Interim Report - 24 of 28

RNS Number : 2108P

HSBC Holdings PLC

15 August 2014

Footnotes to Financial Statements

1 The tables: 'Maximum exposure to credit risk' (page 112), 'Gross loans and advances to customers by industry sector and by geographical region' (page 138), 'Movement in impairment allowances on loans and advances to customers and banks' (page 134), and the Composition of regulatory capital within 'Capital structure' (page 184) excluding those figures that are part of the estimated CRD IV transition position at 31 December 2013, also form an integral part of these financial statements.

2 From1 January 2014, non-trading reverse repos and repos are presented as separate lines in the balance sheet. Previously, non-trading reverse repos were included within 'Loans and advances to banks' and 'Loans and advances to customers' and non-trading repos were included within 'Deposits by banks' and 'Customer accounts'. Comparative data have been re-presented accordingly. Non-trading reverse repos and repos have been presented as separate lines in the balance sheet to align disclosure with market practice and provide more meaningful information in relation to loans and advances. The extent to which reverse repos and repos represent loans to/from customers and banks is set out in Note 11 on the Financial Statements.

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 2013: nil; 31 December 2013: 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 88,240,542 (US$797m) 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 2013: 85,561,934 (US$930m); 31 December 2013: 85,997,271 (US$915m)).

7 Amounts transferred to the income statement in respect of cash flow hedges for the half-year to 30 June 2014 include US$108m gain (30 June 2013: US$116m gain; 31 December 2013: US$107m gain) taken to 'Net interest income' and US$158m loss (30 June 2013: US$140m gain; 31 December 2013: US$531m 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 ...................................	214
2	Accounting policies ....................................	217
3	Dividends ...................................................	217
4	Earnings per share ......................................	218
5	Tax ............................................................	219
6	Trading assets ............................................	222
7	Fair values of financial instruments carried at fair value ............................................	223
8	Fair values of financial instruments not carried at fair value .................................	233
9	Financial assets designated at fair value ......	235
10	Derivatives ................................................	236
11	Non-trading reverse repurchase and repurchase agreements ............................	239
12	Financial investments ................................	239
13	Assets held for sale .....................................	241
14	Trading liabilities .......................................	242

Note
15	Financial liabilities designated at fair value .	242
16	Provisions ..................................................	243
17	Maturity analysis of assets, liabilities and off-balance sheet commitments ..............	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	Interests in associates and joint ventures ....	254
22	Contingent liabilities, contractual commitments and guarantees ..................	257
23	Segmental analysis .....................................	257
24	Goodwill impairment ..................................	259
25	Legal proceedings and regulatory matters ...	259
26	Events after the balance sheet date ............	268
27	Interim Report 2014 and statutory accounts ...............................................................	268

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 2013 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 2013, there were no unendorsed standards effective for the year ended 31 December 2013 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 2013 were prepared in accordance with IFRSs as issued by the IASB.

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.

At 30 June 2014, there were no unendorsed standards effective for the period ended 30 June 2014 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 2014

On 1 January 2014 HSBC adopted 'Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)', 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 were applied retrospectively and did not have a material effect on HSBC's financial statements.

There were no new standards adopted during the period ended 30 June 2014.

During the period ended 30 June 2014, HSBC also adopted interpretations and amendments to standards which had an insignificant effect on these interim consolidated financial statements.

(b) Presentation of information

In accordance with HSBC's policy to provide meaningful disclosures that help investors and other stakeholders understand the Group's performance, financial position and changes thereto, the information provided in the Notes on the Financial Statements and the Interim Management Report goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements and listing rules. In particular, HSBC follows 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.

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, provisions for liabilities and interests in associates. These critical accounting policies are described on pages 72 to 76 of the Annual Report and Accounts 2013.

(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 430 of the Annual Report and Accounts 2013.

(e) Future accounting developments

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

Standards and amendments issued by the IASB but not endorsed by the EU

In May 2014, the IASB issued IFRS 15 'Revenue from Contracts with Customers'. The standard is effective for annual periods beginning on or after 1 January 2017 with early adoption permitted. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for obligations as they are satisfied. The standard should be applied retrospectively, with certain practical expedients available. HSBC is currently assessing the impact of this standard but it is not practicable to quantify the effect as at the date of the publication of these interim financial statements.

In July 2014, the IASB issued IFRS 9 'Financial Instruments', which is the comprehensive standard to replace IAS 39 'Financial Instruments: Recognition and Measurement', and includes requirements for classification and measurement of financial assets and liabilities, impairment of financial assets and hedge accounting.

Classification and measurement

The classification and measurement of financial assets will depend on the entity's business model for their management and their contractual cash flow characteristics and result in financial assets being at amortised cost, fair value through OCI ('FVOCI') or fair value through profit or loss. In many instances, the classification and measurement outcomes will be similar to IAS 39, although differences will arise, for example, since IFRS 9 does not apply embedded derivative accounting to financial assets and equity securities will be measured at fair value through profit or loss or, in limited circumstances, at fair value through OCI. The combined effect of the application of the business model and the contractual cash flow characteristics tests may result in some differences in population of financial assets measured at amortised cost or fair value compared with IAS 39. The classification of financial liabilities is essentially unchanged, except that, for certain liabilities measured at fair value, gains or losses relating to changes in the entity's own credit risk are to be included in OCI.

Impairment

The impairment requirements apply to financial assets measured at amortised cost and FVOCI, and lease receivables and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of commitments and guarantees) is required for expected credit losses ('ECL') resulting from default events that are possible within the next 12 months ('12 month ECL'). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL').

The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period by considering the probability of default occurring over the remaining life of the financial instrument, rather than by considering an increase in ECL.

The assessment of credit risk, as well as the estimation of ECL, are required to be unbiased, probability-weighted and should incorporate all available information which is relevant to the assessment, including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment is intended to be more forward-looking than under IAS 39 and the resulting impairment charge will tend to be more volatile. It will also tend to result in an increase in the total level of impairment allowances, since all financial assets will be assessed for at least 12-month ECL and the population of financial assets to which lifetime ECL applies is likely to be larger than the population for which there is objective evidence of impairment in accordance with IAS 39.

Hedge accounting

The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link between it and risk management strategy and permitting the former to be applied to a greater variety of hedging instruments and risks. The standard does not explicitly address macro hedge accounting strategies, which are being considered in a separate project. To remove the risk of any conflict between existing macro hedge accounting practice and the new general hedge accounting requirements, IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting.

The classification and measurement and impairment requirements are applied retrospectively by adjusting the opening balance sheet at 1 January 2018, with no requirement to restate comparative periods. Hedge accounting is applied prospectively from that date.

The mandatory application date for the standard as a whole is 1 January 2018, but it is possible to apply the revised presentation for certain liabilities measured at fair value from an earlier date. HSBC intends to revise the presentation of fair value gains and losses relating to the entity's own credit risk on certain liabilities as soon as permitted by EU law. If this presentation was applied at 30 June 2014, the effect would be to increase profit before tax by US$215m and reduce other comprehensive income by the same amount with no effect on net assets.

HSBC is currently assessing the impact that the rest of IFRS 9 will have on the financial statements through a group-wide project which has been in place since 2012, but due to the complexity of the classification and measurement, impairment, and hedge accounting requirements and their inter-relationships, it is not possible at this stage to quantify the potential effect.

(f) Changes in composition of the Group

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

(g) Changes in presentation

The interim consolidated financial statements report operating segment information based on geographical areas. Previously, Hong Kong and Rest of Asia-Pacific were reported separately but, as explained in Note 23, from the first half of 2014 they are presented together as the Asia segment.

From 1 January 2014, HSBC has chosen to present non-trading reverse repos and repos separately on the face of the balance sheet. These items are classified for accounting purposes as loans and receivables or financial liabilities measured at amortised cost. Previously, they were presented on an aggregate basis together with other loans or deposits measured at amortised cost under the following headings in the consolidated balance sheet: 'Loans and advances to banks', 'Loans and advances to customers', 'Deposits by banks' and 'Customer accounts'.

The separate presentation aligns disclosure of reverse repos and repos with market practice and provides more meaningful information in relation to loans and advances. Further explanation is provided in Note 11.

Comparative periods have been presented accordingly.

(h) Going concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.

2 Accounting policies

The accounting policies adopted by HSBC for these interim consolidated financial statements are consistent with those described on pages 432 to 450 of the Annual Report and Accounts 2013. The methods of computation applied by HSBC for these interim consolidated financial statements are consistent with those applied for the Annual Report and Accounts 2013.

3 Dividends

On 4 August 2014, the Directors declared a second interim dividend in respect of the financial year ending 31 December 2014 of US$0.10 per ordinary share, a distribution of approximately US$1,910m which will be payable on 9 October 2014. No liability is recognised in the financial statements in respect of this dividend.

Dividends to shareholders of the parent company

	Half-year to
	30 June 2014			30 June 2013			31 December 2013
	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 ...................................	0.19	3,582	1,827	0.18	3,339	540	-	-	-
In respect of current year:
- first interim dividend ...	0.10	1,906	284	0.10	1,861	167	-	-	-
- second interim dividend .......................................	-	-	-	-	-	-	0.10	1,864	952
- third interim dividend ..	-	-	-	-	-	-	0.10	1,873	864

	0.29	5,488	2,111	0.28	5,200	707	0.20	3,737	1,816

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

Dividends to shareholders of the parent company (continued)

	Half-year to
	30 June 2014			30 June 2013			31 December 2013
	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

Quarterly coupons on capital securities classified as equity¹
January coupon ................	0.508	44		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	241		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 15 July 2014, HSBC paid a further coupon on the capital securities of US$0.508 per security, representing a total distribution of US$45m. No liability is recognised in the financial statements in respect of this coupon payment.

4 Earnings per share

Basic earnings per ordinary share are 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 are 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
	2014	2013	2013
	US$m	US$m	US$m

Profit attributable to shareholders of the parent company ............................	9,746	10,284	5,920
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 ..............	9,460	9,998	5,633

Basic and diluted earnings per share

	Half-year to 30 June 2014			Half-year to 30 June 2013			Half-year to 31 December 2013
	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 ............................	9,460	18,847	0.50	9,998	18,467	0.54	5,633	18,530	0.30
Effect of dilutive potential ordinary shares ........................		101			156			124

Diluted² .........................	9,460	18,948	0.50	9,998	18,623	0.54	5,633	18,654	0.30

1 Weighted average number of ordinary shares outstanding.

2 Weighted average number of ordinary shares outstanding assuming dilution.

5 Tax

	Half-year to
	30 June	30 June	31 December
	2014	2013	2013
	US$m	US$m	US$m
Current tax
UK corporation tax charge .......................................................................	165	(107)	99
Overseas tax¹ ............................................................................................	1,803	1,868	2,081

	1,968	1,761	2,180
Deferred tax
Origination and reversal of temporary differences ....................................	54	964	(140)

Tax expense .................................................................................................	2,022	2,725	2,040

Effective tax rate .........................................................................................	16.4%	19.4%	24.0%

1 Overseas tax included Hong Kong profits tax of US$589m (first half of 2013: US$607m; second half of 2013: US$526m). Subsidiaries in Hong Kong provided for Hong Kong profits tax at the rate of 16.5% (2013: 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 operated.

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 2014		30 June 2013		31 December 2013
	US$m	%	US$m	%	US$m	%

Profit before tax .....................................................	12,340		14,071		8,494
						-
Tax at 21.5% (2013: 23.25%) ................................	2,653	21.5	3,272	23.25	1,974	23.25
Effect of differently taxed overseas profits .............	28	0.2	(181)	(1.3)	4	-
Adjustments in respect of prior period liabilities .....	(242)	(2.0)	7	-	(124)	(1.4)
Deferred tax temporary differences not recognised/ (previously not recognised) .................................	(87)	(0.7)	(9)	(0.1)	341	4.0
Effect of profit in associates and joint ventures ......	(278)	(2.2)	(281)	(2.0)	(262)	(3.1)
Tax effect of disposal of Ping An .........................	-	-	(111)	(0.8)	-	-
Tax effect of reclassification of Industrial Bank ....	-	-	(317)	(2.3)	-	-
Non-taxable income and gains ...............................	(317)	(2.6)	(377)	(2.7)	(494)	(5.8)
Permanent disallowables .........................................	129	1.0	308	2.2	339	4.0
Change in tax rates .................................................	(4)	-	(15)	(0.1)	108	1.2
Local taxes and overseas withholding tax ................	159	1.3	266	1.9	285	3.4
Other items ............................................................	(19)	(0.1)	163	1.3	(131)	(1.5)

Total tax charged to the income statement ............	2,022	16.4	2,725	19.4	2,040	24.0

The effective tax rate for the first half of 2014 was 16.4% compared with 19.4% for the first half of 2013. The effective tax rate for the first half of 2014 benefited from a current tax credit in relation to prior years. The effective tax rate in 2013 was higher because of a write-down of deferred tax assets.

The main rate of corporation tax in the UK reduced from 23% to 21% on 1 April 2014 and will be further reduced to 20% on 1 April 2015. The reduction in the corporate tax rate to 20% was enacted through the 2013 Finance Act on 17 July 2013. It is not expected that the future rate reduction will have a significant effect on the net UK deferred tax asset at 30 June 2014 of US$0.3bn.

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 eventually paid may differ materially from the amounts provided, depending on the ultimate resolution of such matters.

Deferred taxation

Net deferred tax assets totalled US$6.1bn at 30 June 2014 (30 June 2013: US$6.3bn; 31 December 2013: US$6.5bn). The main items to note were as follows:

The net deferred tax asset relating to HSBC's operations in the US was US$4.1bn (30 June 2013: US$4.3bn; 31 December 2013: US$4.4bn). The deferred tax assets included in this total reflected the carry forward of tax losses and tax credits of US$1.1bn (30 June 2013: US$0.2bn; 31 December 2013: US$0.7bn), deductible temporary differences in respect of loan impairment allowances of US$1.0bn (30 June 2013: US$1.5bn; 31 December 2013: US$1.2bn) and other temporary differences of US$2.0bn (30 June 2013: US$2.6bn; 31 December 2013: US$2.5bn).

Deductions for loan impairments for US tax purposes generally occur when the impaired loan is charged off or, if earlier, when the impaired loan is sold. The tax deduction is 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 retain 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 the future housing market 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 2017. The current level of the deferred tax asset in respect of loan impairment allowances and other deductible temporary differences is also projected to reduce over the next four years.

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 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 expected that projected future profits from US operations will be relied on in the evaluation of the recognition of the deferred tax asset in future periods as the sustainability of the improving financial performance is demonstrated.

Brazil

The net deferred tax asset relating to HSBC's operations in Brazil was US$1.2bn (30 June 2013: US$1.1bn; 31 December 2013: US$1.0bn). The deferred tax assets included in this total reflected the carry forward of tax losses and tax credits of US$0.2bn (30 June 2013: nil; 31 December 2013: US$0.1bn), deductible temporary differences in respect of loan impairment allowances of US$0.8bn (30 June 2013: US$0.9bn; 31 December 2013: US$0.7bn) and other temporary differences of US$0.2bn (30 June 2013: US$0.2bn; 31 December 2013: US$0.2bn).

Deductions for loan impairments for Brazilian tax purposes generally occur when the impaired loan is charged off, often in a 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.

Management projections of profits from the Brazilian operations currently indicate that the tax losses and other temporary differences will be fully recovered within the next 10 years. Loan impairment deductions are recognised for tax purposes typically within 24 months of accounting recognition.

In light of the recent occurrence of tax losses, the recognition of deferred tax assets in Brazil takes into consideration both the reliance placed on management's projection of income and on the use of general strategies such as corporate reorganisations and other initiatives to improve the profitability of our Brazilian operations from a tax perspective.

Mexico

The net deferred tax asset relating to HSBC's operations in Mexico was US$0.5bn at 30 June 2014 (30 June 2013: US$0.4bn; 31 December 2013: US$0.5bn).

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 impairment charges was historically capped under Mexican legislation at 2.5% of the average qualifying loan portfolio. The balance is carried forward to future years without expiry.

Following the clarification of tax law by the Mexican fiscal authority during 2013, management's analysis of the recognition of these deferred tax assets 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 realise these assets over the next five years.

In September 2013, the Mexican Government proposed a number of tax reforms that were approved by the Chamber of Senate in October 2013 and published in the Official Gazette in December 2013. The tax reforms include a new basis of tax deduction for loan impairment charges that will allow banks to recognise tax deductions as and when loans are written off the balance sheet. The reforms also brought in transitional rules to allow banks to continue to claim any unclaimed deductions with regard to the 2.5% pool as at 31 December 2013. On 4 July 2014, the Mexican Government issued rule I.3.22.5 of the Miscellaneous Tax Resolution that clarified the treatment of the transitional rules but had no impact on the deferred tax assets held in our operations in Mexico.

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

The net deferred tax asset relating to HSBC's operations in the UK was US$0.3bn (30 June 2013: US$0.5bn; 31 December 2013: US$0.4bn). The deferred tax assets included in this total related primarily to other temporary differences.

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 net deferred tax asset within the next 10 years.

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

6 Trading assets

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m
Trading assets:
- not subject to repledge or resale by counterparties ................................	248,929	310,395	201,492
- which may be repledged or resold by counterparties ..............................	98,177	122,206	101,700

	347,106	432,601	303,192

Treasury and other eligible bills ....................................................................	17,678	19,188	21,584
Debt securities ..............................................................................................	155,522	147,568	141,644
Equity securities ...........................................................................................	73,855	51,477	63,891

Trading securities valued at fair value ...........................................................	247,055	218,233	227,119
Loans and advances to banks¹ .......................................................................	41,048	96,748	27,885
Loans and advances to customers¹ ................................................................	59,003	117,620	48,188

	347,106	432,601	303,192

Trading securities valued at fair value²

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m

US Treasury and US Government agencies³ ...................................................	27,019	30,202	23,450
UK Government ...........................................................................................	9,364	11,171	11,591
Hong Kong Government ..............................................................................	5,189	7,151	5,909
Other government ........................................................................................	90,261	82,782	86,714
Asset-backed securities⁴ ................................................................................	2,903	2,725	2,736
Corporate debt and other securities ...............................................................	38,464	32,725	32,828
Equity securities ...........................................................................................	73,855	51,477	63,891

	247,055	218,233	227,119

1 In the second half of 2013 GB&M changed the way it manages repo and reverse repo activities in the Credit and Rates businesses as set out on page 154.

2 Included within these figures are debt securities issued by banks and other financial institutions of US$26,390m (30 June 2013: US$21,653m; 31 December 2013: US$22,989m), of which US$4,036m (30 June 2013: US$3,262m; 31 December 2013: US$3,973m) are guaranteed by various governments.

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

4 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 2014
Listed on a recognised exchange¹ ..........................	1,394	99,414	73,163	173,971
Unlisted² ...............................................................	16,284	56,108	692	73,084

	17,678	155,522	73,855	247,055
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 31 December 2013
Listed on a recognised exchange¹ ..........................	194	85,821	62,724	148,739
Unlisted² ...............................................................	21,390	55,823	1,167	78,380

	21,584	141,644	63,891	227,119

1 Included within listed securities are US$4,479m (30 June 2013: US$3,508m; 31 December 2013: US$3,836m) 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.

7 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 432 to 450 and page 74, respectively, of the Annual Report and Accounts 2013. 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.

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 2014
Assets
Trading assets .................................................................	220,194	121,083	5,829	347,106
Financial assets designated at fair value ...........................	26,359	4,752	712	31,823
Derivatives .....................................................................	2,484	264,877	2,478	269,839
Financial investments: available for sale .........................	259,077	132,934	6,443	398,454

Liabilities
Trading liabilities ............................................................	102,025	118,430	7,680	228,135
Financial liabilities designated at fair value ......................	4,115	78,853	-	82,968
Derivatives .....................................................................	2,857	258,776	1,861	263,494

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

At 31 December 2013
Assets
Trading assets .................................................................	182,721	115,124	5,347	303,192
Financial assets designated at fair value ...........................	30,173	7,649	608	38,430
Derivatives .....................................................................	2,539	277,224	2,502	282,265
Financial investments: available for sale .........................	262,836	130,760	7,245	400,841

Liabilities
Trading liabilities ............................................................	88,935	110,576	7,514	207,025
Financial liabilities designated at fair value ......................	10,482	78,602	-	89,084
Derivatives .....................................................................	4,508	267,441	2,335	274,284

The increase in Level 1 trading assets and liabilities reflects an increase in equity securities. There were no other significant movements during the first half of 2014.

There were no material transfers between Level 1 and Level 2 during 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 483 of the Annual Report and Accounts 2013.

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 484 of the Annual Report and Accounts 2013.

For interest rate derivatives with collateralised counterparties and in significant currencies, and for certain other collateralised derivatives, 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 GB&M.

Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.

Global Banking and Markets fair value adjustments

	At	At	At
	30 June	30 June	31 December
	2014	2013	2013
	US$m	US$m	US$m
Type of adjustment
Risk-related ..................................................................................................	1,419	1,392	1,565
Bid-offer ...................................................................................................	558	639	561
Uncertainty ..............................................................................................	363	126	343
Credit valuation adjustment ......................................................................	968	1,552	1,274
Debit valuation adjustment .......................................................................	(474)	(929)	(616)
Other ........................................................................................................	4	4	3

Model-related ...............................................................................................	202	147	202
Model limitation .......................................................................................	198	142	199
Other ........................................................................................................	4	5	3

Inception profit (Day 1 P&L reserves) (Note 10) ........................................	135	180	167

	1,756	1,719	1,934

Fair value adjustments declined by US$178m during the period. The most significant movement was a decrease of US$306m in respect of the credit valuation adjustment, as a result of the narrowing of counterparty and market credit default swap spreads. This was partially offset by a decrease of US$142m in debit valuation adjustment, as a result of the narrowing of HSBC credit default swap spreads.

Detailed descriptions of risk-related and model-related adjustments are provided on pages 485 and 486 of the Annual Report and Accounts 2013.

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.

HSBC calculates the CVA by applying the probability of default ('PD') of the counterparty, conditional on the non‑default of HSBC, to HSBC's 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. HSBC reviews and refines the CVA and DVA methodologies on an ongoing basis.

Valuation of uncollateralised derivatives

HSBC values uncollateralised derivatives by discounting expected future cash flows at a benchmark interest rate, typically Libor or its equivalent. This approach has historically been adopted across the industry, and has therefore been an appropriate basis for fair value. HSBC and other industry participants are currently considering whether it appropriately reflects the manner in which the derivatives are funded, which may occur at rates other than interbank offer rates. No consensus has yet emerged on how such funding should be reflected in the fair value measurement for uncollateralised derivatives. In the future, and possibly in the second half of 2014, HSBC may adopt a 'funding fair value adjustment' to reflect funding of uncollateralised derivatives at rates other than interbank offer rates.

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 2014
Private equity including strategic investments ...........................	3,562	169		455	-	4,186	-		-	-	-
Asset-backed securities ..............	2,450	641		-	-	3,091	-		-	-	-
Loans held for securitisation .....	-	56		-	-	56	-		-	-	-
Structured notes ........................	-	2		-	-	2	7,680		-	-	7,680
Derivatives with monolines .......	-	-		-	270	270	-		-	2	2
Other derivatives ......................	-	-		-	2,208	2,208	-		-	1,858	1,858
Other portfolios ........................	431	4,961		257	-	5,649	-		-	1	1

	6,443	5,829		712	2,478	15,462	7,680		-	1,861	9,541

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 31 December 2013
Private equity including strategic investments ...........................	3,729	103		420	-	4,252	-		-	-	-
Asset-backed securities ..............	1,677	643		-	-	2,320	-		-	-	-
Loans held for securitisation .....	-	83		-	-	83	-		-	-	-
Structured notes ........................	-	14		-	-	14	7,514		-	-	7,514
Derivatives with monolines .......	-	-		-	320	320	-		-	-	-
Other derivatives ......................	-	-		-	2,182	2,182	-		-	2,335	2,335
Other portfolios ........................	1,839	4,504		188	-	6,531	-		-	-	-

	7,245	5,347		608	2,502	15,702	7,514		-	2,335	9,849

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 487 of the Annual Report and Accounts 2013.

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 2014 ..........................	7,245		5,347		608	2,502	7,514		-	2,335
Total gains/(losses) recognised in profit or loss ...........................	58		18		48	10	94		-	(248)
- trading income excluding net interest income ......................	-		18		-	10	94		-	(248)
- gains less losses from financial investments ...........................	79		-		48	-	-		-	-
- loan impairment charges and other credit risk provisions ....	(21)		-		-	-	-		-	-

Total gains/(losses) recognised in other comprehensive income¹ .....	334		70		(1)	61	113		-	83
- available-for-sale investments: fair value gains/(losses) ...........	145		-		-	-	-		-	-
- cash flow hedges: fair value gains/(losses) ...........	-		-		-	-	-		-	34
- exchange differences ..............	189		70		(1)	61	113			49

Purchases ........................................	1,228		613		123	-	(31)		-	-
New issuances .................................	-		-		-	-	1,416		-	-
Sales ...............................................	(741)		(210)		(40)	-
Settlements .....................................	(722)		(40)		(29)	5	(801)		-	(99)
Transfers out ..................................	(1,654)		(31)		-	(228)	(720)			(321)
Transfers in ....................................	695		62		3	128	95		-	111

At 30 June 2014 ...........................	6,443		5,829		712	2,478	7,680		-	1,861

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 June 2014 ....	(21)		8		23	128	175		-	43
- trading income excluding net interest income ......................	-		8		-	128	175		-	43
- net income/(expense) from other financial instruments designated at fair value ............................	-		-		23	-	-		-	-
- loan impairment charges and other credit risk provisions ....	(21)	�	-		-	-	-		-	-

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
Total gains/(losses) recognised in other comprehensive income¹ .....	60		(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)

	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 2013 .......................	8,960	3,044		471	2,660	7,034		-	2,643
Total gains/(losses) recognised in profit or loss ..................	(89)	295		13	(180)	97		-	(482)
Total gains recognised in other comprehensive income¹ ......	427	46		-	98	166		-	166
Purchases ...............................	726	807		35	-	(482)		-	-
New issuances .........................	-	-		-	-	1,144		-	-
Sales .......................................	(421)	(132)		-	-	483		-	-
Settlements ............................	(490)	(296)		(23)	(28)	(591)		-	110
Transfers out .........................	(2,112)	(305)		(38)	(128)	(486)		-	(111)
Transfers in ...........................	244	1,888		150	80	149		-	9

At 31 December 2013 ............	7,245	5,347		608	2,502	7,514		-	2,335

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 December 2013 .............	(180)	260		18	(280)	(570)		-	524

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 and sales of Level 3 available-for-sale assets predominantly reflect ABS activity, particularly in the securities investment conduits. Transfers out of Level 3 available-for-sale securities reflect increased confidence in the pricing of certain emerging markets corporate debt. New issuances of trading liabilities reflect structured note issuances, predominantly equity-linked notes.

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

The following table shows the sensitivity of Level 3 fair values to reasonably possible alternative assumptions:

Sensitivity of fair values to reasonably possible alternative assumptions

	Reflected in profit or loss		Reflected in other comprehensive income
	Favourable changes	Unfavourable changes	Favourable changes	Unfavourable changes
	US$m	US$m	US$m	US$m
At 30 June 2014
Derivatives, trading assets and trading liabilities¹ ................	266	(251)	-	-
Financial assets and liabilities designated at fair value .........	35	(60)	-	-
Financial investments: available for sale .............................	-	-	369	(614)

	301	(311)	369	(614)
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 31 December 2013
Derivatives, trading assets and trading liabilities¹ ................	350	(285)	-	-
Financial assets and liabilities designated at fair value ..........	32	(51)	-	-
Financial investments: available for sale .............................	-	-	434	(673)

	382	(336)	434	(673)

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 reduction in the effect of both favourable and unfavourable changes in significant unobservable inputs in relation to derivatives, trading assets and trading liabilities predominantly reflects greater certainty in certain emerging market foreign exchange volatility, as markets have developed. The reduction in the effect of both favourable and unfavourable changes in significant unobservable inputs in relation to available-for-sale assets during the period primarily reflects a decrease in the Level 3 balances.

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 2014
Private equity including strategic investments ....................	41	(78)	224	(481)
Asset-backed securities .......................................................	47	(18)	103	(90)
Loans held for securitisation ..............................................	2	(2)	-	-
Structured notes .................................................................	15	(9)	-	-
Derivatives with monolines ................................................	21	(10)	-	-
Other derivatives ...............................................................	141	(156)	-	-
Other portfolios .................................................................	34	(38)	42	(43)

	301	(311)	369	(614)
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 31 December 2013
Private equity including strategic investments ....................	31	(61)	226	(436)
Asset-backed securities .......................................................	60	(27)	113	(99)
Loans held for securitisation ..............................................	3	(3)	-	-
Structured notes .................................................................	16	(9)	-	-
Derivatives with monolines ................................................	25	(16)	-	-
Other derivatives ...............................................................	212	(164)	-	-
Other portfolios .................................................................	35	(56)	95	(138)

	382	(336)	434	(673)

Favourable and unfavourable changes are determined on the basis of sensitivity analysis. The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data. When the available data is not amenable to statistical analysis, the quantification of uncertainty is judgemental, but remains guided by the 95% confidence interval.

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
	Assets	Liabilities		Key unobservable	Full range of inputs		Core range of inputs
	US$m	US$m	Valuation technique	inputs	Lower	Higher	Lower	Higher
At 30 June 2014
Private equity including strategic investments .................................	4,186	-	See notes on page 232	See notes on page 232	n/a	n/a	n/a	n/a

Asset-backed securities ...................	3,091	-
CLO/CDO¹ ..................................	1,872	-	Model - discounted cash flow	Prepayment rate	1%	7%	1%	7%
			Market proxy	Bid quotes	-	101	67	95
Other ABSs .................................	1,219	-	Market proxy	Bid quotes	-	111	19	89

Loans held for securitisation ..........	56

Structured notes .............................	2	7,680
Equity-linked notes .....................	-	6,189	Model - option model	Equity volatility	7%	66%	13%	36%
			Model - option model	Equity correlation	27%	94%	47%	81%
Fund-linked notes ........................	-	518	Model - option model	Fund volatility	7%	37%	7%	37%
FX-linked notes ...........................	2	606	Model - option model	FX volatility	1%	24%	3%	11%
Other ..........................................	-	367

Derivatives with monolines ............	270	2	Model - discounted cash flow	Credit spread	3%	4%	3%	4%

Other derivatives ...........................	2,208	1,858
Interest rate derivatives:
- securitisation swaps ..................	298	865	Model - discounted cash flow	Prepayment rate	0%	50%	8%	21%
- long-dated swaptions ................	747	141	Model - option model	IR volatility	3%	61%	13%	30%
- other ........................................	596	255

FX derivatives:
- FX options ...............................	90	85	Model - option model	FX volatility	0.1%	56%	4%	11%
- other ........................................	31	33

Equity derivatives:
- long-dated single stock options .	250	218	Model - option model	Equity volatility	5%	62%	14%	36%
- other ........................................	41	173

Credit derivatives:
- other ........................................	155	88

Other portfolios .............................	5,649	1
Structured certificates ..................	4,381	-	Model - discounted cash flow	Credit volatility	0.7%	3%	0.7%	3%
EM corporate debt ......................	512	-	Market proxy	Credit spread	0.4%	7%	0.7%	6%
			Market proxy	Bid quotes	60	133	110	132
Other² .........................................	756	1

	15,462	9,541

	Fair value
	Assets	Liabilities		Key unobservable	Full range of inputs		Core range of inputs
	US$m	US$m	Valuation technique	inputs	Lower	Higher	Lower	Higher
At 31 December 2013
Private equity including strategic investments ................................	4,252	-	See notes on page 232 ...................	See notes on page 232 .....................	n/a	n/a	n/a	n/a

Asset-backed securities ..................	2,320	-
CLO/CDO¹ .................................	1,180	-	Model - discounted cash flow	Prepayment rate .	0%	5%	0%	5%
			Market proxy ....	Bid quotes ...........	-	102	46	95
Other ABSs ................................	1,140	-

Loans held for securitisation ..........	83	-

Structured notes..............................	14	7,514
Equity-linked notes ....................	-	5,750	Model - option model ................	Equity volatility .	6%	73%	13%	39%
			Model - option model.................	Equity correlation ............................	51%	59%	52%	57%
Fund-linked notes .......................	-	717	Model - option model ................	Fund volatility ....	18%	22%	20%	21%
FX-linked notes ..........................	14	662	Model - option model ................	FX volatility .......	0.1%	28%	5%	15%
Other .........................................	-	385

Derivatives with monolines ...........	320	-	Model - discounted cash flow....................	Credit spread .......	3%	5%	4%	5%

Other derivatives ...........................	2,182	2,335
Interest rate derivatives:
- securitisation swaps .................	275	1,127	Model - discounted cash flow	Prepayment rate .	0%	22%	2%	20%
- long-dated swaptions ...............	655	185	Model - option model.................	IR volatility ........	3%	160%	13%	41%
- other .......................................	540	265

FX derivatives:
- FX options...............................	114	151	Model - option model ................	FX volatility .......	0.1%	75%	7%	18%
- other........................................	69	51

Equity derivatives:
- long-dated single stock options	218	247	Model - option model ................	Equity volatility..	6%	73%	15%	36%
- other .......................................	24	151

Credit derivatives:
- other .......................................	287	158

Other portfolios ............................	6,531	-
Structured certificates .................	3,800	-	Model - discounted cash flow	Credit volatility...	1%	3%	1%	3%
EM corporate debt .....................	2,073	-	Market proxy ....	Credit spread .......	0.2%	17%	1%	7%
			Market proxy ....	Bid quotes ...........	57	141	100	134
Other² ........................................	658	-

	15,702	9,849

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 2014. The core range of inputs is the estimated range within which 90% of the inputs fall. 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, current prepayment rates in US residential mortgage-backed securities would generally be expected to rise as the US economy improves. Prepayment rates may be estimated using a variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and macroeconomic 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 certain 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 the position within the range. Applying 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 on page 230 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. The core range is significantly narrower than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio. 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 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 macroeconomic 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.

8 Fair values of financial instruments not carried at fair value

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

	At 30 June 2014		At 30 June 2013		At 31 December 2013
	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 banks¹ ....................	127,387	127,421	127,810	127,787	120,046	120,024
Loans and advances to customers¹ ..............	1,047,241	1,040,666	938,294	920,593	992,089	982,282
Reverse repurchase agreements - non-trading¹ ......................................................	198,301	198,287	88,400	88,393	179,690	179,682
Financial investments:
- debt securities ..........................................	25,256	26,196	24,179	24,901	25,084	25,417

Liabilities
Deposits by banks¹ .....................................	92,764	92,758	92,709	92,700	86,507	86,491
Customer accounts¹ ....................................	1,415,705	1,415,732	1,266,905	1,267,128	1,361,297	1,360,919
Repurchase agreements - non-trading¹ .......	165,506	165,506	66,591	66,591	164,220	164,220
Debt securities in issue ................................	96,397	97,536	109,389	109,963	104,080	104,658
Subordinated liabilities ................................	28,052	31,084	28,821	30,517	28,976	31,013

1 See footnote 2 on page 213.

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

	At 30 June 2014		At 30 June 2013		At 31 December 2013
	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 ...................................................................	1,669	1,766	15,433	15,558	1,973	1,980

Customer accounts .....................................	4,880	4,880	17,280	17,339	2,187	2,186

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 2014		At 30 June 2013		At 31 December 2013
	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 customers¹
Europe ...........................................................	479,670	478,049	409,271	400,775	456,110	453,331
Asia ...............................................................	362,387	360,887	326,683	324,949	336,897	335,132
Middle East and North Africa ........................	28,910	28,400	27,934	27,816	27,211	26,891
North America ..............................................	129,620	126,342	129,861	122,247	127,953	122,823
Latin America ...............................................	46,654	46,988	44,545	44,806	43,918	44,105

	1,047,241	1,040,666	938,294	920,593	992,089	982,282

1 See footnote 2 on page 213.

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 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 few 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, believes will ultimately be the case. The investors' valuation processes reflect 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 2014 was due to modest improvements in property values as well as lower required market yields and increased investor demand for these types of loans.

The fair value of loans and advances to customers has marginally improved in Europe relative to their carrying amounts. The fair value differences arise primarily in the UK mortgage market which is sensitive to changes in market pricing.

The fair value 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 497 of the Annual Report and Accounts 2013.

9 Financial assets designated at fair value

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m
Financial assets designated at fair value:
- not subject to repledge or resale by counterparties .................................	31,523	34,950	38,062
- which may be repledged or resold by counterparties ...............................	300	368	368

	31,823	35,318	38,430

Treasury and other eligible bills ....................................................................	27	99	50
Debt securities ..............................................................................................	9,870	12,392	12,589
Equity securities ...........................................................................................	21,886	22,770	25,711

Securities designated at fair value ..................................................................	31,783	35,261	38,350
Loans and advances to banks ........................................................................	39	25	76
Loans and advances to customers .................................................................	1	32	4

	31,823	35,318	38,430

Securities designated at fair value¹

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m

US Treasury and US Government agencies² ..................................................	12	35	34
UK Government ...........................................................................................	153	555	534
Hong Kong Government ..............................................................................	111	115	113
Other government ........................................................................................	4,729	4,612	4,097
Asset-backed securities³ ................................................................................	354	177	140
Corporate debt and other securities ...............................................................	4,538	6,997	7,721
Equity securities ...........................................................................................	21,886	22,770	25,711

	31,783	35,261	38,350

1 Included within these figures are debt securities issued by banks and other financial institutions of US$1,587m (30 June 2013: US$3,688m; 31 December 2013: US$4,419m), of which US$31m (30 June 2013: none; 31 December 2013: US$92m) 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 2014
Listed on a recognised exchange¹ .........................	-	2,706	15,902	18,608
Unlisted ...............................................................	27	7,164	5,984	13,175

	27	9,870	21,886	31,783

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 31 December 2013
Listed on a recognised exchange¹ .........................	-	2,773	18,235	21,008
Unlisted ...............................................................	50	9,816	7,476	17,342

	50	12,589	25,711	38,350

1 Included within listed securities are US$1,337m (30 June 2013: US$991m; 31 December 2013: US$1,148m) of investments listed on a recognised exchange in Hong Kong.

10 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 2014
Foreign exchange .........................	56,756	1,993	58,749	54,999	500	55,499
Interest rate .................................	426,714	2,097	428,811	417,705	4,715	422,420
Equities ........................................	10,993	-	10,993	13,808	-	13,808
Credit ...........................................	7,944	-	7,944	8,146	-	8,146
Commodity and other ..................	1,285	-	1,285	1,564	-	1,564

Gross total fair values ...................	503,692	4,090	507,782	496,222	5,215	501,437

Offset ...........................................			(237,943)			(237,943)

Total ............................................			269,839			263,494

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

Offset ...........................................			(296,325)			(296,325)

Total ............................................			299,213			293,669

At 31 December 2013
Foreign exchange .........................	78,652	2,262	80,914	75,350	448	75,798
Interest rate .................................	456,282	2,294	458,576	448,434	4,097	452,531
Equities ........................................	18,389	-	18,389	22,573	-	22,573
Credit ...........................................	9,092	-	9,092	8,926	-	8,926
Commodity and other ..................	2,624	-	2,624	1,786	-	1,786

Gross total fair values ...................	565,039	4,556	569,595	557,069	4,545	561,614

Offset ...........................................			(287,330)			(287,330)

Total ............................................			282,265			274,284

Derivative assets decreased during the first half of 2014, driven by reduced market volatility in foreign exchange and yield curve movements and portfolio compression in interest rate derivatives. The decline in equity derivative assets and liabilities reflects the inclusion of variation margin on cash-settled exchange-traded equity derivatives within gross fair value rather than "netting". This change has no impact upon total derivatives assets.

A description of HSBC's determination of the fair values of financial instruments, including derivatives, is provided on page 484 of the Annual Report and Accounts 2013.

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 1% rise in the notional amounts of HSBC's derivative contracts during the first half of 2014 was driven by foreign exchange, particularly in Asia.

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

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m

Foreign exchange .........................................................................................	5,560,351	5,645,648	5,264,978
Interest rate .................................................................................................	27,069,408	25,785,120	27,056,367
Equities ........................................................................................................	593,532	566,048	589,903
Credit ...........................................................................................................	615,765	806,260	678,256
Commodity and other ..................................................................................	88,297	90,091	77,842

	33,927,353	32,893,167	33,667,346

Credit derivatives

The notional contract amount of credit derivatives of US$616bn (30 June 2013: US$806bn; 31 December 2013: US$678bn) consisted of protection bought of US$306bn (30 June 2013: US$402bn; 31 December 2013: US$339bn) and protection sold of US$310bn (30 June 2013: US$404bn; 31 December 2013: US$339bn).

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 281 of the Annual Report and Accounts 2013.

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 2014	30 June 2013	31 December 2013
	US$m	US$m	US$m

Unamortised balance at beginning of period ..................................................	167	181	180
Deferral on new transactions ........................................................................	74	113	93
Recognised in the income statement during the period:
- amortisation .........................................................................................	(56)	(55)	(50)
- subsequent to unobservable inputs becoming observable .........................	(7)	(14)	(25)
- maturity or termination, or offsetting derivative ..................................	(49)	(35)	(42)
- risk hedged ............................................................................................	-	(1)	1
Exchange differences ....................................................................................	6	(9)	10

Unamortised balance at end of period¹ ..........................................................	135	180	167

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 2014		At 30 June 2013		At 31 December 2013
	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 ........................................	25,456	97	20,472	110	25,799	226
Interest rate ................................................	220,089	101,784	181,574	70,433	201,197	90,354

	245,545	101,881	202,046	70,543	226,996	90,580

Fair value hedges

Fair value of derivatives designated as fair value hedges

	At 30 June 2014		At 30 June 2013		At 31 December 2013
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	US$m	US$m	US$m	US$m	US$m	US$m

Foreign exchange ........................................	-	1	5	-	5	-
Interest rate ................................................	620	3,263	560	3,412	1,163	2,889

	620	3,264	565	3,412	1,168	2,889

Gains/(losses) arising from fair value hedges

	Half-year to
	30 June 2014	30 June 2013	31 December 2013
	US$m	US$m	US$m
Gains/(losses):
- on hedging instruments .........................................................................	(1,163)	1,398	599
- on the hedged items attributable to the hedged risk ...............................	1,185	(1,352)	(580)

	22	46	19

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 2014		At 30 June 2013		At 31 December 2013
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	US$m	US$m	US$m	US$m	US$m	US$m

Foreign exchange ........................................	1,993	499	1,852	402	2,257	439
Interest rate ................................................	1,477	1,452	1,160	1,513	1,131	1,208

	3,470	1,951	3,012	1,915	3,388	1,647

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 2014, a gain of US$15m was recognised due to hedge ineffectiveness (first half of 2013: gain of US$7m; second half of 2013: gain of US$15m).

Hedges of net investments in foreign operations

The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with currency borrowings.

At 30 June 2014, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of nil (30 June 2013: nil; 31 December 2013: US$4m) and liabilities of US$23m (30 June 2013: US$30m; 31 December 2013: US$23m), and notional contract values of US$1,979m (30 June 2013: US$2,830m; 31 December 2013: US$2,840m).

Ineffectiveness recognised in 'Net trading income' during the period to 30 June 2014 was nil (both halves of 2013: nil).

11 Non-trading reverse repurchase and repurchase agreements

Repos and reverse repos classified as held for trading are included within 'Trading liabilities' (Note 14) and 'Trading assets' (Note 6), respectively. Repos and reverse repos measured at amortised cost, or non-trading, are presented as separate lines in the balance sheet. This separate presentation was adopted with effect from 1 January 2014 and comparatives are re‑presented accordingly. Previously, non-trading reverse repos were included within 'Loans and advances to banks' and 'Loans and advances to customers' and non-trading repos were included within 'Deposits by banks' and 'Customer accounts'. The extent to which non-trading reverse repos and repos represent amounts with customers and banks is set out below.

In the second half of 2013, GB&M changed the way it manages repo and reverse repo activities in the Credit and Rates business as explained on page 154.

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m
Assets
Banks ...........................................................................................................	117,591	57,312	91,475
Customers ....................................................................................................	80,710	31,088	88,215

	198,301	88,400	179,690
Liabilities
Banks ...........................................................................................................	60,604	17,314	42,705
Customers ....................................................................................................	104,902	49,277	121,515

	165,506	66,591	164,220

12 Financial investments

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m
Financial investments:
-. not subject to repledge or resale by counterparties ................................	409,500	376,572	394,207
-. which may be repledged or resold by counterparties ..............................	14,210	27,642	31,718

	423,710	404,214	425,925

Carrying amounts and fair values of financial investments

	At 30 June 2014		At 30 June 2013		At 31 December 2013
	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 ...................	78,177	78,177	79,005	79,005	78,111	78,111
-. available for sale ..................................	78,177	78,177	79,005	79,005	78,111	78,111

Debt securities .............................................	336,807	337,747	315,840	316,562	338,674	339,007
-. available for sale ..................................	311,551	311,551	291,661	291,661	313,590	313,590
-. held to maturity ...................................	25,256	26,196	24,179	24,901	25,084	25,417

Equity securities¹ .........................................	8,726	8,726	9,369	9,369	9,140	9,140
-. available for sale ..................................	8,726	8,726	9,369	9,369	9,140	9,140


	423,710	424,650	404,214	404,936	425,925	426,258

1 At 30 June 2014, the carrying amount of our equity investment in Industrial Bank Co. Limited was US$3,348m, 10% below the cost amount of US$3,721m. No impairment loss was recognised in the first half of 2014 as the deficit of carrying amount below cost was not sufficiently significant or prolonged in accordance with the accounting policy set out on page 439 of the Annual Report and Accounts 2013. If the carrying amount remains below the cost amount in the second half of 2014, an impairment loss may be recognised in the income statement based on the difference between cost and fair value at the point the impairment is recognised.

Financial investments at amortised cost and fair value

	Amortised cost¹	Fair value²
	US$m	US$m
At 30 June 2014
US Treasury ............................................................................................................................	37,378	37,900
US Government agencies³ .......................................................................................................	17,393	17,326
US Government sponsored entities³ ........................................................................................	5,087	5,407
UK Government .....................................................................................................................	29,941	30,189
Hong Kong Government .........................................................................................................	50,187	50,191
Other government ..................................................................................................................	160,023	163,796
Asset-backed securities⁴ ...........................................................................................................	24,574	22,665
Corporate debt and other securities .........................................................................................	85,864	88,448
Equities ...................................................................................................................................	7,876	8,728

	418,323	424,650
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 31 December 2013
US Treasury ............................................................................................................................	50,369	50,421
US Government agencies³ .......................................................................................................	19,211	18,771
US Government sponsored entities³ ........................................................................................	5,263	5,445
UK Government .....................................................................................................................	23,565	23,580
Hong Kong Government .........................................................................................................	49,570	49,579
Other government ..................................................................................................................	153,619	156,208
Asset-backed securities⁴ ...........................................................................................................	25,961	24,115
Corporate debt and other securities .........................................................................................	87,469	88,999
Equities ...................................................................................................................................	8,081	9,140

	423,108	426,258

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 of US$56,437m (30 June 2013: US$58,737m; 31 December 2013: US$55,303m), of which US$11,059m (30 June 2013: US$9,007m; 31 December 2013: US$8,946m) are guaranteed by various governments. The fair value of the debt securities issued by banks and other financial institutions at 30 June 2014 was US$56,559m (30 June 2013: US$59,035m; 31 December 2013: US$55,467m).

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 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 2014
Listed¹ .....................................................	4,219	160,719	6,325	3,892	175,155
Unlisted² ..................................................	73,958	150,832	18,931	4,834	248,555

	78,177	311,551	25,256	8,726	423,710
Carrying amount at 30 June 2013
Listed¹ .....................................................	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
	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 31 December 2013
Listed¹ .....................................................	1,404	134,473	6,176	3,950	146,003
Unlisted² ..................................................	76,707	179,117	18,908	5,190	279,922

	78,111	313,590	25,084	9,140	425,925

1 The fair value of listed held-to-maturity debt securities at 30 June 2014 was US$6,682m (30 June 2013: US$5,662m; 31 December 2013: US$6,281m). Included within listed investments were US$4,069m (30 June 2013: US$2,823m; 31 December 2013: US$2,832m) of investments listed on a recognised exchange in Hong Kong.

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

Maturities of investments in debt securities at their carrying amounts

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m
Remaining contractual maturities of total debt securities:
1 year or less ............................................................................................	71,747	80,814	81,215
5 years or less but over 1 year ...................................................................	153,670	134,706	154,580
10 years or less but over 5 years ...............................................................	59,679	47,347	50,998
over 10 years ............................................................................................	51,711	52,973	51,881

	336,807	315,840	338,674

Remaining contractual maturities of debt securities available for sale:
1 year or less ............................................................................................	69,692	78,106	78,222
5 years or less but over 1 year ...................................................................	144,859	127,063	146,200
10 years or less but over 5 years ...............................................................	52,676	40,049	44,556
over 10 years ............................................................................................	44,324	46,443	44,612

	311,551	291,661	313,590

Remaining contractual maturities of debt securities held to maturity:
1 year or less ............................................................................................	2,055	2,708	2,993
5 years or less but over 1 year ...................................................................	8,811	7,643	8,380
10 years or less but over 5 years ...............................................................	7,003	7,298	6,442
over 10 years ............................................................................................	7,387	6,530	7,269

	25,256	24,179	25,084

13 Assets held for sale

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m

Disposal groups ............................................................................................	9,620	18,921	2,912
Non-current assets held for sale ....................................................................	628	1,456	1,138
- property, plant and equipment .................................................................	331	464	459
- loans and advances to customers ...............................................................	287	849	101
- other ........................................................................................................	10	143	578

Total assets held for sale ..............................................................................	10,248	20,377	4,050

Disposal groups

The composition of disposal groups held for sale at 31 December 2013 is set out on page 521 of the Annual Report and Accounts 2013. The following changes occurred in the period to 30 June 2014:

· the sale of banking operations in Colombia resulting in a cumulative loss until the point of disposal of US$30m;

· the sale of banking operations in Jordan resulted in nil gain or loss on disposal;

· the cessation of the sale and purchase agreement in respect of banking operations in Uruguay, resulting in the reclassification of the associated assets and liabilities to the relevant balance sheet categories; and

· the classification as 'held for sale' of:

− banking operations in Kazakhstan, with assets of US$1.0bn and liabilities of US$1.1bn;

− the UK Pension business of HSBC Life (UK) Limited, with assets of US$7.3bn and liabilities of US$7.4bn; and

− a portfolio of private banking assets in Switzerland, with assets of US$1.3bn including allocated goodwill of US$0.3bn and liabilities of US$3.9bn.

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 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m

Deposits by banks .........................................................................................	47,901	80,418	43,130
Customer accounts .......................................................................................	67,077	159,637	57,688
Other debt securities in issue .........................................................................	35,071	30,212	32,155
Other liabilities - net short positions in securities .........................................	78,086	72,165	74,052

	228,135	342,432	207,025

At 30 June 2014, the cumulative amount of change in fair value attributable to changes in credit risk was a loss of US$123m (30 June 2013: loss of US$25m; 31 December 2013: loss of US$95m).

In the second half of 2013, GB&M changed the way it manages repo and reverse repo activities in the Credit and Rates businesses as set out on page 154.

15 Financial liabilities designated at fair value

	At 30 June 2014	At 30 June 2013	At 31 December 2013
	US$m	US$m	US$m

Deposits by banks and customer accounts .....................................................	552	457	315
Liabilities to customers under investment contracts ......................................	6,676	12,341	13,491
Debt securities in issue ..................................................................................	51,371	53,026	53,363
Subordinated liabilities ..................................................................................	22,716	15,089	18,230
Preferred securities .......................................................................................	1,653	3,341	3,685

	82,968	84,254	89,084

The carrying amount at 30 June 2014 of financial liabilities designated at fair value was US$5,590m more than the contractual amount at maturity (30 June 2013: US$3,792m more; 31 December 2013: US$4,375m more). At 30 June 2014, the cumulative amount of the change in fair value attributable to changes in credit risk was a loss of US$1,543m (30 June 2013: gain of US$117m; 31 December 2013: loss of US$1,334m).

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 2014 ........................	271	177	1,832	2,382	555	5,217
Additional provisions/increase in provisions .............................	51	38	188	299	67	643
Provisions utilised ........................	(77)	(1)	(214)	(1,085)	(51)	(1,428)
Amounts reversed .........................	(20)	(14)	(157)	(64)	(46)	(301)
Unwinding of discounts .................	-	-	22	3	3	28
Exchange differences and other movements ...............................	1	(6)	94	37	(2)	124

At 30 June 2014 ...........................	226	194	1,765	1,572	526	4,283

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 July 2013 .............................	194	212	1,703	2,141	537	4,787
Additional provisions/increase in provisions .............................	147	9	722	1,005	(70)	1,813
Provisions utilised ........................	(43)	(4)	(486)	(825)	18	(1,340)
Amounts reversed .........................	(38)	(29)	(120)	(36)	(95)	(318)
Unwinding of discounts .................	-	(1)	21	3	7	30
Exchange differences and other movements ...............................	11	(10)	(8)	94	158	245

At 31 December 2013 ..................	271	177	1,832	2,382	555	5,217

Further details of legal proceedings and regulatory matters are set out in Note 25. 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.

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, and is not necessarily initiated by regulatory action.

Payment Protection Insurance

At 30 June 2014, a provision of US$759m (30 June 2013: US$1,013m; 31 December 2013: US$946m) was held relating to the estimated liability for redress in respect of the possible mis-selling of Payment Protection Insurance ('PPI') policies in previous years. An increase in provisions of US$194m was recognised during the half-year to 30 June 2014, primarily due to the identification of new rework populations and higher than expected inbound complaint volumes. Cumulative provisions made since the Judicial Review ruling in 2011 amounted to US$3,347m of which US$2,743m had been paid.

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 gross written premiums of approximately US$5.3bn and revenues of approximately US$4.3bn at first half of 2014 average exchange rates. At 30 June 2014, the estimated total complaints expected to be received were 1.7m, representing 31% of total policies sold. It is estimated that contact will be made with regard to 2.1m policies, representing 39% of total policies sold. This estimate includes inbound complaints as well as HSBC's proactive contact exercise on certain policies ('outbound contact').

The following table details the cumulative number of complaints received at 30 June 2014 and the number of claims expected in the future:

	Cumulative to 30 June 2014	Future expected

Inbound complaints¹ (000s of policies) ...................................................................................	1,126	229
Outbound contact (000s of policies) ........................................................................................	448	281
Response rate to outbound contact ..........................................................................................	51%	49%
Average uphold rate per claim² ...............................................................................................	78%	72%
Average redress per claim (US$) ..............................................................................................	2,543	2,701

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$211m. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately US$14m.

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. The decay rate implies that by the end of 2015 inbound claim volumes would mean that the redress programme is complete. However, this timing is subject to some level of uncertainty as the decay rate may change over time based on actual experience.

Interest rate derivatives

At 30 June 2014, a provision of US$317m (31 December 2013: US$776m) was held relating to the estimated liability for redress in respect of the possible mis-selling of interest rate derivatives in the UK. The provision relates to the estimated redress payable to customers in respect of historical payments under derivative contracts, the expected write-off by the bank of open derivative contract balances and the estimated project costs.

The extent to which HSBC is required to pay redress depends on the responses of contacted and other customers during the review period and the facts and circumstances of each individual case. Redress calculations have now been performed for the majority of affected customers, with provisional redress offer letters having been sent for over 90% of total expected claims.

UK Consumer Credit Act

HSBC has undertaken a review of compliance with the fixed-sum unsecured loan agreement requirements of the UK Consumer Credit Act ('CCA'). US$367m has been recognised as at 30 June 2014 within 'Other liabilities' for the repayment of interest to customers where annual statements did not remind them of their right to partially prepay the loan, notwithstanding that the customer loan documentation did include this right. There is uncertainty as to whether other technical requirements of the CCA have been met, for which we have assessed the contingent liability at up to US$1.0bn.

Brazilian labour, civil and fiscal claims

Within 'Legal proceedings and regulatory matters' in the table on page 243 are labour, civil and fiscal litigation provisions of US$404m (30 June 2013: US$484m; 31 December 2013: US$500m). Of these provisions, US$256m (30 June 2013: US$255m; 31 December 2013: US$232m) was 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 on the basis of 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 on the basis of 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 2014
	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 .................................	132,137	-	-	-	-	-	-	-	132,137
Items in the course of collection from other banks ........	8,144	-	-	-	-	-	-	-	8,144
Hong Kong Government certificates of indebtedness .....	26,640	-	-	-	-	-	-	-	26,640
Trading assets ................................................................	345,144	1,025	100	-	-	-	837	-	347,106
Financial assets designated at fair value ..........................	863	346	469	646	289	1,361	3,740	24,109	31,823
Derivatives ....................................................................	265,816	345	551	82	309	669	1,120	947	269,839
Loans and advances to banks¹ ........................................	86,341	20,506	3,958	1,908	2,517	6,734	3,390	2,033	127,387
Loans and advances to customers¹ .................................	252,285	81,682	54,901	30,874	35,921	96,919	189,032	305,627	1,047,241
Reverse repurchase agreements - non-trading¹ ...............	138,214	41,593	7,387	5,034	4,190	363	1,520	-	198,301
Financial investments ....................................................	30,651	43,087	33,722	20,295	21,715	43,448	111,847	118,945	423,710
Assets held for sale ........................................................	1,600	199	72	106	47	115	210	6,598	8,947
Accrued income .............................................................	3,503	2,339	715	671	197	521	809	1,611	10,366
Other financial assets .....................................................	14,681	5,332	1,834	634	102	181	44	2,041	24,849

Total financial assets .................................................	1,306,019	196,454	103,709	60,250	65,287	150,311	312,549	461,911	2,656,490

Non-financial assets .......................................................	-	-	-	-	-	-	-	97,103	97,103

Total assets ..................................................................	1,306,019	196,454	103,709	60,250	65,287	150,311	312,549	559,014	2,753,593

Financial liabilities
Hong Kong currency notes in circulation .......................	26,640	-	-	-	-	-	-	-	26,640
Deposits by banks¹ .........................................................	83,467	3,888	1,613	346	323	850	1,801	476	92,764
Customer accounts¹ .......................................................	1,269,487	62,090	29,768	14,215	20,194	14,620	5,065	266	1,415,705
Repurchase agreements - non-trading¹ ...........................	126,600	23,791	7,603	2,239	4,523	-	-	750	165,506
Items in the course of transmission to other banks ........	9,936	-	-	-	-	-	-	-	9,936
Trading liabilities ...........................................................	189,446	1,304	3,763	3,713	2,752	6,879	9,396	10,882	228,135
Financial liabilities designated at fair value .....................	2,648	973	9	2,135	4,291	9,211	18,622	45,079	82,968
Derivatives ....................................................................	258,655	40	78	41	92	698	1,650	2,240	263,494
Debt securities in issue ...................................................	16,560	9,767	10,576	9,592	6,417	18,854	19,081	5,550	96,397
Liabilities of disposal groups held for sale .......................	7,894	227	49	66	116	225	585	3,158	12,320
Accruals .........................................................................	5,946	2,202	1,217	1,456	336	859	633	383	13,032
Subordinated liabilities ....................................................	16	114	26	183	-	308	4,006	23,399	28,052
Other financial liabilities ................................................	17,466	6,164	1,869	483	1,080	802	999	692	29,555

Total financial liabilities...........................................	2,014,761	110,560	56,571	34,469	40,124	53,306	61,838	92,875	2,464,504

Non-financial liabilities ..................................................	-	-	-	-	-	-	-	90,367	90,367

Total liabilities ...........................................................	2,014,761	110,560	56,571	34,469	40,124	53,306	61,838	183,242	2,554,871

	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 banks¹ ........................................	83,500	22,694	5,317	995	2,566	6,208	2,137	4,393	127,810
Loans and advances to customers¹ .................................	217,002	69,193	50,415	31,804	34,463	76,454	168,581	290,382	938,294
Reverse repurchase agreements - non-trading¹ ...............	58,382	17,030	8,638	2,069	936	949	396	-	88,400
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 banks¹ .........................................................	80,976	3,095	1,663	1,189	1,203	1,975	1,782	826	92,709
Customer accounts¹ .......................................................	1,129,001	66,980	30,032	9,556	16,019	9,060	5,780	477	1,266,905
Repurchase agreements - non-trading¹ ...........................	49,930	6,490	5,191	1,334	3,646	-	-	-	66,591
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

Maturity analysis of assets and liabilities (continued)

	At 31 December 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 .................................	166,599	-	-	-	-	-	-	-	166,599
Items in the course of collection from other banks ........	6,021	-	-	-	-	-	-	-	6,021
Hong Kong Government certificates of indebtedness .....	25,220	-	-	-	-	-	-	-	25,220
Trading assets ................................................................	296,396	3,098	1,536	2,062	100	-	-	-	303,192
Financial assets designated at fair value ..........................	1,929	254	494	426	328	2,145	2,819	30,035	38,430
Derivatives ....................................................................	277,747	48	88	389	552	716	1,486	1,239	282,265
Loans and advances to banks¹ ........................................	76,551	22,107	5,397	1,429	1,290	6,129	2,779	4,364	120,046
Loans and advances to customers¹ .................................	230,736	73,463	56,053	29,273	32,194	87,942	182,525	299,903	992,089
Reverse repurchase agreements - non-trading¹ ...............	134,242	35,329	5,287	1,239	2,072	1,136	385	-	179,690
Financial investments ....................................................	34,331	48,053	35,877	22,353	18,816	50,711	105,340	110,444	425,925
Assets held for sale ........................................................	1,067	541	193	199	229	156	373	744	3,502
Accrued income .............................................................	3,593	2,312	619	644	148	653	581	1,626	10,176
Other financial assets .....................................................	14,059	4,831	1,655	526	323	324	73	2,166	23,957

Total financial assets .....................................................	1,268,491	190,036	107,199	58,540	56,052	149,912	296,361	450,521	2,577,112

Non-financial assets .......................................................	-	-	-	-	-	-	-	94,206	94,206

Total assets ...................................................................	1,268,491	190,036	107,199	58,540	56,052	149,912	296,361	544,727	2,671,318

Financial liabilities
Hong Kong currency notes in circulation .......................	25,220	-	-	-	-	-	-	-	25,220
Deposits by banks¹ .........................................................	76,298	3,931	1,796	858	318	737	1,922	647	86,507
Customer accounts¹ .......................................................	1,229,694	60,683	26,940	13,704	15,384	8,717	5,937	238	1,361,297
Repurchase agreements - non-trading¹ ...........................	136,137	13,058	6,583	3,711	4,231	-	-	500	164,220
Items in the course of transmission to other banks ........	6,910	-	-	-	-	-	-	-	6,910
Trading liabilities ...........................................................	161,231	11,405	4,886	2,844	3,653	6,323	7,979	8,704	207,025
Financial liabilities designated at fair value .....................	4,907	157	92	2,266	68	9,348	21,544	50,702	89,084
Derivatives ....................................................................	269,816	33	95	84	61	563	1,978	1,654	274,284
Debt securities in issue ...................................................	20,739	8,280	15,734	7,442	8,106	18,552	19,850	5,377	104,080
Liabilities of disposal groups held for sale .......................	2,125	208	131	98	107	49	42	5	2,765
Accruals .........................................................................	6,016	3,950	1,388	584	741	811	618	460	14,568
Subordinated liabilities ....................................................	21	28	1,171	144	6	1,435	3,406	22,765	28,976
Other financial liabilities ................................................	17,126	6,317	1,759	598	751	971	932	471	28,925

Total financial liabilities ................................................	1,956,240	108,050	60,575	32,333	33,426	47,506	64,208	91,523	2,393,861
Non-financial liabilities ..................................................	-	-	-	-	-	-	-	86,998	86,998

Total liabilities ..............................................................	1,956,240	108,050	60,575	32,333	33,426	47,506	64,208	178,521	2,480,859

1 See footnote 2 on page 213.

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 2014 ..............................................	2,987	-	-	-	-	-	-	-	2,987
At 30 June 2013 ................................................	455	4	8	6	8	29	93	230	833
At 31 December 2013 .......................................	953	-	-	-	-	-	-	-	953

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 2014 ..............................................	444,957	46,101	25,155	15,011	20,819	13,005	50,181	26,839	642,068
At 30 June 2013 ................................................	411,243	44,863	19,905	13,918	25,458	10,980	42,604	18,975	587,946
At 31 December 2013 .......................................	404,598	45,255	18,770	16,927	20,242	13,320	46,652	21,839	587,603

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
	Gross amounts of recognised financial assets	Gross amounts offset in the balance sheet	Amounts presented 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 2014
Derivatives² (Note 10) ........................	507,782	(237,943)	269,839	(219,192)	(31,539)	19,108

Reverse repos, stock borrowing and similar agreements³ .......	302,581	(85,893)	216,688	(210,904)	(68)	5,716
Classified as:
- trading assets .	19,972	(1,585)	18,387	(18,387)	-	-
- non-trading assets .............	282,609	(84,308)	198,301	(192,517)	(68)	5,716

Loans and advances to customers at amortised cost⁴ ...........................	210,661	(97,748)	112,913	(103,064)	-	9,849

	1,021,024	(421,584)	599,440	(533,160)	(31,607)	34,673

At 30 June 2013
Derivatives² (Note 10) ........................	595,538	(296,325)	299,213	(218,509)	(35,568)	45,136

Reverse repos, stock borrowing and similar agreements³ .......	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
- non-trading assets .............	129,715	(41,279)	88,436	(86,345)	(228)	1,863

Loans and advances to customers at amortised cost⁴ ...........................	162,965	(83,946)	79,019	(71,300)	-	7,719

	1,057,361	(469,048)	588,313	(497,012)	(36,413)	54,888

At 31 December 2013
Derivatives² (Note 10) ........................	569,595	(287,330)	282,265	(215,957)	(36,387)	29,921

Reverse repos, stock borrowing and similar agreements³ .......	288,903	(88,775)	200,128	(197,287)	(57)	2,784
Classified as:
- trading assets .	39,008	(18,570)	20,438	(20,438)	-	-
- non-trading assets .............	249,895	(70,205)	179,690	(176,849)	(57)	2,784

Loans and advances to customers at amortised cost⁴ ...........................	192,437	(92,654)	99,783	(89,419)	-	10,364

	1,050,935	(468,759)	582,176	(502,663)	(36,444)	43,069

1 Including non-cash collateral.

2 Including amounts that are both subject to and not subject to enforceable master netting agreements and similar agreements.

3 For the amount of reverse repos, stock borrowing and similar agreements recognised in the balance sheet, see the 'Consolidated funding sources and uses' table on page 153. In the analysis above, the US$18,387m (30 June 2013: US$121,645m; 31 December 2013: US$20,438m) of trading assets presented in the balance sheet comprised US$4,484m of reverse repos (30 June 2013: US$104,273m; 31 December 2013: US$10,120m) and US$13,903m of stock borrowing (30 June 2013: US$17,372m; 31 December 2013: US$10,318m).

4 At 30 June 2014, the total amount of loans and advances to customers at amortised cost was US$1,047,241m (30 June 2013: US$938,294m; 31 December 2013: US$992,089m) of which US$112,913m (30 June 2013: US$79,019m; 31 December 2013: US$99,783m) was subject to offsetting. For the amount of loans and advances to customers excluding reverse repos at amortised cost recognised in the balance sheet, see the 'Consolidated funding sources and uses' table on page 153.

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
	Gross amounts of recognised financial liabilities	Gross amounts offset in the balance sheet	Amounts presented 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 2014
Derivatives² (Note 10) ................	501,437	(237,943)	263,494	(220,019)	(23,163)	20,312

Repos, stock lending and similar agreements³ .............................	271,840	(85,893)	185,947	(182,451)	(80)	3,416
Classified as:
- trading liabilities ..................	22,026	(1,585)	20,441	(20,431)	-	10
- non-trading liabilities ...........	249,814	(84,308)	165,506	(162,020)	(80)	3,406

Customer accounts at amortised cost⁴ ........................................	213,686	(97,748)	115,938	(103,064)	-	12,874

	986,963	(421,584)	565,379	(505,534)	(23,243)	36,602

At 30 June 2013
Derivatives² (Note 10) ................	589,994	(296,325)	293,669	(218,444)	(34,252)	40,973

Repos, stock lending and similar agreements³ .............................	299,972	(88,777)	211,195	(209,898)	(203)	1,094
Classified as:
- trading liabilities ..................	192,101	(47,498)	144,603	(144,395)	-	208
- non-trading liabilities ...........	107,871	(41,279)	66,592	(65,503)	(203)	886

Customer accounts at amortised cost⁴ ........................................	171,128	(83,946)	87,182	(71,300)	-	15,882

	1,061,094	(469,048)	592,046	(499,642)	(34,455)	57,949

At 31 December 2013
Derivatives² (Note 10) ................	561,614	(287,330)	274,284	(216,596)	(29,093)	28,595

Repos, stock lending and similar agreements³ .............................	282,634	(88,775)	193,859	(193,354)	(81)	424
Classified as:
- trading liabilities ..................	48,209	(18,570)	29,639	(29,625)	-	14
- non-trading liabilities ...........	234,425	(70,205)	164,220	(163,729)	(81)	410

Customer accounts at amortised cost⁴ ........................................	195,153	(92,654)	102,499	(89,394)	-	13,105

	1,039,401	(468,759)	570,642	(499,344)	(29,174)	42,124

1 Including non-cash collateral.

2 Including amounts that are both subject to and not subject to enforceable master netting agreements and similar agreements.

3 For the amount of repos, stock lending and similar agreements recognised in the balance sheet, see the 'Consolidated funding sources and uses' table on page 153. In the analysis above, the US$20,441m (30 June 2013: US$144,603m; 31 December 2013: US$29,639m) of trading liabilities presented in the balance sheet comprised US$5,189m of repos (30 June 2013: US$134,506m; 31 December 2013: US$17,421m) and US$15,252m of stock lending (30 June 2013: US$10,097m; 31 December 2013: US$12,218m).

4 At 30 June 2014, the total amount of customer accounts at amortised cost was US$1,415,705m (30 June 2013: US$1,266,905m; 31 December 2013: US$1,361,297m) of which US$115,937m (30 June 2013: US$87,182m; 31 December 2013: US$102,499m) was subject to offsetting. For the amount of customer accounts excluding repos at amortised cost recognised in the balance sheet, see the 'Consolidated funding sources and uses' table on page 153.

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 repo/repo 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
	2014	2013	2013
	US$m	US$m	US$m

Treasury bills and other eligible securities .....................................................	4,100	5,652	6,387
Loans and advances to banks ........................................................................	25,951	26,150	17,733
Loans and advances to customers .................................................................	87,630	83,657	87,894
Debt securities ..............................................................................................	169,510	210,629	190,095
Equity shares ................................................................................................	10,147	8,594	8,816
Other ...........................................................................................................	1,035	1,747	1,035

	298,373	336,429	311,960

The table above shows assets over which a legal charge has been granted to secure liabilities on a legal and contractual basis. 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 repos and stock borrowing that HSBC is permitted to sell or repledge in the absence of default was US$272,516m (30 June 2013: US$293,935m; 31 December 2013: US$259,617m). The fair value of any such collateral that has been sold or repledged was US$186,823m (30 June 2013: US$184,604m; 31 December 2013: US$186,013m). HSBC is obliged to return equivalent securities.

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

This information is provided by RNS

The company news service from the London Stock Exchange

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