TIDM57HB
RNS Number : 0806A
Hongkong & Shanghai Banking Corp Ld
21 March 2017
38 Related party transactions
The group's related parties include the parent, fellow
subsidiaries, associates, joint ventures, post-employment benefit
plans for the benefit of the group's employees, Key Management
Personnel, close family members of Key Management Personnel and
entities which are controlled or jointly controlled by Key
Management Personnel or their close family members.
a Inter-company
The group is wholly-owned by HSBC Asia Holdings B.V.. HSBC Asia
Holdings B.V. is in turn wholly-owned by HSBC Asia Holdings (UK)
Limited, which is wholly-owned by HSBC Holdings B.V.. HSBC Holdings
B.V. is wholly-owned by HSBC Finance (Netherlands), which is
wholly-owned by HSBC Holdings plc (incorporated in England).
The group entered into transactions with its fellow subsidiaries
in the normal course of business, including the acceptance and
placement of interbank deposits, correspondent banking transactions
and off-balance sheet transactions. The activities were on
substantially the same terms, including interest rates and
security, as for comparable transactions with third party
counterparties.
The group shares the costs of certain IT projects with its
fellow subsidiaries and also used certain processing services of
fellow subsidiaries on a cost recovery basis. The Bank also acted
as agent for the distribution of retail investment funds for fellow
subsidiaries and paid professional fees for services provided by
fellow subsidiaries. The commissions and fees in these transactions
and services are priced on an arm's length basis.
The aggregate amount of income and expenses arising from these
transactions during the year and the balances of amounts due to and
from the relevant parties at the year end are as follows:
2016 2015
---------------------------------- ----------------------------------
Immediate Ultimate Immediate Ultimate
holding holding Fellow holding holding Fellow
company company subsidiaries company company subsidiaries
HK$m HK$m HK$m HK$m HK$m HK$m
Income and expenses
for the year
Interest income
.......................... - - 1,242 - - 599
Interest expense(1)
....................... 1,232 559 517 892 534 341
Fee income
................................ - - 2,482 - - 2,604
Fee expense
............................... - - 971 - - 802
Other operating
income ............. - 826 2,346 - 577 2,729
Other operating
expenses(2)
......... 6 2,387 7,681 7 2,433 7,586
At 31 December
Assets
Trading assets(3)
........................... - 14 17,320 - - 17,051
Derivative assets
........................ - - 110,669 - - 101,630
Other assets(3)
.............................. 1 382 225,056 - 102 227,243
--------- -------- ------------- --------- -------- -------------
1 396 353,045 - 102 345,924
--------- -------- ------------- --------- -------- -------------
Liabilities
Trading liabilities(3)
...................... - 13 13,400 - - 10,232
Financial liabilities
designated at
fair value(3)
................................ - - 8 - - 4
Derivative liabilities
................... - - 115,743 - - 108,317
Other liabilities(3)
......................... 510 7,714 92,338 554 624 78,585
Subordinated
liabilities(3)
............... 65,378 18,677 - 1,395 18,679 -
Preference shares
....................... 26,779 - 100 36,451 - 102
--------- -------- ------------- --------- -------- -------------
92,667 26,404 221,589 38,400 19,303 197,240
--------- -------- ------------- --------- -------- -------------
Guarantees
................................. - - 21,872 - - 21,400
Commitments
............................ - - 2,578 - - 2,841
1 Interest expense included distribution on preference shares
and interest on subordinated liabilities.
2 In 2016, payments were made of HK$682m (2015: HK$1,014m) for
software costs which were capitalised as intangible assets in the
balance sheet of the group.
3 These balances are presented under 'Amounts due from/to Group
companies' in the consolidated balance sheet.
38 Related party transactions (continued)
b Share option and share award schemes
The group participates in various share option and share plans
operated by HSBC whereby share options or shares of HSBC are
granted to employees of the group. As disclosed in note 4(a), the
group recognises an expense in respect of these share options and
share awards. The cost borne by the ultimate holding company in
respect of share options is treated as a capital contribution and
is recorded within 'Other reserves'. In respect of share awards,
the group recognises a liability to the ultimate holding company
over the vesting period. This liability is measured at the fair
value of the shares at each reporting date, with changes since the
award dates adjusted through the capital contribution account
within 'Other reserves'. The balances of the capital contribution
and the liability as at 31 December 2016 amounted to HK$3,225m and
HK$1,945m respectively (2015: HK$3,483m and HK$1,769m
respectively).
c Pension funds
At 31 December 2016, HK$14.0bn (2015: HK$12.6bn) of pension fund
assets were under management by group companies. Total fees paid or
payable by pension plans to group companies for providing fund
management, administrative and trustee services amounted to HK$21m
for the year (2015: HK$22m).
d Associates and joint ventures
The group provides certain banking and financial services to
associates and joint ventures, including loans, overdrafts,
interest and non-interest bearing deposits and current accounts.
Details of interests in associates and joint ventures are given in
note 15. Transactions and balances during the year with associates
and joint ventures were as follows:
2016 2015
------------------------- --------------------------
Highest Balance Highest Balance
balance at balance at
during during
the year 31 December the year 31 December
HK$m HK$m HK$m HK$m
Amounts due from
associates - unsubordinated
.. 24,147 22,268 32,372 15,614
Amounts due from
joint ventures -
unsubordinated
................................................... 3 - 2 -
--------- -------------- --------- ---------------
24,150 22,268 32,374 15,614
--------- -------------- --------- ---------------
Amounts due to associates
.................................. 8,625 4,464 8,113 713
--------- -------------- --------- ---------------
Commitments
.................................................... 1 1 1 1
The disclosure of the year-end balance and the highest balance
during the year is considered the most meaningful information to
represent transactions during the year.
The transactions resulting in amounts due to and from associates
and joint ventures arose in the ordinary course of business and on
substantially the same terms, including interest rates and
security, as for comparable transactions with third party
counterparties.
e Key Management Personnel
Key Management Personnel are defined as those persons having
authority and responsibility for planning, directing and
controlling the activities of the Bank and the group. It includes
members of the Board of Directors and Executive Committee of the
Bank and the Board of Directors and Group Managing Directors of
HSBC Holdings plc.
38 Related party transactions (continued)
The following table shows the expense in respect of compensation
for Key Management Personnel of the Bank for services rendered to
the Bank:
2016 2015
HK$m HK$m
Salaries and other short term
benefits.............................................................................. 285 233
Retirement benefits
.......................................................................................................
. 10 13
Share-based payments
.................................................................................................... 111 179
---- ----
406 425
---- ----
Transactions, arrangements and agreements involving Key
Management Personnel
2016 2015
HK$m HK$m
During the year
Highest average assets(1)
................................................................................................... 21,374 27,536
Highest average liabilities(1)
.............................................................................................. 33,658 39,743
Contribution to the group's profit
before tax ................................................................. 599 865
At the year end
Guarantees
...................................................................................................
.................. 3,547 4,379
Commitments
...................................................................................................
............. 2,623 2,268
1 The disclosure of the highest average balance during the year
is considered the most meaningful information to represent
transactions during the year.
Transactions, arrangements and agreements are entered into by
the group with companies that may be controlled by Key Management
Personnel of the group and their immediate relatives. These
transactions are primarily loans and deposits, and were entered
into in the ordinary course of business and on substantially the
same terms, including interest rates and security, as comparable
transactions with persons or companies of a similar standing or,
where applicable, with other employees. The transactions did not
involve more than the normal risk of repayment or present other
unfavourable features.
No impairment losses have been recorded against balances
outstanding during the year with Key Management Personnel, and
there are no specific impairment allowances on balances with Key
Management Personnel at the
year end (2015: nil).
f Loans to directors
Directors are defined as the Directors of the Bank, its ultimate
holding company, HSBC Holdings plc and intermediate companies, as
well as companies that are controlled by, and entities that are
connected with these directors. Particulars of loans to directors
disclosed pursuant to section 17 of the Companies (Disclosure of
Information about Benefits of Directors) Regulation are as
follows:
Aggregate amount Maximum aggregate
amount
outstanding outstanding
at 31 December during the year
------------------ -------------------
2016 2015 2016 2015
HK$m HK$m HK$m HK$m
By the Bank ........................................................ 1,063 3,246 1,279 4,467
By subsidiaries ..................................................... - - 1 1
-------- -------- --------- --------
1,063 3,246 1,280 4,468
-------- -------- --------- --------
These amounts include principal and interest, and the maximum
liability that may be incurred under guarantees.
39 Fair values of financial instruments carried at fair
value
The fair value of financial instruments is generally measured on
the basis of the individual financial instrument. However, in cases
where the group manages a group of financial assets and financial
liabilities on the basis of its net exposure to either market risks
or credit risk, the group measures the fair value of the group of
financial instruments on a net basis, but presents the underlying
financial assets and liabilities separately in the financial
statements, unless they satisfy the HKFRS offsetting criteria as
described in note 36.
Financial instruments carried at fair value and bases of
valuation
Valuation
techniques
----------------
Third
Level Level Level party
1 2 3 total Inter-company(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
At 31 December
2016
Trading assets(1)
........................ 239,646 131,285 703 371,634 - 371,634
Derivative
assets .................... 3,673 364,062 1,403 369,138 110,669 479,807
Financial
assets designated
at fair value
............................ 72,736 29,524 3,756 106,016 - 106,016
Available-for-sale
investments 1,058,461 510,357 5,766 1,574,584 - 1,574,584
Trading liabilities(1)
................... 75,880 106,768 5,822 188,470 - 188,470
Derivative
liabilities
............... 3,684 340,336 2,695 346,715 115,743 462,458
Financial
liabilities
designated
at fair value
........................ - 50,875 241 51,116 - 51,116
At 31 December
2015
Trading assets(1)
........................ 158,173 143,611 842 302,626 - 302,626
Derivative
assets .................... 6,914 271,230 1,181 279,325 101,630 380,955
Financial
assets designated
at fair value
............................ 65,883 30,766 2,446 99,095 - 99,095
Available-for-sale
investments 1,015,065 466,129 6,253 1,487,447 - 1,487,447
Trading liabilities(1)
................... 56,291 128,102 7,458 191,851 - 191,851
Derivative
liabilities
............... 5,773 253,647 1,682 261,102 108,317 369,419
Financial
liabilities
designated
at fair value
........................ - 50,770 - 50,770 - 50,770
1 Amounts with HSBC Group entities are not reflected here.
2 Inter-company derivative balances are largely under 'Level 2'.
Transfers between levels of the fair value hierarchy are deemed
to occur at the end of the reporting period. Transfers between
level 1 and level 2 are immaterial.
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.
For all financial instruments where fair values are determined
by reference to externally quoted prices or observable pricing
inputs to models, independent price determination or validation is
utilised. In inactive markets, direct observation of a traded price
may not be possible. In these circumstances, the group will source
alternative market information to validate the financial
instrument's fair value, with greater weight given to information
that is considered to be more relevant and reliable. For fair
values determined using valuation models, the control framework may
include, as applicable, development or validation by independent
support functions of (i) the logic within valuation models; (ii)
the inputs to those models; (iii) any adjustments required outside
the valuation models; and (iv) where possible, model outputs.
Valuation models are subject to a process of due diligence and
calibration before becoming operational and are calibrated against
external market data on an on-going basis.
Changes in fair value are generally subject to a profit and loss
analysis process. This process disaggregates changes in fair value
into three high level categories: (i) portfolio changes, such as
new transactions or maturing transactions; (ii) market movements,
such as changes in foreign exchange rates or equity prices; and
(iii) other, such as changes in fair value adjustments.
39 Fair values of financial instruments carried at fair value
(continued)
To this end, the ultimate responsibility for the determination
of fair values lies within the Finance function, which reports to
the Group Finance Director. Finance establishes the accounting
policies and procedures governing valuation, and is responsible for
ensuring that these comply with all relevant accounting
standards.
Determination of fair value
Fair values are determined according to the following
hierarchy:
-- Level 1 - Valuation technique using quoted market price:
Financial instruments with quoted prices for identical instruments
in active markets that the group 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 judgement as to whether a market is active may include, but
is not restricted to, the consideration of factors such as the
magnitude and frequency of trading activity, the availability of
prices and the size of bid/offer spreads. The bid/offer spread
represents the difference in prices at which a market participant
would be willing to buy compared with the price at which they would
be willing to sell. In inactive markets, obtaining assurance that
the transaction price provides evidence of fair value or
determining the adjustments to transaction prices that are
necessary to measure the fair value of the instrument requires
additional work during the valuation process.
Financial liabilities measured at fair value
Structured notes issued and certain other hybrid instrument
liabilities are included within trading liabilities and are
measured at fair value. The credit spread applied to these
instruments is derived from the spreads at which the group issues
structured notes.
Fair value adjustments
Fair value adjustments are adopted when the group determines
that there are additional factors that would be considered relevant
by a market participant that are not incorporated within the
valuation model. Movements in the level of fair value adjustments
do not necessarily result in the recognition of profits or losses
within the income statement, such as when models are enhanced, fair
value adjustments may no longer be required.
Risk-related adjustments
(i) Bid-offer
HKFRS 13 requires use of the price within the bid-offer spread
that is most representative of fair value. Valuation models will
typically generate mid-market values. The bid-offer adjustment
reflects the extent to which bid-offer costs would be incurred if
substantially all residual net portfolio market risks were closed
using available hedging instruments or by disposing of, or
unwinding the position.
(ii) Uncertainty
Certain model inputs may be less readily determinable from
market data, and/or the choice of model itself may be more
subjective. In these circumstances, an adjustment may be necessary
to reflect the likelihood that market participants would adopt more
conservative values for uncertain parameters and/or model
assumptions, than those used in the group's valuation model.
39 Fair values of financial instruments carried at fair value
(continued)
(iii)Credit valuation adjustment ('CVA') and debit valuation
adjustment ('DVA')
The CVA is an adjustment to the valuation of over-the-counter
('OTC') derivative contracts to reflect the possibility that the
counterparty may default and the group may not receive the full
market value of the transactions.
The DVA is an adjustment to the valuation of OTC derivative
contracts to reflect the possibility that the group may default,
and that the group may not pay the full market value of the
transactions.
The group calculates a separate CVA and DVA for each legal
entity, and for each counterparty to which the entity has exposure.
With the exception of central clearing parties, all third-party
counterparties are included in the CVA and DVA calculations, and
these adjustments are not netted across group entities.
The group calculates the CVA by applying the probability of
default ('PD') of the counterparty, conditional on the non-default
of the group, to the group's expected positive exposure to the
counterparty and multiplying the result by the loss expected in the
event of default. Conversely, the group calculates the DVA by
applying the PD of the group, conditional on the non-default of the
counterparty, to the expected positive exposure of the counterparty
to the group and multiplying the result by the loss expected in the
event of default. Both calculations are performed over the life of
the potential exposure.
For most products the group uses a simulation methodology, which
incorporates a range of potential exposures over the life of the
portfolio, to calculate the expected positive exposure to a
counterparty. The simulation methodology includes credit mitigants,
such as counterparty netting agreements and collateral agreements
with the counterparty.
The methodologies do not, in general, account for 'wrong-way
risk' which arises when the underlying value of the derivative
prior to any CVA is positively correlated to the PD of the
counterparty. When there is significant wrong-way risk, a
trade-specific approach is applied to reflect this risk in the
valuation.
(iv) Funding fair value adjustment ('FFVA')
The FFVA is calculated by applying future market funding spreads
to the expected future funding exposure of any uncollateralised
component of the OTC derivative portfolio. The expected future
funding exposure is calculated by a simulation methodology, where
available and is adjusted for events that may terminate the
exposure, such as the default of the group or the counterparty. The
FFVA and DVA are calculated independently.
(v) Model limitation
Models used for portfolio valuation purposes may be based upon a
simplifying set of assumptions that do not capture all material
market characteristics. In these circumstances, model limitation
adjustments are adopted.
(vi) Inception profit (Day 1 profit or loss reserves)
Inception profit adjustments are adopted when the fair value
estimated by a valuation model is based on one or more significant
unobservable inputs.
39 Fair values of financial instruments carried at fair value
(continued)
Reconciliation of fair value measurements in Level 3 of the fair
value hierarchy
Assets Liabilities
--------------------- ----------
Held Designated Held Designated
Available- for at fair for at fair
for-sale trading value Derivatives trading Derivatives value
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
2016
At 1 January
.........................
........... 6,253 842 2,446 1,181 7,458 1,682 -
Total gains
or losses
recognised
in profit
or loss
.........................
........ (11) 16 169 709 (399) 1,479 (9)
Total gains
or losses
recognised
in other comprehensive
income ........ 207 1 1 (5) (117) 85 (7)
Purchases/issues.........
......................... 40 1,400 1,996 - 1,830 - -
Sales
.........................
......................... (14) (1,492) (4) - - - -
Deposits/settlements
......................... (773) - (853) 62 (1,144) (25) -
Net transfers
(out)/in
........................ 64 (64) 1 (544) (1,806) (526) 257
---------- -------- ---------- ----------- -------- ----------- ----------
At 31 December
.........................
....... 5,766 703 3,756 1,403 5,822 2,695 241
---------- -------- ---------- ----------- -------- ----------- ----------
Unrealised
gains or losses
recognised
in profit
or loss relating
to those assets
and liabilities
held at the
end of the
reporting
period(1)
.................. - 4 172 32 - (29) 9
2015
At 1 January
..................................... 6,712 165 1,911 785 12,153 1,108 -
Total gains
or losses
recognised
in profit
or loss ................................. 43 7 276 705 (1,387) 872 -
Total gains
or losses
recognised
in other comprehensive
income ........ (922) (7) (1) (8) (413) (8) -
Purchases/issues.................................. 548 992 1,940 - 4,424 - -
Sales .................................................. (128) (282) (68) - - - -
Deposits/settlements
......................... - - (807) (75) (3,257) (75) -
Net transfers
out ............................... - (33) (805) (226) (4,062) (215) -
----- ----- ----- ----- ------- -----
At 31 December
................................ 6,253 842 2,446 1,181 7,458 1,682 -
----- ----- ----- ----- ------- -----
Unrealised
gains or losses
recognised
in profit
or loss relating
to those assets
and liabilities
held at the
end of the
reporting
period(1)
.................. - 7 101 244 9 (61) -
1 The amount has been reported on a net basis, after taking into
consideration the total gains or losses arising from those
transactions where the risk has been backed out to other HSBC
entities.
Transfers between levels of the fair value hierarchy are deemed
to occur at the end of the reporting period. Transfers out of Level
3 held for trading liabilities predominantly resulted from an
increase in the observability of inputs such as correlations in
pricing the instruments.
Effects of changes in significant non-observable assumptions to
reasonably possible alternatives
The key unobservable inputs to Level 3 financial instruments
include volatility and correlation for structured notes and
deposits valued using option models, bid quotes for corporate bonds
valued using approaches that take into account of market
comparables, and multiple items for private equity and strategic
investments. In the absence of an active market, the fair value of
private equity and strategic investments 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. The change in fair values due to changes in reasonably
possible alternative assumptions for these unobservable inputs is
not significant.
This information is provided by RNS
The company news service from the London Stock Exchange
END
ACSLLFSLVEILFID
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March 21, 2017 08:01 ET (12:01 GMT)
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