Securities lending programme - HSBC

1 For professional clients onlySecurities lending programmeHSBC ETFs plcContents Exchange traded funds and Securities lending 1 Key features of HSBC ETFs plc s Securities lending programme 2 lending agent: HSBC Securities Services 2 Investment manager: HSBC Global Asset Management (UK) Limited 3 Maximum percentage of Securities on loan 3 Indemnification by HSBC Bank plc 3 Counterparty risk selection and monitoring 4 Collateral and haircut policy 4 Operating flow 5 Revenue sharing 5 Transparency of the programme

2 51 Exchange traded funds and Securities lendingIn order to enhance fund performance, a number of HSBC ETFs plc sub-funds engage in Securities lending . Securities lending involves the temporary loan of Securities (such as equities or bonds) to another institution in exchange for a fee. The borrowing institution is then required to post collateral to cover the value of the Securities on loan. Securities lending is a well established process within the investment management industry, utilised by pension funds, mutual funds, and benefits of Securities lendingThe fees charged for Securities lending generate additional income for ETFs with limited risk, as long as the process and any conflict of interest are properly managed. This additional income is incorporated into the net asset value and can add to the fund s performance. Potential risks of Securities lendingSecurities lending is not without any risk. The main concern is the possibility of the Securities on loan not being returned because of borrower default, and that the collateral held is insufficient to cover the outstanding exposure.

3 In order to mitigate this risk, robust Securities lending programmes will only lend Securities to borrowers with a strong credit rating, and have comprehensive risk management processes and controls in place. With all the benefits in mind, investors should consider both the risk management and the transparency of the Securities lending programme in their investment decision making process. 2 Key features of HSBC ETFs plc s Securities lending programmeHSBC ETFs plc runs a robust Securities lending programme that delivers positive returns with conservative risk control: Indemnification by HSBC Bank plc In the event of a third party counterparty default, HSBC Bank plc will reinstate the lent Securities or cash to the funds Cap on the maximum % stock on loan lending limit is capped at 20% of AUM per sub-fund for the existing ETFs High quality collateral Only high quality government bonds are accepted as collateral Securities lent out are collateralised by at least 105% Counterparty exposure is over-collateralised and marked to market daily Minimum of 85% gross revenue generated by lending fees is paid to the fund Minimal disruption to dealing All loans are callable by the sub-fund at any time Transparency Securities lending reports are published on the website monthlyLending agent HSBC Securities ServicesHSBC Securities Services ( HSS ), a division of HSBC Bank plc, has been appointed by the independent board of directors of HSBC ETFs plc (the Board ) to be the lending agent for the ETF range.

4 HSS has been a lending agent for over 40 years and offers competitive levels of return in an operationally seamless and low risk manner through its provision of market leading borrower default indemnification. It provides a range of tailor made products from its centres in London and Hong Kong to a very diverse range of clients globally including fund managers, sovereign wealth funds, insurance companies and pension funds. Throughout its entire history no HSS client has ever suffered any capital loss ensure the safety of the assets, HSBC ETFs plc holds the legal title over the collateral assets, and all of the HSS collateral accounts are held separately to the HSBC Bank plc s own assets, in accordance with regulatory requirements. Where an HSBC affiliate is the borrower of Securities , the transaction is undertaken at arm s length with a robust Chinese Wall in operation between HSS ( lending agent) and HSBC Global Banking & Markets (borrower), in accordance with regulatory requirements and the HSBC Group s conflict of interest policy.

5 HSBC Global Banking & Markets as a borrower has to comply with the same high standard of collateral requirements as any other all HSBC ETF sub-funds actively lend out Securities . With the board taking overall decision for the programme , HSS provides the investment manager with the cost benefit evaluation for each fund and the sub-funds will only engage in Securities lending if it is sufficiently profitable for the shareholdersSecurities lending agent arranges to liquidate collateral poolSecurities lending agent starts to purchases replacement securitiesDoes the lending agent successfully buy back Securities ?Within 5 Business days from credit eventSecurities on loan are returned to the fundEquivalent cash value is returned to the fundYESC redit EventNO31 The shareholder capital is as of 31 December 20122 Ranked by Standard & Poor s (long-term); as at 10 December 2012 Investment manager HSBC Global Asset Management (UK) LimitedThe Board has delegated the oversight and monitoring responsibility to the investment manager, HSBC Global Asset Management (UK) Limited.

6 The investment manager carries out oversight responsibility by ensuring that the lending agent operates efficiently and complies with the Securities lending agreement. In addition, the investment manager ensures that the revenue from Securities lending is maximised within the agreed limitations and assesses the performance of the programme . Risk control is also in place to periodically and independently verify the collateral valuation provided by HSS, and the investment manager has discretion to challenge the quality and valuation if in percentage of Securities on loanWith shareholders best interest in mind, HSBC ETFs plc limits the maximum percentage of Securities on loan to 20% for all the existing equity ETFs. That is to say, on a daily basis, the value of Securities lent out can not exceed 20% of the fund s assets under management. This policy is the first step to significantly limit the potential counterparty by HSBC Bank plcEvery loan that HSBC ETFs enter into with external counterparties is indemnified by HSBC Bank plc, supported by the group s $194 billion of shareholder capital1.

7 HSBC Bank plc has a credit rating of AA- by S&P2. In the unlikely event of an external borrower default, HSS will reinstate the Securities on loan to the funds within five London business days. In the event that HSS is unable to fulfil such obligation within five London business days, it will deposit the equivalent cash in the relevant custody account at its own The discount applied to the market value of collateral received in order to compensate for potential changes in value4 HSBC Institutional Trust Services (Ireland) Limited5 HSBC Securities Services (Ireland) LimitedCounterparty risk selection and monitoringThe programme employs a robust counterparty monitoring policy. In accordance with UCITS requirements, all approved borrowers of the programme must have a minimum credit rating of A2 or equivalent or be deemed to have an implied rating of A2. In addition, HSBC Group Credit & Risk Management and the relevant Global Relationship Managers are responsible for borrower limit authorisation and on-going credit monitoring.

8 All borrowers undergo a regular and comprehensive due diligence process to ensure they consistently meet minimum HSBC Group standards. HSBC has direct banking relationships with almost every borrower across multiple business lines and is therefore in a unique position to gain an intimate view of their creditworthiness. This is a distinct advantage because much of the information on which risk limits are based is not available to external parties, including rating agencies. HSS employs strict divisional risk policies and has additional robust monitoring procedures in place. Comprehensive daily reporting is reviewed by senior managers to ensure full and broad oversight of lending activities. In addition, the Board has the right to remove borrowers from the eligible list or request a higher haircut 3 , if the Board considers that the perceived risk has increasedCollateral and haircut policyThe borrowers participating in the programme are required to post collateral to mitigate the credit risk.

9 All Securities on loan are over-collateralised by at least 5%, and only liquid, high quality government debt is accepted as collateral. The Board determines what is eligible for use as collateral and currently operates a more restrictive collateral policy than that required by UCITS regulation. Eligible collateral is currently limited to G14 government debt, and the 5% minimum haircut is increased when warranted by market conditions and/or counterparty concerns. Cash collateral is only accepted on an intraday basis pending the delivery of non-cash collateral. Both the lending agent and the investment manager monitor the collateral policy closely in the light of market events. For example, in 2011, the programme proactively removed Irish, Spanish and Italian government bonds from the list of eligible collateral because of risk is monitored and marked to market daily by HSS. Regular reporting is provided to the trustees4, administrator5, investment manager, and the Board. As with counterparty selection, the Board has the mandate to amend or remove the list of eligible least 5%Eligible collateralGovernment debt of Austria, Belgium, Canada, Denmark, Finland, France, Germany, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom or United States of America5 Operating flowAll Securities on loan by HSBC ETFs are callable at any time.

10 This is important because the sub-fund s cash flow or replication strategy could be jeopardised if it enters into a fixed term contract with a borrower and consequently is unable to return the redemption money on time to the shareholders. As a result, redemptions received by sub-funds will not be disrupted by their Securities lending loan settlement process is a pre-collateral process, no Securities can be delivered to the borrower without there being sufficient collateral available in the accounts to cover the exposure plus the minimum haircut of 5%.Pre-collateral1. Collateral: at least 105% value in limited government bonds2. Securities : no more than 20% of the fund AUMD ividends, Corporate ActionsLending feesDaily Mark-to-MarketBorrowerLenderRevenue sharingThe sub-funds share the fee revenue generated by the Securities lending programme with the lending agent, in recognition of the services that they provide. Currently, all HSBC ETFs plc s sub-funds retain a minimum of 85% of Securities lending gross revenue for the benefit of the shareholders.