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HSBC Holdings PLC (HSBA)

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Tuesday 23 February, 2021

HSBC Holdings PLC

Annual Financial Report - Part 9

RNS Number : 0683Q
HSBC Holdings PLC
23 February 2021
 

Fair value valuation bases

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


Assets

Liabilities


Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Total

Trading liabilities

Designated at fair value

Derivatives

Total


$m

$m

$m

$m

$m

$m

$m

$m

$m

Private equity including strategic investments

930 



10,971 



11,905 






Asset-backed securities

1,286 


523 


25 



1,834 






Loans held for securitisation










Structured notes






29 


5,301 



5,330 


Derivatives with monolines




68 


68 






Other derivatives




2,602 


2,602 




4,187 


4,187 


Other portfolios

1,438 


1,972 


481 



3,891 


129 




135 


At 31 Dec 2020

3,654 


2,499 


11,477 


2,670 


20,300 


162 


5,306 


4,188 


9,656 












Private equity including strategic investments

716 



8,831 



9,551 






Asset-backed securities

874 


934 


28 



1,836 






Loans held for securitisation



39 



40 






Structured notes






47 


5,016 



5,063 


Derivatives with monolines




66 


66 






Other derivatives




2,070 


2,070 




2,302 


2,302 


Other portfolios

1,628 


4,037 


578 



6,243 






At 31 Dec 2019

3,218 


4,979 


9,476 


2,136 


19,809 


53 


5,016 


2,302 


7,371 


 

Balances from 2019 have been re-presented to disclose a consistent application of the levelling methodology. This resulted in an increase of $2.9bn of assets in Level 3. 'Other portfolios' increased by $1.4bn and 'Private equity including strategic investments' increased by $1.5bn.


Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, derivatives with monolines, certain 'other derivatives' and predominantly all Level 3 ABSs are legacy positions. HSBC has the capability to hold these positions.

Private equity including strategic investments

The fair value of a private equity investment (including strategic investments) is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; the price at which similar companies have changed ownership; or from published net asset values ('NAVs') received. If necessary, adjustments are made to the NAV of funds to obtain the best estimate of fair value.

Asset-backed securities

While quoted market prices are generally used to determine the fair value of the asset-backed securities ('ABSs'), valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For certain ABSs, such as residential mortgage-backed securities, the valuation uses an industry standard model with assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature.

Structured notes

The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios.

Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign exchange rates.

Derivatives

OTC derivative valuation models calculate the present value of expected future cash flows, based upon 'no arbitrage' principles. For many vanilla derivative products, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources.


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

Movement in Level 3 financial instruments



Assets

Liabilities



Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives


Footnotes

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2020


3,218 


4,979 


9,476 


2,136 


53 


5,016 


2,302 


Total gains/(losses) recognised in profit or loss


17 


(6)


504 


2,281 


307 


(59)


3,398 


-  net income/(losses) from financial instruments held for trading or managed on a fair value basis



(6)



2,281 


307 



3,398 


-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss




504 




(59)



-  gains less losses from financial investments at fair value through other comprehensive income


17 








-  expected credit loss charges and other credit risk charges









Total gains recognised in other comprehensive income ('OCI')

1

394 


115 


286 


143 


17 


204 


169 


-  financial investments: fair value gains


270 








-  exchange differences


124 


115 


286 


143 


17 


204 


169 


Purchases


671 


687 


3,701 



66 




New issuances







1,876 



Sales


(674)


(1,579)


(2,042)



(260)




Settlements


(530)


(1,122)


(435)


(1,542)


(26)


(1,531)


(1,462)


Transfers out


(101)


(1,790)


(140)


(565)


(9)


(777)


(528)


Transfers in


659 


1,215 


126 


217 



577 


309 


At 31 Dec 2020


3,654 


2,499 


11,477 


2,670 


162 


5,306 


4,188 


Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2020



(32)


412 


707 



(91)


(1,621)


-  net income/(losses) from financial instruments held for trading or managed on a fair value basis



(32)



707 




(1,621)


-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss




412 




(91)



-  loan impairment recoveries and other credit risk provisions









 

Movement in Level 3 financial instruments (continued)



Assets

Liabilities



Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives


Footnotes

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2019


2,796 


6,759 


7,080 


2,423 


58 


5,328 


1,756 


Total gains/(losses) recognised in profit or loss



(112)


587 


278 


(4)


195 


930 


-  net income/(losses) from financial instruments held for trading or managed on a fair value basis



(112)



278 


(4)



930 


-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss




587 




195 



-  gains less losses from financial investments at fair value through other comprehensive income


10 








-  expected credit loss charges and other credit risk charges


(4)








Total gains/(losses) recognised in other comprehensive income ('OCI')

1

309 


76 


(4)


49 



18 


52 


-  financial investments: fair value gains


301 








-  exchange differences



76 


(4)


49 



18 


52 


Purchases


693 


2,206 


2,506 




157 



New issuances



154 





1,601 



Sales


(56)


(895)


(276)



(9)


(193)



Settlements


(329)


(2,107)


(434)


(100)


(7)


(1,048)


(162)


Transfers out


(488)


(1,558)


(23)


(710)


(9)


(1,079)


(473)


Transfers in


287 


456 


40 


196 



37 


199 


At 31 Dec 2019


3,218 


4,979 


9,476 


2,136 


53 


5,016 


2,302 


Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2019


(4)


(22)


465 


279 



57 


(407)


-  net income/(losses) from financial instruments held for trading or managed on a fair value basis



(22)



279 




(407)


-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss




465 




57 



-  loan impairment recoveries and other credit risk provisions


(4)








1  Included in 'financial investments: fair value gains/(losses)' in the current year and 'exchange differences' in the consolidated statement of comprehensive income.

Balances from 2019 have been re-presented to disclose a consistent application of the levelling methodology. The result of this is an increase of $2.9bn of assets in Level 3. 'Financial investments' increased by $1.2bn and 'Private equity including strategic investments financial assets designated and otherwise mandatorily measured at fair value' increased by $1.7bn.

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.  


Effect of changes in significant unobservable assumptions to reasonably possible alternatives

Sensitivity of fair values to reasonably possible alternative assumptions



2020

2019



Reflected in profit or loss

Reflected in OCI

Reflected in profit or loss

Reflected in OCI



Favourable
changes

Un-
favourable
changes

Favourable
changes

Un-
favourable
changes

Favourable
changes

Un-
favourable
changes

Favourable
changes

Un-
favourable
changes


Footnotes

$m

$m

$m

$m

$m

$m

$m

$m

Derivatives, trading assets and trading liabilities

1

229 


(244)




255 


(230)




Financial assets and liabilities designated and otherwise mandatorily measured at fair value through profit or loss


644 


(643)




618 


(503)




Financial investments


35 


(35)


110 


(110)


48 


(53)


81 


(81)


At 31 Dec


908 


(922)


110 


(110)


921 


(786)


81 


(81)


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


Balances from 2019 have been re-presented to disclose a consistent application of the levelling methodology. The result of this is an increase in 'Financial investments reflected through OCI' and 'Financial asset designated and mandatorily measured at fair value reflected in profit or loss' of $59m and $86m respectively.

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 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.


Key unobservable inputs to Level 3 financial instruments

The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 31 December 2020.

Quantitative information about significant unobservable inputs in Level 3 valuations


Fair value



2020

2019


Assets

Liabilities

Valuation
techniques

Key unobservable
inputs

Full range
of inputs

Full range
of inputs


$m

$m



Lower

Higher

Lower

Higher

Private equity including strategic investments

11,905 



See below

See below





Asset-backed securities

1,834 









-  collateralised loan/debt obligation

59


Market proxy

Prepayment rate 

0%

9%

0%

9%

Market proxy

Bid quotes

0

100

0

100

-  other ABSs

1,775 



Market proxy

Bid quotes

0

101

0

101

Loans held for securitisation









Structured notes


5,330 








-  equity-linked notes


4,069 


Model - Option model

Equity volatility

6%

115%

5%

90%

Model - Option model

Equity correlation

(4)%

88%

9%

93%

-  FX-linked notes


608 


Model - Option model

FX volatility

0%

36%

1%

23%

-  other


653 








Derivatives with monolines

68 



Model - Discounted cash flow

Credit spread

2%

2%

0%

2%

Other derivatives

2,602 


4,187 








-  interest rate derivatives

1,300 


1,414 








  securitisation swaps

285 


707 


Model - Discounted cash flow

Prepayment rate

6%

6%

6%

7%

  long-dated swaptions

529 


370 


Model - Option model

IR volatility

6%

28%

8%

22%

  other

486 


337 








-  FX derivatives

468 


466 








  FX options

152 


194 


Model - Option model

FX volatility

0%

43%

1%

25%

  other

316 


272 








-  equity derivatives

754 


2,244 








  long-dated single stock options

583 


1,091 


Model - Option model

Equity volatility

0%

120%

0%

89%

  other

171 


1,153 








-  credit derivatives

80 


63 








  other

80 


63 








Other portfolios

3,891 


135 








-  structured certificates



Model - Discounted cash flow

Credit volatility 

-

-

4%

4%

-  repurchase agreements

872 


128 


Model - Discounted cash flow

IR curve

0%

5%

1%

8%

-  other1

3,019 









At 31 Dec 2020

20,300 


9,656 








1  'Other' includes a range of smaller asset holdings.


Private equity including strategic investments

Given the bespoke nature of the analysis in respect of each private equity 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. They vary according to the nature of the loan portfolio and expectations of future market conditions, and 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 when specific market pricing is not available but there is evidence from instruments with common characteristics. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence.

Volatility

Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and maturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price. The core range is significantly narrower than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio.

Correlation

Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one. It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.

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.

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 and 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. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC's net risk position in respect of each variable.


HSBC Holdings

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



2020

2019



$m

$m

Valuation technique using observable inputs: Level 2




Assets at 31 Dec




-  derivatives


4,698 


2,002 


-  designated and otherwise mandatorily measured at fair value through profit or loss


65,253 


61,964 


Liabilities at 31 Dec




-  designated at fair value


25,664 


30,303 


-  derivatives


3,060 


2,021 


 


13

Fair values of financial instruments not carried at fair value

 


Fair values of financial instruments not carried at fair value and bases of valuation



Fair value


Carrying
amount

Quoted market
price Level 1

Observable
inputs Level 2

Significant
unobservable
inputs Level 3

Total


$m

$m

$m

$m

$m

At 31 Dec 2020






Assets






Loans and advances to banks

81,616 



80,457 


1,339 


81,796 


Loans and advances to customers

1,037,987 



9,888 


1,025,573 


1,035,461 


Reverse repurchase agreements - non-trading

230,628 



230,330 


272 


230,602 


Financial investments - at amortised cost

88,639 


28,722 


67,572 


507 


96,801 


Liabilities






Deposits by banks

82,080 



81,996 



81,996 


Customer accounts

1,642,780 



1,642,988 


143 


1,643,131 


Repurchase agreements - non-trading

111,901 



111,898 



111,901 


Debt securities in issue

95,492 



96,371 


657 


97,028 


Subordinated liabilities

21,951 



28,552 



28,552 








At 31 Dec 2019






Assets






Loans and advances to banks

69,203 



68,508 


739 


69,247 


Loans and advances to customers

1,036,743 



10,365 


1,027,178 


1,037,543 


Reverse repurchase agreements - non-trading

240,862 


16 


240,199 


691 


240,906 


Financial investments - at amortised cost

85,735 


26,202 


62,572 


287 


89,061 


Liabilities






Deposits by banks

59,022 



58,951 



58,951 


Customer accounts

1,439,115 



1,439,362 


150 


1,439,512 


Repurchase agreements - non-trading

140,344 



140,344 



140,344 


Debt securities in issue

104,555 



104,936 



104,936 


Subordinated liabilities

24,600 



28,861 


385 


29,246 


 

Other financial instruments not carried at fair value are typically short term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness and Hong Kong currency notes in circulation, all of which are measured at amortised cost.


Valuation

Fair value is an 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 an instrument's cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies.

Loans and advances to banks and customers

To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using assumptions that HSBC believes are consistent with those that would be used by market participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans.

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

Financial investments

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

Deposits by banks and customer accounts

The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.

Debt securities in issue and subordinated liabilities

Fair values in debt securities in issue and subordinated liabilities are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.

Repurchase and reverse repurchase agreements - non-trading

Fair values of repurchase and reverse repurchase agreements that are held on a non-trading basis provide approximate carrying amounts. This is due to the fact that balances are generally short dated.


HSBC Holdings

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

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


2020

2019


Carrying amount

Fair value1

Carrying amount

Fair value1


$m

$m

$m

$m

Assets at 31 Dec





Loans and advances to HSBC undertakings

10,443 


10,702 


10,218 


10,504 


Financial investments - at amortised cost

17,485 


17,521 


16,106 


16,121 


Liabilities at 31 Dec





Amounts owed to HSBC undertakings

330 


330 


464 


464 


Debt securities in issue

64,029 


67,706 


56,844 


59,140 


Subordinated liabilities

17,916 


22,431 


18,361 


22,536 


1  Fair values (other than Level 1 financial investments) were determined using valuation techniques with observable inputs (Level 2).


14

Financial assets designated and otherwise mandatorily measured at fair value through profit

or loss

 



2020


2019




Designated at fair value

Mandatorily measured at fair value

Total

Designated at fair value

Mandatorily measured at fair value

Total



$m

$m

$m

$m

$m

$m

Securities


2,492 


39,088 


41,580 


2,344 


35,808 


38,152 


-  treasury and other eligible bills


635 


26 


661 


630 


31 


661 


-  debt securities


1,857 


5,250 


7,107 


1,714 


4,838 


6,552 


-  equity securities



33,812 


33,812 



30,939 


30,939 


Loans and advances to banks and customers



2,988 


2,988 



4,555 


4,556 


Other



985 


985 



919 


919 


At 31 Dec


2,492 


43,061 


45,553 


2,345 


41,282 


43,627 


 

Securities1




2020


2019




Designated at fair value

Mandatorily measured at fair value

Total

Designated at fair value

Mandatorily measured at fair value

Total


Footnotes

$m

$m

$m

$m

$m

$m

Hong Kong Government


22 



22 





Other governments


648 


674 


1,322 


666 


754 


1,420 


Asset-backed securities

2


235 


235 



363 


363 


Corporate debt and other securities


1,822 


4,367 


6,189 


1,674 


3,752 


5,426 


Equities



33,812 


33,812 



30,939 


30,939 


At 31 Dec


2,492 


39,088 


41,580 


2,344 


35,808 


38,152 


1  Included within these figures are debt securities issued by banks and other financial institutions of $1,180m (2019 re-presented: $1,244m), of which nil (2019: nil) are guaranteed by various governments.

2  Excludes asset-backed securities included under US Treasury and US Government agencies.


15

Derivatives

 


Notional contract amounts and fair values of derivatives by product contract type held by HSBC


Notional contract amount

Fair value - Assets

Fair value - Liabilities


Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total


$m

$m

$m

$m

$m

$m

$m

$m

Foreign exchange

7,606,446 


35,021 


106,696 


309 


107,005 


108,903 


1,182 


110,085 


Interest rate

15,240,867 


157,436 


249,204 


1,914 


251,118 


236,594 


2,887 


239,481 


Equities

652,288 



14,043 



14,043 


15,766 



15,766 


Credit

269,401 



2,590 



2,590 


3,682 



3,682 


Commodity and other

120,259 



2,073 



2,073 


3,090 



3,090 


Gross total fair values

23,889,261 


192,457 


374,606 


2,223 


376,829 


368,035 


4,069 


372,104 


Offset (Note 30)





(69,103)




(69,103)


At 31 Dec 2020

23,889,261 


192,457 


374,606 


2,223 


307,726 


368,035 


4,069 


303,001 











Foreign exchange

8,207,629 


31,899 


84,083 


455 


84,538 


84,498 


740 


85,238 


Interest rate

17,895,349 


177,006 


183,668 


1,208 


184,876 


175,095 


2,031 


177,126 


Equities

1,077,347 



9,053 



9,053 


11,237 



11,237 


Credit

345,644 



4,744 



4,744 


5,597 



5,597 


Commodity and other

93,245 



1,523 



1,523 


2,038 



2,038 


Gross total fair values

27,619,214 


208,905 


283,071 


1,663 


284,734 


278,465 


2,771 


281,236 


Offset (Note 30)





(41,739)




(41,739)


At 31 Dec 2019

27,619,214 


208,905 


283,071 


1,663 


242,995 


278,465 


2,771 


239,497 


 

The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

Derivative assets and liabilities increased during 2020, driven by yield curve movements and changes in foreign exchange rates.


Notional contract amounts and fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries


Notional contract amount

Assets

Liabilities


Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total


$m

$m

$m

$m

$m

$m

$m

$m

Foreign exchange

23,413 



506 



506 


870 



870 


Interest rate

47,569 


34,006 


966 


3,221 


4,187 


2,176 



2,184 


At 31 Dec 2020

70,982 


34,006 


1,472 


3,221 


4,693 


3,046 



3,054 











Foreign exchange

24,980 



161 



161 


766 



766 


Interest rate

48,937 


36,769 


435 


1,406 


1,841 


1,072 


183 


1,255 


At 31 Dec 2019

73,917 


36,769 


596 


1,406 


2,002 


1,838 


183 


2,021 


 


 

Use of derivatives

For details regarding the use of derivatives, see page 186 under 'Market risk'.

Trading derivatives

Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenue based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.

Substantially all of HSBC Holdings' derivatives entered into with subsidiaries are managed in conjunction with financial liabilities designated at fair value.

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 shown in the following table:


Unamortised balance of derivatives valued using models with significant unobservable inputs



2020

2019


Footnotes

$m

$m

Unamortised balance at 1 Jan


73 


86 


Deferral on new transactions


232 


145 


Recognised in the income statement during the year:


(205)


(154)


-  amortisation


(116)


(80)


-  subsequent to unobservable inputs becoming observable


(4)


(3)


-  maturity, termination or offsetting derivative


(85)


(71)


Exchange differences




Other



(5)


Unamortised balance at 31 Dec

1

104 


73 


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


Hedge accounting derivatives

HSBC applies hedge accounting to manage the following risks: interest rate, foreign exchange and net investment in foreign operations.  Further details on how these risks arise and how they are managed by the Group can be found in the 'Risk review'.

Fair value hedges

HSBC enters into fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value caused by movements in market interest rates on certain fixed-rate financial instruments that are not measured at fair value through profit or loss, including debt securities held and issued.

HSBC hedging instrument by hedged risk


Hedging instrument


 

Carrying amount


 


Notional amount1

Assets

Liabilities

Balance sheet presentation

Change in fair value2

Hedged risk

$m

$m

$m

$m

Interest rate3

121,573 


1,675 


3,761 


Derivatives

(1,894)


At 31 Dec 2020

121,573 


1,675 


3,761 



(1,894)


 

Interest rate3

122,753 


1,056 


2,208 


Derivatives

(1,531)


At 31 Dec 2019

122,753 


1,056 


2,208 



(1,531)


The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

The hedged risk 'interest rate' includes inflation risk.

HSBC hedged item by hedged risk


Hedged item

Ineffectiveness


Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

Change in fair value1

Recognised in profit and loss



Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

102,260 



3,392 



Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income

2,456 


(11)


Net income from financial instruments held for trading or managed on a fair value basis





Loans and advances to banks


2,280 



56 



Loans and advances to customers

21 



12,148 



1,620 


Debt securities in issue

(613)



89 




Deposits by banks

18 


At 31 Dec 2020

104,546 


12,237 


3,451 


1,623 



1,883 


(11)





 

HSBC hedged item by hedged risk (continued)


Hedged item

Ineffectiveness


Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

Change in fair value1

Recognised in profit and loss



Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

90,617 



1,859 



Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income

2,304 


(7)


Net income from financial instruments held for trading or managed on a fair value basis

153 





Loans and advances to banks


1,897 



12 



Loans and advances to customers

24 



15,206 



797 


Debt securities in issue

(1,011)



3,009 



39 


Deposits by banks

202 



At 31 Dec 2019

92,667 


18,215 


1,875 


836 



1,524 


(7)



Used in effectiveness testing; comprising amount attributable to the designated hedged risk that can be a risk component.

The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were assets of $855m for FVOCI and assets of $17m for debt issued.

The hedged risk 'interest rate' includes inflation risk.

HSBC Holdings hedging instrument by hedged risk


Hedging instrument



Carrying amount




Notional amount1,4

Assets

Liabilities

Balance sheet presentation

Change in fair value2

Hedged risk

$m

$m

$m

$m

Interest rate3

34,006 


3,221 



Derivatives

1,927 


At 31 Dec 2020

34,006 


3,221 




1,927 








Interest rate3

36,769 


1,406 


183 


Derivatives

1,704 


At 31 Dec 2019

36,769 


1,406 


183 



1,704 


The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

The hedged risk 'interest rate' includes foreign exchange risk.

The notional amount of non-dynamic fair value hedges is equal to $34,006m, of which the weighted-average maturity date is February 2028 and the weighted-average swap rate is 1.71%. The majority of these hedges are internal to the Group.

HSBC Holdings hedged item by hedged risk


Hedged item

Ineffectiveness


Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2


Change in fair value1

Recognised in
profit and loss



Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss
presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3


37,338 



3,027 


Debt securities

in issue

(1,910)


17 


Net income from financial instruments held for trading or managed on a fair value basis

At 31 Dec 2020


37,338 



3,027 



(1,910)


17 












Interest rate3


38,126 



1,088 


Debt securities
in issue

(1,697)



Net income from financial instruments held for trading or managed on a fair value basis

At 31 Dec 2019


38,126 



1,088 



(1,697)




Used in effectiveness testing; comprising amount attributable to the designated hedged risk that can be a risk component.

The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were liabilities of $62.8m for debt issued.

The hedged risk 'interest rate' includes foreign exchange risk.

Sources of hedge ineffectiveness may arise from basis risk, including but not limited to the discount rates used for calculating the fair value of derivatives, hedges using instruments with a non-zero fair value, and notional and timing differences between the hedged items and hedging instruments.

For some debt securities held, HSBC manages interest rate risk in a dynamic risk management strategy. The assets in scope of this strategy are high-quality fixed-rate debt securities, which may be sold to meet liquidity and funding requirements.

The interest rate risk of the HSBC fixed-rate debt securities issued is managed in a non-dynamic risk management strategy.

 


Cash flow hedges

HSBC's cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreign-currency basis.

HSBC applies macro cash flow hedging for interest rate risk exposures on portfolios of replenishing current and forecasted issuances of non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.

HSBC also hedges the variability in future cash flows on foreign-denominated financial assets and liabilities arising due to changes in foreign exchange market rates with cross-currency swaps, which are considered dynamic hedges.

Hedging instrument by hedged risk





Hedging instrument

Hedged item

Ineffectiveness



Carrying amount


Change in fair value2

Change in fair value3

Recognised in profit and loss

Profit and loss presentation


Notional amount1

Assets

Liabilities

Balance sheet presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Foreign currency

24,506 


309 


448 


Derivatives

(630)


(630)



Net income from
financial instruments
held for trading or
managed on a fair
value basis

Interest rate

35,863 


239 



Derivatives

519 


514 



At 31 Dec 2020

60,369 


548 


450 



(111)


(116)




 

Foreign currency

21,385 


455 


254 


Derivatives

341 


341 



Net income from financial instruments held for trading or managed on a fair value basis

Interest rate

54,253 


152 


46 


Derivatives

195 


193 



At 31 Dec 2019

75,638 


607 


300 



536 


534 




The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.

Sources of hedge ineffectiveness may arise from basis risk, including but not limited to timing differences between the hedged items and hedging instruments and hedges using instruments with a non-zero fair value.

Reconciliation of equity and analysis of other comprehensive income by risk type


Interest rate

Foreign currency


$m

$m

Cash flow hedging reserve at 1 Jan 2020

204 


(205)


Fair value gains/(losses)

514 


(630)


Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of:



Hedged items that have affected profit or loss

(107)


822 


Income taxes

(79)


(23)


Others

(37)


(1)


Cash flow hedging reserve at 31 Dec 2020

495 


(37)


 




Cash flow hedging reserve at 1 Jan 2019

(26)


(182)


Fair value gains/(losses)

193 


341 


Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of:



Hedged items that has affected profit or loss

99 


(371)


Income taxes

(53)



Others

(9)



Cash flow hedging reserve at 31 Dec 2019

204 


(205)


 

Hedges of net investments in foreign operations

The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken for Group structural exposure to changes in the US dollar-sterling exchange rate using forward foreign exchange contracts or by financing with foreign currency borrowings. This risk arises due to the Group investment in sterling functional currency subsidiaries and is only hedged for changes in spot exchange rates. At 31 December 2020, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of nil (2019: nil), liabilities of $733m (2019: $485m) and notional derivative contract values of $10,500m (2019: $10,500m). These values are included in 'Derivatives' presented in the balance sheet. Ineffectiveness recognised in 'Net income from financial instruments held for trading or managed on a fair value basis' in the year ended 31 December 2020 was nil (2019: nil) and the net investment hedge reserve was a negative $56m as of 31 December 2020 ($304m in 2019 and $780m in 2018). There were no amounts reclassified to the profit and loss account during the accounting periods presented.

 

Interest rate benchmark reform: Amendments to IFRS 9 and IAS 39 'Financial Instruments'

The first set of amendments ('Phase 1') to IFRS 9 and IAS 39, published in September 2019 and endorsed in January 2020, primarily allows the assumption that interbank offered rates ('Ibors') are to continue unaltered for the purposes of forecasting hedged cash flows until such time as the uncertainty of transitioning to near risk-free rates ('RFRs') is resolved. The second set of amendments ('Phase 2'), issued in August 2020 and endorsed in January 2021, allows the modification of hedge documentation to reflect the components of hedge relationships that have transitioned to RFRs on an economically equivalent basis as a direct result of the Ibor transition.

While the application of Phase 1 amendments is mandatory for accounting periods starting on or after 1 January 2020, the Group chose to early adopt the Phase 2 amendments from the beginning of 2020. Significant judgement will be required in determining when Ibor transition uncertainty is resolved and therefore decide when Phase 1 amendments cease to apply and when some of the Phase 2 amendments can be applied.

The notional value of the derivatives impacted by the Ibors reform but which are not used in designated hedge accounting relationships is disclosed on page 113 in the section 'Financial instruments impacted by the Ibor reform'.

The Group has cash flow and fair value hedge accounting relationships that are exposed to different Ibors, predominantly US dollar Libor, sterling Libor and Euribor, as well as overnight rates subject to the market-wide benchmarks reform such as the European Overnight Index Average rate ('Eonia'). Existing financial instruments (such as derivatives, loans and bonds) designated in relationships referencing these benchmarks are expected to transition to RFRs in different ways and at different times. External progress on the transition to RFRs is being monitored, with the objective of ensuring a smooth transition for the Group's hedge accounting relationships. The specific issues arising will vary with the details of each hedging relationship, but may arise due to the transition of existing products included in the designation, a change in expected volumes of products to be issued, a change in contractual terms of new products issued, or a combination of these factors. Some hedges may need to be de-designated and new relationships entered into, while others may survive the market-wide benchmarks reform.

The hedge accounting relationships that are affected by Phase 1 and Phase 2 amendments are presented in the balance sheet as 'Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income', 'Loans and advances to customers', 'Debt securities in issue' and 'Deposits by banks'.

The notional amounts of interest rate derivatives designated in hedge accounting relationships represent the extent of the risk exposure managed by the Group that is expected to be directly affected by market-wide Ibors reform and in scope of Phase 1 and Phase 2 amendments. The cross-currency swaps designated in hedge accounting relationships and affected by Ibor reform are not significant and have not been presented below:

Hedging instrument impacted by Ibor reform


Hedging instrument


Impacted by Ibor reform

Not impacted by Ibor reform

Notional

amount1


£

$

Other

Total


$m

$m

$m

$m

$m

$m

$m

Fair value hedges

17,792 


3,706 


32,789 


10,128 


64,415 


57,157 


121,572 


Cash flow hedges

8,344 


2,522 


8,705 


6,797 


26,368 


9,495 


35,863 


At 31 Dec 2020

26,136 


6,228 


41,494 


16,925 


90,783 


66,652 


157,435 










Fair value hedges

20,378 


4,533 


41,274 


13,435 


79,620 


43,133 


122,753 


Cash flow hedges

5,724 


6,594 


15,750 


15,979 


44,047 


10,206 


54,253 


At 31 Dec 2019

26,102 


11,127 


57,024 


29,414 


123,667 


53,339 


177,006 


The notional contract amounts of interest rate derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

During 2019, the main market event in scope of Ibor reform was the change to the calculation of Eonia to be calculated as the euro short-term rate ('€STR') plus a fixed spread of 8.5 basis points. This event had no material impact to the valuation of components of designated hedge accounting relationships and there were no discontinuations of existing designated relationships. The main market events in scope of Ibor reform during 2020 were the changes applied by central clearing counterparties to remunerating euro and US dollar collateral. While there was a minimal valuation impact to the derivatives in scope that are used for hedge accounting, these changes had no discontinuation impact to any of the designated relationships affected.

For further details of Ibor transition, see 'Areas of special interest' in the Risk review on page 116.


Hedging instrument impacted by Ibor reform held by HSBC Holdings


Hedging instrument


Impacted by Ibor reform

Not impacted by Ibor reform

Notional amount


£

$

Other

Total


$m

$m

$m

$m

$m

$m

$m

Fair value hedges

4,290 


5,393 


21,081 


3,242 


34,006 



34,006 


At 31 Dec 2020

4,290 


5,393 


21,081 


3,242 


34,006 



34,006 










Fair value hedges

3,928 


5,222 


24,500 


3,119 


36,769 



36,769 


At 31 Dec 2019

3,928 


5,222 


24,500 


3,119 


36,769 



36,769 


 


16

Financial investments

 

Carrying amount of financial investments


2020

2019


$m

$m

Financial investments measured at fair value through other comprehensive income

402,054 


357,577 


-  treasury and other eligible bills

118,163 


95,043 


-  debt securities

281,467 


260,536 


-  equity securities

2,337 


1,913 


-  other instruments

87 


85 


Debt instruments measured at amortised cost

88,639 


85,735 


-  treasury and other eligible bills

11,757 


10,476 


-  debt securities

76,882 


75,259 


At 31 Dec

490,693 


443,312 


 

Equity instruments measured at fair value through other comprehensive income


Fair value

Dividends recognised

Type of equity instruments

$m

$m

Investments required by central institutions

904 


22 


Business facilitation

1,387 


22 


Others

46 



At 31 Dec 2020

2,337 


47 





Investments required by central institutions

738 


22 


Business facilitation

1,124 


19 


Others

51 



At 31 Dec 2019

1,913 


50 


 

Financial investments at amortised cost and fair value



2020

2019



Amortised cost

Fair value1

Amortised cost

Fair value1


Footnotes

$m

$m

$m

$m

US Treasury


75,531 


78,251 


79,633 


80,589 


US Government agencies

2

19,851 


20,320 


26,356 


26,387 


US Government-sponsored entities


10,691 


11,224 


8,070 


8,259 


UK Government


28,094 


28,754 


28,621 


28,973 


Hong Kong Government


55,483 


55,507 


47,824 


47,820 


Other governments


178,091 


180,881 


140,510 


142,511 


Asset-backed securities

3

2,708 


2,536 


2,954 


2,889 


Corporate debt and other securities


110,015 


118,960 


101,750 


107,364 


Equities


1,410 


2,337 


1,241 


1,913 


At 31 Dec


481,874 


498,770 


436,959 


446,705 


1  Included within 'fair value' figures are debt securities issued by banks and other financial institutions of $62bn (2019: $61bn), of which $10bn (2019: $11bn) are guaranteed by various governments.

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

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

Maturities of investments in debt securities at their carrying amount


Up to 1 year

1 to 5 years

5 to 10 years

Over 10 years

Total


$m

$m

$m

$m

$m

Debt securities measured at fair value through other comprehensive income

72,250 


131,859 


42,168 


35,190 


281,467 


Debt securities measured at amortised cost

6,135 


16,499 


19,437 


34,811 


76,882 


At 31 Dec 2020

78,385 


148,358 


61,605 


70,001 


358,349 








Debt securities measured at fair value through other comprehensive income

61,833 


123,740 


42,831 


32,132 


260,536 


Debt securities measured at amortised cost

5,472 


14,395 


21,431 


33,961 


75,259 


At 31 Dec 2019

67,305 


138,135 


64,262 


66,093 


335,795 


 

Contractual maturities and weighted average yields of investment debt securities


Up to 1 year

1 to 5 years

5 to 10 years

Over 10 years


Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield


$m

%

$m

%

$m

%

$m

%

Debt securities measured at fair value through other comprehensive income









US Treasury

6,596 


1.2 


22,945 


1.6 


15,618 


1.5 


4,195 


2.3 


US Government agencies



95 


1.8 


43 


2.8 


12,608 


1.8 


US Government-sponsored agencies

30 


2.8 


789 


2.2 


2,988 


2.5 


4,968 


1.8 


UK Government

2,765 


1.5 


5,126 


0.8 


6,220 


0.2 


4,910 


2.3 


Hong Kong Government

84 


1.6 


247 


1.6 


167 


1.8 




Other governments

51,507 


1.7 


62,587 


2.3 


8,184 


1.6 


2,089 


4.3 


Asset-backed securities

18 


2.9 


93 


1.4 


399 


1.8 


2,199 


1.2 


Corporate debt and other securities

10,831 


2.1 


35,615 


1.4 


7,169 


1.8 


2,583 


3.4 


Total amortised cost at 31 Dec 2020

71,831 



127,497 



40,788 



33,552 



Total carrying value

72,250 



131,859 



42,168 



35,190 



Debt securities measured at amortised cost









US Treasury

3,769 


0.1 


4,618 


1.6 


3,003 


2.0 


969 


2.8 


US Government agencies




3.8 


13 


4.5 


7,084 


2.6 


US Government-sponsored agencies

110 


2.5 


258 


2.7 


436 


2.2 


1,112 


3.3 


Hong Kong Government

13 


3.0 


23 


1.6 


118 


2.6 


12 


4.8 


Other governments

179 


3.4 


370 


4.1 


426 


3.8 


1,011 


4.2 


Asset-backed securities








6.0 


Corporate debt and other securities

2,064 


3.3 


11,221 


3.4 


15,441 


3.4 


24,621 


3.8 


Total amortised cost at 31 Dec 2020

6,135 



16,499 



19,437 



34,811 



Total carrying value

6,135 



16,497 



19,439 



34,812 



 

The maturity distributions of ABSs are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2020 by the book amount of debt securities at that date. The yields do not include the effect of related derivatives.


HSBC Holdings

HSBC Holdings carrying amount of financial investments


2020

2019


$m

$m

Debt instruments measured at amortised cost



-  treasury and other eligible bills

10,941 


10,081 


-  debt securities

6,544 


6,025 


At 31 Dec

17,485 


16,106 


 

Financial investments at amortised cost and fair value


2020

2019


Amortised cost

Fair value

Amortised cost

Fair value


$m

$m

$m

$m

US Treasury

17,485 


17,521 


16,106 


16,121 


US Government agencies





US Government-sponsored entities





At 31 Dec

17,485 


17,521 


16,106 


16,121 


 

Maturities of investments in debt securities at their carrying amount


Up to 1 year

1 to 5 years

5 to 10 years

Over 10 years

Total


$m

$m

$m

$m

$m

Debt securities measured at amortised cost

3,767 


2,777 




6,544 


At 31 Dec 2020

3,767 


2,777 




6,544 








Debt securities measured at amortised cost

3,010 


3,015 




6,025 


At 31 Dec 2019

3,010 


3,015 




6,025 


 

Contractual maturities and weighted average yields of investment debt securities


Up to 1 year

1 to 5 years

5 to 10 years

Over 10 years


Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield


$m

%

$m

%

$m

%

$m

%

Debt securities measured at amortised cost









US Treasury

3,767 


1.5 


2,777 


0.3 






US Government agencies









US Government-sponsored agencies









Total amortised cost at 31 Dec 2020

3,767 



2,777 







Total carrying value

3,767 



2,777 







The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2020 by the book amount of debt securities at that date. The yields do not include the effect of related derivatives.


17

Assets pledged, collateral received and assets transferred

 


 

Assets pledged

Financial assets pledged as collateral



2020

2019



$m

$m

Treasury bills and other eligible securities


12,774 


14,034 


Loans and advances to banks


236 


1,975 


Loans and advances to customers


43,168 


26,017 


Debt securities


67,312 


60,995 


Equity securities


26,101 


24,626 


Other


60,810 


50,231 


Assets pledged at 31 Dec


210,401 


177,878 


 


 

Assets pledged as collateral include all assets categorised as encumbered in the disclosure on page 78 of the Pillar 3 Disclosures at 31 December 2020 .

The amount of assets pledged to secure liabilities may be greater than the book value of assets utilised as collateral. For example, in the case of securitisations and covered bonds, the amount of liabilities issued plus mandatory over-collateralisation is less than the book value of the pool of assets available for use as collateral. This is also the case where assets are placed with a custodian or a settlement agent that has a floating charge over all the assets placed to secure any liabilities under settlement accounts.

These transactions are conducted under terms that are usual and customary for collateralised transactions including, where relevant, standard securities lending and borrowing, repurchase agreements and derivative margining. HSBC places both cash and non-cash collateral in relation to derivative transactions.

Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificates of indebtedness are held.


Financial assets pledged as collateral which the counterparty has the right to sell or repledge


2020

2019


$m

$m

Trading assets

64,225 


63,163 


Financial investments

16,915 


10,782 


At 31 Dec

81,140 


73,945 


 


 

Collateral received

The fair value of assets accepted as collateral relating primarily to standard securities lending, reverse repurchase agreements, swaps of securities and derivative margining that HSBC is permitted to sell or repledge in the absence of default was $447,101m (2019: $468,798m). The fair value of any such collateral sold or repledged was $246,520m (2019: $304,261m).

HSBC is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard securities lending, reverse repurchase agreements and derivative margining.

Assets transferred

The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements, as well as swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to be recognised in full while a related liability, reflecting the Group's obligation to repurchase the assets for a fixed price at a future date, is also recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no associated liability as the non-cash collateral received is not recognised on the balance sheet. The Group is unable to use, sell or pledge the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these pledged assets. With the exception of 'Other sales' in the following table, the counterparty's recourse is not limited to the transferred assets.


Transferred financial assets not qualifying for full derecognition and associated financial liabilities


Carrying amount of:

Fair value of:



Transferred
assets

Associated
liabilities

Transferred
assets

Associated
liabilities

Net
position


$m

$m

$m

$m

$m

At 31 Dec 2020






Repurchase agreements

52,413 


51,092 





Securities lending agreements

38,364 


124 





Other sales (recourse to transferred assets only)

3,564 


3,478 


3,619 


3,564 


55 








At 31 Dec 2019






Repurchase agreements

45,831 


45,671 





Securities lending agreements

35,122 


3,225 





Other sales (recourse to transferred assets only)

2,971 


2,885 


2,974 


2,897 


77 


 

 

 


18

Interests in associates and joint ventures

 


Carrying amount of HSBC's interests in associates and joint ventures




2020

2019


$m

$m

Interests in associates

26,594 


24,384 


Interests in joint ventures

90 


90 


Interests in associates and joint ventures

26,684 


24,474 


 


Principal associates of HSBC



2020

2019



Carrying amount

Fair value1

Carrying amount

Fair value1



$m

$m

$m

$m

Bank of Communications Co., Limited


21,248 


7,457 


18,982 


10,054 


The Saudi British Bank


4,215 


4,197 


4,370 


5,550 


Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).