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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
Derivative Financial Instruments
 
In the normal course of business, the derivative instruments entered into are for trading, market making and risk management purposes. For financial reporting purposes, derivative instruments are designated in one of the following categories: (a) financial instruments held for trading, (b) hedging instruments designated as qualifying hedges under derivative and hedge accounting principles or (c) non-qualifying economic hedges. The derivative instruments held are predominantly swaps, futures, options and forward contracts. All derivatives are stated at fair value. Where we enter into enforceable master netting agreements with counterparties, the master netting agreements permit us to net those derivative asset and liability positions and to offset cash collateral held and posted with the same counterparty.
The following table presents the fair value of derivative contracts by major product type on a gross basis. Gross fair values exclude the effects of both counterparty netting as well as collateral, and therefore are not representative of our exposure. The table below presents the amounts of counterparty netting and cash collateral that have been offset in the consolidated balance sheet, as well as cash and securities collateral posted and received under enforceable master netting agreements that do not meet the criteria for netting. Derivative assets and liabilities which are not subject to an enforceable master netting agreement, or are subject to a netting agreement where an appropriate legal opinion to determine such agreements are enforceable has not been either sought or obtained, have not been netted in the table below. Where we have received or posted collateral under netting agreements where an appropriate legal opinion to determine such agreements are enforceable has not been either sought or obtained, the related collateral also has not been netted in the table below.
 
September 30, 2016
 
December 31, 2015
 
Derivative assets
 
Derivative liabilities
 
Derivative assets
 
Derivative liabilities
 
(in millions)
Derivatives accounted for as fair value hedges(1)
 
 
 
 
 
 
 
OTC-cleared(2)
$
52

 
$
1,021

 
$
42

 
$
240

Bilateral OTC(2)
—

 
342

 
—

 
292

Interest rate contracts
52

 
1,363

 
42

 
532

Derivatives accounted for as cash flow hedges(1)
 
 
 
 
 
 
 
Foreign exchange contracts - bilateral OTC(2)
—

 
4

 
17

 
—

OTC-cleared(2)
6

 
24

 
6

 
16

Bilateral OTC(2)
—

 
221

 
—

 
137

Interest rate contracts
6

 
245

 
6

 
153

Total derivatives accounted for as hedges
58

 
1,612

 
65

 
685

Trading derivatives not accounted for as hedges(3)
 
 
 
 
 
 
 
Exchange-traded(2)
56

 
61

 
27

 
27

OTC-cleared(2)
25,111

 
23,293

 
15,717

 
14,723

Bilateral OTC(2)
21,624

 
23,861

 
18,716

 
19,906

Interest rate contracts
46,791

 
47,215

 
34,460

 
34,656

Exchange-traded(2)
—

 
6

 
—

 
15

Bilateral OTC(2)
19,473

 
17,656

 
24,160

 
22,324

Foreign exchange contracts
19,473

 
17,662

 
24,160

 
22,339

Equity contracts - bilateral OTC(2)
1,439

 
1,435

 
1,344

 
1,340

Exchange-traded(2)
38

 
21

 
38

 
39

Bilateral OTC(2)
740

 
653

 
891

 
552

Precious metals contracts
778

 
674

 
929

 
591

OTC-cleared(2)
213

 
258

 
899

 
1,212

Bilateral OTC(2)
1,431

 
1,262

 
2,913

 
2,565

Credit contracts
1,644

 
1,520

 
3,812

 
3,777

Other derivatives not accounted for as hedges(1)
 
 
 
 
 
 
 
OTC-cleared(2)
5

 
64

 
—

 
—

Bilateral OTC(2)
1,045

 
117

 
761

 
120

Interest rate contracts
1,050

 
181

 
761

 
120

Foreign exchange contracts - bilateral OTC(2)
—

 
38

 
—

 
97

Equity contracts - bilateral OTC(2)
542

 
272

 
462

 
422

Credit contracts - bilateral OTC(2)
36

 
4

 
73

 
6

Total derivatives
71,811

 
70,613

 
66,066

 
64,033

Less: Gross amounts of receivable / payable subject to enforceable master netting agreements(4)(6)
62,411

 
62,411

 
55,510

 
55,510

Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements(5)(6)
5,473

 
1,305

 
4,942

 
1,530

Net amounts of derivative assets / liabilities presented in the balance sheet
3,927

 
6,897

 
5,614

 
6,993

Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet
895

 
4,736

 
1,114

 
3,674

Net amounts of derivative assets / liabilities
$
3,032

 
$
2,161

 
$
4,500

 
$
3,319

 
(1) 
Derivative assets / liabilities related to cash flow hedges, fair value hedges and derivative instruments held for purposes other than for trading are recorded in other assets / interest, taxes and other liabilities on the consolidated balance sheet.
(2) 
Over-the-counter (OTC) derivatives include derivatives executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. The credit risk associated with bilateral OTC derivatives is managed through master netting agreements and obtaining collateral. OTC-cleared derivatives are executed bilaterally in the OTC market but then novated to a central clearing counterparty, whereby the central clearing counterparty becomes the counterparty to both of the original counterparties. Exchange traded derivatives are executed directly on an organized exchange that provides pre-trade price transparency. Credit risk is minimized for OTC-cleared derivatives and exchange traded derivatives through daily margining required by central clearing counterparties.
(3) 
Trading related derivative assets/liabilities are recorded in trading assets / trading liabilities on the consolidated balance sheet.
(4) 
Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable netting agreements.
(5) 
Represents the netting of cash collateral posted and received by counterparty under enforceable netting agreements.
(6) 
Netting is performed at a counterparty level in cases where enforceable master netting agreements are in place, regardless of the type of derivative instrument. Therefore, we have not attempted to allocate netting to the different types of derivative instruments shown in the table above.
See Note 18, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," for further information on offsetting related to resale and repurchase agreements and securities borrowing and lending arrangements.
Derivatives Held for Risk Management Purposes  Our risk management policy requires us to identify, analyze and manage risks arising from the activities conducted during the normal course of business. We use derivative instruments as an asset and liability management tool to manage our exposures in interest rate, foreign currency and credit risks in existing assets and liabilities, commitments and forecasted transactions. The accounting for changes in fair value of a derivative instrument will depend on whether the derivative has been designated and qualifies for hedge accounting.
We designate derivative instruments to offset the fair value risk and cash flow risk arising from fixed-rate and floating-rate assets and liabilities as well as forecasted transactions. We assess the hedging relationships, both at the inception of the hedge and on an ongoing basis, using a regression approach to determine whether the designated hedging instrument is highly effective in offsetting changes in the fair value or the cash flows attributable to the hedged risk. Accounting principles for qualifying hedges require us to prepare detailed documentation describing the relationship between the hedging instrument and the hedged item, including, but not limited to, the risk management objective, the hedging strategy and the methods to assess and measure the ineffectiveness of the hedging relationship. We discontinue hedge accounting when we determine that the hedge is no longer highly effective, the hedging instrument is terminated, sold or expired, the designated forecasted transaction is not probable of occurring, or when the designation is removed by us.
Fair Value Hedges  In the normal course of business, we hold fixed-rate loans and securities and issue fixed-rate senior and subordinated debt obligations. The fair value of fixed-rate (U.S. dollar and non-U.S. dollar denominated) assets and liabilities fluctuates in response to changes in interest rates or foreign currency exchange rates. We utilize interest rate swaps, forward and futures contracts and foreign currency swaps to minimize the effect on earnings caused by interest rate and foreign currency volatility. The changes in the fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying amount of the hedged item (basis adjustment). If the hedging relationship is terminated and the hedged item continues to exist, the basis adjustment is amortized over the remaining life of the hedged item.
We recorded basis adjustments for active fair value hedges which decreased the carrying amount of our debt by $26 million and increased by $70 million during the three and nine months ended September 30, 2016, respectively, compared with increases of $25 million and $13 million during the three and nine months ended September 30, 2015, respectively. We amortized $2 million and $5 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships of our debt during the three and nine months ended September 30, 2016, respectively, compared with $2 million and $5 million during the three and nine months ended September 30, 2015, respectively. The total accumulated unamortized basis adjustments amounted to an increase in the carrying amount of our debt of $59 million at September 30, 2016, compared with a decrease of $6 million at December 31, 2015.
Basis adjustments for active fair value hedges of available-for-sale ("AFS") securities decreased the carrying amount of the securities by $93 million and increased by $861 million during the three and nine months ended September 30, 2016, respectively, compared with increases of $412 million and $234 million during the three and nine months ended September 30, 2015, respectively. The total accumulated unamortized basis adjustments for active fair value hedges of AFS securities amounted to increases in the carrying amount of the securities of $1,278 million and $439 million at September 30, 2016 and December 31, 2015, respectively.
The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in fair value hedges and the hedged items in fair value hedges and their location on the consolidated statement of income:
 
Gain (Loss) on Derivative
 
Gain (Loss) on Hedged Items
 
Net Ineffective Gain (Loss) Recognized
  
Interest Income
(Expense)
 
Other Income (Loss)
 
Interest Income
(Expense)
 
Other Income (Loss)
 
Other Income (Loss)
 
(in millions)
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Interest rate contracts/AFS Securities
$
(38
)
 
$
26

 
$
92

 
$
(37
)
 
$
(11
)
Interest rate contracts/long-term debt
8

 
(27
)
 
(34
)
 
26

 
(1
)
Total
$
(30
)
 
$
(1
)
 
$
58

 
$
(11
)
 
$
(12
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Interest rate contracts/AFS Securities
$
(51
)
 
$
(434
)
 
$
92

 
$
414

 
$
(20
)
Interest rate contracts/long-term debt
7

 
27

 
(22
)
 
(25
)
 
2

Total
$
(44
)
 
$
(407
)
 
$
70

 
$
389

 
$
(18
)
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Interest rate contracts/AFS Securities
$
(133
)
 
$
(1,027
)
 
$
281

 
$
965

 
$
(62
)
Interest rate contracts/long-term debt
23

 
71

 
(95
)
 
(70
)
 
1

Total
$
(110
)
 
$
(956
)
 
$
186

 
$
895

 
$
(61
)
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Interest rate contracts/AFS Securities
$
(154
)
 
$
(229
)
 
$
273

 
$
217

 
$
(12
)
Interest rate contracts/long-term debt
16

 
15

 
(55
)
 
(13
)
 
2

Total
$
(138
)
 
$
(214
)
 
$
218

 
$
204

 
$
(10
)

Cash Flow Hedges  We own or issue floating rate financial instruments and enter into forecasted transactions that give rise to variability in future cash flows. As a part of our risk management strategy, we use interest rate swaps, currency swaps and futures contracts to mitigate risk associated with variability in the cash flows. Changes in fair value of a derivative instrument associated with the effective portion of a qualifying cash flow hedge are recognized initially in other comprehensive income (loss). When the cash flows being hedged materialize and are recorded in income or expense, the associated gain or loss from the hedging derivative previously recorded in accumulated other comprehensive loss ("AOCI") is reclassified into earnings in the same accounting period in which the designated forecasted transaction or hedged item affects earnings. If a cash flow hedge of a forecasted transaction is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in AOCI unless it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period as documented at the inception of the hedge, at which time the cumulative gain or loss is released into earnings.
At September 30, 2016 and December 31, 2015, active cash flow hedge relationships extend or mature through July 2036. During the three and nine months ended September 30, 2016, respectively, $5 million and $14 million of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from AOCI, compared with losses of $3 million and $8 million during the three and nine months ended September 30, 2015, respectively. During the next twelve months, we expect to amortize $13 million of remaining losses to earnings resulting from these terminated and/or re-designated cash flow hedges. The interest accrual related to the hedging instruments is recognized in interest income.
The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in cash flow hedges (including amounts recognized in AOCI from all terminated cash flow hedges) and their locations on the consolidated statement of income:
 
Gain (Loss)
Recognized
in AOCI on
Derivative
(Effective
Portion)
 
Location of Gain
(Loss) Reclassified
from AOCI into Income 
(Effective Portion)
 
Gain (Loss)
Reclassed
From AOCI
into Income
(Effective
Portion)
 
Location of Gain
(Loss) Recognized
in Income on the Derivative
(Ineffective Portion and
Amount Excluded from Effectiveness Testing)
 
Gain (Loss)
Recognized
in Income
on the
Derivative
(Ineffective
Portion)
 
2016
 
2015
 
 
2016
 
2015
 
 
2016
 
2015
 
(in millions)
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
—

 
$
(2
)
 
Interest income (expense)
 
$
—

 
$
—

 
Other income (loss)
 
$
—

 
$
—

Interest rate contracts
11

 
(51
)
 
Interest income (expense)
 
(5
)
 
(3
)
 
Other income (loss)
 
—

 
—

Total
$
11

 
$
(53
)
 
 
 
$
(5
)
 
$
(3
)
 
 
 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
—

 
$
(1
)
 
Interest income (expense)
 
$
—

 
$
—

 
Other income (loss)
 
$
—

 
$
—

Interest rate contracts
(89
)
 
(36
)
 
Interest income (expense)
 
(14
)
 
(8
)
 
Other income (loss)
 
—

 
—

Total
$
(89
)
 
$
(37
)
 
 
 
$
(14
)
 
$
(8
)
 
 
 
$
—

 
$
—


Trading Derivatives and Non-Qualifying Hedging Activities  In addition to risk management, we enter into derivative instruments, including buy- and sell-protection credit derivatives, for trading and market making purposes, to repackage risks and structure trades to facilitate clients’ needs for various risk taking and risk modification purposes. We manage our risk exposure by entering into offsetting derivatives with other financial institutions to mitigate the market risks, in part or in full, arising from our trading activities with our clients. In addition, we also enter into buy-protection credit derivatives with other market participants to manage our counterparty credit risk exposure. Where we enter into derivatives for trading purposes, realized and unrealized gains and losses are recognized in trading revenue or residential mortgage banking revenue (expense). Credit losses arising from counterparty risk on over-the-counter derivative instruments and offsetting buy protection credit derivative positions are recognized as an adjustment to the fair value of the derivatives and are recorded in trading revenue.
Our non-qualifying hedging activities include:
•
Derivative contracts related to the fixed-rate long-term debt issuances and hybrid instruments, including all structured notes and structured deposits, for which we have elected fair value option accounting. These derivative contracts are non-qualifying hedges but are considered economic hedges.
•
Credit default swaps which are designated as economic hedges against the credit risks within our loan portfolio. In the event of an impairment loss occurring in a loan that is economically hedged, the impairment loss is recognized as provision for credit losses while the gain on the credit default swap is recorded as other income.
•
Forward purchase or sale of to-be-announced ("TBA") securities designated to economically hedge mortgage servicing rights. Changes in the fair value of TBA positions, which are considered derivatives, are recorded in residential mortgage banking revenue (expense).
Derivative instruments designated as economic hedges that do not qualify for hedge accounting are recorded at fair value through profit and loss. Realized and unrealized gains and losses on economic hedges are recognized in gain (loss) on instruments designated at fair value and related derivatives, other income (loss) or residential mortgage banking revenue (expense) while the derivative asset or liability positions are reflected as other assets or other liabilities.
The following table presents information on gains and losses on derivative instruments held for trading purposes and their locations on the consolidated statement of income:
 
Location of Gain (Loss)
Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
(in millions)
Interest rate contracts
Trading revenue (expense)
 
$
97

 
$
260

 
$
(413
)
 
$
801

Interest rate contracts
Residential mortgage banking revenue (expense)
 
(3
)
 
28

 
40

 
34

Foreign exchange contracts
Trading revenue (expense)
 
(243
)
 
(372
)
 
(15
)
 
(521
)
Equity contracts
Trading revenue (expense)
 
2

 
(3
)
 
5

 
—

Precious metals contracts
Trading revenue (expense)
 
35

 
25

 
64

 
44

Credit contracts
Trading revenue (expense)
 
(40
)
 
(23
)
 
(102
)
 
(40
)
Total
 
 
$
(152
)
 
$
(85
)
 
$
(421
)
 
$
318


The following table presents information on gains and losses on derivative instruments held for non-qualifying hedging activities and their locations on the consolidated statement of income:
 
Location of Gain (Loss)
Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
(in millions)
Interest rate contracts
Gain (loss) on instruments designated at fair value and related derivatives
 
$
(6
)
 
$
164

 
$
319

 
$
131

Interest rate contracts
Residential mortgage banking revenue (expense)
 
—

 
(1
)
 
—

 
—

Foreign exchange contracts
Gain (loss) on instruments designated at fair value and related derivatives
 
6

 
(18
)
 
26

 
(13
)
Equity contracts
Gain (loss) on instruments designated at fair value and related derivatives
 
194

 
(533
)
 
226

 
(401
)
Precious metals contracts
Gain (loss) on instruments designated at fair value and related derivatives
 
—

 
(1
)
 
—

 
—

Credit contracts
Gain (loss)on instruments designated at fair value and related derivatives
 
—

 
—

 
—

 
(3
)
Credit contracts
Other income (loss)
 
(23
)
 
92

 
(64
)
 
69

Total
 
 
$
171

 
$
(297
)
 
$
507

 
$
(217
)
Credit-Risk Related Contingent Features  We enter into total return swap, interest rate swap, cross-currency swap and credit default swap contracts, amongst others, which contain provisions that require us to maintain a specific credit rating from each of the major credit rating agencies. Sometimes the derivative instrument transactions are a part of broader structured product transactions. If HSBC Bank USA, National Association's ("HSBC Bank USA") credit ratings were to fall below the current ratings, the counterparties to our derivative instruments could demand us to post additional collateral. The amount of additional collateral required to be posted will depend on whether HSBC Bank USA is downgraded by one or more notches. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position at September 30, 2016 was $7,949 million, for which we had posted collateral of $7,575 million. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position at December 31, 2015 was $7,139 million, for which we had posted collateral of $6,283 million. Substantially all of the collateral posted is in the form of cash or securities available-for-sale. See Note 18, "Guarantee Arrangements, Pledged Assets and Repurchase Agreements," for further details.
The following tables summarize our obligation to post additional collateral (from the current collateral level) in certain hypothetical commercially reasonable downgrade scenarios of our long term ratings. It is not appropriate to accumulate or extrapolate information presented in the tables below to determine our total obligation because the information presented to determine the obligation in hypothetical rating scenarios is not mutually exclusive.
 
Single-notch downgrade
 
Two-notch downgrade
Moody’s
A1
 
A2
 
(in millions)
Amount of additional collateral to be posted upon downgrade
$
59

 
$
65


 
Single-notch downgrade
 
Two-notch downgrade
Standard & Poor's ("S&P")
A+
 
A
 
(in millions)
Amount of additional collateral to be posted upon downgrade
$
59

 
$
65



Notional Value of Derivative Contracts  The following table summarizes the notional values of derivative contracts:

September 30, 2016
 
December 31, 2015
 
(in millions)
Interest rate:
 
 
 
Futures and forwards
$
421,519

 
$
149,413

Swaps
2,245,350

 
2,453,526

Options written
91,443

 
65,747

Options purchased
110,002

 
80,092

 
2,868,314

 
2,748,778

Foreign exchange:
 
 
 
Swaps, futures and forwards
1,055,428

 
980,811

Options written
72,066

 
81,132

Options purchased
73,007

 
82,004

Spot
27,429

 
42,724

 
1,227,930

 
1,186,671

Commodities, equities and precious metals:
 
 
 
Swaps, futures and forwards
73,915

 
35,546

Options written
17,466

 
19,601

Options purchased
29,929

 
33,374

 
121,310

 
88,521

Credit derivatives
143,515

 
188,070

Total
$
4,361,069

 
$
4,212,040