15th Aug 2014 16:32
Securitisation exposures and other structured products
This section contains information about our exposure to asset-backed securities ('ABS's), including mortgage-backed securities ('MBS's) and related collateralised debt obligations ('CDO's) and direct
lending at fair value through profit or loss summarised in the table below:
A summary of the nature of HSBC's exposures is provided on page 274 of the Annual Report and Accounts 2013. |
Overall exposure of HSBC
Carrying amount28 at | |||||
30 June 2014 | 30 June 2013 | 31 December 2013 | |||
US$bn | US$bn | US$bn | |||
Asset-backed securities ............................................................................... | 46.6 | 54.6 | 50.1 | ||
- fair value through profit or loss ............................................................. | 3.1 | 3.1 | 3.1 | ||
- available for sale29 ................................................................................. | 39.6 | 46.4 | 42.7 | ||
- held to maturity29 .................................................................................. | 1.0 | 1.3 | 1.1 | ||
- loans and receivables .............................................................................. | 2.9 | 3.8 | 3.2 | ||
Direct lending at fair value through profit or loss ....................................... | - | 0.2 | 0.1 | ||
Total ABSs and direct lending at fair value through profit or loss ............... | 46.6 | 54.8 | 50.2 | ||
For footnotes, see page 172.
Within the above table are assets held in the GB&M legacy credit portfolio with a carrying value of US$26.9bn (30 June 2013: US$29.2bn; 31 December 2013: US$28.0bn).
ABSs classified as available for sale
Our principal holdings of available-for-sale ABSs are held in GB&M structured entities ('SE's) established from the outset with the benefit of external investor first loss protection support, and positions held directly and by Solitaire Funding Ltd ('Solitaire'), where we provide first loss risk protection of US$1.2bn through a liquidity facility.
Movement in the available-for-sale reserve
Half-year to 30 June 2014 | Half-year to 30 June 2013 | Half-year to 31 December 2013 | |||||||||||||||
Directly held/ Solitaire30 | SEs | Total | Directly held/ Solitaire30 | SEs | Total | Directly held/ Solitaire30 | SEs | Total | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
Available-for-sale reserve at beginning of period ........ | (1,514) | (129) | (1,643) | (1,473) | (720) | (2,193) | (1,586) | (362) | (1,948) | ||||||||
Increase/(decrease) in fair value of securities .......... | 593 | 96 | 689 | (215) | 374 | 159 | (227) | 225 | (2) | ||||||||
Effect of impairments31 .... | 13 | - | 13 | 124 | 8 | 132 | (23) | 53 | 30 | ||||||||
Repayment of capital ........ | 34 | 116 | 150 | (35) | 55 | 20 | 73 | 30 | 103 | ||||||||
Other movements ............. | (106) | (54) | (160) | 13 | (79) | (66) | 249 | (75) | 174 | ||||||||
Available-for-sale reserve at end of period ................. | (980) | 29 | (951) | (1,586) | (362) | (1,948) | (1,514) | (129) | (1,643) | ||||||||
For footnotes, see page 172.
The table below summarises the carrying amount of our ABS exposure by categories of collateral and details where the risk of our ABSexposure is mitigated through credit derivatives with monoline insurance companies and other financial institutions.
Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss
Trading | Available for sale | Held to maturity | Designatedat fair value through profit or loss | Loans and receivables | Total | Of whichheld through consolidated SEs | Gross principal exposure32 | Credit default swap protection33 | Net principal exposure34 | ||||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||||
At 30 June 2014 | |||||||||||||||||||
Mortgage-related assets: | |||||||||||||||||||
Sub-prime residential ............................. | 150 | 3,231 | - | - | 394 | 3,775 | 3,041 | 4,495 | 107 | 4,388 | |||||||||
- direct lending .................................... | 23 | - | - | - | - | 23 | - | 62 | - | 62 | |||||||||
- MBSs and MBS CDOs ........................ | 127 | 3,231 | - | - | 394 | 3,752 | 3,041 | 4,433 | 107 |
4,326 | |||||||||
US Alt-A residential .............................. | 96 | 3,214 | 18 | - | 128 | 3,456 | 2,738 | 4,881 | 97 | 4,784 | |||||||||
- direct lending .................................... | 1 | - | - | - | - | 1 | - | - | - | - | |||||||||
- MBSs ................................................ | 95 | 3,214 | 18 | - | 128 | 3,455 | 2,738 | 4,881 | 97 | 4,784 | |||||||||
US Government agency and sponsored enterprises: | |||||||||||||||||||
MBSs ................................................ | 136 | 16,739 | 1,004 | - | - | 17,879 | - | 16,411 | - | 16,411 | |||||||||
Other residential ................................... | 266 | 1,737 | - | - | 362 | 2,365 | 1,336 | 2,458 | 49 | 2,409 | |||||||||
- direct lending .................................... | - | - | - | - | - | - | - | - | - | - | |||||||||
- MBSs ................................................ | 266 | 1,737 | - | - | 362 | 2,365 | 1,336 | 2,458 | 49 | 2,409 | |||||||||
Commercial property | |||||||||||||||||||
MBSs and MBS CDOs ........................ | 469 | 4,942 | - | - | 593 | 6,004 | 4,472 | 6,417 | - | 6,417 | |||||||||
1,117 | 29,863 | 1,022 | - | 1,477 | 33,479 | 11,587 | 34,662 | 253 | 34,409 | ||||||||||
Leveraged finance-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 298 | 4,836 | - | - | 242 | 5,376 | 4,209 | 5,601 | 357 | 5,244 | |||||||||
Student loan-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 227 | 3,654 | - | - | 123 | 4,004 | 3,546 | 4,629 | 200 | 4,429 | |||||||||
Other assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 1,375 | 1,245 | - | 22 | 1,051 | 3,693 | 995 | 4,030 | 812 | 3,218 | |||||||||
3,017 | 39,598 | 1,022 | 22 | 2,893 | 46,552 | 20,337 | 48,922 | 1,622 | 47,300 |
Trading | Available for sale | Held to maturity | Designatedat fair value throughprofit or loss | Loans and receivables | Total | Of whichheld through consolidated SEs | Gross principal exposure32 | Credit default swap protection33 | Net principal exposure34 | ||||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||||
At 30 June 2013 | |||||||||||||||||||
Mortgage-related assets: | |||||||||||||||||||
Sub-prime residential ............................. | 195 | 2,607 | - | - | 419 | 3,221 | 2,380 | 4,318 | 121 | 4,197 | |||||||||
- direct lending .................................... | 54 | - | - | - | - | 54 | - | 127 | - | 127 | |||||||||
- MBSs and MBS CDOs ........................ | 141 | 2,607 | - | - | 419 | 3,167 | 2,380 | 4,191 | 121 | 4,070 | |||||||||
US Alt-A residential .............................. | 104 | 3,641 | 30 | - | 127 | 3,902 | 2,996 | 6,208 | 100 | 6,108 | |||||||||
- direct lending .................................... | 11 | - | - | - | - | 11 | - | 17 | - | 17 | |||||||||
- MBSs ................................................ | 93 | 3,641 | 30 | - | 127 | 3,891 | 2,996 | 6,191 | 100 | 6,091 | |||||||||
US Government agency and sponsored enterprises: | |||||||||||||||||||
MBSs ................................................ | 196 | 21,814 | 1,257 | - | - | 23,267 | - | 22,663 | - | 22,663 | |||||||||
Other residential ................................... | 579 | 1,877 | - | - | 449 | 2,905 | 1,324 | 3,727 | 62 | 3,665 | |||||||||
- direct lending .................................... | 166 | - | - | - | - | 166 | - | 166 | - | 166 | |||||||||
- MBSs ................................................ | 413 | 1,877 | - | - | 449 | 2,739 | 1,324 | 3,561 | 62 | 3,499 | |||||||||
Commercial property | |||||||||||||||||||
MBSs and MBS CDOs ........................ | 197 | 6,082 | - | 105 | 1,155 | 7,539 | 5,270 | 8,260 | - | 8,260 | |||||||||
1,271 | 36,021 | 1,287 | 105 | 2,150 | 40,834 | 11,970 | 45,176 | 283 | 44,893 | ||||||||||
Leveraged finance-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 279 | 4,980 | - | - | 239 | 5,498 | 4,164 | 5,845 | 374 | 5,471 | |||||||||
Student loan-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 205 | 4,003 | - | - | 120 | 4,328 | 3,662 | 5,286 | 199 | 5,087 | |||||||||
Other assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 1,398 | 1,395 | - | 63 | 1,279 | 4,135 | 1,016 | 5,352 | 1,143 | 4,209 | |||||||||
3,153 | 46,399 | 1,287 | 168 | 3,788 | 54,795 | 20,812 | 61,659 | 1,999 | 59,660 |
Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss (continued)
Trading | Available for sale | Held to maturity | Designatedat fair value throughprofit or loss | Loans and receivables | Total | Of whichheld through consolidated SEs | Gross principal exposure32 | Credit default swap protection33 | Net principal exposure34 | ||||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||||
At 31 December 2013 | |||||||||||||||||||
Mortgage-related assets: | |||||||||||||||||||
Sub-prime residential ............................. | 178 | 2,977 | - | - | 403 | 3,558 | 2,782 | 4,504 | 112 | 4,392 | |||||||||
- direct lending .................................... | 46 | - | - | - | - | 46 | - | 106 | - | 106 | |||||||||
- MBSs and MBS CDOs ........................ | 132 | 2,977 | - | - | 403 | 3,512 | 2,782 | 4,398 | 112 | 4,286 | |||||||||
US Alt-A residential .............................. | 101 | 3,538 | 18 | - | 134 | 3,791 | 2,926 | 5,692 | 100 | 5,592 | |||||||||
- direct lending .................................... | 10 | - | - | - | - | 10 | - | 14 | - | 14 | |||||||||
- MBSs ................................................ | 91 | 3,538 | 18 | - | 134 | 3,781 | 2,926 | 5,678 | 100 | 5,578 | |||||||||
US Government agency and sponsored enterprises: | |||||||||||||||||||
MBSs ................................................ | 178 | 18,661 | 1,110 | - | - | 19,949 | - | 19,812 | - | 19,812 | |||||||||
Other residential ................................... | 618 | 1,925 | - | - | 399 | 2,942 | 1,513 | 3,981 | 53 | 3,928 | |||||||||
- direct lending .................................... | - | - | - | - | - | - | - | - | - | - | |||||||||
- MBSs ................................................ | 618 | 1,925 | - | - | 399 | 2,942 | 1,513 | 3,981 | 53 | 3,928 | |||||||||
Commercial property | |||||||||||||||||||
MBSs and MBS CDOs ........................ | 133 | 5,667 | - | 104 | 669 | 6,573 | 5,146 | 7,188 | - | 7,188 | |||||||||
1,208 | 32,768 | 1,128 | 104 | 1,605 | 36,813 | 12,367 | 41,177 | 265 | 40,912 | ||||||||||
Leveraged finance-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 294 | 5,011 | - | - | 251 | 5,556 | 4,310 | 5,841 | 365 | 5,476 | |||||||||
Student loan-related assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 196 | 3,705 | - | - | 121 | 4,022 | 3,495 | 4,897 | 199 | 4,698 | |||||||||
Other assets: | |||||||||||||||||||
ABSs and ABS CDOs ............................. | 1,271 | 1,265 | - | 34 | 1,186 | 3,756 | 989 | 4,805 | 1,010 | 3,795 | |||||||||
2,969 | 42,749 | 1,128 | 138 | 3,163 | 50,147 | 21,161 | 56,720 | 1,839 | 54,881 |
For footnotes, see page 172.
The above table excludes leveraged finance transactions.
Representations and warranties related to mortgage sales and securitisation activities
We have been involved in various activities related to the sale and securitisation of residential mortgages, that are not recognised on our balance sheet. These activities include:
· the purchase of US$24bn of third-party originated mortgages by HSBC Bank USA and the securitisation of these by HSBC Securities (USA) Inc. ('HSI') between 2005 and 2007;
· HSI acting as underwriter for third-party issuance of private label MBSs with an original issuance value of US$37bn, most of which were sub-prime; and
· the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities.
In selling and securitising mortgage loans, various representations and warranties may be made to purchasers of the mortgage loans and MBSs. When purchasing and securitising mortgages originated by third-parties and underwriting third-party MBSs, the obligation to repurchase loans in the event of a breach of loan level representations and warranties resides predominantly with the organisation that originated the loan.
Participants in the US mortgage securitisation market that purchased and repackaged whole loans, such as servicers, originators, underwriters, trustees or sponsors of securitisations have been the subject of lawsuits and governmental and regulatory investigations and inquiries. Further details are provided in Note 25 on the Financial Statements.
At 30 June 2014, a liability of US$34m (30 June 2013: US$217m; 31 December 2013: US$99m) was recognised in respect of various representations and warranties relating to the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities. These relate to, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and compliance with the origination criteria established by the agencies. In the event of a breach of its representations and warranties, HSBC Bank USA may be obliged to repurchase the loans with identified defects or to indemnify the buyers. The estimated liability was based on the level of outstanding repurchase demands, the level of outstanding requests for loan files and the expected future repurchase demands in respect of mortgages sold to date which were either two or more payments delinquent or might become delinquent at an estimated conversion rate. Repurchase demands of US$3m were outstanding at 30 June 2014 (30 June 2013: US$53m; 31 December 2013: US$44m).
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