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Fair Value Option
3 Months Ended
Mar. 31, 2024
Fair Value Disclosures [Abstract]  
Fair Value Option Fair Value Option
We report our results to HSBC in accordance with HSBC Group accounting and reporting policies ("Group Reporting Basis"), which apply International Financial Reporting Standards ("IFRSs") as issued by the International Accounting Standards Board ("IASB"). We typically have elected to apply fair value option ("FVO") accounting to selected financial instruments to align the measurement attributes of those instruments under U.S. GAAP and the Group Reporting Basis and to simplify the accounting model applied to those financial instruments. We elected to apply FVO accounting to certain commercial loans held for sale, certain student loans held for investment, certain fixed-rate long-term debt issuances, all of our hybrid instruments, including structured notes and deposits, and certain client share repurchase transactions. Excluding the fair value movement on fair value option liabilities attributable to our own credit spread, which is recorded in other comprehensive income (loss), changes in the fair value of fair value option assets and liabilities as well as the mark-to-market adjustment on the related derivatives and the net realized gains or losses on these derivatives are reported in gain (loss) on instruments designated at fair value and related derivatives in the consolidated statement of income.
Loans and Loans Held For Sale We elected to apply FVO accounting to certain commercial syndicated loans which are originated with the intent to sell and certain commercial loans that we purchased from the secondary market and hold as hedges against our exposure to certain total return swaps or intend to sell and include these loans as loans held for sale in the consolidated balance sheet. We also elected to apply FVO accounting to certain student loans held for investment. These elections allow us to account for these loans at fair value which is consistent with the manner in which the instruments are managed. Where available, fair value is based on observable market pricing obtained from independent sources, relevant broker quotes or observed market prices of instruments with similar characteristics. Where observable market parameters are not available, fair value is determined based on contractual cash flows adjusted for estimates of prepayment rates, expected default rates and loss severity discounted at management's estimate of the expected rate of return required by market participants. We also consider loan-specific risk mitigating factors such as collateral arrangements in determining the fair value estimate. Interest from these loans is recorded as interest income in the consolidated statement of income. Because a substantial majority of the loans elected for the fair value option are floating-rate commercial loans, changes in their fair value are primarily attributable to changes in loan-specific credit risk factors. The components of gain (loss) related to loans designated at fair value are summarized in the table below. At March 31, 2024 and December 31, 2023, no loans for which the fair value option has been elected were 90 days or more past due or in nonaccrual status.
Long-Term Debt (Own Debt Issuances)  We elected to apply FVO accounting for certain fixed-rate long-term debt for which we had applied or otherwise would elect to apply fair value hedge accounting. The election allows us to achieve a similar accounting effect without having to meet the hedge accounting requirements. The own debt issuances elected under FVO are traded in secondary markets and, as such, the fair value is determined based on observed prices for the specific instruments. The observed market price of these instruments reflects the effect of changes to our own credit spreads and interest rates. Interest on the fixed-rate debt accounted for under FVO is recorded as interest expense in the consolidated statement of income. Excluding the fair value movement attributable to our own credit spread, the components of gain (loss) in the consolidated statement of income related to long-term debt designated at fair value are summarized in the table below.
Hybrid Instruments  We elected to apply FVO accounting to all of our hybrid instruments issued, including structured notes and deposits. The valuation of the hybrid instruments is predominantly driven by the derivative features embedded within the instruments and our own credit risk. Cash flows of the hybrid instruments in their entirety, including the embedded derivatives, are discounted at an appropriate rate for the applicable duration of the instrument adjusted for our own credit spreads. The credit spreads applied to structured notes are determined with reference to our own debt issuance rates observed in the primary and secondary markets, internal funding rates, and structured note rates in recent executions while the credit spreads applied to structured deposits are determined using market rates currently offered on comparable deposits with similar characteristics and maturities. Interest on this debt is recorded as interest expense in the consolidated statement of income. Excluding the fair value movement attributable to our own credit spread, the components of gain (loss) in the consolidated statement of income related to hybrid instruments designated at fair value are summarized in the table below.
Client Share Repurchase Transactions From time to time, we enter into agreements with clients to facilitate share repurchase transactions under which the clients make a substantial up-front cash payment in exchange for the delivery of shares. Simultaneously, we enter into corresponding agreements with HSBC Bank plc to execute the share repurchases. We elected to apply FVO accounting to these transactions, which are recorded in other assets and interest, taxes and other liabilities on the consolidated balance sheet.
The following table summarizes the fair value and unpaid principal balance for items we account for under FVO:
Fair ValueUnpaid Principal BalanceFair Value Over (Under) Unpaid Principal Balance
 (in millions)
At March 31, 2024
Student loans held for investment$14 $16 $(2)
Commercial loans held for sale264 272 (8)
Client share repurchase asset661 661  
Fixed rate long-term debt756 741 15 
Hybrid instruments:
Structured deposits2,084 2,057 27 
Structured notes6,114 5,741 373 
Client share repurchase liability661 661  
At December 31, 2023
Student loans held for investment$15 $17 $(2)
Commercial loans held for sale250 256 (6)
Client share repurchase asset10 10 — 
Fixed rate long-term debt749 741 
Hybrid instruments:
Structured deposits1,821 1,816 
Structured notes6,790 6,418 372 
Client share repurchase liability10 10 — 
Components of Gain (Loss) on Instruments Designated at Fair Value and Related Derivatives  The following table summarizes the components of gain (loss) on instruments designated at fair value and related derivatives reflected in the consolidated statement of income for the three months ended March 31, 2024 and 2023:
Loans and Loans Held for SaleLong-Term
Debt
Hybrid
Instruments
Total
(in millions)
Three Months Ended March 31, 2024
Interest rate and other components(1)
$ $23 $(141)$(118)
Credit risk component(2)
1   1 
Total mark-to-market on financial instruments designated at fair value
1 23 (141)(117)
Mark-to-market on related derivatives (27)125 98 
Net realized gain (loss) on related long-term debt derivatives (1) (1)
Gain (loss) on instruments designated at fair value and related derivatives
$1 $(5)$(16)$(20)
Three Months Ended March 31, 2023
Interest rate and other components(1)
$— $(21)$(450)$(471)
Credit risk component(2)
(6)— — (6)
Total mark-to-market on financial instruments designated at fair value
(6)(21)(450)(477)
Mark-to-market on related derivatives— 23 431 454 
Net realized gain on related long-term debt derivatives
— — 
Gain (loss) on instruments designated at fair value and related derivatives
$(6)$$(19)$(22)
(1)As it relates to hybrid instruments, interest rate and other components primarily includes interest rate and equity contract risks.
(2)The fair value movement on fair value option liabilities attributable to our own credit spread is recorded in other comprehensive income (loss).