Interim Report - 24 of 28

RNS Number : 9192L

HSBC Holdings PLC

16 August 2013

 



Footnotes to Financial Statements

1  The tables: 'Maximum exposure to credit risk' (page 115), 'Gross loans and advances to customers by industry sector and by geographical region' (page 142), 'Movement in impairment allowances on loans and advances to customers and banks' (page 138), and the Composition of regulatory capital within 'Capital structure' (page 186) also form an integral part of these financial statements.

2  Fair value gains in available-for-sale investments relating to the investment in Ping An classified as assets held for sale were nil (31 December 2012: US$737m).

3  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.

4  Share premium includes no deduction in respect of issuance costs incurred during the period (30 June 2012: nil; 31 December 2012: nil).

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 plc. The balance of US$1,669m was charged against retained earnings.

6  Retained earnings include 85,561,934 (US$930m) 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 2012: 83,578,031 (US$5,719m); 31 December 2012: 86,394,826 (US$874m)).

7  Amounts transferred to the income statement in respect of cash flow hedges for the half-year to 30 June 2013 include US$116m gain (30 June 2012: US$12m loss; 31 December 2012: US$55m gain) taken to 'Net interest income' and US$140m gain (30 June 2012: US$232m loss; 31 December 2012: US$612m 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. 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  Including distributions paid on preference shares and capital securities classified as equity.

Note
1	Basis of preparation ...................................	216
2	Accounting policies ....................................	219
3	Dividends ...................................................	219
4	Earnings per share ......................................	219
5	Post-employment benefits .........................	220
6	Tax ............................................................	221
7	Trading assets ............................................	223
8	Fair values of financial instruments carried at fair value ............................................	224
9	Fair values of financial instruments not carried at fair value .................................	233
10	Financial assets designated at fair value ......	235
11	Derivatives ................................................	236
12	Financial investments ................................	239
13	Assets held for sale .....................................	241

Note
14	Trading liabilities .......................................	242
15	Financial liabilities designated at fair value .	242
16	Provisions ..................................................	243
17	Maturity analysis of assets and liabilities ....	245
18	Offsetting of financial assets and financial liabilities .................................................	250
19	Assets charged as security for liabilities and collateral accepted as security for assets .	252
20	Notes on the statement of cash flows .........	253
21	Contingent liabilities, contractual commitments and guarantees ..................	254
22	Segmental analysis .....................................	254
23	Goodwill impairment ..................................	255
24	Legal proceedings and regulatory matters ...	255
25	Events after the balance sheet date ............	262
26	Interim Report 2013 and statutory accounts ...............................................................	263

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 Conduct 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 2012 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 2012, there were no unendorsed standards effective for the year ended 31 December 2012 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 2012 were prepared in accordance with IFRSs as issued by the IASB.

At 30 June 2013, there were no unendorsed standards effective for the period ended 30 June 2013 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.

Standards adopted during the period ended 30 June 2013

On 1 January 2013, HSBC adopted the following significant new standards and revisions to standards for which the financial effect is insignificant to these interim consolidated financial statements:

·      IFRS 10 'Consolidated Financial Statements,' IFRS 11 'Joint Arrangements', IFRS 12 'Disclosure of Interests in Other Entities' and amendments to IFRS 10, IFRS 11 and IFRS 12 'Transition Guidance'. IFRSs 10 and 11 are required to be applied retrospectively.

Under IFRS 10, there is one approach for determining consolidation for all entities, based on the concepts of power, variability of returns and their linkage. This replaces the approach which applied to previous financial statements which emphasised legal control or exposure to risks and rewards, depending on the nature of the entity. HSBC controls and consequently consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

IFRS 11 places more focus on the investors' rights and obligations than on the structure of the arrangement when determining the type of joint arrangement in which HSBC is involved, unlike the previous approach, and introduces the concept of a joint operation.

IFRS 12 is a comprehensive standard on disclosure requirements for all forms of interests in other entities, including for unconsolidated structured entities.

·      IFRS 13 'Fair Value Measurement' establishes a single framework for measuring fair value and introduces new requirements for disclosure of fair value measurements. 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. New disclosures and enhancements to existing disclosures are provided in Note 8.

·      Amendments to IFRS 7 'Disclosures - Offsetting Financial Assets and Financial Liabilities' which requires disclosure of the effect or potential effects of netting arrangements on an entity's financial position. The amendment requires disclosure of recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement. The amendments have been applied retrospectively. New disclosures are provided in Note 18.

·      Amendments to IAS 19 'Employee Benefits' ('IAS 19 revised'). IAS 19 revised is required to be applied retrospectively. IAS 19 revised replaces the interest cost on the plan liability and expected return on plan assets with a finance cost comprising the net interest on the net defined benefit liability or asset. This finance cost is determined by applying to the net defined benefit liability or asset the same discount rate used to measure the defined benefit obligation. The difference between the actual return on plan assets and the return included in the finance cost component reflected in the income statement is presented in other comprehensive income. The effect of this change is to increase or decrease the pension expense by the difference between the current expected return on plan assets and the return calculated by applying the relevant discount rate.

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 2013, HSBC also adopted an interpretation 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. HSBC Holdings' functional currency is also 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.

(c)  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, deferred tax assets and provisions for liabilities. These critical accounting policies are described on page 54 of the Annual Report and Accounts 2012.

(d)  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 page 384 of the Annual Report and Accounts 2012. The previous accounting policy on special purpose entities that reflected guidance under SIC 12 'Consolidation - Special purpose entities' is no longer applicable as a result of the adoption of IFRS 10.

(e)   Future accounting developments

In addition to the projects to complete financial instrument accounting, discussed below, the IASB is continuing to work on projects on insurance, revenue recognition and lease accounting which could represent significant changes to accounting requirements in the future.

Amendments issued by the IASB and endorsed by the EU

In December 2011, the IASB issued amendments to IAS 32 'Offsetting Financial Assets and Financial Liabilities' which clarified the requirements for offsetting financial instruments and addressed inconsistencies in current practice when applying the offsetting criteria in IAS 32 'Financial Instruments: Presentation'. The amendments are effective for annual periods beginning on or after 1 January 2014 with early adoption permitted and are required to be applied retrospectively.

Based on the assessment performed to date, we do not expect the amendments to IAS 32 to have a material effect on HSBC's financial statements.

Amendments issued by the IASB but not endorsed by the EU

During 2012 and 2013, the IASB issued various amendments to IFRS that are effective from 1 January 2014 and which are expected to have an insignificant effect on the consolidated financial statements of HSBC.

Standards applicable in 2015

In November 2009, the IASB issued IFRS 9 'Financial Instruments' which introduced new requirements for the classification and measurement of financial assets. In October 2010, the IASB issued an amendment to IFRS 9 incorporating requirements for financial liabilities. Together, these changes represent the first phase in the IASB's planned replacement of IAS 39 'Financial Instruments: Recognition and Measurement.'

The second and third phases in the IASB's project to replace IAS 39 will address the impairment of financial assets and general hedge accounting. Macro hedging is not included in the IFRS 9 project and will be addressed separately.

Following the IASB's decision in December 2011 to defer the effective date, the existing version of IFRS 9 is effective for annual periods beginning on or after 1 January 2015. IFRS 9 is required to be applied retrospectively but prior periods need not be restated. However, as a result of the IASB's decision that all phases of IFRS 9 will be applied from the same effective date and it now seems unlikely that the final standard will be issued in 2013, we expect that the mandatory effective date of IFRS 9 will be deferred at least until 1 January 2016. In November 2012, the IASB issued proposed amendments to IFRS9 in respect of classification and measurement. Since the final requirements for classification and measurement are uncertain, it remains impracticable to quantify the effect of the existing IFRS 9 as at the date of the publication of these financial statements.

(f)   Changes in composition of the Group

Except as discussed in Note 13 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 387 to 405 of the Annual Report and Accounts 2012, except as discussed in Note 1. The methods of computation applied by HSBC for these interim consolidated financial statements are consistent with those applied for the Annual Report and Accounts 2012.

3     Dividends

The Directors declared after the end of the period a second interim dividend in respect of the financial year ending 31 December 2013 of US$0.10 per ordinary share, a distribution of approximately US$1,864m which will be payable on 9 October 2013. 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 2013						30 June 2012						31 December 2012
	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 .	0.18		3,339		540		0.14		2,535		259		-		-		-
In respect of current year:
- first interim dividend .....	0.10		1,861		167		0.09		1,633		748		-		-		-
- second interim dividend .	-		-		-		-		-		-		0.09		1,646		783
- third interim dividend ....	-		-		-		-		-		-		0.09		1,655		639
	0.28		5,200		707		0.23		4,168		1,007		0.18		3,301		1,422
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		45				0.508		44				-		-
March coupon ..................	0.500		76				0.500		76				-		-
April coupon ....................	0.508		45				0.508		45				-		-
June coupon .....................	0.500		76				0.500		76				-		-
July coupon ......................	-		-				-		-				0.508		45
September coupon ............	-		-				-		-				0.500		76
October coupon ...............	-		-				-		-				0.508		45
December coupon ............	-		-				-		-				0.500		76
	2.016		242				2.016		241				2.016		242

1  HSBC Holdings issued Perpetual Subordinated Capital Securities of US$3,800m in June 2010 and US$2,200m in April 2008, which are classified as equity under IFRSs.

On 11 July 2013, 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 were 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 were 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
	2013		2012		2012
	US$m		US$m		US$m
Profit attributable to shareholders of the parent company ............................	10,284		8,438		5,589
Dividend payable on preference shares classified as equity ............................	(45)		(45)		(45)
Coupon payable on capital securities classified as equity ...............................	(241)		(241)		(242)
Profit attributable to ordinary shareholders of the parent company ..............	9,998		8,152		5,302

Basic and diluted earnings per share

	Half-year to 30 June 2013						Half-year to 30 June 2012						Half-year to 31 December 2012
	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 ............................	9,998		18,467		0.54		8,152		17,983		0.45		5,302		18,267		0.29
Effect of dilutive potential ordinary shares ........................			156						158						153
Diluted2 .........................	9,998		18,623		0.54		8,152		18,141		0.45		5,302		18,420		0.29

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                2013		30 June                2012	2005	31 December                2012
	US$m		US$m		US$m
Defined benefit pension plans
Current service cost ......................................................	255		259		244
Net interest income on the net defined benefit liability/asset ............................................................	(15)		(66)		(83)
Past service cost and (gains)/losses on settlements ........	(407)		3		27
Administrative costs and taxes paid by plan1 ................	7		17		26
	(160)		213		214
Defined benefit healthcare plans ......................................	34		20		29
Total (income)/expense ...................................................	(126)		233		243

1  Amounts previously disclosed within current service cost disclosed separately under the requirements of IAS 19 revised.

In June 2013, following consultation on various employee benefit proposals, HSBC announced to employees in the UK that the future service accrual for active members of the Defined Benefit Section ('DBS') would cease with effect from 30 June 2015. As a result, defined benefit pensions based on service to 30 June 2015 will continue to be linked to final salary on retirement (underpinned by increases in CPI) but all active members of the DBS will become members of the Defined Contribution Section from 1 July 2015. As part of these amendments, the HSBC Bank (UK) Pension Scheme ('the Scheme') will cease to deliver ill-health benefits to active members of the DBS, and these benefits will, instead, be covered via insurance policies from 1 January 2015, consistent with other UK employees. This resulted in a reduction in the defined benefit obligation of the Scheme and a corresponding gain of US$430m, recorded in 'Past service cost and (gains)/losses on settlements' in the presentation above.

6     Tax

	Half-year to
	30 June		30 June		31 December
	2013		2012		2012
	US$m		US$m		US$m
Current tax
UK corporation tax charge .......................................................................	(107)		100		150
Overseas tax1 ............................................................................................	1,868		3,549		2,011
	1,761		3,649		2,161
Deferred tax
Origination and reversal of temporary differences ....................................	964		(20)		(475)
Tax expense .................................................................................................	2,725		3,629		1,686
Effective tax rate .........................................................................................	19.4%		28.5%		21.3%

1  Overseas tax included Hong Kong profits tax of US$607m (first half of 2012: US$476m; second half of 2012: US$573m). Subsidiaries in Hong Kong provided for Hong Kong profits tax at the rate of 16.5% (2012: 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.

Tax reconciliation

The tax charged to the income statement differs to the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows:

	Half-year to
	30 June 2013				30 June 2012				31 December 2012
	US$m		%		US$m		%		US$m		%
Profit before tax .....................................................	14,071				12,737				7,912
Tax at 23.25% (2012: 24.5%) ................................	3,272		23.25		3,122		24.5		1,935		24.5
Effect of differently taxed overseas profits .............	(181)		(1.3)		265		2.1		(322)		(4.0)
Adjustments in respect of prior period liabilities .....	7		-		479		3.7		(442)		(5.6)
Deferred tax temporary differences not recognised/ (previously not recognised) .................................	(9)		(0.1)		2		-		372		4.7
Effect of profit in associates and joint ventures ......	(281)		(2.0)		(459)		(3.6)		(413)		(5.2)
Tax effect of disposal of Ping An .........................	(111)		(0.8)		-		-		(204)		(2.8)
Tax effect of reclassification of Industrial Bank ....	(317)		(2.3)		-		-		-		-
Non-taxable income and gains ...............................	(377)		(2.7)		(280)		(2.2)		(262)		(3.3)
Permanent disallowables .........................................	308		2.2		405		3.2		687		8.7
Change in tax rates .................................................	(15)		(0.1)		(18)		(0.1)		96		1.2
Local taxes and overseas withholding tax ................	266		1.9		205		1.6		376		4.8
Other items ............................................................	163		1.3		(92)		(0.7)		(137)		(1.7)
Total tax charged to the income statement ............	2,725		19.4		3,629		28.5		1,686		21.3

The effective tax rate for the first half of 2013 was 19.4% compared with 28.5% for the first half of 2012. The effective tax rate for the first half of 2013 benefited from the non-taxable gain on the reclassification of Industrial Bank as a financial investment and the Ping An disposal. The effective tax rate in 2012 was higher because of the US tax charge arising on the disposal of the US branch network and cards business and an adjustment to prior period liabilities.

The UK Government announced that the main rate of corporation tax for the year beginning 1 April 2013 will reduce from 24% to 23% to be followed by further a 2% reduction to 21% for the year beginning 1 April 2014 and a 1% reduction to 20% for the year beginning 1 April 2015. The reduction in the corporate tax rate to 23% was enacted through the 2012 Finance Act and this results in a weighted average of 23.25% for 2013 (2012: 24.5%). The reductions to 21% and 20% that were announced in the 2012 Autumn Statement and the 2013 Budget respectively became enacted through the 2013 Finance Act on 17 July 2013. It is not expected that the future rate reductions will have a significant effect on the net UK deferred tax asset at 30 June 2013 of US$0.5bn.

The Group's legal entities are subject to routine review and audit by tax authorities in the territories in which the Group operates. The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters.

Deferred taxation

The net deferred tax assets totalled US$6.3bn at 30 June 2013 (30 June 2012: US$6.1bn; 31 December 2012: US$6.5bn). The main items to note were as follows:

US

The net deferred tax asset relating to HSBC's operations in the US was US$4.3bn (30 June 2012: US$5.0bn; 31 December 2012: US$4.6bn). The deferred tax assets included in this total reflected the carry forward of tax losses and tax credits of US$0.2bn (30 June 2012: US$0.2bn; 31 December 2012: nil), deductible temporary differences in respect of loan impairment allowances of US$1.5bn (30 June 2012: US$2.5bn; 31 December 2012: US$2.0bn) and other temporary differences of US$2.6bn (30 June 2012: US$2.3bn; 31 December 2012: US$2.6bn).

Deductions for loan impairments for US tax purposes generally occur when the impaired loan is charged off, often in the period subsequent to that in which the impairment is recognised for accounting purposes. As a result, the amount of the associated deferred tax asset should generally move in line with the impairment allowance balance.

On the evidence available, including historical levels of profitability, management projections of future income and HSBC Holdings' commitment to continue to invest sufficient capital in North America to recover the deferred tax asset, it is expected there will be sufficient taxable income generated by the business to realise these assets. Management projections of profits from the US operations are prepared for a 10-year period and include assumptions about future house prices and US economic conditions, including unemployment levels.

Management projections of profits from the US operations currently indicate that tax losses and tax credits will be fully recovered by 2015. The current level of the deferred tax asset in respect of loan impairment allowances is projected to reduce over the 10-year period.

As there has been a recent history of losses in HSBC's US operations, management's analysis of the recognition of these deferred tax assets significantly discounts any future expected profits from the US operations and relies to a greater extent on capital support from HSBC Holdings, including tax planning strategies implemented in relation to such support. The principal strategy involves generating future taxable profits through the retention of capital in the US in excess of normal regulatory requirements in order to reduce deductible funding expenses or otherwise deploy such capital to increase levels of taxable income. As financial performance in our US operations improves it is anticipated that projected future profits will be considered in the evaluation of the recognition of the deferred tax asset.

Brazil

The net deferred tax asset relating to HSBC's operations in Brazil was US$1.1bn at 30 June 2013 (30 June 2012: US$0.7bn; 31 December 2012: US$0.9bn). The deferred tax assets included in this total arose primarily in relation to deductible temporary differences in respect of loan impairment allowances.

Deductions for loan impairments for Brazil tax purposes generally occur when the impaired loan is charged off, often in the period subsequent to that in which the impairment is recognised for accounting purposes. As a result, the amount of the associated deferred tax asset should generally move in line with the impairment allowance balance.

Loan impairment deductions are recognised for tax purposes typically within 24 months of accounting recognition. On the evidence available, including historical levels of profitability, management projections of income and the state of the Brazilian economy, it is anticipated there will be sufficient taxable income generated by the business to realise these assets when deductible for tax purposes.

There are no material carried forward tax losses or tax credits recognised within the Group's deferred tax assets in Brazil.

Mexico

The net deferred tax asset relating to HSBC's operations in Mexico was US$0.4bn at 30 June 2013 (30 June 2012: US$0.5bn; 31 December 2012: US$0.6bn). The deferred tax assets included in this total related primarily to deductible temporary differences in respect of accounting provisions for impaired loans. The annual deduction for loan impairments is capped under Mexican legislation at 2.5% of the average qualifying loan portfolio. The balance is carried forward to future years without expiry but with annual deduction subject to the 2.5% cap.

Following the clarification of tax law by the Mexican fiscal authority during the second quarter of 2013 which led to a write down of the deferred tax assets on loan impairments of US$0.3bn, management's analysis of the recognition of these deferred tax assets now relies on the primary strategy of selling certain loan portfolios, the losses on which are deductible for tax in Mexico when sold. Any such deductions for tax would lead to the reversal of the carried forward loan impairment provision recognised for deferred tax purposes.

On the evidence available, including historical and projected levels of loan portfolio sales and profitability, it is expected that the business will now realise these assets over a shorter period, within the next 10 years, than originally was the case under the previous strategy of projecting loan portfolio growth, loan impairment rates and profitability, which expected that the assets would be realised within the next 15 years.

There are no material carried forward tax losses or tax credits recognised within the Group's deferred tax assets in Mexico.

UK

The net deferred tax asset relating to HSBC's operations in the UK was US$0.5bn (30 June 2012: net liability US$0.3bn; 31 December 2012: net asset US$0.3bn). The deferred tax assets included in this total reflected the carry forward of tax losses and tax credits of US$0.1bn (30 June 2012: nil; 31 December 2012: US$0.3bn) and other temporary differences of US$0.4bn (30 June 2012: net liability US$0.3bn; 31 December 2012: nil).

On the evidence available, including historical levels of profitability and management projections of future income it is expected that there will be sufficient taxable income generated by the business to recover the deferred tax asset for tax losses within the current period.

7     Trading assets

	At           30 June                2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
Trading assets:
-  not subject to repledge or resale by counterparties ................................	310,395		296,042		305,312
-  which may be repledged or resold by counterparties ..............................	122,206		95,329		103,499
	432,601		391,371		408,811
Treasury and other eligible bills ....................................................................	19,188		30,098		26,282
Debt securities ..............................................................................................	147,568		131,563		144,677
Equity securities ...........................................................................................	51,477		30,019		41,634
Trading securities valued at fair value ...........................................................	218,233		191,680		212,593
Loans and advances to banks ........................................................................	96,748		94,830		78,271
Loans and advances to customers .................................................................	117,620		104,861		117,947
	432,601		391,371		408,811

Trading securities valued at fair value¹

	At          30 June                2013		At            30 June                2012		At    31 December                2012
	US$m		US$m		US$m
US Treasury and US Government agencies2 ...................................................	30,202		21,369		28,405
UK Government ...........................................................................................	11,171		11,043		11,688
Hong Kong Government ..............................................................................	7,151		6,684		6,228
Other government ........................................................................................	82,782		87,798		91,498
Asset-backed securities3 ................................................................................	2,725		2,805		2,896
Corporate debt and other securities ...............................................................	32,725		31,962		30,244
Equity securities ...........................................................................................	51,477		30,019		41,634
	218,233		191,680		212,593

1  Included within these figures are debt securities issued by banks and other financial institutions of US$21,653m (30 June 2012: US$22,285m; 31 December 2012: US$20,274m), of which US$3,262m (30 June 2012: US$3,981m; 31 December 2012: US$3,469m) 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 2013
Listed on a recognised exchange1 ..........................	2,447		83,220		50,332		135,999
Unlisted2 ...............................................................	16,741		64,348		1,145		82,234
	19,188		147,568		51,477		218,233
Fair value at 30 June 2012
Listed on a recognised exchange1 ..........................	1,055		75,928		29,295		106,278
Unlisted2 ...............................................................	29,043		55,635		724		85,402
	30,098		131,563		30,019		191,680
Fair value at 31 December 2012
Listed on a recognised exchange1 ..........................	606		82,732		39,945		123,283
Unlisted2 ...............................................................	25,676		61,945		1,689		89,310
	26,282		144,677		41,634		212,593

1  Included within listed securities are US$3,508m (30 June 2012: US$2,648m; 31 December 2012: US$2,828m) 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.

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 387 to 405 and page 56, respectively, of the Annual Report and Accounts 2012. The fair value of financial instruments is generally measured on the basis of the individual financial instrument. However, in cases where HSBC manages a group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, HSBC measures the fair value of the group of financial instruments on a net basis, but presents the underlying financial assets and liabilities separately in the financial statements, unless they satisfy the IFRS offsetting criteria as described on page 397 of the Annual Report and Accounts 2012.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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
Recurring fair value measurements
At 30 June 2013
Assets
Trading assets .................................................................	246,233		183,324		3,044		432,601
Financial assets designated at fair value ...........................	27,540		7,307		471		35,318
Derivatives .....................................................................	3,035		293,518		2,660		299,213
Financial investments: available for sale .........................	235,460		135,615		8,960		380,035
Liabilities
Trading liabilities ............................................................	148,118		187,280		7,034		342,432
Financial liabilities designated at fair value ......................	9,195		75,059		-		84,254
Derivatives .....................................................................	2,471		288,555		2,643		293,669

			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 2012
Assets
Trading assets .................................................................	212,386		174,428		4,557		391,371
Financial assets designated at fair value ...........................	24,844		6,814		652		32,310
Derivatives .....................................................................	1,530		350,142		4,262		355,934
Financial investments: available for sale .........................	229,863		132,894		8,494		371,251
Liabilities
Trading liabilities ............................................................	136,437		164,455		7,672		308,564
Financial liabilities designated at fair value ......................	30,257		57,336		-		87,593
Derivatives .....................................................................	1,724		351,058		3,170		355,952
At 31 December 2012
Assets
Trading assets .................................................................	198,843		205,590		4,378		408,811
Financial assets designated at fair value ...........................	25,575		7,594		413		33,582
Derivatives .....................................................................	1,431		352,960		3,059		357,450
Financial investments: available for sale .........................	253,246		135,931		8,511		397,688
Liabilities
Trading liabilities ............................................................	116,550		180,543		7,470		304,563
Financial liabilities designated at fair value ......................	10,703		77,017		-		87,720
Derivatives .....................................................................	1,506		354,375		3,005		358,886

The increase in Level 1 trading assets and liabilities reflected an increase in equity securities and settlement account balances, the latter varying with the level of trading activity. Movement in derivative balances is described in Note 11.

The table below shows transfers between Level 1 and Level 2 fair values.

	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 2013
Transfers from Level 1 to Level 2 ............................	110		402		-		18		12		-		17
Transfers from Level 2 to Level 1 ............................	1,275		1,264		423		-		-		-		-

Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period. Transfers from Level 2 to Level 1 related to increased liquidity in certain emerging market government bonds. There were no material transfers from Level 1 to 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 page 438 of the Annual Report and Accounts 2012.

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 that HSBC can access at the measurement date.

·    

·     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 page 438 of the Annual Report and Accounts 2012.

For swaps with collateralised counterparties and in significant currencies, HSBC applies a discounting curve that reflects the overnight interest rate ('OIS discounting').

Fair value adjustments

Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant that are not incorporated within the valuation model. HSBC classifies fair value adjustments as either 'risk-related' or 'model-related'. The majority of these adjustments relate to 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
	2013		2012		2012
	US$m		US$m		US$m
Type of adjustment
Risk-related ..................................................................................................	1,392		1,777		2,013
Bid-offer ...................................................................................................	639		646		638
Uncertainty ..............................................................................................	126		151		142
Credit valuation adjustment ......................................................................	1,552		980		1,747
Debit valuation adjustment .......................................................................	(929)		-		(518)
Other ........................................................................................................	4		-		4
Model-related ...............................................................................................	147		282		162
Model limitation .......................................................................................	142		286		161
Other ........................................................................................................	5		(4)		1
Inception profit (Day 1 P&L reserves) (Note 11) ........................................	180		184		181
	1,719		2,243		2,356

Fair value adjustments declined by US$637m during the period. The most significant movement was of US$411m in respect of the debit valuation adjustment, as a result of the widening of HSBC's spreads on credit default swaps and a refinement of the calculation.

Detailed descriptions of risk-related and model-related adjustments are provided on page 440 of the Annual Report and Accounts 2012.

Credit valuation adjustment/debit valuation adjustment methodology

HSBC calculates a separate credit valuation adjustment ('CVA') and debit valuation adjustment ('DVA') for each HSBC legal entity, and within each entity for each counterparty to which the entity has exposure. The calculation of the monoline credit valuation adjustment is described on page 151.

HSBC calculates the CVA by applying the probability of default ('PD') of the counterparty conditional on the non-default of HSBC to the expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC and multiplying by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure.

For most products HSBC uses a simulation methodology to calculate the expected positive exposure to a counterparty. This incorporates a range of potential exposures across the portfolio of transactions with the counterparty over the life of the portfolio. The simulation methodology includes credit mitigants such as counterparty netting agreements and collateral agreements with the counterparty. A standard loss given default ('LGD') assumption of 60% is generally adopted for developed market exposures, and 75% for emerging market exposures. Alternative loss given default assumptions may be adopted where both the nature of the exposure and the available data support this.

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 the mapping approach is not appropriate, using a simplified methodology which generally follows 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 is used in the simulation methodology.

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

With the exception of certain central clearing parties, HSBC includes all third-party counterparties in the CVA and DVA calculations and does not net these adjustments across HSBC Group entities. During the period, HSBC refined the methodologies used to calculate the CVA and DVA to more accurately reflect credit mitigation. HSBC reviews and refines the CVA and DVA methodologies on an ongoing basis.

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	At fair     value1			Deriv-   atives		Total		Held for trading	At fair      value1			Deriv-   atives		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Private equity including strategic investments ...........................	4,100		92		392		-		4,584		-		-		-		-
Asset-backed securities ..............	1,683		430		-		-		2,113		-		-		-		-
Loans held for securitisation .....	-		89		-		-		89		-		-		-		-
Structured notes ........................	-		-		-		-		-		7,034		-		-		7,034
Derivatives with monolines .......	-		-		-		407		407		-		-		-		-
Other derivatives ......................	-		-		-		2,253		2,253		-		-		2,643		2,643
Other portfolios ........................	3,177		2,433		79		-		5,689		-		-		-		-
	8,960		3,044		471		2,660		15,135		7,034		-		2,643		9,677
At 30 June 2012
Private equity including strategic investments ...........................	4,367		88		433		-		4,888		-		-		-		-
Asset-backed securities ..............	2,362		966		-		-		3,328		-		-		-		-
Loans held for securitisation .....	-		618		-		-		618		-		-		-		-
Structured notes ........................	-		17		-		-		17		7,208		-		-		7,208
Derivatives with monolines .......	-		-		-		799		799		-		-		-		-
Other derivatives ......................	-		-		-		3,463		3,463		-		-		3,170		3,170
Other portfolios ........................	1,765		2,868		219		-		4,852		464		-		-		464
	8,494		4,557		652		4,262		17,965		7,672		-		3,170		10,842
At 31 December 2012
Private equity including strategic investments ...........................	3,582		92		377		-		4,051		-		-		-		-
Asset-backed securities ..............	2,288		652		-		-		2,940		-		-		-		-
Loans held for securitisation .....	-		547		-		-		547		-		-		-		-
Structured notes ........................	-		23		-		-		23		6,987		-		-		6,987
Derivatives with monolines .......	-		-		-		630		630		-		-		-		-
Other derivatives ......................	-		-		-		2,429		2,429		-		-		3,005		3,005
Other portfolios ........................	2,641		3,064		36		-		5,741		483		-		-		483
	8,511		4,378		413		3,059		16,361		7,470		-		3,005		10,475

1  Designated at fair value through profit or loss.

The basis for determining the fair value of the financial instruments in the table above is explained on page 442 of the Annual Report and Accounts 2012.

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 2013 ..........................	8,511		4,378		413		3,059		7,470		-		3,005
Total gains/(losses) recognised in profit or loss ...........................	37		48		23		(25)		(844)		-		875
-  trading income excluding net interest income ......................	-		48		-		(25)		(844)		-		875
-  net income/(expense) from other financial instruments designated at fair value ...........	-		-		23		-		-		-		-
-  gains less losses from financial investments ...........................	23		-		-		-		-		-		-
-  loan impairment charges and other credit risk provisions ....	14		-		-		-		-		-		-
Total gains/(losses) recognised in other comprehensive income1 .....	60		(26)		-		(105)		(157)		-		(109)
-  available-for-sale investments: fair value gains/(losses) ...........	295		-		-		-		-		-		-
-  exchange differences ..............	(235)		(26)		-		(105)		(157)		-		(109)
Purchases ........................................	1,112		486		21		-		-		-		-
New issuances .................................	-		-		-		-		2,017		-		-
Sales ...............................................	(345)		(1,689)		(4)		-		(497)		-		-
Settlements .....................................	(266)		(177)		(4)		(283)		(559)		-		(1,114)
Transfers out ..................................	(1,009)		(80)		(30)		(43)		(565)		-		(49)
Transfers in ....................................	860		104		52		57		169		-		35
At 30 June 2013 ...........................	8,960		3,044		471		2,660		7,034		-		2,643
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 June 2013 ....	14		102		23		(17)		169		-		(452)
-  trading income excluding net interest income ......................	-		102		-		(17)		169		-		(452)
-  net income/(expense) from other financial instruments designated at fair value ............................	-		-		23		-		-		-		-
-  loan impairment charges and other credit risk provisions ....	14	�	-		-		-		-		-		-
At 1 January 2012 ..........................	9,121		4,780		716		4,449		7,827		567		3,129
Total gains/(losses) recognised in profit or loss ...........................	(146)		73		5		(225)		158		2		(36)
Total gains/(losses) recognised in other comprehensive income1 .....	177		23		1		32		33		-		26
Purchases ........................................	503		291		64		-		(202)		-		-
New issuances .................................	-		-		-		-		1,658		-		-
Sales ...............................................	(282)		(663)		(33)		-		-		-		-
Settlements .....................................	(163)		(95)		(1)		36		(1,011)		-		78
Transfers out ..................................	(1,542)		(47)		(150)		(73)		(889)		(569)		(69)
Transfers in ....................................	826		195		50		43		98		-		42
At 30 June 2012 .............................	8,494		4,557		652		4,262		7,672		-		3,170
Total gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 June 2012 ....	10		(137)		4		(29)		63		-		127

	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 2012 .......................	8,494		4,557		652		4,262		7,672		-		3,170
Total gains/(losses) recognised in profit or loss ..................	(268)		283		5		(749)		161		(2)		46
Total gains/(losses) recognised in other comprehensive income1 ..............................	295		55		(33)		60		110		-		58
Purchases ...............................	1,235		651		49		-		(166)		-		-
New issuances .........................	-		-		-		-		1,194		-		-
Sales .......................................	(558)		(745)		(36)		-		-		-		-
Settlements ............................	(204)		(522)		(24)		(50)		(593)		-		(60)
Transfers out .........................	(1,402)		(251)		(200)		(498)		(1,012)		2		(222)
Transfers in ...........................	919		350		-		34		104		-		13
At 31 December 2012 ............	8,511		4,378		413		3,059		7,470		-		3,005
Total gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 December 2012 .............	134		(237)		36		617		101		8		80

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

Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period.

Purchases of Level 3 available-for-sale assets reflect acquisition of certain less liquid emerging market government and corporate debt. Transfers out of Level 3 available-for-sale securities reflect increased confidence in the pricing of certain ABS assets. Sales of Level 3 trading assets reflect the unwind of certain legacy monoline and structured credit exposures. New issuances of trading liabilities reflect structured note issuances, predominantly equity-linked notes.

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 that 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 2013
Derivatives, trading assets and trading liabilities1 ................	395		(371)		-		-
Financial assets and liabilities designated at fair value .........	45		(45)		-		-
Financial investments: available for sale .............................	-		-		745		(777)
	440		(416)		745		(777)
At 30 June 2012
Derivatives, trading assets and trading liabilities1 ................	366		(335)		-		-
Financial assets and liabilities designated at fair value ..........	70		(70)		-		-
Financial investments: available for sale .............................	-		-		782		(784)
	436		(405)		782		(784)
At 31 December 2012
Derivatives, trading assets and trading liabilities1 ................	465		(384)		-		-
Financial assets and liabilities designated at fair value ..........	41		(41)		-		-
Financial investments: available for sale .............................	-		-		680		(710)
	506		(425)		680		(710)

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 increase in the effect of unfavourable changes in significant unobservable inputs in relation to available-for-sale assets during the period primarily reflects an increase in the Level 3 strategic investments held, following reclassification of a strategic investment from held-for-sale to available-for-sale.

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 2013
Private equity including strategic investments ....................	61		(61)		400		(400)
Asset-backed securities .......................................................	55		(29)		138		(123)
Loans held for securitisation ..............................................	3		(5)		-		-
Structured notes .................................................................	24		(17)		-		-
Derivatives with monolines ................................................	41		(31)		-		-
Other derivatives ...............................................................	219		(237)		-		-
Other portfolios .................................................................	37		(36)		207		(254)
	440		(416)		745		(777)
At 30 June 2012
Private equity including strategic investments ....................	69		(69)		448		(448)
Asset-backed securities .......................................................	57		(52)		192		(180)
Loans held for securitisation ..............................................	9		(9)		-		-
Structured notes .................................................................	5		(5)		-		-
Derivatives with monolines ................................................	71		(52)		-		-
Other derivatives ...............................................................	171		(162)		-		-
Other portfolios .................................................................	54		(56)		142		(156)
	436		(405)		782		(784)
At 31 December 2012
Private equity including strategic investments ....................	62		(62)		353		(353)
Asset-backed securities .......................................................	41		(27)		143		(139)
Loans held for securitisation ..............................................	3		(3)		-		-
Structured notes .................................................................	4		(5)		-		-
Derivatives with monolines ................................................	36		(20)		-		-
Other derivatives ...............................................................	320		(267)		-		-
Other portfolios .................................................................	40		(41)		184		(218)
	506		(425)		680		(710)

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, the 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 the most unfavourable change from varying the assumptions individually.

Quantitative information about significant unobservable inputs in Level 3 valuations

	Fair value						Key unobservable		Range of inputs
	Assets		Liabilities		Valuation technique		Inputs		Lower		Higher
	US$m		US$m
At 30 June 2013
Private equity including strategic investments ................	4,584		-		See notes below....		See notes below		n/a		n/a
Asset-backed securities ..	2,113		-
CLO/CDO1 .................	1,167		-		Model - Discounted cash flow		Prepayment rate .........................		0%		5%
					Market proxy .....		Bid quotes .........		-		101
Other ABSs ................	946		-
Loans held for securitisation	89		-
Structured notes.............	-		7,034
Equity-linked notes ....	-		5,137		Model - Option model ..................		Equity volatility .........................		7%		81%
					Model - Option model...................		Equity correlation .......		0.12		0.83
Fund-linked notes .......	-		503		Model - Option model ..................		Fund volatility ..		20%		23%
FX-linked notes ..........	-		829		Model - Option model ..................		FX volatility ....		2%		34%
Other .........................	-		565
Derivatives with monolines	407		-		Model - Discounted cash flow		Credit spread ....		3%		26%
Other derivatives ..........	2,253		2,643
Interest rate derivatives:
- securitisation swaps .	208		1,257		Model - Discounted cash flow		Prepayment rate .......................		2%		25%
- long-dated swaptions .................................	543		289		Model - Option model...................		IR volatility .....		4%		145%
- other .......................	636		336
FX derivatives:
- FX options...............	264		190		Model - Option model ..................		FX volatility ....		0.05%		24%
- other........................	40		20
Equity derivatives:
- long-dated single stock options ...........	245		230		Model - Option model ..................		Equity volatility .........................		7%		81%
- other .......................	50		165
Credit derivatives:
- other .......................	267		156
Other portfolios ............	5,689		-
Structured certificates .	1,501		-		Model - Discounted cash flow		Credit volatility		1%		4%
EM corporate debt .....	2,581		-		Market proxy .....		Credit spread ....		0.2%		7%
			-		Market proxy .....		Bid quotes .........		99		158
EM sovereign debt ......	824		-		Market proxy .....		Bid quotes .........		99		115
Other2 ........................	783		-
	15,135		9,677

1  Collateralised loan obligation/collateralised debt obligation.

2  Includes a range of smaller asset holdings, a majority of which are emerging market sovereign and corporate debt.

Key unobservable inputs to Level 3 financial instruments

The table above lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs as at 30 June 2013. A further description of the categories of key unobservable inputs is given below.

Private equity including strategic investments

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

Prepayment rates

Prepayment rates are a measure of the anticipated future speed at which a loan portfolio will be repaid in advance of the due date. Prepayment rates are an important input into modelled values of ABSs. A modelled price may be used where insufficient observable market prices exist to enable a market price to be determined directly. Prepayment rates are also an important input into the valuation of derivatives linked to securitisations. For example, so-called securitisation swaps have a notional value that is linked to the size of the outstanding loan portfolio in a securitisation, which may fall as prepayments occur. Prepayment rates vary according to the nature of the loan portfolio, and expectations of future market conditions. For example, prepayment rates will generally be anticipated to increase as interest rates rise. Prepayment rates may be estimated using a variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historic prepayment rates, macro-economic modelling.

Market proxy

Market proxy pricing may be used for an instrument for which specific market pricing is not available, but evidence is available in respect of instruments that have some characteristics in common. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence. For example, in the collateralised loan obligation market it may be possible to establish that A-rated securities exhibit prices in a range, and to isolate key factors that influence position within the range. Application of this to a specific A-rated security within HSBC's portfolio allows assignment of a price.

The range of prices used as inputs into a market proxy pricing methodology may therefore be wide. This range is not indicative of the uncertainty associated with the price derived for an individual security.

Volatility

Volatility is a measure of the anticipated future variability of a market price. Volatility tends to increase in stressed market conditions, and decrease in calmer market conditions. Volatility is an important input in the pricing of options. In general, the higher the volatility, the more expensive the option will be. This reflects both the higher probability of an increased return from the option, and the potentially higher costs that HSBC may incur in hedging the risks associated with the option. If option prices become more expensive, this will increase the value of HSBC's long option positions (i.e. the positions in which HSBC has purchased options), while HSBC's short option positions (i.e. the positions in which HSBC has sold options) will suffer losses.

Volatility varies by underlying reference market price, and by strike and maturity of the option. Volatility also varies over time. As a result, it is difficult to make general statements regarding volatility levels. For example, while it is generally the case that foreign exchange volatilities are lower than equity volatilities, there may be examples in particular currency pairs or for particular equities where this is not the case.

Certain volatilities, typically those of a longer-dated nature, are unobservable. The unobservable volatility is then estimated from observable data. For example, longer-dated volatilities may be extrapolated from shorter-dated volatilities.

The range of unobservable volatilities quoted in the table reflects the wide variation in volatility inputs by reference market price. For example, foreign exchange volatilities for a pegged currency may be very low, whereas for non-managed currencies the foreign exchange volatility may be higher. As a further example, volatilities for deep-in-the-money or deep-out-of-the-money equity options may be significantly higher than at-the-money options. For any single unobservable volatility, the uncertainty in the volatility determination is significantly less than the range quoted above.

Correlation

Correlation is a measure of the inter-relationship between two market prices. Correlation is a number between minus one and one. A positive correlation implies that the two market prices tend to move in the same direction, with a correlation of one implying that they always move in the same direction. A negative correlation implies that the two market prices tend to move in opposite directions, with a correlation of minus one implying that the two market prices always move in opposite directions.

Correlation is used to value more complex instruments where the payout is dependent upon more than one market price. For example, an equity basket option has a payout that is dependent upon the performance of a basket of single stocks, and the correlation between the price movements of those stocks will be an input to the valuation. This is referred to as equity-equity correlation. There are a wide range of instruments for which correlation is an input, and

consequently a wide range of both same-asset correlations (e.g. equity-equity correlation) and cross-asset correlations (e.g. foreign exchange rate-interest rate correlation) used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.

Correlation may be unobservable. Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices, proxy correlations and examination of historical price relationships.

The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market price pair. For any single unobservable correlation, the uncertainty in the correlation determination is likely to be less than the range quoted above.

Credit spread

Credit spread is the premium over a benchmark interest rate required by the market to accept a lower credit quality. In a discounted cash flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit spreads may be implied from market prices. Credit spreads may not be observable in more illiquid markets.

Inter-relationships between key unobservable inputs

Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react to macro-economic or other events. For example, improving economic conditions may lead to a 'risk on' market, in which prices of risky assets such as equities and high yield bonds will rise, while 'safe haven' assets such as gold and US Treasuries decline. Furthermore, the impact of changing market variables upon the HSBC portfolio will depend upon HSBC's net risk position in respect of each variable. For example, increasing high-yield bond prices will benefit long high-yield bond positions, but the value of any credit derivative protection held against those bonds will fall.

9     Fair values of financial instruments not 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 387 to 405 and page 56, respectively, of the Annual Report and Accounts 2012.

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

	At 30 June 2013				At 30 June 2012				At 31 December 2012
	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 ......................	185,122		185,098		182,191		182,266		152,546		152,823
Loans and advances to customers ...............	969,382		951,675		974,985		950,935		997,623		973,741
Financial investments:
- debt securities ..........................................	24,179		24,901		22,485		24,202		23,413		25,458
Liabilities
Deposits by banks ......................................	110,023		110,014		123,553		123,576		107,429		107,392
Customer accounts .....................................	1,316,182		1,316,405		1,278,489		1,278,801		1,340,014		1,340,521
Debt securities in issue ................................	109,389		109,963		125,543		125,664		119,461		120,779
Subordinated liabilities ................................	28,821		30,517		29,696		29,357		29,479		32,159

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

	At 30 June 2013				At 30 June 2012				At 31 December 2012
	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 and customer accounts held for sale1
Loans and advances to banks and customers ...................................................................	15,525		15,650		6,772		6,816		6,632		6,387
Customer accounts .....................................	17,280		17,339		9,668		9,433		2,990		2,990

1  Including financial instruments within disposal groups held for sale.

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		Liabilities
Cash and balances at central banks		Hong Kong currency notes in circulation
Items in the course of collection from other banks		Items in the course of transmission to other banks
Hong Kong Government certificates of indebtedness		Investment contracts with discretionary participation features within
Endorsements and acceptances		'Liabilities under insurance contracts'
Short-term receivables within 'Other assets'		Endorsements and acceptances
Accrued income		Short-term payables within 'Other liabilities'
		Accruals

Analysis of loans and advances to customers by geographical segment

	At 30 June 2013				At 30 June 2012				At 31 December 2012
	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 ...........................................................	433,436		424,932		445,445		436,921		463,440		453,382
Hong Kong ....................................................	189,625		187,881		165,204		163,139		173,613		171,926
Rest of Asia-Pacific .......................................	139,333		139,343		129,489		129,175		138,119		138,015
Middle East and North Africa ........................	27,934		27,816		27,896		27,889		28,086		27,954
North America ..............................................	134,494		126,881		153,991		141,094		140,756		128,637
Latin America ...............................................	44,560		44,822		52,960		52,717		53,609		53,827
	969,382		951,675		974,985		950,935		997,623		973,741

Valuation

The calculation of fair value incorporates HSBC's estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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.

The fair values of loans and advances to customers in the US are substantially lower than their carrying amount, reflecting the market conditions at the balance sheet date. The secondary market demand and estimated value for US loans and advances has been heavily influenced by the challenging economic conditions during the past number of years, including house price depreciation, elevated unemployment, changes in consumer behaviour, changes in discount rates and the lack of financing options available to support the purchase of loans and advances. For certain consumer loans, investors incorporate numerous assumptions in predicting cash flows, such as higher charge-off levels and/or slower voluntary prepayment speeds than HSBC, as the servicer of these loans, believe will ultimately be the case. The investor's valuation process reflects this difference in overall cost of capital assumptions as well as the potential volatility in the underlying cash flow assumptions, the combination of which may yield a significant pricing discount from HSBC's intrinsic value. The increase in the relative fair value of US mortgage loans during the first half of 2013 was largely due to improved conditions in the housing industry driven by increased property values and, to a lesser extent, lower required market yields and increased investor demand for these types of loans.

The most significant discount between the fair value of loans and advances to customers in Europe relative to their carrying amount arises in the UK mortgage and corporate lending portfolios, and largely reflects changes in market pricing. The UK discount reduced marginally during the first half of 2013.

The fair values of loans and advances to customers in Latin America are higher than their carrying amount, primarily driven by a decrease in market interest rates, in particular for the mortgage portfolios.

The basis for measuring the fair values of loans and advances to banks and customers, financial investments, deposits by banks, customer accounts, debt securities in issue and subordinated liabilities is explained on page 448 of the Annual Report and Accounts 2012.

10   Financial assets designated at fair value

	At           30 June                2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
Financial assets designated at fair value:
-  not subject to repledge or resale by counterparties .................................	34,950		32,298		33,562
-  which may be repledged or resold by counterparties ...............................	368		12		20
	35,318		32,310		33,582
Treasury and other eligible bills ....................................................................	99		91		54
Debt securities ..............................................................................................	12,392		14,238		12,551
Equity securities ...........................................................................................	22,770		17,775		20,868
Securities designated at fair value ..................................................................	35,261		32,104		33,473
Loans and advances to banks ........................................................................	25		127		55
Loans and advances to customers .................................................................	32		79		54
	35,318		32,310		33,582

Securities designated at fair value¹

	At           30 June                2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
US Treasury and US Government agencies2 ..................................................	35		32		37
UK Government ...........................................................................................	555		654		625
Hong Kong Government ..............................................................................	115		145		135
Other government ........................................................................................	4,612		5,148		4,508
Asset-backed securities3 ................................................................................	177		172		158
Corporate debt and other securities ...............................................................	6,997		8,178		7,142
Equity securities ...........................................................................................	22,770		17,775		20,868
	35,261		32,104		33,473

1  Included within these figures are debt securities issued by banks and other financial institutions of US$3,688m (30 June 2012: US$3,311m; 31 December 2012: US$3,509m), of which none (30 June 2012: none; 31 December 2012: US$5m) 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 2013
Listed on a recognised exchange1 .........................	-		2,791		15,924		18,715
Unlisted ...............................................................	99		9,601		6,846		16,546
	99		12,392		22,770		35,261
Fair value at 30 June 2012
Listed on a recognised exchange1 .........................	17		4,440		11,606		16,063
Unlisted ...............................................................	74		9,798		6,169		16,041
	91		14,238		17,775		32,104
Fair value at 31 December 2012
Listed on a recognised exchange1 .........................	-		3,007		14,063		17,070
Unlisted ...............................................................	54		9,544		6,805		16,403
	54		12,551		20,868		33,473

1  Included within listed securities are US$991m (30 June 2012: US$831m; 31 December 2012: US$931m) of investments listed in Hong Kong.

11   Derivatives

Fair values of derivatives by product contract type held by HSBC

	Assets						Liabilities
	Trading		Hedging		Total		Trading		Hedging		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Foreign exchange .........................	72,591		1,857		74,448		71,192		418		71,610
Interest rate .................................	484,207		1,720		485,927		476,829		4,925		481,754
Equities ........................................	18,415		-		18,415		21,858		-		21,858
Credit ...........................................	11,094		-		11,094		10,769		-		10,769
Commodity and other ..................	5,654		-		5,654		4,003		-		4,003
Gross total fair values ...................	591,961		3,577		595,538		584,651		5,343		589,994
Netting .........................................					(296,325)						(296,325)
					299,213						293,669
At 30 June 2012
Foreign exchange .........................	68,314		915		69,229		71,393		391		71,784
Interest rate .................................	561,439		2,465		563,904		551,245		6,511		557,756
Equities ........................................	17,550		-		17,550		20,629		-		20,629
Credit ...........................................	20,193		-		20,193		20,847		-		20,847
Commodity and other ..................	1,732		-		1,732		1,610		-		1,610
Gross total fair values ...................	669,228		3,380		672,608		665,724		6,902		672,626
Netting .........................................					(316,674)						(316,674)
					355,934						355,952
At 31 December 2012
Foreign exchange .........................	68,277		1,227		69,504		70,944		239		71,183
Interest rate .................................	628,162		2,417		630,579		618,808		6,491		625,299
Equities ........................................	15,413		-		15,413		19,889		-		19,889
Credit ...........................................	12,740		-		12,740		13,508		-		13,508
Commodity and other ..................	1,443		-		1,443		1,236		-		1,236
Gross total fair values ...................	726,035		3,644		729,679		724,385		6,730		731,115
Netting .........................................					(372,229)						(372,229)
					357,450						358,886

Derivative assets decreased during the first half of 2013, driven by a decrease in the fair value of interest rate derivatives as yield curves in major currencies steepened. This resulted in the decrease in gross fair values and thereby a commensurate decrease in the netting adjustment.

A description of HSBC's determination of the fair values of financial instruments, including derivatives, is provided on page 438 of the Annual Report and Accounts 2012.

Trading derivatives

The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. The 21% rise in the notional amounts of HSBC's derivative contracts during the first half of 2013 was primarily driven by an increase in trading volumes in the period.

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

	At           30 June                2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
Foreign exchange .........................................................................................	5,645,648		4,630,298		4,435,729
Interest rate .................................................................................................	25,785,120		19,427,340		21,355,749
Equities ........................................................................................................	566,048		471,380		495,668
Credit ...........................................................................................................	806,260		985,945		901,507
Commodity and other ..................................................................................	90,091		96,975		80,219
	32,893,167		25,611,938		27,268,872

Credit derivatives

The notional contract amount of credit derivatives of US$806bn (30 June 2012: US$986bn; 31 December 2012: US$901bn) consisted of protection bought of US$402bn (30 June 2012: US$481bn; 31 December 2012: US$446bn) and protection sold of US$404bn (30 June 2012: US$505bn; 31 December 2012: US$455bn).

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. The 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 265 of the Annual Report and Accounts 2012.

Derivatives valued using models with unobservable inputs

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

Unamortised balance of derivatives valued using models with significant unobservable inputs

	Half-year to
	30 June                2013		30 June                2012		31 December                2012
	US$m		US$m		US$m
Unamortised balance at beginning of period ..................................................	181		200		184
Deferral on new transactions ........................................................................	113		71		78
Recognised in the income statement during the period:
-  amortisation .........................................................................................	(55)		(61)		(51)
-  subsequent to unobservable inputs becoming observable .........................	(14)		-		(1)
-  maturity or termination, or offsetting derivative ..................................	(35)		(20)		(26)
-  risk hedged ............................................................................................	(1)		(7)		(4)
Exchange differences ....................................................................................	(9)		1		1
Unamortised balance at end of period1 ..........................................................	180		184		181

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

The fair value at initial recognition is the transaction price. The transaction price may be viewed as the combination of a model price and a margin. In subsequent periods, the model price reflects changes in market conditions. The unamortised balance reflects that component of the margin that has yet to be recognised in the income statement.

Hedge accounting derivatives

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

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

	At 30 June 2013				At 30 June 2012				At 31 December 2012
	Cash flow hedges		Fair value hedges		Cash flow hedges		Fair value hedges		Cash flow hedges		Fair value hedges
	US$m		US$m		US$m		US$m		US$m		US$m
Foreign exchange ........................................	20,472		110		15,219		102		16,716		112
Interest rate ................................................	181,574		70,433		210,362		69,605		182,688		75,505
	202,046		70,543		225,581		69,707		199,404		75,617

Fair value hedges

Fair value of derivatives designated as fair value hedges

	At 30 June 2013				At 30 June 2012				At 31 December 2012
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
	US$m		US$m		US$m		US$m		US$m		US$m
Foreign exchange ........................................	5		-		-		15		-		-
Interest rate ................................................	560		3,412		332		4,525		199		4,450
	565		3,412		332		4,540		199		4,450

Gains/(losses) arising from fair value hedges

	Half-year to
	30 June                2013		30 June                2012		31 December                2012
	US$m		US$m		US$m
Gains/(losses):
-  on hedging instruments .........................................................................	1,398		(706)		(192)
-  on the hedged items attributable to the hedged risk ...............................	(1,352)		674		197
	46		(32)		5

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 2013				At 30 June 2012				At 31 December 2012
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
	US$m		US$m		US$m		US$m		US$m		US$m
Foreign exchange ........................................	1,852		402		764		376		1,230		200
Interest rate ................................................	1,160		1,513		2,133		1,986		2,218		2,041
	3,012		1,915		2,897		2,362		3,448		2,241

The gains and losses on ineffective portions of derivatives designated as cash flow hedges are recognised immediately in 'Net trading income'. During the period to 30 June 2013, a gain of US$7m was recognised due to hedge ineffectiveness (first half of 2012: gain of US$3m; second half of 2012: gain of US$32m).

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 2013, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of nil (30 June 2012: US$151m; 31 December 2012: US$3m) and liabilities of US$30m (30 June 2012: US$7m; 31 December 2012: US$50m), and notional contract values of US$2,830m (30 June 2012: US$2,637m; 31 December 2012: US$2,654m).

Ineffectiveness recognised in 'Net trading income' during the period to 30 June 2013 was nil (both halves of 2012: nil).

12   Financial investments

	At           30 June               2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
Financial investments:
-. not subject to repledge or resale by counterparties ................................	376,572		369,879		399,613
-. which may be repledged or resold by counterparties ..............................	27,642		23,857		21,488
	404,214		393,736		421,101

Carrying amounts and fair values of financial investments

	At 30 June 2013				At 30 June 2012				At 31 December 2012
	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 ...................	79,005		79,005		71,552		71,552		87,550		87,550
-. available for sale ..................................	79,005		79,005		71,552		71,552		87,550		87,550
Debt securities .............................................	315,840		316,562		315,498		317,215		327,762		329,807
-. available for sale ..................................	291,661		291,661		293,013		293,013		304,349		304,349
-. held to maturity ...................................	24,179		24,901		22,485		24,202		23,413		25,458
Equity securities ..........................................	9,369		9,369		6,686		6,686		5,789		5,789
-. available for sale ..................................	9,369		9,369		6,686		6,686		5,789		5,789
	404,214		404,936		393,736		395,453		421,101		423,146

Financial investments at amortised cost and fair value

	Amortised                  cost1		Fair               value2
	US$m		US$m
At 30 June 2013
US Treasury ........................................................................................................................	45,812		46,229
US Government agencies3 ...................................................................................................	22,360		21,966
US Government sponsored entities3 ....................................................................................	5,131		5,470
UK Government .................................................................................................................	17,153		16,850
Hong Kong Government .....................................................................................................	45,929		45,934
Other government ..............................................................................................................	142,558		145,609
Asset-backed securities4 ......................................................................................................	26,835		24,616
Corporate debt and other securities .....................................................................................	87,127		88,893
Equities ...............................................................................................................................	8,289		9,369
	401,194		404,936
At 30 June 2012
US Treasury ........................................................................................................................	49,944		51,271
US Government agencies3 ...................................................................................................	22,264		23,283
US Government sponsored entities3 ....................................................................................	4,581		5,262
UK Government .................................................................................................................	19,860		20,335
Hong Kong Government .....................................................................................................	36,993		37,018
Other government ..............................................................................................................	133,375		135,540
Asset-backed securities4 ......................................................................................................	32,628		27,387
Corporate debt and other securities .....................................................................................	86,456		88,671
Equities ...............................................................................................................................	4,806		6,686
	390,907		395,453

	Amortised                  cost1		Fair                value2
	US$m		US$m
At 31 December 2012
US Treasury .......................................................................................................................	60,657		61,925
US Government agencies3 ...................................................................................................	22,579		23,500
US Government sponsored entities3 ....................................................................................	5,262		5,907
UK Government .................................................................................................................	17,018		17,940
Hong Kong Government ....................................................................................................	42,687		42,711
Other government ..............................................................................................................	146,507		149,179
Asset-backed securities4 ......................................................................................................	29,960		26,418
Corporate debt and other securities .....................................................................................	86,099		89,777
Equities ..............................................................................................................................	4,284		5,789
	415,053		423,146

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

2  Included within these figures are debt securities issued by banks and other financial institutions with a carrying amount of US$58,737m (30 June 2012: US$60,043m; 31 December 2012: US$59,908m), of which US$9,007m (30 June 2012: US$11,680m; 31 December 2012: US$6,916m) are guaranteed by various governments. The fair value of the debt securities issued by banks and other financial institutions at 30 June 2013 was US$59,035m (30 June 2012: US$60,583m; 31 December 2012: US$60,616m).

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

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

Financial investments listed on a recognised exchange and unlisted

	Treasury     and other eligible bills      available        for sale		Debt     securities      available         for sale		Debt     securities          held to      maturity		Equity     securities      available         for sale		Total
	US$m		US$m		US$m		US$m		US$m
Carrying amount at 30 June 2013
Listed on a recognised exchange1 .........................	1,759		117,941		5,518		569		125,787
Unlisted2 ..............................................................	77,246		173,720		18,661		8,800		278,427
	79,005		291,661		24,179		9,369		404,214
Carrying amount at 30 June 2012
Listed on a recognised exchange1 .........................	1,938		113,083		4,975		509		120,505
Unlisted2 ..............................................................	69,614		179,930		17,510		6,177		273,231
	71,552		293,013		22,485		6,686		393,736
Carrying amount at 31 December 2012
Listed on a recognised exchange1 .........................	3,284		113,399		5,599		536		122,818
Unlisted2 ..............................................................	84,266		190,950		17,814		5,253		298,283
	87,550		304,349		23,413		5,789		421,101

1  The fair value of listed held-to-maturity debt securities at 30 June 2013 was US$5,662m (30 June 2012: US$5,374m; 31 December 2012: US$6,123m). Included within listed investments were US$2,823m (30 June 2012: US$3,507m; 31 December 2012: US$3,512m) 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 amounts

	At           30 June                2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
Remaining contractual maturities of total debt securities:
1 year or less ............................................................................................	80,814		60,079		67,268
5 years or less but over 1 year ...................................................................	134,706		147,920		157,075
10 years or less but over 5 years ...............................................................	47,347		50,603		47,123
over 10 years ............................................................................................	52,973		56,896		56,296
	315,840		315,498		327,762

	At           30 June                2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
Remaining contractual maturities of debt securities available for sale:
1 year or less ............................................................................................	78,106		58,985		65,500
5 years or less but over 1 year ...................................................................	127,063		139,967		149,195
10 years or less but over 5 years ...............................................................	40,049		42,609		39,498
over 10 years ............................................................................................	46,443		51,452		50,156
	291,661		293,013		304,349
Remaining contractual maturities of debt securities held to maturity:
1 year or less ............................................................................................	2,708		1,094		1,768
5 years or less but over 1 year ...................................................................	7,643		7,953		7,880
10 years or less but over 5 years ...............................................................	7,298		7,994		7,625
over 10 years ............................................................................................	6,530		5,444		6,140
	24,179		22,485		23,413

13   Assets held for sale

	At           30 June                2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
Disposal groups ............................................................................................	18,921		11,695		5,797
Non-current assets held for sale ....................................................................	1,456		688		13,472
- property, plant and equipment ..................................................................	464		519		500
- investment in Ping An ..............................................................................	-		-		8,168
- loans and advances to customers ................................................................	849		-		3,893
- other .........................................................................................................	143		169		911
Total assets held for sale ..............................................................................	20,377		12,383		19,269

Disposal groups

The major classes of assets and associated liabilities of disposal groups held for sale were as follows:

	30 June 2013
	Panama		Monaco            Private         Banking		South       American      businesses		Other		Total
	US$m		US$m		US$m		US$m		US$m
Assets of disposal groups held for sale
Trading assets ..........................................	298		8		20		-		326
Loans and advances to banks ...................	522		269		778		148		1,717
Loans and advances to customers .............	5,612		4,406		2,494		447		12,959
Financial investments ..............................	529		895		334		134		1,892
Prepayments and accrued income ............	46		15		37		4		102
Goodwill and intangible assets ..................	293		332		63		-		688
Other assets of disposal groups .................	408		96		693		40		1,237
Total assets .............................................	7,708		6,021		4,419		773		18,921
Liabilities of disposal groups held for sale
Deposits by banks ....................................	800		5		151		12		968
Customer accounts ...................................	5,560		7,044		3,129		1,547		17,280
Debt securities in issue .............................	-		-		471		-		471
Liabilities under insurance contracts .........	40		-		-		26		66
Other liabilities of disposal groups ............	357		137		184		56		734
Total liabilities ........................................	6,757		7,186		3,935		1,641		19,519
Net unrealised losses recognised in 'other operating income' as a result of reclassification to held for sale .........	-		279		7		-		286
Expected date of completion ...................	Q4 2013				Q1 2014
Operating segment ...................................	Latin America		Europe		Latin America

Disposal groups

At 30 June 2013, the following businesses represented the majority of disposal groups held for sale:

·     HSBC Bank (Panama) S.A.;

·     Monaco private banking operations. Subsequent to the period-end a decision was made to retain this business (see Note 25); and

·     South American businesses, which include banking operations in Peru, Colombia, Paraguay and Uruguay.

The sale of the US life insurance business that was held for sale at 31 December 2012 was completed on 29 March 2013 with a loss on disposal of US$99m.

Investment in Ping An

In the second half of 2012, we entered into an agreement to dispose of our entire shareholding in Ping An, details of which are provided on page 472 of the Annual Report and Accounts 2012. In the first half of 2013, we completed the disposal of our remaining investment in Ping An realising a gain on derecognition of US$1,235m recorded in 'Gains less losses from financial investments'. This was partly offset by an adverse fair value movement of US$682m on the contingent forward sale contract in the period to the point of delivery of the remaining shares recorded in 'Net trading income', resulting in a net income statement gain before tax of US$553m.

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.

14   Trading liabilities

	At           30 June                2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
Deposits by banks .........................................................................................	80,418		65,894		61,686
Customer accounts .......................................................................................	159,637		149,556		150,705
Other debt securities in issue .........................................................................	30,212		30,808		31,198
Other liabilities - net short positions in securities .........................................	72,165		62,306		60,974
	342,432		308,564		304,563

At 30 June 2013, the cumulative amount of change in fair value attributable to changes in credit risk was a loss of US$25m (30 June 2012: gain of US$270m; 31 December 2012: loss of US$29m).

15   Financial liabilities designated at fair value

	At           30 June                2013		At             30 June                2012		At    31 December                2012
	US$m		US$m		US$m
Deposits by banks and customer accounts .....................................................	457		500		496
Liabilities to customers under investment contracts ......................................	12,341		11,736		12,456
Debt securities in issue ..................................................................................	53,026		53,459		53,209
Subordinated liabilities ..................................................................................	15,089		17,700		16,863
Preferred securities .......................................................................................	3,341		4,198		4,696
	84,254		87,593		87,720

The carrying amount at 30 June 2013 of financial liabilities designated at fair value was US$3,792m more than the contractual amount at maturity (30 June 2012: US$3,190m more; 31 December 2012: US$7,032m more). At 30 June 2013, the cumulative amount of the change in fair value attributable to changes in credit risk was a gain of US$117m (30 June 2012: gain of US$2,959m; 31 December 2012: loss of US$88m).

16   Provisions

	Restruc- turing costs		Contingent liabilities and contractual commitments		Legal proceedings and regulatory matters		Customer remediation		Other provisions		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 1 January 2013 ........................	251		301		1,667		2,387		646		5,252
Additional provisions/increase in provisions .............................	32		48		487		531		300		1,398
Provisions utilised ........................	(68)		(1)		(223)		(662)		(185)		(1,139)
Amounts reversed .........................	(27)		(37)		(220)		(58)		(31)		(373)
Unwinding of discounts .................	-		1		17		4		6		28
Exchange differences and other movements ...............................	6		(100)		(25)		(61)		(199)		(379)
At 30 June 2013 .........................	194		212		1,703		2,141		537		4,787
At 1 January 2012 ........................	169		206		1,473		1,067		409		3,324
Additional provisions/increase in provisions .............................	276		62		972		1,439		94		2,843
Provisions utilised ........................	(155)		(1)		(105)		(476)		(97)		(834)
Amounts reversed .........................	(50)		(34)		(47)		(1)		(29)		(161)
Unwinding of discounts .................	-		-		20		-		1		21
Exchange differences and other movements ...............................	36		154		(127)		(71)		74		66
At 30 June 2012 ...........................	276		387		2,186		1,958		452		5,259
At 1 July 2012 .............................	276		387		2,186		1,958		452		5,259
Additional provisions/increase in provisions .............................	158		11		1,807		1,034		282		3,292
Provisions utilised ........................	(165)		(1)		(2,405)		(546)		(56)		(3,173)
Amounts reversed .........................	(39)		(24)		(57)		(136)		(34)		(290)
Unwinding of discounts .................	-		-		22		1		4		27
Exchange differences and other movements ...............................	21		(72)		114		76		(2)		137
At 31 December 2012 ..................	251		301		1,667		2,387		646		5,252

Further details of legal proceedings and regulatory matters are set out in Note 24. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC. In December 2012, HSBC made payments totalling US$1,921m to US authorities in relation to investigations regarding inadequate compliance with anti-money laundering and sanctions laws. Further details of the agreements reached with the US authorities are set out on page 260.

Customer remediation refers to activities (root cause analysis, customer contact, case reviews, decision making and redress calculations) carried out by HSBC to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is initiated by HSBC in response to customer complaints and/or industry developments in sales practices.

Payment Protection Insurance

An increase in provisions of US$367m was recognised during the half-year ended 30 June 2013 in respect of the estimated liability for redress regarding the mis-selling of payment protection insurance ('PPI') policies in previous years. Cumulative provisions made since the Judicial Review ruling in 2011 amounted to US$2,764m of which US$1,804m had been paid. At 30 June 2013, the provision amounted to US$1,013m (30 June 2012: US$1,060m; 31 December 2012: US$1,321m).

The estimated liability for redress is calculated on the basis of the total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for single premium and regular premium policies. Future estimated redress levels are based on historically observed redress per policy.

A total of 5.4m PPI policies have been sold by HSBC since 2000, which generated estimated revenues of US$4.0bn at first half of 2013 average exchange rates. The gross written premiums on these polices was approximately US$4.9bn at 2013 average exchange rates. At 30 June 2013, the estimated total complaints expected to be received was 1.4m, representing 26% of total policies sold. It is estimated that contact will be made with regard to 1.9m policies, representing 35% of total policies sold. This estimate includes inbound complaints as well as HSBC's proactive contact exercise on certain policies ('outbound contact').

In determining the level of additional provision in the first half of 2013, management noted the higher levels of response to outbound mailings than had been previously assumed, now that the outbound contact exercise implemented is reasonably mature for some brands, as well as the increased cost of cases referred to the Financial Ombudsman Service. We continued to review remediation processes across all brands and sales channels and align these to the highest common standard and industry best practice.

The following table details the cumulative number of complaints received at 30 June 2013 and the number of claims expected in the future:

	Cumulative to           30 June               2013		Future         expected
Inbound complaints1 (000s of policies) ...................................................................................	936		164
Outbound contact (000s of policies) ........................................................................................	263		495
Response rate to outbound contact ..........................................................................................	45%		42%
Average uphold rate per claim2 ...............................................................................................	78%		82%
Average redress per claim (US$) ..............................................................................................	2,120		2,450

1  Excludes invalid claims where the complainant has not held a PPI policy.

2  Claims include inbound and responses to outbound contact.

The main assumptions involved in calculating the redress liability are the volume of inbound complaints, the projected period of inbound complaints, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint. The main assumptions are likely to evolve over time as root cause analysis continues, more experience is available regarding customer initiated complaint volumes received, and we handle responses to our ongoing outbound contact.

A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately US$170m. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately US$10m.

In addition to these factors and assumptions, the extent of the required redress will also depend on the facts and circumstances of each individual customer's case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress for this matter.

Interest rate derivatives

At 30 June 2013, a provision of US$537m (31 December 2012: US$598m) was held relating to the estimated liability for redress in respect of the possible mis-selling of interest rate derivatives in the UK. During the first half of 2013, we utilised US$26m of the provision.

Following an FSA review of the sale of interest rate derivatives, HSBC agreed to pay redress to customers where mis-selling of these products has occurred under the FSA's criteria. On 31 January 2013, the FSA announced the findings from their review of pilot cases completed by the banks. Following its review, the FSA clarified the eligibility criteria to ensure the programme is focused on those small businesses that were unlikely to understand the risks associated with those products.

There are around 3,200 customers within the scope of the programme, of which 2,700 are currently categorised as 'non-sophisticated' under the eligibility criteria. We are in the process of advising customers the outcome of the eligibility test and aim to complete this by September 2013.

Our provision is based on extrapolating the results of a relatively small population of cases reviewed to date. The extent to which HSBC is ultimately required to pay redress depends on the responses of contacted and other customers during the review period and analysis of the facts and circumstances of each individual case, including consequential loss claims received. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress related to this programme.

Brazilian labour and fiscal claims

Within 'legal proceedings and regulatory matters' above are labour and fiscal litigation provisions of US$484m (30 June 2012: US$496m; 31 December 2012: US$506m) which include provisions in respect of labour and overtime litigation claims brought by past employees against HSBC operations in Brazil following their departure from the bank. The main assumptions involved in estimating the liability are the expected number of departing employees, individual salary levels and the facts and circumstances of each individual case.

17   Maturity analysis of assets, liabilities and off-balance sheet commitments

The table on page 246 provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments by residual contractual maturity at the balance sheet date. Asset and liability balances are included in the maturity analysis as follows:

·     except for reverse repos, repos and debt securities in issue, trading assets and liabilities (including trading derivatives) are included in the 'Due less than one month' time bucket, and not by contractual maturity because trading balances are typically held for short periods of time;

·     financial assets and liabilities with no contractual maturity (such as equity securities) are included in the 'Due over five years' time bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the 'Due over five years' time bucket;

·     non-financial assets and liabilities with no contractual maturity (such as property, plant and equipment, goodwill and intangible assets, current and deferred tax assets and liabilities and retirement benefit liabilities) are included in the 'Due over five years' time bucket;

·     financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction; and

·     liabilities under insurance contracts are included in the 'Due over five years' time bucket. Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are classified based on the contractual notice period investors are entitled to give. Where there is no contractual notice period, undated contracts are included in the 'Due over five years' time bucket.

Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.

HSBC

Maturity analysis of assets and liabilities

	At 30 June 2013
	Due   less than     1 month		Due     between       1 and 3      months		Due     between       3 and 6      months		Due     between       6 and 9      months		Due     between   9 months and 1 year		Due     between       1 and 2          years		Due     between       2 and 5          years		Due            over       5 years		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Financial assets
Cash and balances at central banks .................................	148,285		-		-		-		-		-		-		-		148,285
Items in the course of collection from other banks ........	8,416		-		-		-		-		-		-		-		8,416
Hong Kong Government certificates of indebtedness .....	24,275		-		-		-		-		-		-		-		24,275
Trading assets ................................................................	411,519		16,079		1,900		530		2,570		3		-		-		432,601
Financial assets designated at fair value ..........................	237		441		238		865		443		2,947		2,743		27,404		35,318
Derivatives ....................................................................	295,575		34		103		66		75		1,516		1,291		553		299,213
Loans and advances to banks .........................................	123,437		32,014		10,726		2,296		2,566		7,157		2,533		4,393		185,122
Loans and advances to customers ...................................	235,447		76,903		53,644		32,572		35,399		76,454		168,581		290,382		969,382
Financial investments ....................................................	32,835		44,588		27,647		25,923		28,203		43,858		90,848		110,312		404,214
Assets held for sale ........................................................	5,964		2,062		912		543		733		1,080		3,342		3,424		18,060
Accrued income .............................................................	2,476		1,241		529		154		349		205		369		2,944		8,267
Other financial assets .....................................................	14,876		3,841		1,534		554		710		215		43		4,080		25,853
Total financial assets .................................................	1,303,342		177,203		97,233		63,503		71,048		133,435		269,750		443,492		2,559,006
Non-financial assets .......................................................	-		-		-		-		-		-		-		86,310		86,310
																	-
Total assets ..................................................................	1,303,342		177,203		97,233		63,503		71,048		133,435		269,750		529,802		2,645,316
Financial liabilities
Hong Kong currency notes in circulation .......................	24,275		-		-		-		-		-		-		-		24,275
Deposits by banks ..........................................................	91,882		7,845		3,188		1,252		1,273		1,975		1,782		826		110,023
Customer accounts .........................................................	1,168,025		68,720		33,698		10,827		19,595		9,060		5,780		477		1,316,182
Items in the course of transmission to other banks ........	9,364		-		-		-		-		-		-		-		9,364
Trading liabilities ...........................................................	249,076		20,397		6,127		6,101		5,545		10,544		21,582		23,060		342,432
Financial liabilities designated at fair value .....................	1,944		1,771		221		3,489		1,371		8,687		20,078		46,693		84,254
Derivatives ....................................................................	288,856		108		305		214		208		434		2,319		1,225		293,669
Debt securities in issue ...................................................	22,742		13,188		16,833		9,679		7,189		17,136		18,391		4,231		109,389
Liabilities of disposal groups held for sale .......................	13,759		1,635		1,042		649		678		664		631		13		19,071
Accruals .........................................................................	4,964		1,593		486		399		411		267		311		1,291		9,722
Subordinated liabilities ....................................................	-		10		-		26		1,161		556		4,682		22,386		28,821
Other financial liabilities ................................................	17,721		5,884		1,927		558		1,004		790		769		1,567		30,220
Total financial liabilities...........................................	1,892,608		121,151		63,827		33,194		38,435		50,113		76,325		101,769		2,377,422
Non-financial liabilities ..................................................	-		-		-		-		-		-		-		85,533		85,533
Total liabilities ...........................................................	1,892,608		121,151		63,827		33,194		38,435		50,113		76,325		187,302		2,462,955

	At 30 June 2012
	Due      less than      1 month		Due       between        1 and 3       months		Due       between        3 and 6       months		Due       between        6 and 9       months		Due       between    9 months   and 1 year		Due       between        1 and 2           years		Due       between        2 and 5           years		Due            over        5 years		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Financial assets
Cash and balances at central banks .................................	147,911		-		-		-		-		-		-		-		147,911
Items in the course of collection from other banks ........	11,075		-		-		-		-		-		-		-		11,075
Hong Kong Government certificates of indebtedness .....	21,283		-		-		-		-		-		-		-		21,283
Trading assets ................................................................	363,140		12,830		8,007		3,716		3,076		602		-		-		391,371
Financial assets designated at fair value ..........................	2,654		249		247		978		375		3,021		2,262		22,524		32,310
Derivatives ....................................................................	352,970		45		57		50		89		788		1,349		586		355,934
Loans and advances to banks .........................................	112,807		39,579		11,186		2,472		2,817		7,057		2,757		3,516		182,191
Loans and advances to customers ...................................	221,747		81,544		58,623		33,531		39,110		82,187		172,856		285,387		974,985
Financial investments ....................................................	24,277		47,124		27,424		17,368		15,181		61,128		86,121		115,113		393,736
Assets held for sale ........................................................	1,408		533		283		145		1,936		543		2,148		3,241		10,237
Accrued income .............................................................	2,748		2,054		471		229		529		202		337		1,943		8,513
Other financial assets .....................................................	14,625		4,921		1,776		822		479		317		75		2,685		25,700
Total financial assets .....................................................	1,276,645		188,879		108,074		59,311		63,592		155,845		267,905		434,995		2,555,246
Non-financial assets .......................................................	-		-		-		-		-		-		-		97,088		97,088
Total assets ...................................................................	1,276,645		188,879		108,074		59,311		63,592		155,845		267,905		532,083		2,652,334
Financial liabilities
Hong Kong currency notes in circulation .......................	21,283		-		-		-		-		-		-		-		21,283
Deposits by banks ..........................................................	94,623		9,838		4,222		928		1,554		1,896		9,326		1,166		123,553
Customer accounts .........................................................	1,105,201		72,032		36,332		12,317		21,248		10,853		19,552		954		1,278,489
Items in the course of transmission to other banks ........	11,321		-		-		-		-		-		-		-		11,321
Trading liabilities ...........................................................	254,138		10,498		6,306		3,399		3,903		4,856		11,032		14,432		308,564
Financial liabilities designated at fair value .....................	1,434		1,056		4,327		2,077		74		7,599		24,308		46,718		87,593
Derivatives ....................................................................	349,545		60		10		35		1,647		367		2,072		2,216		355,952
Debt securities in issue ...................................................	17,619		21,516		12,146		6,218		13,580		21,713		28,943		3,808		125,543
Liabilities of disposal groups held for sale .......................	9,837		363		302		150		179		257		71		1,301		12,460
Accruals .........................................................................	3,193		3,401		536		357		615		331		437		1,314		10,184
Subordinated liabilities ....................................................	300		-		369		43		-		1,225		2,858		24,901		29,696
Other financial liabilities ................................................	18,343		8,283		2,076		730		592		485		1,193		1,146		32,848
Total financial liabilities ................................................	1,886,837		127,047		66,626		26,254		43,392		49,582		99,792		97,956		2,397,486
Non-financial liabilities ..................................................	-		-		-		-		-		-		-		81,082		81,082
Total liabilities ..............................................................	1,886,837		127,047		66,626		26,254		43,392		49,582		99,792		179,038		2,478,568

Maturity analysis of assets and liabilities (continued)

	At 31 December 2012
	Due      less than      1 month		Due       between        1 and 3       months		Due       between        3 and 6       months		Due       between        6 and 9       months		Due       between    9 months   and 1 year		Due       between        1 and 2           years		Due       between        2 and 5           years		Due            over        5 years		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Financial assets
Cash and balances at central banks .................................	141,532		-		-		-		-		-		-		-		141,532
Items in the course of collection from other banks ........	7,303		-		-		-		-		-		-		-		7,303
Hong Kong Government certificates of indebtedness .....	22,743		-		-		-		-		-		-		-		22,743
Trading assets ................................................................	382,654		12,506		9,829		248		3,169		405		-		-		408,811
Financial assets designated at fair value ..........................	437		576		425		526		239		2,462		3,545		25,372		33,582
Derivatives ....................................................................	354,222		65		252		22		227		596		1,127		939		357,450
Loans and advances to banks .........................................	104,397		22,683		5,859		2,292		5,032		6,238		2,027		4,018		152,546
Loans and advances to customers ...................................	221,242		69,709		47,507		29,659		71,928		59,100		194,147		304,331		997,623
Financial investments ....................................................	28,085		51,339		33,996		14,072		26,478		61,443		93,127		112,561		421,101
Assets held for sale ........................................................	4,953		298		515		125		669		519		1,079		9,964		18,122
Accrued income .............................................................	2,776		2,325		739		493		542		164		217		1,284		8,540
Other financial assets .....................................................	13,383		3,486		1,759		337		745		332		372		3,170		23,584
Total financial assets .....................................................	1,283,727		162,987		100,881		47,774		109,029		131,259		295,641		461,639		2,592,937
Non-financial assets .......................................................	-		-		-		-		-		-		-		99,601		99,601
Total assets ...................................................................	1,283,727		162,987		100,881		47,774		109,029		131,259		295,641		561,240		2,692,538
Financial liabilities
Hong Kong currency notes in circulation .......................	22,742		-		-		-		-		-		-		-		22,742
Deposits by banks ..........................................................	79,100		12,029		1,957		437		2,155		1,695		9,440		616		107,429
Customer accounts .........................................................	1,193,736		67,638		34,010		11,939		16,019		7,034		8,985		653		1,340,014
Items in the course of transmission to other banks ........	7,131		7		-		-		-		-		-		-		7,138
Trading liabilities ...........................................................	240,212		29,003		4,707		1,820		5,197		3,867		9,736		10,021		304,563
Financial liabilities designated at fair value .....................	427		81		2,068		2,163		1,605		2,916		28,902		49,558		87,720
Derivatives ....................................................................	352,696		75		43		29		2,408		628		1,212		1,795		358,886
Debt securities in issue ...................................................	23,738		12,368		6,355		2,840		27,992		11,992		29,100		5,076		119,461
Liabilities of disposal groups held for sale .......................	2,475		242		433		254		188		166		45		-		3,803
Accruals .........................................................................	3,369		4,173		907		521		1,200		232		419		842		11,663
Subordinated liabilities ....................................................	32		44		-		10		-		1,481		1,516		26,396		29,479
Other financial liabilities ................................................	19,837		4,881		2,115		519		867		599		1,409		2,190		32,417
Total financial liabilities ................................................	1,945,495		130,541		52,595		20,532		57,631		30,610		90,764		97,147		2,425,315
Non-financial liabilities ..................................................	-		-		-		-		-		-		-		84,094		84,094
Total liabilities ..............................................................	1,945,495		130,541		52,595		20,532		57,631		30,610		90,764		181,241		2,509,409

Maturity analysis of off-balance sheet commitments received

	Due   less than     1 month		Due     between       1 and 3      months		Due     between       3 and 6      months		Due     between       6 and 9      months		Due     between   9 months and 1 year		Due     between       1 and 2          years		Due     between       2 and 5          years		Due            over       5 years		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Loan and other credit-related commitments
At 30 June 2013 ..............................................	455		4		8		6		8		29		93		230		833
At 30 June 2012 ................................................	4,455		13		14		4		8		25		74		93		4,686
At 31 December 2012 .......................................	2,455		3		8		5		8		25		75		98		2,677

Maturity analysis of off-balance sheet commitments given

	Due   less than     1 month		Due     between       1 and 3      months		Due     between       3 and 6      months		Due     between       6 and 9      months		Due     between   9 months and 1 year		Due     between       1 and 2          years		Due     between       2 and 5          years		Due            over       5 years		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Loan and other credit-related commitments
At 30 June 2013 ..............................................	411,243		44,863		19,905		13,918		25,458		10,980		42,604		18,975		587,946
At 30 June 2012 ................................................	362,873		42,448		20,723		12,218		28,904		19,304		49,602		28,041		564,113
At 31 December 2012 .......................................	408,815		43,394		8,389		5,191		37,751		11,598		45,910		18,421		579,469

18    Offsetting of financial assets and financial liabilities

Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements

	Gross amounts of recognised financial assets		Gross amounts offset in the balance sheet		Amounts presented in the balance sheet		Amounts not set off in the balance sheet
							Financial instruments1		Cash  collateral received		Net amount
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Derivatives (Note 11) .................................	595,538		(296,325)		299,213		218,509		35,568		45,136
Reverse repurchase, securities borrowing and similar agreements ...........	298,858		(88,777)		210,081		207,203		845		2,033
Classified as:
-  trading assets ....	169,143		(47,498)		121,645		120,858		617		170
-  loans and advances to banks at amortised cost ..........................	65,005		(7,693)		57,312		55,382		93		1,837
-  loans and advances to customers at amortised cost ..	64,710		(33,586)		31,124		30,963		135		26
Loans and advances excluding reverse repos
-  to customers .....	162,965		(83,946)		79,019		71,300		-		7,719
	1,057,361		(469,048)		588,313		497,012		36,413		54,888
At 30 June 2012
Derivatives (Note 11) .................................	672,608		(316,674)		355,934		301,903		38,539		15,492
Reverse repurchase, securities borrowing and similar agreements ...........	313,595		(101,002)		212,593		208,135		-		4,458
Classified as:
-  trading assets ....	180,751		(59,907)		120,844		120,504		-		340
-  loans and advances to banks at amortised cost ..........................	48,887		(6,458)		42,429		38,311		-		4,118
-  loans and advances to customers at amortised cost ..	83,957		(34,637)		49,320		49,320		-		-
Loans and advances excluding reverse repos
-  to customers .....	178,150		(108,174)		69,976		66,003		-		3,973
	1,164,353		(525,850)		638,503		576,041		38,539		23,923
At 31 December 2012
Derivatives (Note 11) .................................	729,679		(372,229)		357,450		271,944		38,915		46,591
Reverse repurchase, securities borrowing and similar agreements ...........	293,966		(89,089)		204,877		202,575		214		2,088
Classified as:
-  trading assets ....	195,112		(60,360)		134,752		134,328		-		424
-  loans and advances to banks at amortised cost ..........................	42,430		(6,969)		35,461		33,721		170		1,570
-  loans and advances to customers at amortised cost ..	56,424		(21,760)		34,664		34,526		44		94
Loans and advances excluding reverse repos
-  to customers .....	172,530		(89,838)		82,692		76,761		-		5,931
	1,196,175		(551,156)		645,019		551,280		39,129		54,610

Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements

	Gross amounts of recognised financial liabilities		Gross amounts offset in the balance sheet		Amounts presented in the balance sheet		Amounts not set off in the balance sheet
							Financial instruments1		Cash  collateral pledged		Net amount
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Derivatives (Note 11) ......	589,994		(296,325)		293,669		218,444		34,252		40,973
Repurchase, securities lending and similar agreements ...................	299,972		(88,777)		211,195		209,898		203		1,094
Classified as:
-  trading liabilities .......	192,101		(47,498)		144,603		144,395		-		208
-  deposits by banks ......	25,007		(7,693)		17,314		16,389		107		818
-  customer accounts ....	82,864		(33,586)		49,278		49,114		96		68
Customer accounts excluding repos ................	171,128		(83,946)		87,182		71,300		-		15,882
	1,061,094		(469,048)		592,046		499,642		34,455		57,949
At 30 June 2012
Derivatives (Note 11) ......	672,626		(316,674)		355,952		302,193		32,469		21,290
Repurchase, securities lending and similar agreements ...................	263,123		(101,002)		162,121		159,899		221		2,001
Classified as:
-  trading liabilities .......	178,548		(59,907)		118,641		118,606		-		35
-  deposits by banks ......	23,512		(6,458)		17,054		15,486		169		1,399
-  customer accounts ....	61,063		(34,637)		26,426		25,807		52		567
Customer accounts excluding repos ................	182,234		(108,174)		74,060		66,003		-		8,057
	1,117,983		(525,850)		592,133		528,095		32,690		31,348
At 31 December 2012
Derivatives (Note 11) ......	731,115		(372,229)		358,886		275,723		39,594		43,569
Repurchase, securities lending and similar agreements ...................	266,697		(89,089)		177,608		176,573		94		941
Classified as:
-  trading liabilities .......	197,401		(60,360)		137,041		136,173		-		868
-  deposits by banks ......	18,918		(6,969)		11,949		11,857		92		-
-  customer accounts ....	50,378		(21,760)		28,618		28,543		2		73
Customer accounts excluding repos ................	180,494		(89,838)		90,656		76,761		-		13,895
	1,178,306		(551,156)		627,150		529,057		39,688		58,405

1  Including non-cash collateral.

Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously ('the offset criteria').

Derivatives and reverse repurchase/repurchase agreements included in amounts not set off in the balance sheet relate to transactions where:

·     the counterparty has an offsetting exposure with HSBC and a master netting or similar arrangement is in place with a right of set off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and

·     cash and non-cash collateral received/pledged in respect of the transactions described above.

The Group offsets certain loans and advances to customers and customer accounts when the offset criteria are met and the amounts presented above represent this subset of the total amounts recognised in the balance sheet. Of this subset, the loans and advances to customers and customer accounts included in amounts not set off in the balance sheet primarily relate to transactions where the counterparty has an offsetting exposure with HSBC and an agreement is in place with the right of offset but the offset criteria are otherwise not satisfied.

19    Assets charged as security for liabilities and collateral accepted as security for assets

Financial assets pledged to secure liabilities

	Assets pledged at
	30 June		30 June		31 December
	2013		2012		2012
	US$m		US$m		US$m
Treasury bills and other eligible securities .....................................................	5,652		4,454		4,381
Loans and advances to banks ........................................................................	26,150		24,652		22,074
Loans and advances to customers .................................................................	83,657		86,419		81,333
Debt securities ..............................................................................................	210,629		195,290		198,671
Equity shares ................................................................................................	8,594		10,828		6,255
Other ...........................................................................................................	1,747		1,025		1,090
	336,429		322,668		313,804

The table above shows assets over which a legal charge has been granted to secure liabilities. The amount of such assets may be greater than the book value of assets utilised as collateral for funding purposes or to cover liabilities. This is the case for securitisations and covered bonds where the amount of liabilities issued, plus any mandatory over-collateralisation, is less than the book value of financial assets available for funding or collateral purposes in the relevant pool of assets. This is also the case where financial assets are placed with a custodian or settlement agent, which has a floating charge over all the financial assets placed to secure any liabilities under settlement accounts.

These transactions are conducted under terms that are usual and customary to collateralised transactions, including, where relevant, standard securities lending and repurchase agreements.

Collateral accepted as security for assets

The fair value of assets accepted as collateral in relation to reverse repo and stock borrowing that HSBC is permitted to sell or repledge in the absence of default is US$293,935m (30 June 2012: US$327,018m; 31 December 2012: US$295,709m). The fair value of any such collateral that has been sold or repledged was US$184,604m (30 June 2012: US$196,259m; 31 December 2012: US$202,662m). HSBC is obliged to return equivalent securities.

These transactions are conducted under terms that are usual and customary to standard securities borrowing and reverse repurchase agreements.

 

END

 

 

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