20 February 2013

FRC: Presentation of market risk disclosures

When it was established, one of the primary objectives of the Financial Reporting Lab (the Lab) was to help market participants develop innovations in corporate reporting. It was envisaged that such innovations would primarily be made through voluntary practices that could be adopted within current requirements, though some innovations favoured by market participants may need changes in requirements to enable their adoption.

Some of the topics discussed relate to:

• taking forward the theme of identifying and helping companies to cut clutter from their reporting;
• presentational aspects of reporting to make important information more accessible; and
• opportunities for innovation within the UK government’s proposed revisions to narrative reporting requirements.

When speaking with companies about specific topics of interest for Lab projects, the Lab sought to explore how certain of these themes and developments were being considered by companies and perceived by the investment community. HSBC volunteered to participate in a project to look at changes made to its risk disclosure during 2011. Specifically, HSBC wanted to discuss with investors whether separating static policy information from current measures of key risk figures and changes to assumptions has been effective in clarifying or improving the usefulness of the bank’s risk disclosure.

Reflecting this, the Lab designed a project to explore how these changes are perceived by the investment community, focusing on the disclosure of market risk to illustrate the change in presentation. The Lab also asked investors to comment on aspects of the content of market risk disclosures and how these disclosures are used and best presented in practice.

In conducting the project, the Lab involved members of HSBC’s reporting function as well as members of the investment community in a series of interviews.

The findings of this report were mainly discussed in the context of the banking sector; however there are clear messages for all those with significant market risk exposure and indeed all those involved in corporate reporting.

Summary of project process

Beginning with its 2011 Interim Report, HSBC changed the structure of how it presents its risk disclosure. The updated presentation moves a significant amount of recurring information detailing static policies and procedures related to its risk function into an appendix immediately following the primary risk disclosure. The result of this change is a primary risk disclosure that is focused on current period results and dynamic risk trends facing the bank and the industry.

Refer to the comparison of disclosures from HSBC’s 2010 and 2011 Annual Reports in the section ‘Example disclosure’ (see page 6) for an illustration of the change.

Questions were developed by the Lab together with HSBC to elicit specific views from investors on the bank’s presentation changes and overall disclosure of market risk. Fifteen individuals from seven organisations representing a wide spectrum of views including institutional investors, a sell-side broker and a credit rating agency, provided input on the project.

Summary of project observations

Persistent themes included:

• Investors value the focus placed by HSBC on evaluating the format and function of its risk disclosures in an effort to reduce the volume and complexity of reporting, while remaining proportionate to the bank’s underlying risk exposures;
• Disclosures that are tailored to be concise and relevant to current results and exposures increase the ease of using reports by eliminating unnecessary or cumbersome detail;
• Investors were either neutral or positive towards HSBC’s change in presentation to split the risk disclosure within the section of the report on risk; none believed the changes were retrograde;
• Many investors would welcome static information being moved to company websites, if this were to become permitted, but feel that clear cross referencing in the report to related information outside of the report is essential; and
• Investors focus on material assumptions and changes to policy when analysing key metrics such as Value-at-Risk (VaR). Splitting the presentation of information between policy and standing information and current information is not essential to achieve this objective, but can be helpful.

Press release

Lab project report

© FRC