		1,712	3,856	990

Effective tax rate .........................................................................................		14.9%	34.7%	12.5%

1 Overseas tax included Hong Kong profits tax of US$453m (first half of 2010: US$426m; second half of 2010: US$536m). Subsidiaries in Hong Kong provided for Hong Kong profits tax at the rate of 16.5% (2010: 16.5%) on the profits for the period assessable in Hong Kong. Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.

The following table reconciles the overall tax expense which would apply if all profits had been taxed at the UK corporation tax rate of 26.5% (2010: 28%):

	Half-year to
	30 June 2011		30 June 2010		31 December 2010
	US$m	%	US$m	%	US$m	%
Analysis of tax expense
Taxation at UK corporation tax rate of 26.5% (2010: 28%) .......................................................	3,041	26.5	3,109	28.0	2,221	28.0
Effect of taxing overseas profits in principal locations at different rates ..................................	(275)	(2.4)	(326)	(2.9)	(418)	(5.3)
Adjustments in respect of prior period liabilities .....	522	4.5	(20)	(0.2)	20	0.2
Deferred tax temporary differences not provided/ (previously not recognised) .................................	(1,008)	(8.8)	8	0.1	(14)	(0.2)
Low income housing tax credits ..............................	(42)	(0.4)	(44)	(0.4)	(42)	(0.5)
Effect of profit in associates and joint ventures ......	(412)	(3.6)	(332)	(3.0)	(373)	(4.7)
Tax effect of intra-Group transfer of subsidiary ......	-	-	1,590	14.3	(374)	(4.7)
Effect of gains arising from dilution of interests in associates ........................................................	(48)	(0.4)	-	-	(53)	(0.6)
Non taxable income ..............................................	(179)	(1.5)	(164)	(1.5)	(210)	(2.6)
Gains not subject to tax ..........................................	(5)	-	(180)	(1.6)	(95)	(1.2)
Permanent disallowables .........................................	95	0.8	99	0.9	177	2.2
Effect of bank payroll tax ......................................	-	-	91	0.8	(12)	(0.2)
Change in tax rates .................................................	2	-	-	-	31	0.4
Local taxes and overseas withholding tax ................	117	1.0	38	0.3	23	0.3
Other items ............................................................	(96)	(0.8)	(13)	(0.1)	109	1.4

Overall tax expense ................................................	1,712	14.9	3,856	34.7	990	12.5

The effective tax rate for the first half of 2011 was 14.9% compared with 34.7% for the first half of 2010. The lower tax charge in the first half of 2011 included the benefit of deferred tax recognised in respect of foreign tax credits, partly offset by a current tax charge in respect of prior periods in a number of jurisdictions. The tax charge in the first half of 2010 included US$1.6bn attributable to a taxable gain arising from an internal reorganisation within our North American operations.

The UK government has announced that the main rate of corporation tax for the year beginning 1 April 2011 will reduce by 2 percentage points from 28% to 26% to be followed over a period of three years by further 1 percentage point reductions to 23% for the year beginning 1 April 2014. This results in a weighted average rate of 26.5% for 2011 (2010: 28%). It is not expected that the proposed future rate reductions will have a significant effect on the UK net deferred tax asset recognised at 30 June 2011 of US$237m.

For the period ended 30 June 2011, HSBC's share of associates' tax on profit was US$418m (30 June 2010: US$356m; 31 December 2010: US$418m), which is included within share of profit in associates and joint ventures in the income statement.

Of the total net deferred tax assets of US$6.8bn at 30 June 2011 (30 June 2010: US$5.0bn; 31 December 2010: US$5.9bn), US$5.2bn (30 June 2010: US$3.5bn; 31 December 2010: US$4.0bn) arose in respect of HSBC's US operations where there has been a recent history of losses. Management's updated analysis is consistent with the assumption that it is probable that there will be sufficient taxable income to support the deferred tax assets that have been recognised in respect of the US operations as at 30 June 2011.

7 Trading assets

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m
Trading assets:
-. not subject to repledge or resale by counterparties ................................	338,455	315,137	284,940
-. which may be repledged or resold by counterparties ..............................	136,495	88,663	100,112

	474,950	403,800	385,052

Treasury and other eligible bills ....................................................................	23,899	22,236	25,620
Debt securities ..............................................................................................	208,805	194,390	168,268
Equity securities ...........................................................................................	36,718	27,360	41,086

Trading securities valued at fair value ...........................................................	269,422	243,986	234,974
Loans and advances to banks ........................................................................	100,134	77,434	70,456
Loans and advances to customers .................................................................	105,394	82,380	79,622

	474,950	403,800	385,052

Trading securities valued at fair value¹

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

US Treasury and US Government agencies² ..................................................	23,849	22,774	20,239
UK Government ...........................................................................................	30,535	11,874	17,036
Hong Kong Government ..............................................................................	7,228	14,325	11,053
Other government ........................................................................................	110,691	79,177	92,826
Asset-backed securities³ ................................................................................	3,742	4,381	3,998
Corporate debt and other securities ...............................................................	56,659	84,095	48,736
Equity securities ...........................................................................................	36,718	27,360	41,086

	269,422	243,986	234,974

1 Included within these figures are debt securities issued by banks and other financial institutions of US$40,033m (30 June 2010: US$35,424m; 31 December 2010: US$37,170m), of which US$8,311m (30 June 2010: US$8,399m; 31 December 2010: US$8,330m) 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 30 June 2011
Listed on a recognised exchange¹ .......................................	205	149,912	35,944	186,061
Unlisted² ............................................................................	23,694	58,893	774	83,361

	23,899	208,805	36,718	269,422

Fair value at 30 June 2010
Listed on a recognised exchange¹ .......................................	2,097	146,713	26,900	175,710
Unlisted² ............................................................................	20,139	47,677	460	68,276

	22,236	194,390	27,360	243,986

Fair value at 31 December 2010
Listed on a recognised exchange¹ .......................................	698	113,878	40,098	154,674
Unlisted² ............................................................................	24,922	54,390	988	80,300

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

1 Included within listed securities are US$3,080m (30 June 2010: US$3,384m; 31 December 2010: US$3,254m) of investments listed in Hong Kong.

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

Loans and advances to banks held for trading

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

Reverse repos ...............................................................................................	60,833	43,820	45,771
Settlement accounts .....................................................................................	19,465	12,843	5,226
Stock borrowing ...........................................................................................	7,374	5,793	6,346
Other ...........................................................................................................	12,462	14,978	13,113

	100,134	77,434	70,456

Loans and advances to customers held for trading

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

Reverse repos ...............................................................................................	50,540	36,330	46,366
Settlement accounts .....................................................................................	28,274	22,039	7,516
Stock borrowing ...........................................................................................	12,452	12,487	11,161
Other ...........................................................................................................	14,128	11,524	14,579

	105,394	82,380	79,622

8 Fair values of financial instruments carried at fair value

The accounting policies which determine the classification of financial instruments and the use of assumptions and estimation in valuing them are described on pages 253 to 270 and 34 to 36, respectively, of the Annual Report and Accounts 2010.

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
At 30 June 2011
Assets
Trading assets ................................................................	303,025	165,224	6,701	474,950
Financial assets designated at fair value ..........................	24,805	14,118	642	39,565
Derivatives ....................................................................	1,337	255,511	3,824	260,672
Financial investments: available for sale .........................	225,469	162,711	8,592	396,772

Liabilities
Trading liabilities ...........................................................	165,552	207,126	13,146	385,824
Financial liabilities designated at fair value .....................	27,570	70,110	600	98,280
Derivatives ....................................................................	1,521	252,154	3,350	257,025

At 30 June 2010
Assets
Trading assets ................................................................	258,303	139,855	5,642	403,800
Financial assets designated at fair value ..........................	19,043	12,151	1,049	32,243
Derivatives ....................................................................	1,844	281,705	4,730	288,279
Financial investments: available for sale .........................	181,160	177,447	7,951	366,558

Liabilities
Trading liabilities ...........................................................	126,435	139,961	8,440	274,836
Financial liabilities designated at fair value .....................	28,271	51,689	476	80,436
Derivatives ....................................................................	1,612	281,126	4,276	287,014

		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
At 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

The increase in Level 1 assets and liabilities reflects a significant increase in settlement account balances, which vary considerably in proportion with the level of trading activity. The increase in Level 1 assets also reflects increased holdings of debt securities, driven by higher issuances of and customer demand for government and government agency debt securities. A rise in short bond positions, which was in line with the growth in the Rates portfolio, contributed to the increase in Level 1 and Level 2 trading liabilities. The increase in Level 2 assets reflects higher reverse repo balances used to cover short positions, notably in Europe, North America and Latin America, and an increase in repo balances contributed to the growth in Level 2 liabilities.

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. To this end, ultimate responsibility for the determination of fair values lies with Finance, which reports functionally to the Group Finance Director. Finance establishes the accounting policies and procedures governing valuation, and is responsible for ensuring compliance with all relevant accounting standards.

Further details of the control framework are included on pages 308 to 309 of the Annual Report and Accounts 2010.

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. In the event that the market for a financial instrument is not active, a valuation technique is used. Further details on fair values determined using valuation techniques are included on pages 309 to 310 of the Annual Report and Accounts 2010.

HSBC has, for swaps with collateralised counterparties and in significant currencies, adopted a discounting curve that reflects the overnight interest rate ('OIS discounting'). Prior to 2010, in line with market practice, discount curves did not reflect this overnight interest rate component but were based on a term LIBOR rate. During the period, HSBC applied an OIS discounting curve to an expanded range of significant currencies in line with evolving market practice. The financial effect of this change was not significant.

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	At	At
	30 June	30 June	31 December
	2011	2010	2010
	US$m	US$m	US$m
Type of adjustment
Risk-related ..................................................................................................	1,934	2,243	2,171
Bid-offer ...................................................................................................	623	560	620
Uncertainty ..............................................................................................	110	162	136
Credit risk adjustment ...............................................................................	1,192	1,493	1,355
Other ........................................................................................................	9	28	60

Model-related ...............................................................................................	351	447	389
Model limitation .......................................................................................	344	367	383
Other ........................................................................................................	7	80	6

Inception profit (Day 1 P&L reserves) (Note 12) ........................................	279	256	250

	2,564	2,946	2,810

Fair value adjustments declined by US$246m during the period. The most significant movement was a reduction of US$163m in credit risk adjustment driven by a variety of factors including reduction in exposure to monoline insurers and credit derivative product companies and inclusion of mandatory break clauses within the calculation methodology.

Detailed descriptions of risk-related and model-related adjustments are provided on page 311 of the Annual Report and Accounts 2010.

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 methodologies that could be applied is described on page 131. Of the total credit risk adjustment at 30 June 2011 of US$1,192m (30 June 2010: US$1,493m; 31 December 2010: US$1,355m), US$735m (30 June 2010: US$926m; 31 December 2010: US$836m) 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 the period, 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 30 June 2011
Private equity including strategic investments ...............................	3,915	88		178	-	-		-	-
Asset-backed securities ..................	1,711	1,093		-	-	-		-	-
Leveraged finance .........................	-	-		-	-	-		-	10
Loans held for securitisation ..........	-	806		-	-	-		-	-
Structured notes .............................	-	74		-	-	12,453		-	-
Derivatives with monolines ...........	-	-		-	930	-		-	-
Other derivatives ...........................	-	-		-	2,894	-		-	3,340
Other portfolios ............................	2,966	4,640		464	-	693		600	-

	8,592	6,701		642	3,824	13,146		600	3,350

At 30 June 2010
Private equity including strategic investments ...............................	3,672	195		396	-	-		-	-
Asset-backed securities ..................	1,903	659		-	-	-		-	-
Leveraged finance .........................	-	42		-	-	-		-	18
Loans held for securitisation ..........	-	1,127		-	-	-		-	-
Structured notes .............................	-	-		-	-	7,786		-	-
Derivatives with monolines ...........	-	-		-	1,104	-		-	-
Other derivatives ...........................	-	-		-	3,626	-		-	4,258
Other portfolios ............................	2,376	3,619		653	-	654		476	-

	7,951	5,642		1,049	4,730	8,440		476	4,276

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

Private equity including strategic investments

HSBC's private equity 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

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.

Trading liabilities valued using a valuation technique with significant unobservable inputs principally comprised equity-linked structured notes, which are issued by HSBC and provide the counterparty with a return that is linked to the performance of certain equity securities, and other portfolios. The notes are classified as level 3 due to the unobservability of parameters such as long-dated equity volatilities and correlations between equity prices, between equity prices and interest rates and between interest rates and foreign exchange rates.

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 130.

Derivativeproducts valued using valuation techniques with significant unobservable inputs included certain types of correlation products, such as foreign exchange basket options, equity basket options, foreign exchange interest rate hybrid transactions and long-dated option transactions. Examples of the latter are equity options, interest rate and foreign exchange options and certain credit derivatives. Credit derivatives include certain tranched CDS transactions.

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

At 1 January 2011 ...................	8,237	5,689		587	3,961	11,393		570	3,806
Total gains/(losses) recognised in profit or loss ....................	187	(112)		12	(43)	71		12	298
Total gains/(losses) recognised in other comprehensive income¹ ...............................	182	68		(4)	47	199		18	92
Purchases ................................	1,277	908		132	-	(89)		-	-
New issuances ..........................	-	-		-	-	3,401		-	-
Sales ........................................	(417)	(323)		(16)	-	-		-	-
Settlements .............................	(815)	(104)		(4)	(145)	(1,561)		-	(736)
Transfers out ...........................	(885)	(273)		(75)	(139)	(565)		-	(362)
Transfers in .............................	826	848		10	143	297		-	252
	-	-		-	-	-		-	-
At 30 June 2011 ....................	8,592	6,701		642	3,824	13,146		600	3,350

Total gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 June 2011 .......................	54	(146)		12	131	103		12	382

At 1 January 2010 ...................	10,214	6,420		1,224	4,453	8,774		507	5,192
Total gains/(losses) recognised in profit or loss ....................	112	131		41	199	(245)		(8)	(431)
Total gains/(losses) recognised in other comprehensive income¹ ...............................	198	(181)		(36)	(133)	(325)		(23)	(24)
Purchases ................................	1,428	419		36	-	-		-	-
New issuances ..........................	-	-		-	-	1,730		-	-
Sales ........................................	(960)	(1,044)		(28)	-	-		-	-
Settlements .............................	(173)	18		(6)	(92)	(823)		-	(407)
Transfers out ...........................	(4,731)	(339)		(304)	(442)	(1,165)		-	(423)
Transfers in .............................	1,863	218		122	745	494		-	369

At 30 June 2010 ......................	7,951	5,642		1,049	4,730	8,440		476	4,276

Total gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 June 2010 .......................	70	74		42	720	(246)		(8)	105

Movement in Level 3 financial instruments (continued)

	Assets					Liabilities
	Available for sale	Held for trading	Designated at fair value through profit or loss		Derivatives	Held for trading	Designated at fair value through profit or loss		Derivatives
	US$m	US$m		US$m	US$m	US$m		US$m	US$m

At 1 July 2010 ........................	7,951	5,642		1,049	4,730	8,440		476	4,276
Total gains/(losses) recognised in profit or loss ....................	233	27		22	(874)	411		(3)	191
Total gains recognised in other comprehensive income¹ .......	420	80		-	23	168		97	117
Purchases ................................	2,280	439		45	-	(356)		-	-
New issuances ..........................	-	-		-	-	2,295		-	-
Sales ........................................	(1,501)	(499)		20	-	-		-	-
Settlements .............................	(859)	(17)		(16)	156	(125)		-	(413)
Transfers out ...........................	(2,334)	(290)		(590)	(227)	(585)		-	(580)
Transfers in .............................	2,047	307		57	153	1,145		-	215

At 31 December 2010 .............	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 at 31 December 2010 ..............	113	116		17	268	180		(14)	361

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

There were few significant movements in Level 3 assets or liabilities during the period. Purchases of available-for-sale securities reflects the acquisition of corporate bonds across a range of geographies. New issuances of trading liabilities were driven primarily by equity structured note issuances and settlements of trading liabilities reflect structured note maturities during the period.

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 30 June 2011
Derivatives, trading assets and trading liabilities¹ .................	414	(310)	-	-
Financial assets and liabilities designated at fair value ...........	72	(64)	-	-
Financial investments: available for sale ..............................	-	-	673	(711)

	486	(374)	673	(711)
At 30 June 2010
Derivatives, trading assets and trading liabilities¹ .................	661	(637)	-	-
Financial assets and liabilities designated at fair value ...........	116	(103)	-	-
Financial investments: available for sale ..............................	-	-	595	(573)

	777	(740)	595	(573)
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)

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 period primarily reflected greater certainty in pricing of structured credit transactions as a number of trades were unwound and the residual maturity of the portfolio reduced, as well as greater certainty in a number of structured rates transactions. 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 30 June 2011
Private equity including strategic investments ....................	103	(57)	368	(368)
Asset-backed securities .......................................................	3	(3)	130	(124)
Leveraged finance ..............................................................	-	-	-	-
Loans held for securitisation ..............................................	5	(5)	-	-
Structured notes .................................................................	16	(16)	-	-
Derivatives with monolines ................................................	117	-	-	-
Other derivatives ...............................................................	126	(169)	-	-
Other portfolios .................................................................	116	(124)	175	(219)

	486	(374)	673	(711)

At 30 June 2010
Private equity including strategic investments ....................	69	(59)	356	(340)
Asset-backed securities .......................................................	18	(11)	131	(134)
Leveraged finance ..............................................................	1	(1)	-	-
Loans held for securitisation ..............................................	10	(10)	-	-
Structured notes .................................................................	24	(33)	-	-
Derivatives with monolines ...............................................	116	(85)	-	-
Other derivatives ...............................................................	328	(370)	-	-
Other portfolios ................................................................	211	(171)	108	(99)

	777	(740)	595	(573)

At 31 December 2010
Private equity including strategic investments ....................	112	(71)	383	(383)
Asset-backed securities .......................................................	8	(8)	179	(181)
Leveraged finance ..............................................................	-	-	-	-
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)

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.

9 Fair values of financial instruments not carried at fair value

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

	At 30 June 2011		At 30 June 2010		At 31 December 2010
	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m	US$m	US$m
Assets
Loans and advances to banks .........................	226,043	226,150	196,296	196,122	208,271	208,311
Loans and advances to customers ..................	1,037,888	1,011,319	893,337	864,274	958,366	934,444
Financial investments:
- debt securities .........................................	19,883	21,320	18,788	20,075	19,386	20,374
- treasury and other eligible bills ................	202	202	125	125	113	113

Liabilities
Deposits by banks ..........................................	125,479	125,492	127,316	127,286	110,584	110,563
Customer accounts .........................................	1,318,987	1,318,873	1,147,321	1,148,229	1,227,725	1,227,428
Debt securities in issue ...................................	149,803	149,947	153,600	152,820	145,401	145,417
Subordinated liabilities ....................................	32,753	32,931	28,247	27,978	33,387	33,161

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

	At 30 June 2011		At 30 June 2010		At 31 December 2010
	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m	US$m	US$m
Assets classified as held for sale
Loans and advances to banks and customers ...	62	62	40	40	116	116
Financial investments: debt securities .............	-	-	70	70	-	-

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 30 June 2011		At 30 June 2010		At 31 December 2010
	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m	US$m	US$m
Loans and advances to customers
Europe ...........................................................	486,331	478,660	407,226	400,580	435,799	430,333
Hong Kong ....................................................	159,370	157,859	114,075	114,265	140,691	140,699
Rest of Asia-Pacific .......................................	121,429	121,069	91,672	91,616	108,731	108,582
Middle East and North Africa ........................	25,694	25,781	23,394	23,389	24,626	24,539
North America ..............................................	179,262	162,704	208,141	185,643	190,532	172,522
Latin America ...............................................	65,802	65,246	48,829	48,781	57,987	57,769

	1,037,888	1,011,319	893,337	864,274	958,366	934,444

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.

Following the recent market disruption, there remains a significant reduction in the secondary market demand for US consumer lending assets. Uncertainty over the extent and timing of future credit losses, together with a near absence of liquidity for non-prime ABSs and loans, continued to be reflected in a lack of bid prices at 30 June 2011. It is not possible from the indicative market prices that are available to distinguish between the relative discount to nominal value within the fair value measurement that reflects cash flow impairment due to expected losses to maturity, and the discount that the market is demanding for holding an illiquid asset. Under impairment accounting for loans and advances, there is no requirement to adjust carrying value to reflect illiquidity as HSBC's intention is to fund assets until the earlier of prepayment, charge-off or repayment on maturity. The fair value, by contrast, reflects both incurred loss and loss expected through the life of the asset, a discount for illiquidity and a credit spread which reflects the market's current risk preferences. This usually differs from the credit spread applicable in the market at the time the loan was underwritten and funded.

The estimated fair values at 30 June 2011, 30 June 2010 and 31 December 2010 of loans and advances to customers in North America reflect the combined effect of these conditions. As a result, the fair values are substantially lower than the carrying amount of customer loans held on-balance sheet. Accordingly, the fair values reported do not reflect HSBC's estimate of the underlying long-term value of the assets.

Fair values of the assets and liabilities set out below are estimated for the purpose of disclosure as follows:

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.

10 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. The accounting policy for reclassifications is set out on page 255 of the Annual Report and Accounts 2010. No further reclassifications were undertaken by HSBC.

Reclassified financial assets

	At 30 June 2011		At 30 June 2010		At 31 December 2010
	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m	US$	US$m
Reclassified to loans and receivables
Asset-backed securities .............................	5,664	4,928	6,172	4,947	5,892	4,977
Trading loans - commercial mortgage loans	559	529	484	440	522	493
Leveraged finance and syndicated loans .......	2,337	2,087	5,015	4,338	4,533	4,166

	8,560	7,544	11,671	9,725	10,947	9,636
Reclassified to available for sale
Corporate debt and other securities ...........	64	62	103	103	91	91

	8,624	7,606	11,774	9,828	11,038	9,727

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
	Asset-backed securities	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
Half-year to 30 June 2011
Recorded in the income statement¹ .....................................................	118	14	93	225	8	233
Assuming no reclassification²........	375	15	158	548	(10)	538

Net effect of reclassification ........	(257)	(1)	(65)	(323)	18	(305)

Attributable to:
Europe ......................................	(245)	(1)	(39)	(285)	18	(267)
North America .........................	(12)	-	(20)	(32)	-	(32)
Middle East and North Africa ...	-	-	(6)	(6)	-	(6)

	Financial assets reclassified to:
	loans and receivables				available for sale
	Asset-backed securities	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
Half-year to 30 June 2010
Recorded in the income statement¹ .....................................................	214	12	177	403	55	458
Assuming no reclassification²........	538	10	(170)	378	69	447

Net effect of reclassification ........	(324)	2	347	25	(14)	11

Attributable to:
Europe ......................................	(247)	2	176	(69)	(13)	(82)
North America .........................	(77)	-	110	33	(1)	32
Middle East and North Africa ...	-	-	61	61	-	61

Half-year to 31 December 2010
Recorded in the income statement¹ .....................................................	21	17	169	207	1	208
Assuming no reclassification²........	370	35	477	882	(10)	872

Net effect of reclassification ........	(349)	(18)	(308)	(675)	11	(664)

Attributable to:
Europe ......................................	(280)	(18)	(199)	(497)	11	(486)
North America .........................	(69)	-	(61)	(130)	-	(130)
Middle East and North Africa ...	-	-	(48)	(48)	-	(48)

1 'Income and expense' recorded in the income statement represents the accrual of the effective interest rate and, for the first half of 2011, includes US$15m in respect of impairment (first half of 2010: write-back of US$25m; second half of 2010: US$31m).

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

11 Financial assets designated at fair value

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

Financial assets designated at fair value:
- not subject to repledge or resale by counterparties .................................	39,526	32,239	36,990
- which may be repledged or resold by counterparties ...............................	39	4	21

	39,565	32,243	37,011

Treasury and other eligible bills ....................................................................	207	249	159
Debt securities ..............................................................................................	18,496	16,153	18,248
Equity securities ...........................................................................................	19,588	13,893	17,418

Securities designated at fair value ..................................................................	38,291	30,295	35,825
Loans and advances to banks ........................................................................	355	1,149	315
Loans and advances to customers .................................................................	919	799	871

	39,565	32,243	37,011

Securities designated at fair value¹

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

US Treasury and US Government agencies² ...................................................	87	49	78
UK Government ...........................................................................................	739	1,119	1,304
Hong Kong Government ...............................................................................	152	155	151
Other government ........................................................................................	4,762	3,206	4,130
Asset-backed securities³ ................................................................................	6,164	5,986	6,128
Corporate debt and other securities ...............................................................	6,799	5,887	6,616
Equity securities ............................................................................................	19,588	13,893	17,418
		-
	38,291	30,295	35,825

1 Included within these figures are debt securities issued by banks and other financial institutions of US$9,746m (30 June 2010: US$9,643m; 31 December 2010: US$10,185m), of which US$46m (30 June 2010: US$46m; 31 December 2010: US$48m) 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 30 June 2011
Listed on a recognised exchange¹ .........................................	6	3,605	13,521	17,132
Unlisted ...............................................................................	201	14,891	6,067	21,159

	207	18,496	19,588	38,291

Fair value at 30 June 2010
Listed on a recognised exchange¹ .........................................	105	3,252	9,358	12,715
Unlisted ...............................................................................	144	12,901	4,535	17,580

	249	16,153	13,893	30,295

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

1 Included within listed securities are US$668m (30 June 2010: US$544m; 31 December 2010: US$756m) of investments listed in Hong Kong.

12 Derivatives

Fair values of derivatives by product contract type

	Assets			Liabilities
	Trading	Hedging	Total	Trading	Hedging	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2011
Foreign exchange ..........................	71,280	1,550	72,830	71,621	175	71,796
Interest rate ..................................	283,315	2,236	285,551	277,545	3,577	281,122
Equities .........................................	15,348	-	15,348	17,416	-	17,416
Credit ............................................	19,284	-	19,284	18,613	-	18,613
Commodity and other ...................	1,084	-	1,084	1,503	-	1,503

Gross total fair values ....................	390,311	3,786	394,097	386,698	3,752	390,450

Netting ..........................................			(133,425)			(133,425)

Total .............................................			260,672			257,025

At 30 June 2010
Foreign exchange ..........................	60,502	775	61,277	61,269	879	62,148
Interest rate ..................................	311,491	3,461	314,952	306,571	4,250	310,821
Equities .........................................	15,381	-	15,381	17,805	-	17,805
Credit ............................................	26,223	-	26,223	25,227	-	25,227
Commodity and other ...................	927	-	927	1,494	-	1,494

Gross total fair values ....................	414,524	4,236	418,760	412,366	5,129	417,495

Netting ..........................................			(130,481)			(130,481)

Total .............................................			288,279			287,014

	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
Equities .........................................	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

Derivative assets were largely unchanged during the first half of 2011, as higher client activity drove an increase in fair value of foreign exchange contracts, offset by greater netting from increased trades through clearing houses where the settlement arrangements satisfied the IFRSs netting criteria.

A description of HSBC's determination of the fair values of financial instruments, including derivatives, is provided on page 312 of the Annual Report and Accounts 2010.

Trading derivatives

The notional contract amount 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 18% increase in the notional amounts of HSBC's derivative assets during the first half of 2011 was primarily driven by an increase in the market of open interest rate and foreign exchange contracts, reflecting increased trading volumes in the period.

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

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

Foreign exchange ...........................................................................................	4,440,515	3,373,419	3,692,798
Interest rate ...................................................................................................	21,305,123	16,377,107	18,104,141
Equities ..........................................................................................................	400,877	240,954	294,587
Credit ............................................................................................................	1,091,052	1,147,016	1,065,218
Commodity and other ....................................................................................	97,825	77,683	82,856

	27,335,392	21,216,179	23,239,600

Credit derivatives

The notional contract amount of credit derivatives of US$1,091bn (30 June 2010: US$1,147bn; 31 December 2010: US$1,065bn) consisted of protection bought of US$539bn (30 June 2010: US$571bn; 31 December 2010: US$530bn) and protection sold of US$552bn (30 June 2010: US$576bn; 31 December 2010: US$535bn).

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. The credit derivative business operates within the market risk management framework described on page 136.

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 unobservable inputs

	Half-year to
	30 June 2011	30 June 2010	31 December 2010
	US$m	US$m	US$m

Unamortised balance at beginning of period ..................................................	250	260	256
Deferral on new transactions ........................................................................	161	223	108
Recognised in the income statement during the period:
- amortisation .........................................................................................	(74)	(48)	(58)
- subsequent to unobservable inputs becoming observable .........................	(38)	(14)	(3)
- maturity or termination, or offsetting derivative ..................................	(25)	(134)	(29)
Exchange differences ....................................................................................	9	(21)	6
Risk hedged ..................................................................................................	(4)	(10)	(30)

Unamortised balance at end of period¹ ..........................................................	279	256	250

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

Hedging instruments

The notional contract amounts of these instruments 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 30 June 2011		At 30 June 2010		At 31 December 2010
	Cash flow hedge	Fair value hedge	Cash flow hedge	Fair value hedge	Cash flow hedge	Fair value hedge
	US$m	US$m	US$m	US$m	US$m	US$m

Foreign exchange ........................................	11,476	1,403	11,143	1,748	10,599	1,392
Interest rate ................................................	340,773	74,434	241,552	51,734	282,412	62,757

	352,249	75,837	252,695	53,482	293,011	64,149

Fair value hedges

Fair value of derivatives designated as fair value hedges

	At 30 June 2011		At 30 June 2010		At 31 December 2010
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	US$m	US$m	US$m	US$m	US$m	US$m

Foreign exchange .........................................	236	-	120	-	153	-
Interest rate .................................................	427	2,351	136	2,285	443	2,226

	663	2,351	256	2,285	596	2,226

Gains/(losses) arising from fair value hedges

	Half-year to
	30 June 2011	30 June 2010	31 December 2010
	US$m	US$m	US$m
Gains/(losses):
- on hedging instruments .........................................................................	(794)	(1,249)	419
- on the hedged items attributable to the hedged risk ................................	722	1,266	(398)

	(72)	17	21

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

Cash flow hedges

Fair value of derivatives designated as cash flow hedges

	At 30 June 2011		At 30 June 2010		At 31 December 2010
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	US$m	US$m	US$m	US$m	US$m	US$m

Foreign exchange .........................................	1,314	175	655	879	1,151	340
Interest rate .................................................	1,809	1,226	3,325	1,965	2,321	1,683

	3,123	1,401	3,980	2,844	3,472	2,023

The gains and losses on ineffective portions of such derivatives are recognised immediately in 'Net trading income'. During the period to 30 June 2011, a gain of US$2m was recognised due to hedge ineffectiveness (first half of 2010: loss of US$24m; second half of 2010: gain of US$15m).

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 30 June 2011, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were liabilities of US$30m (30 June 2010: assets of US$3m and liabilities of US$38m; 31 December 2010: liabilities of US$34m), and notional contract values of US$1,251m (30 June 2010: US$617m; 31 December 2010: US$644m).

No ineffectiveness was recognised in 'Net trading income' for the period ended 30 June 2011 (both halves of 2010: nil).

13 Financial investments

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m
Financial investments:
-. not subject to repledge or resale by counterparties ..................................	385,126	361,931	369,597
-. which may be repledged or resold by counterparties ................................	31,731	23,540	31,158

	416,857	385,471	400,755

Carrying amount and fair values of financial investments

	At 30 June 2011		At 30 June 2010		At 31 December 2010
	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m	US$m	US$m

Treasury and other eligible bills ...................	61,664	61,664	61,275	61,275	57,129	57,129
-. available for sale ..................................	61,462	61,462	61,150	61,150	57,016	57,016
-. held to maturity ...................................	202	202	125	125	113	113

Debt securities .............................................	346,986	348,423	315,367	316,654	335,643	336,632
-. available for sale ..................................	327,103	327,103	296,579	296,579	316,257	316,257
-. held to maturity ...................................	19,883	21,320	18,788	20,075	19,386	20,375

Equity securities
-. available for sale ..................................	8,207	8,207	8,829	8,829	7,983	7,983

	416,857	418,294	385,471	386,758	400,755	401,744

Financial investments at amortised cost and fair value¹

	Amortised cost	Fair value
	US$m	US$m
At 30 June 2011
US Treasury ........................................................................................................................	37,584	37,697
US Government agencies² ...................................................................................................	21,910	22,500
US Government sponsored entities² ....................................................................................	4,669	4,958
UK Government .................................................................................................................	30,034	30,787
Hong Kong Government .....................................................................................................	31,700	31,734
Other government ..............................................................................................................	125,452	126,088
Asset-backed securities³ ......................................................................................................	37,835	32,292
Corporate debt and other securities .....................................................................................	122,521	124,031
Equities ...............................................................................................................................	5,849	8,207

	417,554	418,294

At 30 June 2010
US Treasury ........................................................................................................................	24,162	24,756
US Government agencies² ...................................................................................................	18,418	19,051
US Government sponsored entities² ....................................................................................	5,016	5,278
UK Government .................................................................................................................	27,339	28,191
Hong Kong Government .....................................................................................................	35,447	35,443
Other government ..............................................................................................................	94,320	95,478
Asset-backed securities³ ......................................................................................................	42,534	34,010
Corporate debt and other securities .....................................................................................	134,393	135,722
Equities ...............................................................................................................................	6,568	8,829

	388,197	386,758
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

1 Included within these figures are debt securities issued by banks and other financial institutions with a carrying amount of US$98,472m (30 June 2010: US$115,836m; 31 December 2010: US$99,733m), of which US$37,929m (30 June 2010: US$45,171m; 31 December 2010: US$38,862m) are guaranteed by various governments. The fair value of the debt securities issued by banks and other financial institutions at 30 June 2011 was US$98,939m (30 June 2010: US$116,316m; 31 December 2010: US$100,070m).

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 30 June 2011
Listed on a recognised exchange¹ .................	2,049	-	152,844	4,237	690	159,820
Unlisted² .....................................................	59,413	202	174,259	15,646	7,517	257,037

	61,462	202	327,103	19,883	8,207	416,857

Carrying amount at 30 June 2010
Listed on a recognised exchange¹ .................	3,394	125	139,398	3,142	524	146,583
Unlisted² .....................................................	57,756	-	157,181	15,646	8,305	238,888

	61,150	125	296,579	18,788	8,829	385,471

	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

1 The fair value of listed held-to-maturity debt securities at 30 June 2011 was US$4,483m (30 June 2010: US$3,302m; 31 December 2010: US$4,332m). Included within listed investments were US$3,125m (30 June 2010: US$1,668m; 31 December 2010: US$1,902m) 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 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m
Remaining contractual maturities of total debt securities:
1 year or less ............................................................................................	110,240	74,101	92,961
5 years or less but over 1 year ...................................................................	116,145	138,240	124,596
10 years or less but over 5 years ...............................................................	56,531	42,770	56,926
over 10 years ............................................................................................	64,070	60,256	61,160

	346,986	315,367	335,643

Remaining contractual maturities of debt securities available for sale:
1 year or less ............................................................................................	108,930	73,411	91,939
5 years or less but over 1 year ...................................................................	109,498	131,587	117,931
10 years or less but over 5 years ...............................................................	49,501	36,301	50,113
over 10 years ............................................................................................	59,174	55,280	56,274

	327,103	296,579	316,257

Remaining contractual maturities of debt securities held to maturity:
1 year or less ............................................................................................	1,310	690	1,022
5 years or less but over 1 year ...................................................................	6,647	6,653	6,665
10 years or less but over 5 years ...............................................................	7,030	6,469	6,813
over 10 years ............................................................................................	4,896	4,976	4,886

	19,883	18,788	19,386

14 Assets held for sale

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

Disposal groups ............................................................................................	445	-	530
Non-current assets held for sale ....................................................................	1,154	1,426	1,461
- interest in associates .................................................................................	-	85	-
- property, plant and equipment ..................................................................	1,055	1,224	1,342
- financial assets ..........................................................................................	96	110	116
- other .........................................................................................................	3	7	3

Total assets held for sale ..............................................................................	1,599	1,426	1,991

Disposal groups

At 30 June 2011, disposal groups included:

· US$124m related to the sale of the Mexican pension funds management business. Associated liabilities of US$11m were included in 'Other liabilities'. Neither a gain nor a loss was recognised on reclassifying the assets as held for sale. The transaction is expected to complete in the third quarter of 2011.

· US$303m related to the sale of a majority interest in the Middle East private equity fund management business to the unit's senior management team. Associated liabilities of US$30m were included in 'Other liabilities'. A loss of US$7m was recognised on reclassifying the assets as held for sale. The transaction is expected to complete in the second half of 2011.

Property, plant and equipment

Property, plant and equipment classified as held for sale principally results from the repossession of property that had been pledged as collateral by customers. These assets are expected to be disposed of within 12 months of acquisition. The majority arose within the geographical segment, North America.

Neither a gain nor a loss was recognised on reclassifying these assets as held for sale during the period.

15 Trading liabilities

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

Deposits by banks .........................................................................................	54,651	52,639	38,678
Customer accounts .......................................................................................	166,974	102,919	125,684
Other debt securities in issue .........................................................................	37,746	28,782	33,726
Other liabilities - net short positions in securities .........................................	126,453	90,496	102,615

	385,824	274,836	300,703

At 30 June 2011, the cumulative amount of change in fair value attributable to changes in credit risk was a gain of US$202m (30 June 2010: gain of US$374m; 31 December 2010: gain of US$142m).

16 Financial liabilities designated at fair value

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

Deposits by banks and customer accounts .....................................................	6,515	6,360	6,527
Liabilities to customers under investment contracts .....................................	12,191	10,384	11,700
Debt securities in issue ..................................................................................	55,885	41,042	46,091
Subordinated liabilities ..................................................................................	18,920	18,763	19,395
Preferred securities .......................................................................................	4,769	3,887	4,420

	98,280	80,436	88,133

The carrying amount at 30 June 2011 of financial liabilities designated at fair value was US$2,144m more than the contractual amount at maturity (30 June 2010: US$1,987m more; 31 December 2010: US$1,631m more). At 30 June 2011, the cumulative amount of the change in fair value attributable to changes in credit risk was a gain of US$1,114m (30 June 2010: gain of US$2,571m; 31 December 2010: gain of US$1,279m).

17 Provisions

	Half-year to
	30 June	30 June	31 December
	2011	2010	2010
	US$m	US$m	US$m

Balance at beginning of period ......................................................................	2,138	1,965	1,828
Additional provisions/increase in provisions .................................................	1,090	245	567
Provisions utilised .........................................................................................	(207)	(210)	(354)
Amounts reversed .........................................................................................	(153)	(87)	(45)
Exchange differences and other movements .................................................	159	(85)	142

Balance at end of period ...............................................................................	3,027	1,828	2,138

Provisions include US$1,998m (30 June 2010: US$990m; 31 December 2010: US$1,257m) relating to legal proceedings, investigations and regulatory matters, US$426m (30 June 2010: US$313m; 31 December 2010: US$405m) relating to costs arising from contingent liabilities and contractual commitments; and US$98m (30 June 2010: US$117m; 31 December 2010: US$118m) relating to provisions for onerous property contracts.

18 Maturity analysis of assets and liabilities

The following is an analysis, by remaining contractual maturities at the reporting date, of asset and liability line items that combine amounts within one year, and after one year. Trading assets and liabilities are excluded because they are not held for collection or settlement over the period of contractual maturity.

	Due within one year	Due after more than one year	Total
	US$m	US$m	US$m
At 30 June 2011
Assets
Financial assets designated at fair value .........................................................	3,064	36,501	39,565
Loans and advances to banks ........................................................................	216,034	10,009	226,043
Loans and advances to customers ..................................................................	482,370	555,518	1,037,888
Financial investments ...................................................................................	172,407	244,450	416,857
Other financial assets ....................................................................................	24,822	5,692	30,514

	898,697	852,170	1,750,867
Liabilities
Deposits by banks .........................................................................................	118,505	6,974	125,479
Customer accounts ........................................................................................	1,272,152	46,835	1,318,987
Financial liabilities designated at fair value ....................................................	9,670	88,610	98,280
Debt securities in issue ..................................................................................	82,747	67,056	149,803
Other financial liabilities ...............................................................................	27,494	4,606	32,100
Subordinated liabilities ...................................................................................	575	32,178	32,753

	1,511,143	246,259	1,757,402

At 30 June 2010
Assets
Financial assets designated at fair value .........................................................	3,887	28,356	32,243
Loans and advances to banks ........................................................................	188,946	7,350	196,296
Loans and advances to customers .................................................................	405,218	488,119	893,337
Financial investments ...................................................................................	135,608	249,863	385,471
Other financial assets ...................................................................................	21,205	5,766	26,971

	754,864	779,454	1,534,318
Liabilities
Deposits by banks .........................................................................................	122,026	5,290	127,316
Customer accounts .......................................................................................	1,103,851	43,470	1,147,321
Financial liabilities designated at fair value ....................................................	7,773	72,663	80,436
Debt securities in issue ..................................................................................	89,012	64,588	153,600
Other financial liabilities ..............................................................................	69,905	5,705	75,610
Subordinated liabilities ..................................................................................	381	27,866	28,247

	1,392,948	219,582	1,612,530

At 31 December 2010
Assets
Financial assets designated at fair value .........................................................	3,030	33,981	37,011
Loans and advances to banks ........................................................................	200,098	8,173	208,271
Loans and advances to customers .................................................................	424,713	533,653	958,366
Financial investments ...................................................................................	149,954	250,801	400,755
Other financial assets ...................................................................................	19,417	5,519	24,936

	797,212	832,127	1,629,339
Liabilities
Deposits by banks .........................................................................................	105,462	5,122	110,584
Customer accounts .......................................................................................	1,181,095	46,630	1,227,725
Financial liabilities designated at fair value ....................................................	10,141	77,992	88,133
Debt securities in issue ..................................................................................	86,096	59,305	145,401
Other financial liabilities ..............................................................................	24,865	4,792	29,657
Subordinated liabilities ..................................................................................	791	32,596	33,387

	1,408,450	226,437	1,634,887

This information is provided by RNS

The company news service from the London Stock Exchange

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