HSBC USA Inc 2Q 2013 Form 10-Q - Part 2

RNS Number : 9044K

HSBC Holdings PLC

05 August 2013

 



Significant Unobservable Inputs for Recurring Fair Value Measurements

Collateralized Debt Obligations (CDOs)

▪      Prepayment rate - The rate at which borrowers pay off the mortgage loans early. The prepayment rate is affected by a number of factors including the location of the mortgage collateral, the interest rate type of the mortgage loans, borrowers' credit and sensitivity to interest rate movement. The prepayment rate of our CDOs portfolio is tilted towards the low end of the range.

▪      Default rate - Annualized percentage of default rate over a group of collateral such as residential or commercial mortgage loans. The default rate and loss severity rate are positively correlated. The default rate of our portfolio is close to mid point of the range.

▪      Loss Severity Rate - Included in our Level 3 CDOs portfolio are collateralized loan obligations (CLOs) and trust preferred securities which are about equally distributed. The loss severity rate for trust preferred securities as of June 30, 2013 is about 1.8 times of CLOs.

Equity Securities (Investments in Hedge Funds)

▪      Equity Interest in Hedge Funds - As of June 30, 2013, HUSI owns interests in about 30 distressed hedge funds where the majority of the funds have been discounted at 50% to 60% to reflect our expectation of recovery.

Derivatives

▪      Correlation of Default - The default correlation of a group of credit exposures measures the likelihood that the credit references within a group will default together. The default correlation is not observable. For a Tranched Credit Default swap, HUSI, through its participation in the industry survey, estimates and validates the default correlation of benchmark market credit default swap indices which, after adjusting for any differences in the composition and the tenure between the market index and the bespoke tranche under measurement, is used as an input to measure a bespoke CDS tranche. The correlations of default of our credit derivative portfolio are not widely dispersed. 

▪      Implied volatility - The implied volatility is a significant pricing input for freestanding or embedded options including equity, foreign currency and interest rate options. The level of volatility is a function of the nature of the underlying risk, the level of strike price and the years to maturity of the option. Depending on the underlying risk and tenure, we determine the implied volatility based on observable input where information is available. However, substantially all of the implied volatilities are derived based on historical information. The implied volatility for different foreign currency pairs is between 1% and 40% while the implied volatility for equity/equity or equity/equity index is between 12% and 49%, respectively at June 30, 2013. Although implied foreign currency volatility and equity volatility appear to be widely distributed at the portfolio level, the deviation of implied volatility on a trade-by-trade basis is narrower.  The average deviation of implied volatility for the foreign currency pair and at-the-money equity option are 4.4% and 4.6%, respectively at June 30, 2013.

▪      Correlations of a group of foreign currency or equity - Correlation measures the relative change in values among two or more variables (i.e., equity or foreign currency pair). Variables can be positively or negatively correlated. Correlation is a key input in determining the fair value of a derivative referenced to a basket of variables such as equities or foreign currencies. A majority of the correlations are not observable, but are derived based on historical data. The correlation between equity/equity and equity/equity index was between 51% and 60% at June 30, 2013.

Sensitivity of Level 3 Inputs to Fair Value Measurements

Collateralized Debt Obligations - Probability of default, prepayment speed and loss severity rate are significant unobservable inputs. Significant increase (decrease) in these inputs will result in a lower (higher) fair value measurement of a collateralized debt obligation. A change in assumption for default probability is often accompanied by a directionally similar change in loss severity, and a directionally opposite change in prepayment speed.

Corporate and Domestic Debt Securities - The fair value measurements of certain corporate debt securities are affected by the fair value of the underlying portfolios of investments used as collateral and the make-whole guarantee provided by third party guarantors. The probability that the collateral fair value declines below the collateral call threshold concurrent with the guarantors failure to perform its make whole obligation is unobservable. The increase (decrease) in the probability the collateral value falls below the collateral call threshold is often accompanied by a directionally similar change in default probability of the guarantor.

Credit derivatives - Correlation of default among a basket of reference credit names is a significant unobservable input if the credit attributes of the portfolio are not within the parameters of relevant standardized CDS indices. Significant increase (decrease) in the unobservable input will result in a lower (higher) fair value measurement of the credit derivative. A change in assumption for default correlation is often accompanied by a directionally similar change in default probability and loss rates of other credit names in the basket.

Equity and foreign currency derivatives- The fair value measurement of a structured equity or foreign currency derivative is primarily affected by the implied volatility of the underlying equity price or exchange rate of the paired foreign currencies. The implied volatility is not observable. Significant increase (decrease) in the implied volatility will result in a higher (lower) fair value of a long position in the derivative contract.

Material Additions to and Transfers Into (Out of) Level 3 Measurements During the six months ended June 30, 2013, we transferred $46 million of credit derivatives from Level 2 to Level 3 as result of including specific fair value adjustments related to certain credit default swaps. During the three and six months ended June 30, 2013, we transferred $208 million and $287 million, respectively, of deposits in domestic offices and $136 million and $138 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility. Additionally, during the three and six months ended June 30, 2013, we transferred $177 million and $160 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

During the three and six months ended June 30, 2012, we transferred $313 million and $475 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis  Certain financial and non-financial assets are measured at fair value on a non-recurring basis and therefore, are not included in the tables above. These assets include (a) mortgage and consumer loans classified as held for sale reported at the lower of amortized cost or fair value and (b) impaired loans or assets that are written down to fair value based on the valuation of underlying collateral during the period. These instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances (e.g., impairment). The following table presents the fair value hierarchy level within which the fair value of the financial and non-financial assets has been recorded as of June 30, 2013 and December 31, 2012. The gains (losses) during the three and six months ended June 30, 2013 and 2012 are also included.

	Non-Recurring Fair Value Measurements as of June 30, 2013																Total Gains (Losses) For the Three Months Ended Jun. 30 2013				Total Gains (Losses) For the Six Months Ended Jun. 30 2013
	Level 1				Level 2				Level 3				Total
	(in millions)
Residential mortgage loans held for sale(1).	$	-			$	134			$	68			$	202			$	-			$	3
Impaired commercial loans(2).........................	-				-				129				129				(1		)		(2		)
Impaired consumer loans(2)............................	-				249				45				294				(11		)		(31		)
Real estate owned(3)........................................	22				-				-				22				-				2
Total assets at fair value on a non-recurring basis.................................................	$	22			$	383			$	242			$	647			$	(12	)		$	(28	)

	Non-Recurring Fair Value Measurements as of December 31, 2012																Total Gains (Losses) For the Three Months Ended Jun. 30 2012				Total Gains (Losses) For the Six Months Ended Jun. 30 2012
	Level 1				Level 2				Level 3				Total
	(in millions)
Residential mortgage loans held for sale(1).	$	-			$	10			$	67			$	77			$	(4	)		$	(6	)
Impaired commercial loans(2).........................	-				-				155				155				(12		)		(23		)
Impaired consumer loans(2)...........................	-				600				118				718				(35		)		(60		)
Real estate owned(3).......................................	24				-				-				24				-				2
Total assets at fair value on a non-recurring basis................................................	$	24			$	610			$	340			$	974			$	(51	)		$	(87	)

⁽¹⁾        As of June 30, 2013 and December 31, 2012, the fair value of the loans held for sale was below cost. Certain residential mortgage loans held for sale have been classified as a Level 3 fair value measurement within the fair value hierarchy as the underlying real estate properties which determine fair value are illiquid assets as a result of market conditions and significant inputs in estimating fair value were unobservable. Additionally, the fair value of these properties is affected by, among other things, the location, the payment history and the completeness of the loan documentation.

⁽²⁾        Certain commercial and consumer loans have undergone troubled debt restructurings and are considered impaired. As a matter of practical expedient, we measure the credit impairment of a collateral-dependent loan based on the fair value of the collateral asset. The collateral often involves real estate properties that are illiquid due to market conditions. As a result, these loans are classified as a Level 3 fair value measurement within the fair value hierarchy.

⁽³⁾        Real estate owned are required to be reported on the balance sheet net of transactions costs. The real estate owned amounts in the table above reflect the fair value unadjusted for transaction costs.

The following table presents quantitative information about non-recurring fair value measurements of assets and liabilities classified with Level 3 of the fair value hierarchy as of June 30, 2013 and December 31, 2012.

As of June 30, 2013
Financial Instrument Type		Fair Value (in millions)				Valuation Technique(s)		Significant Unobservable Inputs		Range of Inputs
Residential mortgage loans held for sale.........................		$	68			Valuation of third party appraisal on underlying collateral		Loss severity rates		-% - 100%
Impaired commercial loans............................................		129				Valuation of third party appraisal on underlying collateral		Loss severity rates		-% - 81%

As of December 31, 2012
Financial Instrument Type		Fair Value (in millions)				Valuation Technique(s)		Significant Unobservable Inputs		Range of Inputs
Residential mortgage loans held for sale.........................		$	67			Valuation of third party appraisal on underlying collateral		Loss severity rates		-% - 100%
Impaired commercial loans............................................		155				Valuation of third party appraisal on underlying collateral		Loss severity rates		1% - 79%

Significant Unobservable Inputs for Non-Recurring Fair Value Measurements 

Residential mortgage loans held for sale represent subprime residential mortgage loans which were previously acquired with the intent of securitizing or selling them to third parties. The weighted average loss severity rate for these loans was approximately 59% at June 30, 2013. These severity rates are primarily impacted by the outstanding balances of the loans and the value of the underlying collateral securing the loans.

Impaired loans represent commercial loans. Loss severity rates for impaired loans are also primarily impacted by the outstanding loan balance and the value of the underlying collateral securing the loan. The weighted average severity rate for these loans was approximately 22% at June 30, 2013. These severity rates are primarily impacted by the outstanding balances of the loans and the value of the underlying collateral securing the loans.

Valuation Techniques  Following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for those financial instruments not recorded at fair value for which fair value disclosure is required.

Short-term financial assets and liabilities - The carrying amount of certain financial assets and liabilities recorded at cost is considered to approximate fair value because they are short-term in nature, bear interest rates that approximate market rates, and generally have negligible credit risk. These items include cash and due from banks, interest bearing deposits with banks, accrued interest receivable, customer acceptance assets and liabilities and short-term borrowings.

Federal funds sold and purchased and securities purchased and sold under resale and repurchase agreements - Federal funds sold and purchased and securities purchased and sold under resale and repurchase agreements are recorded at cost. A significant majority of these transactions are short-term in nature and, as such, the recorded amounts approximate fair value. For transactions with long-dated maturities, fair value is based on dealer quotes for instruments with similar terms and collateral.

Loans - Except for leveraged loans, selected residential mortgage loans and certain foreign currency denominated commercial loans, we do not record loans at fair value on a recurring basis. From time to time, we record impairments to loans. The write-downs can be based on observable market price of the loan or the underlying collateral value. In addition, fair value estimates are determined based on the product type, financial characteristics, pricing features and maturity.

•       Mortgage Loans Held for Sale - Certain residential mortgage loans are classified as held for sale and are recorded at the lower of amortized cost or fair value. The fair value of these mortgage loans is determined based on the valuation information observed in alternative exit markets, such as the whole loan market, adjusted for portfolio specific factors. These factors include the location of the collateral, the loan-to-value ratio, the estimated rate and timing of default, the probability of default or foreclosure and loss severity if foreclosure does occur.

•       Leveraged Loans - We record leveraged loans and revolvers held for sale at fair value. Where available, market consensus pricing obtained from independent sources is used to estimate the fair value of the leveraged loans and revolvers. In validating the fair value, we take into consideration the number of participants submitting pricing information, the range of pricing information and distribution, the methodology applied by the pricing services to cleanse the data and market liquidity. Where consensus pricing information is not available, fair value is estimated using observable market prices of similar instruments or inputs, including bonds, credit derivatives, and loans with similar characteristics. Where observable market parameters are not available, fair value is determined based on contractual cash flows, adjusted for the probability of default and estimated recoveries where applicable, discounted at the rate demanded by market participants under current market conditions. In those cases, we also consider the loan specific attributes and inherent credit risk and risk mitigating factors such as collateral arrangements.

•       Commercial Loans - Commercial loans and commercial real estate loans are valued by discounting the contractual cash flows, adjusted for prepayments and the borrower's credit risk, using a discount rate that reflects the current rates offered to borrowers of similar credit standing for the remaining term to maturity and, when applicable, our own estimate of liquidity premium.

•       Commercial impaired loans - Fair value is determined based on the pricing quotes obtained from an independent third party appraisal.

•       Consumer Loans - The estimated fair value of our consumer loans were determined by developing an approximate range of value from a mix of various sources as appropriate for the respective pool of assets. These sources included estimates from an HSBC affiliate which reflect over-the-counter trading activity, forward looking discounted cash flow models using assumptions consistent with those which would be used by market participants in valuing such receivables; trading input from other market participants which includes observed primary and secondary trades; where appropriate, the impact of current estimated rating agency credit tranching levels with the associated benchmark credit spreads; and general discussions held directly with potential investors. For revolving products, the estimated fair value excludes future draws on the available credit line as well as other items and, therefore, does not include the fair value of the entire relationship.

Valuation inputs include estimates of future interest rates, prepayment speeds, default and loss curves, estimated collateral value and market discount rates reflecting management's estimate of the rate that would be required by investors in the current market given the specific characteristics and inherent credit risk of the receivables. Some of these inputs are influenced by collateral value changes and unemployment rates. Where available, such inputs are derived principally from or corroborated by observable market data. We perform analytical reviews of fair value changes on a quarterly basis and periodically validate our valuation methodologies and assumptions based on the results of actual sales of such receivables. In addition, from time to time, we may engage a third party valuation specialist to measure the fair value of a pool of receivables. Portfolio risk management personnel provide further validation through discussions with third party brokers and other market participants. Since an active market for these receivables does not exist, the fair value measurement process uses unobservable significant inputs specific to the performance characteristics of the various receivable portfolios.

Lending-related commitments - The fair value of commitments to extend credit, standby letters of credit and financial guarantees are not included in the table. The majority of the lending related commitments are not carried at fair value on a recurring basis nor are they actively traded. These instruments generate fees, which approximate those currently charged to originate similar commitments, which are recognized over the term of the commitment period. Deferred fees on commitments and standby letters of credit totaled $45 million and $46 million at June 30, 2013 and December 31, 2012, respectively.

Precious metals trading - Precious metals trading primarily include physical inventory which is valued using spot prices.

 Securities - Where available, debt and equity securities are valued based on quoted market prices. If a quoted market price for the identical security is not available, the security is valued based on quotes from similar securities, where possible. For certain securities, internally developed valuation models are used to determine fair values or validate quotes obtained from pricing services. The following summarizes the valuation methodology used for our major security classes:

•       U.S. Treasury, U.S. Government agency issued or guaranteed and Obligations of U.S. state and political subdivisions - As these securities transact in an active market, fair value measurements are based on quoted prices for the identical security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated.

•       U.S. Government sponsored enterprises - For government sponsored mortgage-backed securities which transact in an active market, fair value measurements are based on quoted prices for the identical security or quoted prices for similar securities with adjustments as necessary made using observable inputs which are market corroborated. For government sponsored mortgage-backed securities which do not transact in an active market, fair value is determined primarily based on pricing information obtained from pricing services and is verified by internal review processes.

•       Asset-backed securities, including collateralized debt obligations - Fair value is primarily determined based on pricing information obtained from independent pricing services adjusted for the characteristics and the performance of the underlying collateral.

Additional information relating to asset-backed securities and collateralized debt obligations as of June 30, 2013 is presented in the following tables:

Trading asset-backed securities and related collateral:

		Prime								Alt-A								Subprime
Rating of Securities:(1)	Collateral Type:	Level 2				Level 3				Level 2				Level 3				Level 2				Level 3				Total
		(in millions)
AAA -A........................................	Residential mortgages...............	$	-			$	-			$	91			$	-			$	71			$	-			$	162
CCC-Unrated................................	Residential mortgages...............	-				-				-				-				5				-				5
		$	-			$	-			$	91			$	-			$	76			$	-			$	167

Trading collateralized debt obligations and related collateral:

Rating of Securities:(1)	Collateral Type:	Level 2				Level 3
		(in millions)
AAA -A.....................................................................	Student loans...........................................................	$	74			$	-
BBB -B.......................................................................	Corporate loans........................................................	-				-
	Other..........................................................................	-				228
	Total BBB -B.............................................................	-				228
		$	74			$	228

Available-for-sale securities backed by collateral:

		Commercial Mortgages								Prime								Alt-A								Subprime
Rating of Securities:(1)	Collateral Type:	Level 2				Level 3				Level 2				Level 3				Level 2				Level 3				Level 2				Level 3				Total
		(in millions)
AAA -A.......................	Residential mortgages	$	165			$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	165
	Home equity................	-				-				-				-				106				-				-				-				106
	Total AAA -A.............	165				-				-				-				106				-				-				-				271
BBB -B..........................	Home equity................	-				-				-				-				79				-				-				-				79
	Other.............................	-				-				-				-				104				-				-				-				104
	Total BBB -B................	-				-				-				-				183				-				-				-				183
CCC -Unrated..............	Residential mortgages	-				-				-				-				1				-				-				-				1
	Home equity................	-				-				-				-				61				-				-				-				61
	Total CCC -Unrated....	-				-				-				-				62				-				-				-				62
		$	165			$	-			$	-			$	-			$	351			$	-			$	-			$	-			$	516

⁽¹⁾     We utilize Standard & Poor's ("S&P") as the primary source of credit ratings in the tables above.  If S&P ratings are not available, ratings by Moody's and Fitch are used in that order. 

•       Other domestic debt and foreign debt securities (corporate and government) - A significant portion of the domestic and foreign securities are classified as Level 3 measurements. For non-callable corporate securities, a credit spread scale is created for each issuer. These spreads are then added to the equivalent maturity U.S. Treasury yield to determine current pricing. Credit spreads are obtained from the new market, secondary trading levels and dealer quotes. For securities with early redemption features, an option adjusted spread ("OAS") model is incorporated to adjust the spreads determined above. Additionally, we survey the broker/dealer community to obtain relevant trade data including benchmark quotes and updated spreads.

•       Equity securities - Except for those legacy investments in hedge funds, since most of our securities are transacted in active markets, fair value measurements are determined based on quoted prices for the identical security. For mutual fund investments, we receive monthly statements from the investment manager with the estimated fair value.

Derivatives - Derivatives are recorded at fair value. Asset and liability positions in individual derivatives that are covered by legally enforceable master netting agreements, including receivables (payables) for cash collateral posted (received), are offset and presented net in accordance with accounting principles which allow the offsetting of amounts.

Derivatives traded on an exchange are valued using quoted prices. OTC derivatives, which comprise a majority of derivative contract positions, are valued using valuation techniques. The fair value for the majority of our derivative instruments are determined based on internally developed models that utilize independently corroborated market parameters, including interest rate yield curves, option volatilities, and currency rates. For complex or long-dated derivative products where market data is not available, fair value may be affected by the underlying assumptions about, among other things, the timing of cash flows, expected exposure, probability of default and recovery rates. The fair values of certain structured derivative products are sensitive to unobservable inputs such as default correlations of the referenced credit and volatilities of embedded options. These estimates are susceptible to significant change in future periods as market conditions change.

We use the Overnight Indexed Swap (OIS) curves as inputs to measure the fair value of collateralized interest rate derivatives.

Significant inputs related to derivative classes are broken down as follows:

•       Credit Derivatives - Use credit default curves and recovery rates which are generally provided by broker quotes and various pricing services. Certain credit derivatives may also use correlation inputs in their model valuation. Correlation is derived using market quotes from brokers and various pricing services.

•       Interest Rate Derivatives - Swaps use interest rate curves based on currency that are actively quoted by brokers and other pricing services. Options will also use volatility inputs which are also quoted in the broker market.

•       Foreign Exchange ("FX") Derivatives - FX transactions use spot and forward FX rates which are quoted in the broker market.

•       Equity Derivatives - Use listed equity security pricing and implied volatilities from equity traded options position.

•       Precious Metal Derivative - Use spot and forward metal rates which are quoted in the broker market.

As discussed earlier, we make fair value adjustments to model valuations in order to ensure that those values represent appropriate estimates of fair value. These adjustments, which are applied consistently over time, are generally required to reflect factors such as bid-ask spreads and counterparty credit risk that can affect prices in arms-length transactions with unrelated third parties. Such adjustments are based on management judgment and may not be observable.

We estimate the counterparty credit risk for financial assets and own credit standing for financial liabilities (the "credit risk adjustments") in determining the fair value measurement. For derivative instruments, we calculate the credit risk adjustment by applying the probability of default of the counterparty to the expected exposure, and multiplying the result by the expected loss given default. We also take into consideration the risk mitigating factors including collateral agreements and master netting arrangements in determining credit risk adjustments. We estimate the implied probability of default based on the credit spreads of the specific counterparties observed in the credit default swap market. Where credit default spread of the specific counterparty is not available, we use the credit default spread of specific proxy (e.g., the CDS spread of the parent). Where specific proxy credit default swap is not available, we apply a blended approach based on a combination of credit default swap referencing to credit names of similar credit standing in the same industry sector and the historical rating-based probability of default. 

Real estate owned - Fair value is determined based on third party appraisals obtained at the time we take title to the property and, if less than the carrying amount of the loan, the carrying amount of the loan is adjusted to the fair value. The carrying amount of the property is further reduced, if necessary, not less than once every 45 days to reflect observable local market data including local area sales data.

Mortgage servicing rights - We elected to measure residential mortgage servicing rights, which are classified as intangible assets, at fair value. The fair value for the residential mortgage servicing rights is determined based on an option adjusted approach which involves discounting servicing cash flows under various interest rate projections at risk-adjusted rates. The valuation model also incorporates our best estimate of the prepayment speed of the mortgage loans, current cost to service and discount rates which are unobservable. As changes in interest rates is a key factor affecting the prepayment speed and hence the fair value of the mortgage servicing rights, we use various interest rate derivatives and forward purchase contracts of mortgage-backed securities to risk-manage the mortgage servicing rights.

Structured notes - Certain structured notes were elected to be measured at fair value in their entirety under fair value option accounting principles. As a result, derivative features embedded in the structured notes are included in the valuation of fair value. The valuation of embedded derivatives may include significant unobservable inputs such as correlation of the referenced credit names or volatility of the embedded option. Other significant inputs include interest rates (yield curve), time to maturity, expected loss and loss severity.

Cash flows of the funded notes are discounted at the appropriate rate for the applicable duration of the instrument adjusted for our own credit spreads. The credit spreads applied to these instruments are derived from the spreads at which institutions of similar credit standing would offer for issuing similar structured instruments as of the measurement date. The market spreads for structured notes are generally lower than the credit spreads observed for plain vanilla debt or in the credit default swap market.

Long-term debt - We elected to apply fair value option to certain own debt issuances for which fair value hedge accounting otherwise would have been applied. These 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 instrument. The observed market price of these instruments reflects the effect of our own credit spreads. The credit spreads applied to these instruments were derived from the spreads recognized in the secondary market for similar debt as of the measurement date.

For long-term debt recorded at cost, fair value is determined based on quoted market prices where available. If quoted market prices are not available, fair value is based on dealer quotes, quoted prices of similar instruments, or internally developed valuation models adjusted for own credit risks.

Deposits - For fair value disclosure purposes, the carrying amount of deposits with no stated maturity (e.g., demand, savings, and certain money market deposits), which represents the amount payable upon demand, is considered to generally approximate fair value. For deposits with fixed maturities, fair value is estimated by discounting cash flows using market interest rates currently offered on deposits with similar characteristics and maturities.

21.     Litigation and Regulatory Matters

In addition to the matters described below, in the ordinary course of business, we are routinely named as defendants in, or as parties to, various legal actions and proceedings relating to activities of our current and/or former operations. These legal actions and proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief. In the ordinary course of business, we also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In connection with formal and informal inquiries by these regulators, we receive numerous requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of our regulated activities.

In view of the inherent unpredictability of litigation and regulatory matters, particularly where the damages sought are substantial or indeterminate or when the proceedings or investigations are in the early stages, we cannot determine with any degree of certainty the timing or ultimate resolution of litigation and regulatory matters or the eventual loss, fines, penalties or business impact, if any, that may result. We establish reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and can be reasonably estimated. The actual costs of resolving litigation and regulatory matters, however, may be substantially higher than the amounts reserved for those matters.

For the litigation and governmental and regulatory matters disclosed below as to which a loss in excess of accrued liability is reasonably possible in future periods and for which there is sufficient currently available information on the basis of which management believes it can make a reliable estimate, we believe a reasonable estimate could be as much as $1.8 billion. The litigation and governmental and regulatory matters underlying this estimate of possible loss will change from time to time and actual results may vary significantly from this current estimate.

Given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could have a material adverse effect on our consolidated financial statements in particular quarterly or annual periods.

Litigation

Credit Card Litigation  Since June 2005, HSBC Bank USA, HSBC Finance Corporation, HSBC North America and HSBC, as well as other banks and Visa Inc. and MasterCard Incorporated, have been named as defendants in four class actions filed in Connecticut and the Eastern District of New York: Photos Etc. Corp. et al v. Visa U.S.A., Inc., et al.(D. Conn. No. 3:05-CV-01007 (WWE)); National Association of Convenience Stores, et al. v. Visa U.S.A., Inc., et al.(E.D.N.Y. No. 05-CV 4520 (JG)); Jethro Holdings, Inc., et al. v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-4521(JG)); and American Booksellers Asps' v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-5391 (JG)). Numerous other complaints containing similar allegations (in which no HSBC entity is named) were filed across the country against Visa Inc., MasterCard Incorporated and other banks. Various individual (non-class) actions were also brought by merchants against Visa Inc., and MasterCard Incorporated.  These class and individual merchant actions principally allege that the imposition of a no-surcharge rule by the associations and/or the establishment of the interchange fee charged for credit card transactions causes the merchant discount fee paid by retailers to be set at supracompetitive levels in violation of the Federal antitrust laws. These suits were consolidated and transferred to the Eastern District of New York. The consolidated case is: In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. ("MDL 1720"). On February 7, 2011, MasterCard Incorporated, Visa Inc., the other defendants, including HSBC Bank USA, and certain affiliates of the defendants entered into settlement and judgment sharing agreements (the "Sharing Agreements") that provide for the apportionment of certain defined costs and liabilities that the defendants, including HSBC Bank USA and our affiliates, may incur, jointly and/or severally, in the event of an adverse judgment or global settlement of one or all of these actions. A class settlement was preliminarily approved by the District Court on November 27, 2012. The class settlement is subject to final approval by the District Court. Pursuant to the class settlement agreement and the Sharing Agreements, we have deposited our portion of the class settlement amount into an escrow account for payment in the event the class settlement is approved. On October 22, 2012, a settlement agreement with the individual merchant plaintiffs became effective, and pursuant to the Sharing Agreements we have deposited our portion of that settlement amount into an escrow account.

Numerous merchants-including absent class member large and small merchants and certain named plaintiff merchants and trade associations-have objected and/or opted out of the settlement during the exclusion period, which ended on May 28, 2013. The defendants had the right to terminate the settlement agreement because the volume threshold was reached, but elected not to do so. We anticipate that most of the larger merchants who opted out of the settlement will initiate separate actions seeking to recover damages. A hearing on class plaintiffs' motion for final approval of the class settlement is scheduled for September 12, 2013, before the District Court.    

Checking Account Overdraft Litigation   On March 1, 2011 an action captioned Ofra Levin et al v. HSBC Bank USA, N.A. et al. (N.Y. Sup. Ct. 650562/11) (the "State Action") was filed in New York State Court on behalf of a putative New York class of customers who allegedly incurred overdraft fees due to the posting order of debit card transactions. We filed a motion to dismiss the complaint, which was granted in part with leave to amend.

Subsequently, plaintiffs (the "Levin Plaintiffs") in the State Action acquired new attorneys and filed a new action in federal court, captioned Ofra Levin et al. v. HSBC Bank USA, N.A. et al. (E.D.N.Y. 12-CV-5696) (the "Levin Federal Action").  The Levin Federal Action seeks relief for a putative nationwide class and a putative New York subclass, asserting the same claims as the State Action and adding allegations that deposited funds are not made available pursuant to HSBC's funds availability disclosures.  The Levin Plaintiffs also filed a motion to dismiss the State Action, which the state court denied.

The Levin Plaintiffs' former counsel amended the complaint in the State Action substituting a new named plaintiff, Darek Jura,  and the State Action was recaptioned In Re HSBC Bank USA, N.A. Checking Account Overdraft Litigation. Jura then filed a motion for class certification.  HSBC's response deadline has not been set, as the State Action is being held in abeyance until August 14, 2013.  Jura also filed a federal action captioned Darek Jura v. HSBC Bank USA, N.A. et al. (E.D.N.Y. 12-CV-6224) (the "Jura Federal Action"), presenting similar claims to the State Action.

On February 20, 2013, a fourth action captioned Hanes v. HSBC Bank USA, N.A. (E.D. Va. 13-CV-00229) (the "Hanes Action") was filed.  The Hanes Action presents similar claims to the previously filed actions and seeks relief for a putative nationwide class and a putative California subclass.

We subsequently sought centralization of all three federal actions with the Judicial Panel on Multidistrict Litigation ("JPML"), and on June 5, 2013, the JPML created the HSBC Overdraft MDL and transferred the Hanes Action to the Eastern District of New York for coordinated or consolidated pretrial proceedings with the Levin Federal Action and the Jura Federal Action.  HSBC has filed motions to dismiss in each of the three federal actions,

On July 22, 2013 the Eastern District of New issued an Order which:  (1) consolidated the three federal actions; (2) appointed counsel in the Jura Federal Action and the Hanes Action as interim class counsel; (3) ordered the interim class counsel to file a consolidated complaint within 30 days; and (4) denied HSBC's previously filed motions to dismiss as moot, without prejudice.  Additionally, the plaintiffs in each of the underlying federal actions, respectively, have served written discovery, and HSBC has responded and made productions in each of the actions.

DeKalb County, et al. v. HSBC North America Holdings Inc., et al.  In October 2012, three of the five counties constituting the metropolitan area of Atlanta, Georgia, filed a lawsuit pursuant to the Fair Housing Act against HSBC North America and numerous subsidiaries, including HSBC Finance Corporation and HSBC Bank USA, in connection with residential mortgage lending, servicing and financing activities.  In the action, captioned DeKalb County, Fulton County, and Cobb County, Georgia v. HSBC North America Holdings Inc., et al. (N.D. Ga. No. 12-CV-03640), the plaintiff counties assert that the defendants' allegedly discriminatory lending and servicing practices led to increased loan delinquencies, foreclosures and vacancies, which in turn caused the plaintiff counties to incur damages in the form of lost property tax revenues and increased municipal services costs, among other damages.  Defendants' motion to dismiss the case has been fully briefed and we are awaiting scheduling of oral argument.

Lender-Placed Insurance Matters  Lender-placed insurance involves a lender obtaining an insurance policy (hazard or flood insurance) on a mortgaged property when the borrower fails to maintain their own policy. The cost of the lender-placed insurance is then passed on to the borrower. Industry practices with respect to lender-placed insurance are receiving heightened regulatory scrutiny from both federal and state agencies. Beginning in October 2011, a number of mortgage servicers and insurers, including our affiliate, HSBC Insurance (USA) Inc., received subpoenas from the New York Department of Financial Services (the "NYDFS") with respect to lender-placed insurance activities dating back to September 2005. We have and will continue to provide documentation and information to the NYDFS that is responsive to the subpoena.   Additionally, in March 2013, the Massachusetts Attorney General issued a Civil Investigative Demand ("MA LPI CID") to HSBC Mortgage Corporation (USA) seeking information about lender-placed insurance activities.  We are providing responsive documentation and information to the Massachusetts Attorney General and will continue to do so.

Between June 2011 and April 2013, several putative class actions related to lender-placed insurance were filed against various HSBC U.S. entities, including actions against HSBC USA, Inc. and certain of our subsidiaries captioned Montanez et al v. HSBC Mortgage Corporation (USA) et al. (E.D. Pa. No. 11-CV-4074); West et al. v. HSBC Mortgage Corporation (USA) et al. (South Carolina Court of Common Pleas, 14th Circuit No. 12-CP-00687); Weller et al. v. HSBC Mortgage Services, Inc. et al. (D. Col. No. 13-CV-00185); and Hoover et al. v. HSBC Bank USA, N.A. et al. (N.D.N.Y. 13-CV-00149); and Lopez v. HSBC Bank USA, N.A. et al. (S.D. Fla 13-CV-21104). These actions relate primarily to industry-wide practices, and include allegations regarding the relationships and potential conflicts of interest between the various entities that place the insurance, the value and cost of the insurance that is placed, back-dating policies to the date the borrower allowed it to lapse, self-dealing and insufficient disclosure. HSBC filed motions to dismiss the complaints in the Montanez, Lopez, Weller, and Hoover matters.  The Court denied the motion to dismiss in the Lopez matter and we await the court's ruling on the other motions.   In addition, in Montanez, plaintiffs filed a motion for multi-district litigation treatment to consolidate the action with Lopez. In West, discovery is ongoing.

Private Mortgage Insurance Matters  Private Mortgage Insurance ("PMI") is insurance required to be obtained by home purchasers who provide a down payment less than a certain percentage threshold of the purchase price, typically 20 percent. The insurance generally protects the lender against a default on the loan. In January 2013, a putative class action related to PMI was filed against various HSBC U.S. entities, including HSBC USA, Inc. and certain of our subsidiaries captioned Ba v. HSBC Bank USA, N.A. et al (E.D. Pa. No. 2:13-cv-00072PD). This action relates primarily to industry-wide practices and includes allegations regarding the relationships and potential conflicts of interest between the various entities that place the insurance, self-dealing, insufficient disclosures and improper fees. HSBC filed a motion to dismiss the complaint on the Ba matter. No date has been set for oral argument yet, and HSBC awaits the court's ruling.

People of the State of New York v. HSBC Bank USA, National Association and HSBC Mortgage Corporation (USA). On June 3, 2013, the New York Attorney General ("AG") commenced a special proceeding against HSBC Bank USA and HSBC Mortgage Corporation ("HSBC"), alleging that HSBC repeatedly violated Executive Law 63(12).  Specifically, the AG claims that HSBC has an obligation to file a Request for Judicial Intervention ("RJI") at the same time that it files proof of service in a foreclosure action.  The filing of an RJI triggers the scheduling of a mandatory settlement conference.  According to the AG, the failure to file the RJI causes a significant delay in mandatory settlement conferences being scheduled, during which time the AG alleges additional penalties, fees and interest accrue to the borrower.   The AG seeks both a change in HSBC's practices and damages for individual homeowners.  HSBC believes it has a number of factual and legal defenses available to the AG's claims.

Credit Default Swap Litigation  In July 2013 HSBC Bank, HSBC Holdings plc. and HSBC Bank plc. were named as defendants, among others, in three putative class actions filed in federal courts located in New York and Chicago.  These class actions allege that the defendants, which include ISDA, Markit and several other financial institutions, conspired to restrain trade in violation of the federal anti-trust laws by, among other things, restricting access to credit default swap pricing exchanges and blocking new entrants into the exchange market, with the purpose and effect of artificially inflating the bid/ask spread paid to buy and sell credit default swaps in the United States. The Plaintiffs in these suits purport to represent a class of all persons who purchased or sold credit default swaps to defendants in the United States.  These actions all are at a very early stage.

Madoff Litigation  In December 2008, Bernard L. Madoff ("Madoff") was arrested for running a Ponzi scheme and a trustee was appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC ("Madoff Securities"), an SEC-registered broker-dealer and investment adviser. Various non-U.S. HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the United States whose assets were invested with Madoff Securities. Plaintiffs (including funds, funds investors and the Madoff Securities trustee, as described below) have commenced Madoff-related proceedings against numerous defendants in a multitude of jurisdictions. Various HSBC companies have been named as defendants in suits in the United States, Ireland, Luxembourg and other jurisdictions. Certain suits (which include U.S. putative class actions) allege that the HSBC defendants knew or should have known of Madoff's fraud and breached various duties to the funds and fund investors.

In November 2011, the District Court judge overseeing three related putative class actions in the Southern District of New York, captioned In re Herald, Primeo and Thema Funds Securities Litigation (S.D.N.Y. Nos. 09-CV-0289 (RMB), 09-CV-2558 (RMB)), dismissed all claims against the HSBC defendants on forum non conveniens grounds, but temporarily stayed this ruling as to one of the actions against the HSBC defendants - the claims of investors in Thema International Fund plc. - in light of a proposed amended settlement agreement between the lead plaintiff in that action and the relevant HSBC defendants (including, subject to the granting of leave to effect a proposed pleading amendment, HSBC Bank USA). In December 2011, the District Court lifted this temporary stay and dismissed all remaining claims against the HSBC defendants, and declined to consider preliminary approval of the settlement. In light of the District Court's decisions, HSBC has terminated the settlement agreement. The Thema plaintiff contests HSBC's right to terminate. Plaintiffs in all three actions filed notices of appeal to the U.S. Circuit Court of Appeals for the Second Circuit, where the actions are captioned In re Herald, Primeo and Thema Funds Securities Litigation (2nd Cir, Nos. 12-156, 12-184, 12-162). Briefing in that appeal was completed in September 2012 and oral argument was held in April 2013. A decision is expected later this year.

 In December 2010, the Madoff Securities trustee commenced suits against various HSBC companies in the U.S. Bankruptcy Court and in the English High Court. The U.S. action, captioned Picard v. HSBC et al (Bankr S.D.N.Y. No. 09-01364), which also names certain funds, investment managers, and other entities and individuals, sought $9 billion in damages and additional recoveries from HSBC Bank USA, certain of our foreign affiliates and the various other codefendants. It sought damages against the HSBC defendants for allegedly aiding and abetting Madoff's fraud and breach of fiduciary duty. In July 2011, after withdrawing the case from the Bankruptcy Court in order to decide certain threshold issues, the District Court dismissed the trustee's various common law claims on the grounds that the trustee lacks standing to assert them. In December 2011, the trustee filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit, where the action is captioned Picard v. HSBC Bank plc et al. (2nd Cir., No. 11-5207). Briefing in that appeal was completed in April 2012, and oral argument was held in November 2012.  On June 20, 2013, the Second Circuit Court of Appeals affirmed the decision of the District Court. The District Court returned the remaining claims to the Bankruptcy Court for further proceedings. Those claims seek, pursuant to U.S. bankruptcy law, recovery of unspecified amounts received by the HSBC defendants from funds invested with Madoff, including amounts that the HSBC defendants received when they redeemed units held in the various funds. The HSBC defendants acquired those fund units in connection with financing transactions the HSBC defendants had entered into with various clients. The trustee's U.S. bankruptcy law claims also seek recovery of fees earned by the HSBC defendants for providing custodial, administration and similar services to the funds. Between September 2011 and April 2012, the HSBC defendants and certain other defendants moved again to withdraw the case from the Bankruptcy Court. The District Court granted those withdrawal motions as to certain issues, and briefing and oral arguments on the merits of the withdrawn issues are now complete. The District Court has issued rulings on several of the withdrawn issues, but decisions with respect to other issues remain pending and are expected in 2013. The trustee's English action, which names HSBC Bank USA and other HSBC entities as defendants, seeks recovery of unspecified transfers of money from Madoff Securities to or through HSBC on the ground that the HSBC defendants actually or constructively knew of Madoff's fraud. HSBC has not been served with the trustee's English action.

Between October 2009 and April 2012, Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited ("Fairfield"), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands and the United States against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC's private banking business and other clients who invested in the Fairfield funds. The Fairfield actions, including an action captioned Fairfield Sentry Ltd. v. Zurich Capital Markets et al. (Bankr. S.D.N.Y. No. 10-03634), in which HSBC Bank USA is a defendant, and an action captioned Fairfield Sentry Ltd. et al. v. ABN AMRO Schweiz AG et al. (Bankr. S.D.N.Y. No. 10-03636), naming beneficial owners of accounts held in the name of Citco Global Custody (NA) NV, which include HSBC Private Bank, a division of HSBC Bank USA, as nominal owner of those accounts for its customers, seek restitution of amounts paid to the defendants in connection with share redemptions, on the ground that such payments were made by mistake, based on inflated values resulting from Madoff's fraud. Some of these actions also seek recovery of the share redemptions under British Virgin Islands insolvency law. The U.S. actions are currently stayed in the Bankruptcy Court pending developments in related appellate litigation in the British Virgin Islands.

HSBC Bank USA was also a defendant in an action filed in July 2011, captioned Wailea Partners, LP v. HSBC Bank USA, N.A. (N.D. Ca. No. 11-CV-3544), arising from derivatives transactions between Wailea Partners, LP and HSBC Bank USA that were linked to the performance of a fund that placed its assets with Madoff Securities pursuant to a specified investment strategy. The plaintiff alleged, among other things, that HSBC Bank USA knew or should have known that the fund's assets would not be invested as contemplated. The plaintiff also alleged that HSBC Bank USA marketed, sold and entered into the derivatives transactions on the basis of materially misleading statements and omissions in violation of California law. The plaintiff sought rescission of the transactions and return of amounts paid to HSBC Bank USA in connection with the transactions, together with interest, fees, expenses and disbursements. In December 2011, the District Court granted HSBC's motion to dismiss the complaint with prejudice, and the plaintiff appealed to the U.S. Court of Appeals for the Ninth Circuit, where the action is captioned Wailea Partners, LP v. HSBC Bank USA, N.A., (9th Cir., No. 11-18041). Briefing on that appeal was completed in May 2012, and oral argument has not yet been scheduled.

There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings including, but not limited to, the circumstances of the fraud, the multiple jurisdictions in which proceeding have been brought and the number of different plaintiffs and defendants in such proceedings. For these reasons, among others, we are unable to reasonably estimate the aggregate liability or ranges of liability that might arise as a result of these claims but they could be significant. In any event, we consider that we have good defenses to these claims and will continue to defend them vigorously.

Federal Home Loan Mortgage Corporation v. Bank of America, et al.  On March 14, 2013, the Federal Home Loan Mortgage Corporation ("Freddie Mac"), filed a lawsuit in the United States District Court for the Eastern District of Virginia naming as defendants HSBC Bank USA and other panel USD LIBOR panel banks, as well as the British Bankers' Association.  The lawsuit alleges improper practices in connection with the setting of USD LIBOR, and claims violation of the Sherman Act, breach of contract, and fraud arising out of various swap agreements entered into by Freddie Mac with the USD LIBOR panel banks, including HSBC Bank USA.  In May 2013 the lawsuit was transferred to the USD LIBOR Litigation Multi-District Proceeding pending before Judge Buchwald in the Southern District of New York where it will be subject to a stay imposed by that court on all new proceedings. 

The lawsuit is at an early stage, and does not allege specific damages as to HSBC Bank USA.

Mortgage Securitization Activity and Litigation  In addition to the repurchase risk described in Note 19, "Guarantee Arrangements and Pledged Assets," we have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by HSI. During 2005-2007, we purchased and sold $24 billion of whole loans to HSI which were subsequently securitized and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $6.9 billion and $7.4 billion at June 30, 2013 and December 31, 2012, respectively.

Participants in the U.S. mortgage securitization market that purchased and repackaged whole loans have been the subject of lawsuits and governmental and regulatory investigations and inquiries, which have been directed at groups within the U.S. mortgage market, such as servicers, originators, underwriters, trustees or sponsors of securitizations, and at particular participants within these groups. As the industry's residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to an increasing number of foreclosed homes as trustee on behalf of various securitization trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws regarding property upkeep and tenants' rights. While we believe and continue to maintain that the obligations at issue and any related liability are properly those of the servicer of each trust, we continue to receive significant and adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of "HSBC, as trustee."

HSBC Bank USA and certain of our affiliates have been named as defendants in a number of actions in connection with residential mortgage-backed securities ("RMBS") offerings, which generally allege that the offering documents for securities issued by securitization trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans. In September 2011, the Federal Housing Finance Agency (the "FHFA"), acting in its capacity as conservator for the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), filed an action in the U.S. District Court for the Southern District of New York against HSBC Bank USA, HSBC USA, HSBC North America, HSI, HSI Asset Securitization Corporation ("HASCO") and five former and current officers and directors of HASCO seeking damages or rescission of mortgage-backed securities purchased by Fannie Mae and Freddie Mac that were either underwritten or sponsored by HSBC entities. The aggregate unpaid principal balance of the securities was approximately $1.6 billion at June 30, 2013. This action, captioned Federal Housing Finance Agency, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation v. HSBC North America Holdings Inc. et al. (S.D.N.Y. No. CV 11-6189-LAK), is one of a series of similar actions filed against 17 financial institutions alleging violations of federal and state securities laws in connection with the sale of private-label RMBS purchased by Fannie Mae and Freddie Mac, primarily from 2005 to 2008. This action, along with all of the similar FHFA RMBS actions that were filed in the U.S. District Court for the Southern District of New York, was transferred to a single judge, who directed the defendant in the first-filed matter, UBS, to file a motion to dismiss. In May 2012, the District Court filed its decision denying the motion to dismiss FHFA's securities law claims and granting the motion to dismiss FHFA's negligent misrepresentation claims. The District Court's ruling formed the basis for rulings on the other matters, including the action filed against HSBC Bank USA and our affiliates. On April 5, 2013, the Second Circuit Court of Appeals affirmed the ruling of the District Court. In December 2012, the District Court directed the FHFA parties to schedule mediation with the Magistrate Judge assigned to the action.  In January 2013, the FHFA parties met with the Magistrate Judge to discuss how to structure a mediation. Since that time, 3 of the FHFA defendants (GE, Citigroup and UBS) have resolved their lawsuits (the terms of these settlements are largely confidential, but have been disclosed to varying degrees, including to some extent by the defendants in securities filings). Discovery in the action against HSBC is proceeding.

In January 2012, Deutsche Zentral-Genossenschaftsbank ("DZ Bank") filed a summons with notice in New York County Supreme Court, State of New York, naming as defendants HSBC North America, HSBC USA, HSBC Bank USA, HSBC Markets (USA) Inc., HASCO and HSI in connection with DZ Bank's alleged purchase of $122.4 million in RMBS from the HSBC defendants. In February 2012, HSH Nordbank AG ("HSH") filed a summons with notice in New York County Supreme Court, State of New York, naming as defendants HSBC Holdings plc., HSBC North America Holdings Inc., HSBC USA, HSBC Bank USA, HSBC Markets (USA) Inc., HASCO, and two Blaylock entities alleging HSH purchases of $41.3 million in RMBS from the HSBC and Blaylock defendants. In May 2012, HSBC removed both the DZ Bank and HSH cases to the United States District Court for the Southern District of New York. The cases were consolidated in an action captioned Deutsche Zentral-Genossenschaftsbank AG, New York Branch v. HSBC North America Holdings Inc. et al (S.D.N.Y. No. 12-CV-4025) following removal. In September 2012, DZ Bank and HSH filed a consolidated complaint against all defendants named in their prior summonses other than HSBC Holdings plc. The claims against HSBC are for (i) fraud; (ii) fraudulent concealment; (iii) negligent misrepresentation; (iv) aiding and abetting fraud; and (v) rescission. This action is at a very early stage.

In December 2012, Bayerische Landesbank ("BL") filed a summons with notice in New York County Supreme Court, State of New York, naming as defendants HSBC, HSBC North America, HSBC USA, HSBC Markets (USA) Inc., HSBC Bank USA, HSI Asset Securitization Corp. and HSI. In May 2013 BL served the HSBC entities with a complaint alleging that BL purchased $75 million in RMBS from the defendants and has sustained unspecified damages as a result of material misrepresentations and omissions regarding certain characteristics of the mortgage loans backing the securities.  The claims against the HSBC entities are for (i) fraud; (ii) fraudulent concealment; (iii) negligent misrepresentation; (iv) aiding and abetting fraud; and (v) rescission.  This action is at a very early stage.

In June 2013, Deutsche Bank National Trust Company ("DBNTC"), as Trustee of HASCO 2007-NC1, filed a summons with notice in New York County Supreme Court, State of New York, naming HBUS as the sole defendant.  The summons alleges that DBNTC brought the action at the direction of certificateholders of the Trust, seeking specific performance and damages of at least $508 million arising out of the alleged breach of various representations and warranties made by HBUS in the applicable loan purchase agreement regarding certain characteristics of the mortgage loans contained in the Trust.  This action is at a very early stage.

In December 2010 and February 2011, we received subpoenas from the SEC seeking production of documents and information relating to our involvement, and the involvement of our affiliates, in specified private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee or custodian as well as our involvement as a servicer. We have also had preliminary contacts with other governmental authorities exploring the role of trustees in private-label RMBS transactions. In February 2011, we also received a subpoena from the U.S. Department of Justice (U.S. Attorney's Office, Southern District of New York) seeking production of documents and information relating to loss mitigation efforts with respect to HUD-insured mortgages on residential properties located in the State of New York. In January 2012, our affiliate, HSI, was served with a Civil Investigative Demand by the Massachusetts State Attorney General seeking documents, information and testimony related to the sale of RMBS to public and private customers in the State of Massachusetts from January 2005 to the present.

We expect these type of claims to continue. As a result, we may be subject to additional claims, litigation and governmental and regulatory scrutiny related to our participation in the U.S. mortgage securitization market, either individually or as a member of a group.

Governmental and Regulatory Matters

Foreclosure Practices  In April 2011, HSBC Bank USA entered into a consent cease and desist order with the OCC (the "OCC Servicing Consent Order") and our affiliate, HSBC Finance Corporation, and our common indirect parent, HSBC North America, entered into a similar consent order with the Federal Reserve (together with the OCC Servicing Consent Order, the "Servicing Consent Orders") following completion of a broad horizontal review of industry foreclosure practices. The OCC Servicing Consent Order requires HSBC Bank USA to take prescribed actions to address the deficiencies noted in the joint examination and described in the consent order. We continue to work with the OCC and the Federal Reserve to align our processes with the requirements of the Servicing Consent Orders and are implementing operational changes as required.

The Servicing Consent Orders required an independent review of foreclosures (the "Independent Foreclosure Review") pending or completed between January 2009 and December 2010 to determine if any borrower was financially injured as a result of an error in the foreclosure process. As required by the Servicing Consent Orders, an independent consultant was retained to conduct that review. On February 28, 2013, HSBC Bank USA entered into an agreement with the OCC, and HSBC Finance Corporation and HSBC North America entered into an agreement with the Federal Reserve (together the "IFR Settlement Agreements"), pursuant to which the Independent Foreclosure Review has ceased and been replaced by a broader framework under which we and twelve other participating servicers will, in the aggregate, provide in excess of $9.3 billion in cash payments and other assistance to help eligible borrowers.  Pursuant to the IFR Settlement Agreements, HSBC North America has made a cash payment of $96 million into a fund that will be used to make payments to borrowers that were in active foreclosure during 2009 and 2010 and, in addition, will provide other assistance (e.g., loan modifications) to help eligible borrowers.  As a result, in 2012, we recorded expenses of $19 million which reflects the portion of HSBC North America's total expense of $104 million that we believe is allocable to us. The mailing of checks to eligible borrowers by Rust Consulting, Inc., the paying agent, has begun and is targeted for completion during the third quarter of 2013. Borrowers who receive compensation will not be required to execute a release or waiver of rights and will not be precluded from pursuing litigation concerning foreclosure or other mortgage servicing practices. For participating servicers, including HSBC Bank USA and HSBC Finance Corporation, fulfillment of the terms of the IFR Settlement Agreements will satisfy the Independent Foreclosure Review requirements of the Servicing Consent Orders, including the wind down of the Independent Foreclosure Review. 

The Servicing Consent Orders do not preclude additional enforcement actions against HSBC Bank USA or our affiliates by bank regulatory, governmental or law enforcement agencies, such as the U.S. Department of Justice or State Attorneys General, which could include the imposition of civil money penalties and other sanctions relating to the activities that are the subject of the Servicing Consent Orders. Pursuant to the IFR Settlement Agreement with the OCC, however, the OCC has agreed that it will not assess civil money penalties or initiate any further enforcement action with respect to past mortgage servicing and foreclosure-related practices addressed in the Servicing Consent Orders, provided the terms of the IFR Settlement Agreement are fulfilled.  The OCC's agreement not to assess civil money penalties is further conditioned on HSBC North America making payments or providing borrower assistance pursuant to any agreement that may be entered into with the U.S. Department of Justice in connection with the servicing of residential mortgage loans within two years.  The Federal Reserve has agreed that any assessment of civil money penalties by the Federal Reserve will reflect a number of adjustments, including amounts expended in consumer relief and payments made pursuant to any agreement that may be entered into with the U.S. Department of Justice in connection with the servicing of residential mortgage loans. In addition, the IFR Settlement Agreements do not preclude private litigation concerning these practices.

Separate from the Servicing Consent Orders and the settlement related to the Independent Foreclosure Review discussed above, in February 2012, the U.S. Department of Justice, the U.S. Department of Housing and Urban Development and State Attorneys General of 49 states announced a settlement with the five largest U.S. mortgage servicers with respect to foreclosure and other mortgage servicing practices. Following the February 2012 settlement, these government agencies initiated discussions with other mortgage industry servicers. HSBC Bank USA, together with our affiliate HSBC Finance Corporation, have had discussions with U.S. bank regulators and other governmental agencies regarding a potential resolution, although the timing of any settlement is not presently known. We recorded an accrual of $38 million in the fourth quarter of 2011 (which was reduced by $6 million in the second quarter of 2013) reflecting the portion of the HSBC North America accrual  that we currently believe is allocable to HSBC Bank USA. As this matter progresses and more information becomes available, we will continue to evaluate our portion of the HSBC North America liability which may result in a change to our current estimate. Any such settlement, however, may not completely preclude other enforcement actions by state or federal agencies, regulators or law enforcement agencies related to foreclosure and other mortgage servicing practices, including, but not limited to, matters relating to the securitization of mortgages for investors. In addition, such a settlement would not preclude private litigation concerning these practices.

Anti-Money Laundering, Bank Secrecy Act and Office of Foreign Assets Control Investigations.  In October 2010, HSBC Bank USA entered into a consent cease and desist order with the OCC, and our indirect parent, HSBC North America, entered into a consent cease and desist order with the Federal Reserve (together, the "AML/BSA Consent Orders"). These actions require improvements to establish an effective compliance risk management program across our U.S. businesses, including various issues relating to BSA and Anti-Money Laundering ("AML") compliance. Steps continue to be taken to address the requirements of the AML/BSA Consent Orders to ensure compliance, and that effective policies and procedures are maintained.

In December 2012, HSBC, HSBC North America and HSBC Bank USA entered into agreements to achieve a resolution with U.S. and United Kingdom government agencies regarding past inadequate compliance with AML/BSA and sanctions laws, including the previously reported investigations by the U.S. Department of Justice, the Federal Reserve, the OCC and the U.S. Department of Treasury's Financial Crimes Enforcement Network ("FinCEN") in connection with AML/BSA compliance, including cross-border transactions involving our cash handling business in Mexico and banknotes business in the U.S., and historical transactions involving parties subject to OFAC economic sanctions. As part of the resolution, HSBC and HSBC Bank USA entered into a five-year deferred prosecution agreement with the U.S. Department of Justice, the United States Attorney's Office for the Eastern District of New York, and the United States Attorney's Office for the Northern District of West Virginia (the "U.S. DPA"), and HSBC entered into a two-year deferred prosecution agreement with the New York County District Attorney ("DANY DPA"), and HSBC consented to a cease and desist order and a monetary penalty order with the Federal Reserve.  In addition, HSBC Bank USA entered into a monetary penalty consent order with FinCEN and a separate monetary penalty order with the OCC.  HSBC also entered into an undertaking with the U.K. Financial Services Authority, now a Financial Conduct Authority ("FCA") Direction, to comply with certain forward-looking obligations with respect to AML and sanctions requirements over a five-year term.

Under these agreements, HSBC and HSBC Bank USA made payments totaling $1.921 billion to U.S. authorities, of which $1.381 billion was attributed to and paid by HSBC Bank USA, and are continuing to comply with ongoing obligations. Over the five-year term of the agreements with the U.S. Department of Justice and the FCA, an independent monitor (who also will be, for FCA purposes, a "skilled person" under Section 166 of the Financial Services and Markets Act) will evaluate HSBC's progress in fully implementing its obligations, and will produce regular assessments of the effectiveness of HSBC's compliance function.  Michael Cherkasky has been selected as the independent monitor and in July 2013, the United States District Court for the Eastern District of New York approved the U.S. DPA. The U.S. DPA remains pending under the jurisdiction of the United States District Court for the Eastern District of New York.

If HSBC and HSBC Bank USA fulfills all of the requirements imposed by the U.S. DPA, the U.S. Department of Justice's charges against those entities will be dismissed at the end of the five-year period of that agreement.  Similarly, if HSBC fulfills all of the requirements imposed by the DANY DPA, DANY's charges against it will be dismissed at the end of the two-year period of that agreement.   The U.S. Department of Justice may prosecute HSBC or HSBC Bank USA in relation to the matters that are subject of the U.S. DPA if HSBC or HSBC Bank USA breaches the terms of the US DPA, and DANY may prosecute HSBC in relation to the matters which are the subject of the DANY DPA if HSBC violates the terms of the DANY DPA.

HSBC Bank USA also entered into a separate consent order with the OCC requiring it to correct the circumstances and conditions as noted in the OCC's then most recent report of examination, imposing certain restrictions on HSBC Bank USA directly or indirectly acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, unless it receives prior approval from the OCC.  HSBC Bank USA also entered into a separate consent order with the OCC requiring it to adopt an enterprise-wide compliance program.

The settlement with the U.S. and U.K. government agencies does not preclude private litigation relating to, among other things, HSBC's compliance with applicable AML/BSA and sanctions laws or other regulatory or law enforcement action for AML/BSA or sanctions matters not covered by the various agreements.

Our affiliate, HSBC Securities (USA) Inc. ("HSI"), continues to cooperate in a review of its AML/BSA compliance program by the Financial Industry Regulatory Authority and a similar examination by the SEC, both of which were initiated in the third quarter of 2012.

Other Regulatory and Law Enforcement Investigations.  We continue to cooperate in ongoing investigations by the U.S. Department of Justice and the IRS regarding whether certain HSBC Group companies and employees acted appropriately in relation to certain customers who had U.S. tax reporting requirements.

In April 2011, HSBC Bank USA received a "John Doe" summons from the Internal Revenue Service (the "IRS") directing us to produce records with respect to U.S.-based clients of an HSBC Group company in India. We have cooperated fully by providing responsive documents in our possession in the U.S. to the IRS.

Also in April 2011, HSBC Bank USA received a subpoena from the SEC directing HSBC Bank USA to produce records in the United States related to, among other things, HSBC Private Bank Suisse SA's cross-border policies and procedures and adherence to U.S. broker-dealer and investment adviser rules and regulations when dealing with U.S. resident clients. HSBC Bank USA continues to cooperate with the SEC.

In July 2013, HSBC and certain of its affiliates, including HBUS, received a Statement of Objections from the European Commission relating to its ongoing investigation of alleged anti-competitive activity by a number of market participants in the credit derivatives market between 2006 and 2009.  The Statement of Objections sets out the European Commission's preliminary views and does not prejudge the final outcome of its investigation. HSBC is reviewing the Statement of Objections in detail and will submit a response to the European Commission in due course. Based on the facts currently known, it is not practicable at this time for us to predict the resolution of the European Commission's investigation, including the timing or impact on HSBC or us.

Based on the facts currently known, in respect of each of these investigations, it is not practicable at this time for us to determine the terms on which these ongoing investigations will be resolved or the timing of such resolution or for us to estimate reliably the amounts, or range of possible amounts, of any fines and/or penalties. As matters progress, it is possible that any fines and/or penalties could be significant. 

22.     New Accounting Pronouncements

The following new accounting pronouncements were adopted effective January 1, 2013:

Ÿ Disclosures About Offsetting Assets and Liabilities  In December 2011, the FASB issued an Accounting Standards Update ("ASU") that required entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and those which are subject to an agreement similar to master netting arrangement. The new guidance became effective for all annual and interim periods beginning January 1, 2013. Additionally, entities are required to provide the disclosures required by the new guidance retrospectively for all comparative periods.  In January 2013, the FASB issued another ASU to clarify the instruments and transactions to which the guidance in the previously issued Accounting Standards Update would apply.  The adoption of the guidance in these ASUs did not have an impact on our financial position or results of operations.

Ÿ Accumulated Other Comprehensive Income  In February 2013, the FASB issued an ASU that adds new disclosure requirements for items reclassified out of accumulated other comprehensive income.  The new guidance became effective for all annual and interim periods beginning January 1, 2013 and was applied prospectively.  The adoption of this guidance did not have an impact on our financial position or results of operations.

We do not expect any accounting pronouncements issued during the first half of 2013 will have a significant impact on our financial position or results of operations.

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and with our Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Form 10-K"). MD&A may contain certain statements that may be forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make or approve certain statements in future filings with the SEC, in press releases, or oral or written presentations by representatives of HSBC USA Inc. ("HSBC USA") that are not statements of historical fact and may also constitute forward-looking statements. Words such as "may," "will," "should," "would," "could," "appears," "believe," "intends," "expects," "estimates," "targeted," "plans," "anticipates," "goal" and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. These matters or statements will relate to our future financial condition, economic forecast, results of operations, plans, objectives, performance or business developments and will involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from that which were expressed or implied by such forward-looking statements. Forward-looking statements are based on our current views and assumptions and speak only as of the date they are made. HSBC USA Inc. undertakes no obligation to update any forward-looking statement to reflect subsequent circumstances or events.

Executive Overview

HSBC USA Inc. ("HSBC USA" and, together with its subsidiaries, "HUSI") is an indirect wholly-owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect wholly-owned subsidiary of HSBC Holdings plc ("HSBC"). HUSI may also be referred to in MD&A as "we", "us" or "our".

The following discussion of our financial condition and results of operations excludes the results of our discontinued operations unless otherwise noted. See Note 2, "Discontinued Operations," in the accompanying consolidated financial statements for further discussion.

Current Environment  The U.S. economy continued to improve at a modest pace during the first half of 2013, with GDP running at an annualized rate of less than 2 percent which remains well below the economy's potential growth rate. Demand for manufacturing remains tepid partially as a result of weak global demand and many manufacturers are continuing to hold back hiring. Although consumer confidence in May climbed to its highest level since early 2008 in part due to rising house prices, with continuing high gasoline prices, the increase in payroll taxes at the beginning of the year and the onset of sequestration in March, consumer confidence remains under pressure and many households remain uncertain about the future as domestic fiscal uncertainties continue to affect consumer sentiment. Serious threats to economic growth remain, including the sustainability of a housing market recovery, high energy costs, and elevated unemployment levels. During the second quarter of 2013, long-term interest rates began to rise in part out of concern that the Federal Reserve may begin to slow its quantitative easing program if the economy continues to strengthen. Federal Reserve policy makers previously announced that they do not expect to increase short-term rates until the unemployment rate falls below 6.5 percent which, according to the Federal Reserve's economic projections, would keep the Federal funds rate near zero into 2015. The prolonged period of low interest rates continues to put pressure on spreads earned on our deposit base. The housing market continued the strong rebound which began in the second half of 2012 with overall home prices moving higher in many regions as demand increased and the supply of homes for sale remaining tight. However, the sharp decline in the distressed share of home sales currently being experienced, which is contributing to the increase in home sale prices, may not continue as the impact of servicers resuming foreclosure activities and the listing of the underlying properties for sale could slow down future price gains.

In addition, certain courts and state legislatures have issued new rules or statutes relating to foreclosures. Scrutiny of foreclosure documentation has increased in some courts. Also, in some areas, officials are requiring additional verification of information filed prior to the foreclosure proceeding. The combination of these factors has led to a significant backlog of foreclosures which will take time to resolve. If  a significant number of foreclosures come to market at the same time, due to the backlog or other delays in processing, it could have an adverse impact upon home prices.

While the economy continued to add jobs in 2013, the pace of new job creation continued to be slower than needed to meaningfully reduce unemployment. As a result, uncertainty remains as to how pronounced the economic recovery will ultimately be. Although unemployment rates, which are a major factor influencing credit quality, fell from 7.8 percent at the beginning of the year to 7.6 percent in June 2013, unemployment remains high based on historical standards. Also, a significant number of U.S. residents are no longer looking for work and, therefore, are not reflected in the U.S. unemployment rates. Unemployment has continued to have an impact on the provision for credit losses in our loan portfolio and in loan portfolios across the industry. Concerns about the future of the U.S. economy, including the pace and magnitude of recovery from the recent economic recession, consumer confidence, fiscal policy, including the ability of the legislature to work collaboratively to address fiscal issues in the U.S., volatility in energy prices, credit market volatility including the ability to resolve the European sovereign debt crisis and trends in corporate earnings will continue to influence the U.S. economic recovery and the capital markets. In particular, continued improvement in unemployment rates, a sustained recovery of the housing markets and stabilization in energy prices remain critical components of a broader U.S. economic recovery. These conditions in combination with the impact of recent regulatory changes, including the on-going implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"), will continue to impact our results in 2013 and beyond.

Performance, Developments and Trends Income (loss) from continuing operations was $180 million and $363 million during the three and six months ended June 30, 2013, respectively, compared with a loss from continuing operations of $593 million and $513 million during the three and six months ended June 30, 2012, respectively. Income from continuing operations before income tax was $229 million and $516 million during the three and six months ended June 30, 2013, respectively, compared with a loss from continuing operations before income tax of $242 million and $144 million during the three and six months ended June 30, 2012, respectively. The significant improvement in both periods reflects lower operating expenses as the prior year periods  include an expense of $700 million related to certain regulatory matters and, in the three month period, a lower provision for credit losses which was partially offset by lower net interest income and lower other revenues.  Other revenues in both 2012 periods includes a $330 million pre-tax gain ($71 million after-tax) from the sale of certain branches to First Niagara.  In addition, our results in all periods were impacted by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option which distorts comparability of the underlying performance trends of our business. The following table summarizes the impact of this item on our income from continuing operations before income tax for all periods presented:      

	Three Months Ended June 30,								Six Months Ended June 30,
	2013				2012				2013				2012
	(in millions)
Income (loss) from continuing operations before income tax, as reported......................	$	229			$	(242	)		$	516			$	(144	)
Fair value movement on own fair value option debt attributable to credit spread.........	(53		)		(131		)		(11		)		90
Underlying income (loss) from continuing operations before income tax (1)...................	$	176			$	(373	)		$	505			$	(54	)

⁽¹⁾        Represents a non-U.S. GAAP financial measure.

Excluding the impact of the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option in the table above, our underlying income (loss) from continuing operations before tax for the three and six months ended June 30, 2013 increased $549 million and $559 million, respectively, compared with the prior year periods as discussed above.

During the six months ended June 30, 2013, we continued to reduce legacy and other risk positions as opportunities arose, including the sale of $475 million of leveraged acquisition finance loans previously held for sale. A summary of the significant valuation adjustments associated with these market conditions that impacted revenue for the three and six months ended June 30, 2013 and 2012 is presented in the following table: 

	Three Months Ended June 30,								Six Months Ended June 30,
	2013				2012				2013				2012
	(in millions)
Gains (Losses)
Insurance monoline structured credit products(1)................................................................	$	21			$	(18	)		$	41			$	(10	)
Other structured credit products(1).........................................................................................	2				33				38				74
Mortgage whole loans held for sale (predominantly subprime)(2).....................................	5				(2		)		7				(3		)
Leverage acquisition finance loans(3)....................................................................................	-				4				13				34
Total gains.................................................................................................................................	$	28			$	17			$	99			$	95

⁽¹⁾           Reflected in Trading revenue in the consolidated statement of income (loss).

⁽²⁾           Reflected in Other income in the consolidated statement of income (loss).

⁽³⁾           Reflected in Loss on instruments designated at fair value and related derivatives in the consolidated statement of income (loss).

In addition to the impact of changes in value of our own debt attributable to credit spread for which we elected fair value option  presented in the table above, other revenues in both prior year periods includes a $330 million pre-tax gain from the sale of certain retail branches to First Niagara. Excluding the impact of both items, other revenues increased $95 million and $124 million during the three and six months ended June 30, 2013, respectively, primarily due to higher mortgage banking revenue, higher affiliate income, higher other income, in the three month period higher trading revenue and, in the year-to-date period, higher securities gains, partially offset by lower credit card fees, lower fees and commissions, in the year-to-date period lower trading revenue and in the three month period, lower securities gains.  Trading revenue in both periods reflects higher revenue related to precious metals, derivatives and balance sheet management activities which was more than offset in the year-to-date period by lower foreign exchange revenue due to lower trade volumes and price volatility. The higher mortgage banking revenue was largely driven by improved MSR performance and lower provisions for mortgage repurchase exposures on previously sold loans. Affiliate income was higher primarily due to billings associated with internal audit activities performed for other HSBC affiliates. Higher other income reflects higher miscellaneous income associated with fair value hedge ineffectiveness and improved valuations on loans held for sale. Securities gains were higher in the year-to-date period due to sales largely occurring in the first quarter associated with a continued re-balancing of the portfolio for risk management purposes based on the low interest rate environment.  Lower credit card fees and lower other fees and commissions reflect the impact of our branch sales to First Niagara in the second and third quarters of 2012 which in addition to deposits also included certain loans and, in the case of other fees and commissions, lower custodial fees. See "Results of Operations" for a more detailed discussion of other revenues.

Net interest income was $518 million and $1.0 billion during the three and six months ended June 30, 2013, respectively, compared with $535 million and $1.1 billion during the prior year-ago periods. The decrease in both periods reflects the impact of lower interest income on securities due to lower interest rates including the impact from the sale of securities and an increase in interest charges related to estimated tax exposures, partially offset by higher interest income on loans driven by higher average balances on commercial loans due to new business volume and lower interest expense on deposits reflecting the impact of our branch sales to First Niagara in 2012 and lower average rates paid. See "Results of Operations" for a more detailed discussion of net interest income.

Our provision for credit losses was $67 million and $88 million during the three and six months ended June 30, 2013, respectively, compared with $89 million and $89 million, respectively, during the prior year periods. In our consumer loan portfolio, the provision for credit losses declined in both periods, driven by a lower provision in our residential mortgage loan portfolio and in the year-to-date period in our credit card loan portfolio due to continued improvements in economic and credit conditions, including lower dollars of delinquency on accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates.  In our commercial portfolio, our provision for credit losses was higher in both periods reflecting higher levels of reserves for risk factors primarily associated with large Global Banking and Markets loan exposures. In addition, while we experienced continued improvements in economic and credit conditions including lower nonperforming loans and criticized asset levels in 2013, reductions in higher risk rated loan balances and stabilization in credit downgrades in both years resulted in a higher overall release in our credit loss reserves in the prior year periods. See "Results of Operations" for a more detailed discussion of our provision for credit losses.

Operating expenses totaled $788 million and $1.6 billion during the three and six months ended June 30, 2013, respectively, a decrease of 50 percent and 35 percent, respectively, compared with the year-ago periods.  Lower operating expenses in both periods reflect lower compliance costs, the impact of our retail branch divestitures including lower expenses related to support services from affiliates, lower other expenses and, in the year-to-date period, lower salaries and benefits as well as the non-recurrence of a $700 million expense recorded in the second quarter of 2012 related to certain regulatory matters.  Compliance costs while remaining a significant component of our cost base in the second quarter and the first half of 2013 declined, totaling $71 million and $147 million in the three and six months ended June 30, 2013, respectively, compared with $111 million and $208 million in the prior year periods, as the prior year reflects investment in BSA/AML process enhancements and infrastructure and, to a lesser extent, foreclosure remediation which did not occur at the same level in 2013. While we continue to focus attention on cost mitigation efforts in order to continue realization of optimal cost efficiencies, we believe compliance related costs have permanently increased to higher levels due to the remediation of regulatory consent agreements. See "Results of Operations" for a more detailed discussion of our operating expenses.

Our efficiency ratio from continuing operations was 72.7 percent and 72.3 percent during the three and six months ended June 30, 2013, respectively, compared with 110.8 percent and 102.3 percent during the year-ago periods. Our efficiency ratio was impacted in both periods by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting. Excluding the impact of this item as discussed above, our efficiency ratio in the three and six months ended June 30, 2013 improved to 76.4 percent and 72.7 percent, respectively, compared with 122.1 percent and 98.6 percent in the corresponding three and six months ended June 30, 2012.   The decrease in efficiency ratio was a result of a decrease in operating expenses partially offset by a decrease in net interest income and in other revenues as the prior year periods includes a $330 million pre-tax gain from the sale of certain branches to First Niagara. While operating expenses declined in both periods, driven by the impact of our retail branch divestitures, cost mitigation efforts and the non-recurrence of a $700 million expense in the second quarter of 2012 related to certain regulatory matters, they continue to reflect elevated levels of compliance costs.

Our effective tax rate was 21.4 percent for the three months ended June 30, 2013 compared with 145.0 percent in the prior year quarter. Our effective tax rate was 29.7 percent for the six months ended June 30, 2013 compared with 256.3 percent in the prior year period. The effective tax rate for the three and six months ended June 30, 2013 was primarily impacted by an increase in state uncertain tax reserves, prior period adjustments to current and deferred tax balance sheet accounts, the utilization of low income housing tax credits and state income tax expense.  The effective tax rate for the three and six months ended June 30, 2012 reflects the non-deductible goodwill related to the branches sold to First Niagara, a non-deductible expense accrual related to certain regulatory matters, the establishment of a tax reserve against the current liability account, foreign tax expense, an increase in the state uncertain tax reserves, the utilization of low income housing credits and the impact of state taxes.

Based on the results of our interim goodwill impairment testing in December 2012 and March 2013 and the historically narrow differences between fair value and book value in our Global Banking and Markets reporting unit, we performed an interim review of goodwill impairment for this reporting unit during the second quarter of 2013. As a result of this testing, the fair value of this reporting unit continued to exceed its carrying value, including goodwill. At June 30, 2013, the book value of our Global Banking and Markets reporting unit including allocated goodwill of $612 million, was 97 percent of fair value. Our goodwill impairment testing is, however, highly sensitive to certain assumptions and estimates used. As our testing results continue to indicate that there is only a marginal excess of fair value over book value for our Global Banking and Markets reporting unit, we will continue to monitor this reporting unit and perform interim impairment testing in future periods as very small changes in projections could result in either partial or full goodwill impairment of this reporting unit. We continue to perform periodic analyses of the risks and strategies of all our business and product offerings. If deterioration in economic conditions occurs or changes in the strategy or performance of our businesses or product offerings occur, interim impairment tests for reporting units in addition to Global Banking and Markets could be required in 2013.

We continue to focus on cost optimization efforts to ensure realization of cost efficiencies. To date, we have identified and implemented various opportunities to reduce costs through organizational structure redesign, vendor spending, discretionary spending and other general efficiency initiatives.  Additional cost reduction opportunities have been identified and are in the process of implementation. Workforce reductions, some of which relate to our retail branch divestitures, have resulted in total legal entity full-time equivalent employees being reduced by 35 percent since December 21, 2010. Workforce reductions are also occurring in certain non-compliance shared services functions, which we expect will result in additional reductions to future allocated costs for these functions. These efforts continue and, as a result, we may incur restructuring charges in future periods, the amount of which will depend upon the actions that ultimately are implemented.

During the second quarter of 2013, we completed the conversion of our mortgage processing and servicing operations to PHH Mortgage under our previously announced strategic relationship agreement with PHH Mortgage to manage our mortgage processing and servicing operations. Under the terms of the agreement, PHH Mortgage now provides us with mortgage origination processing services as well as sub-servicing of our portfolio of owned and serviced mortgages totaling $46.8 billion as of June 30, 2013. Although we continue to own both the mortgages on our balance sheet and the mortgage servicing rights associated with the serviced loans at the time of conversion, we now sell our agency eligible originations beginning with May 2013 applications directly to PHH Mortgage on a servicing released basis which will result in no new mortgage servicing rights being recognized going forward. The outsourcing will allow our Retail Banking and Wealth Management business to focus on strategic wealth products and service initiatives. No significant one-time restructuring costs have been or are expected to be incurred as a result of this transaction. We plan to continue originating mortgages for our customers with particular emphasis on Premier relationships.

We continue to evaluate our overall operations as we seek to optimize our risk profile and cost efficiencies as well as our liquidity, capital and funding requirements. This could result in further strategic actions that may include changes to our legal structure, asset levels, cost structure or product offerings in support of HSBC's strategic priorities.

The financial information set forth below summarizes selected financial highlights of HSBC USA Inc. as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012.

	Three Months Ended June 30,								Six Months Ended June 30,
	2013				2012				2013				2012
	(dollars are in millions)
Income (loss) from continuing operations...............................................	$	180			$	(593	)		$	363			$	(513	)
Rate of return on average:
Total assets..............................................................................................	.4				(1.2		)		.4				(.5		)
Total common shareholder's equity.....................................................	4.1				(14.2		)		4.1				(6.4		)
Net interest margin......................................................................................	1.30				1.29				1.30				1.35
Efficiency ratio.............................................................................................	72.7				110.8				72.3				102.3
Commercial net charge-off ratio(1).............................................................	(.04		)		.09				.25				.49
Consumer net charge-off ratio(1)................................................................	.70				1.41				.80				1.39
Balance Sheet Data:									June 30, 2013				December 31, 2012
Loans:
Construction and other real estate.....................................................									$	8,529			$	8,457
Business and corporate banking........................................................									12,391				12,608
Global banking.......................................................................................									23,339				20,009
Other commercial loans........................................................................									3,005				3,076
Total commercial loans...........................................................................									47,264				44,150
Residential mortgages, excluding home equity mortgages............									15,837				15,371
Home equity mortgages.......................................................................									2,172				2,324
Credit card..............................................................................................									858				815
Other consumer.....................................................................................									574				598
Total consumer loans..............................................................................									19,441				19,108
Total loans....................................................................................................									$	66,705			$	63,258
Loans held for sale......................................................................................									$	359			$	1,018
Allowance as a percent of loans(1)............................................................									.91				1.02
Consumer two-months-and-over contractual delinquency..................									6.51				6.92
Loans to deposits ratio(2)............................................................................									77.34				71.35
Tier 1 capital to risk weighted assets........................................................									12.43				13.61
Tier 1 common equity to risk weighted assets........................................									10.65				11.63
Total capital to risk weighted assets........................................................									17.42				19.52
Total shareholders' equity to total assets...............................................									9.05				9.07

⁽¹⁾       Excludes loans held for sale.

⁽²⁾       Represents period end loans, net of allowance for loan losses, as a percentage of domestic deposits equal to or less than $100,000.

Loans  Loans, excluding loans held for sale, were $66.7 billion at June 30, 2013 compared with $63.3 billion at December 31, 2012. The increase in loans as compared with December 31, 2012 was driven by an increase in commercial loans of $3.1 billion due to new business activity, largely in global banking, including an increase of $2.5 billion in affiliate loans. These increases were partially offset by paydowns and managed reductions in certain exposures. Consumer loans increased, driven by higher levels of residential mortgage loans due largely to the inclusion of approximately $310 million of Federal Housing Administration ("FHA") guaranteed loans purchased from the Government National Mortgage Association ("GNMA") which had previously been recorded in other assets, and to a lesser extent, new originations targeted at our Premier customer relationships. We continue to sell a substantial portion of new mortgage loan originations to government sponsored enterprises. See "Balance Sheet Review" for a more detailed discussion of the changes in loan balances.

Credit Performance  Our allowance for credit losses as a percentage of total loans decreased to .91 percent at June 30, 2013 as compared with 1.02 percent at December 31, 2012. The decrease in our allowance ratio reflects a lower allowance for credit losses in our commercial portfolio due to reductions in certain loan exposures including the charge-off of a single client relationship and  continued improvements in economic conditions, partially offset by a higher allowance for certain portfolio risk factors. Also contributing to the decrease was a lower allowance in our consumer portfolio due to improved credit quality including improved delinquency roll rates reflecting continued improvements in economic conditions.  See "Credit Quality" for a more detailed discussion of this change.

Our consumer two-months-and-over contractual delinquency as a percentage of loans and loans held for sale ("delinquency ratio") decreased to 6.51 percent at June 30, 2013 as compared with 6.92 percent at December 31, 2012 largely due to lower levels of residential mortgage loan delinquency on accounts less than 180 days contractually delinquent due to improvements in credit quality including improved delinquency roll rates and, to a lesser extent, lower credit card delinquency. Residential mortgage loan delinquency levels on accounts greater than 180 days contractually delinquent, however, continue to remain elevated driven by an elongated foreclosure process. See "Credit Quality" for a more detailed discussion of the trends in our delinquency ratios.

Net charge-offs as a percentage of average loans ("net charge-off ratio") decreased 35 basis points compared with the prior year quarter due largely to lower levels of residential mortgage loan charge-offs as well as lower charge-offs in our commercial portfolio. See "Credit Quality" for a more detailed discussion of our trends in net charge-off.

Funding and Capital  Capital amounts and ratios are calculated in accordance with current banking regulations. Our Tier 1 capital ratio was 12.43 percent and 13.61 percent at June 30, 2013 and December 31, 2012, respectively. Our capital levels remain well above levels established by current banking regulations as "well capitalized". The regulatory capital ratios in 2013 reflect the impact of the U.S. market risk final rule (known as Basel 2.5).

Issuances of long-term debt during 2013 included $3.5 billion of medium term notes, of which $1.9 billion was issued by HSBC Bank USA.  See "Balance Sheet Review" for a more detailed discussion regarding long-term debt.

Income Before Income Tax Expense - Significant Trends Income from continuing operations before income tax expense, and changes in various trends and activity affecting operations between years, are summarized in the following table.

	Three Months Ended June 30,								Six Months Ended June 30,
	2013				2012				2013				2012
	(in millions)
Income from continuing operations before income tax from prior year..................	$	(242	)		$	90			$	(144	)		$	382
Increase (decrease) in income from continuing operations before income tax attributable to:
Balance sheet management activities excluding gains (losses) on security sales(1).......................................................................................................................	94				(3		)		40				9
Trading revenue(2).......................................................................................................	29				(45		)		4				(80		)
Gains (losses) on security sales................................................................................	(42		)		53				59				39
Loans held for sale(3)..................................................................................................	8				12				12				16
Residential mortgage banking related revenue(4)...................................................	-				(53		)		21				(2		)
Gain on the sale of branches...................................................................................	(330		)		330				(330		)		330
Gain (loss) on own debt designated at fair value and related derivatives(5)......	(104		)		111				108				(111		)
Gain (loss) on instruments designated at fair value and related derivatives, excluding own debt(5)..............................................................................................	78				(10		)		51				(21		)
Provision for credit losses(6)......................................................................................	22				6				1				4
Expense related to certain regulatory matters(7).....................................................	700				(700		)		700				(700		)
Interest expense on certain tax exposures(8)...........................................................	(8		)		82				(12		)		71
Impairment of software development costs..........................................................	-				16				-				94
All other activity(9)......................................................................................................	24				(131		)		6				(175		)
Income from continuing operations before income tax for current year.................	$	229			$	(242	)		$	516			$	(144	)

⁽¹⁾           Balance sheet management activities primarily generate net interest income resulting from management of interest rate risk associated with the repricing characteristics of balance sheet assets and liabilities. For additional discussion regarding Global Banking and Markets net interest income, trading revenues, and the Global Banking and Markets business segment, see the caption "Business Segments" in this MD&A.

⁽²⁾           For additional discussion regarding trading revenue, see the caption "Results of Operations" in this MD&A.

⁽³⁾           For additional discussion regarding loans held for sale, see the caption "Balance Sheet Review" in this MD&A.

⁽⁴⁾           For additional discussion regarding residential mortgage banking revenue, see the caption "Results of Operations" in this MD&A.

⁽⁵⁾           For additional discussion regarding fair value option on our own debt, see Note 11, "Fair Value Option," in the accompanying consolidated financial statements.

⁽⁶⁾           For additional discussion regarding provision for credit losses, see the caption "Results of Operations" in this MD&A.

⁽⁷⁾           For additional discussion regarding expense accrual related to certain regulatory matters, see Note 21, "Litigation and Regulatory Matters" in the accompanying consolidated financial statements.

⁽⁸⁾           For additional discussion on interest expense on certain tax exposures, see Note 12, "Income Taxes," in the accompanying consolidated financial statements.

⁽⁹⁾           Represents other banking activities.

Basis of Reporting

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Unless noted, the discussion of our financial condition and results of operations included in MD&A are presented on a continuing operations basis of reporting. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

In addition to the U.S. GAAP financial results reported in our consolidated financial statements, MD&A includes reference to the following information which is presented on a non-U.S. GAAP basis:

International Financial Reporting Standards ("IFRSs") Because HSBC reports financial information in accordance with IFRSs and IFRSs operating results are used in measuring and rewarding performance of employees, our management also separately monitors net income under IFRSs (a non-U.S. GAAP financial measure). The following table reconciles our net income on a U.S. GAAP basis to net income on an IFRSs basis.

	Three Months Ended June 30,								Six Months Ended June 30,
	2013				2012				2013				2012
	(in millions)
Net income - U.S. GAAP basis............................................................................................	$	180			$	(545	)		$	363			$	(310	)
Adjustments, net of tax:
IFRS reclassification of fair value measured financial assets during 2008.................	(7		)		(11		)		(17		)		(42		)
Securities..............................................................................................................................	(1		)		-				(4		)		(1		)
Derivatives...........................................................................................................................	-				(2		)		1				(2		)
Loan impairment..................................................................................................................	18				10				11				10
Property................................................................................................................................	(2		)		(6		)		(4		)		(9		)
Pension costs......................................................................................................................	3				3				7				8
Transfer of credit card receivables to held for sale and subsequent sale..................	-				(41		)		-				(31		)
Gain on sale of branches...................................................................................................	-				70				-				70
Litigation accrual................................................................................................................	(7		)		-				(7		)		-
Other.....................................................................................................................................	(9		)		7				(23		)		11
Net income - IFRSs basis......................................................................................................	175				(515		)		327				(296		)
Tax expense - IFRSs basis....................................................................................................	(47		)		(346		)		(142		)		(424		)
Profit before tax - IFRSs basis..............................................................................................	$	222			$	(169	)		$	469			$	128

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented below:

IFRS reclassification of fair value measured financial assets during 2008 - Certain securities were reclassified from "trading assets" to "loans and receivables" under IFRSs as of July 1, 2008 pursuant to an amendment to IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"), and are no longer marked to market under IFRSs. In November 2008, additional securities were similarly transferred to loans and receivables. These securities continue to be classified as "trading assets" under U.S. GAAP.

Additionally, certain Leverage Acquisition Finance ("LAF") loans were classified as "Trading Assets" for IFRSs and to be consistent, an irrevocable fair value option was elected on these loans under U.S. GAAP on January 1, 2008. These loans were reclassified to "loans and advances" as of July 1, 2008 pursuant to the IAS 39 amendment discussed above. Under U.S. GAAP, these loans are classified as "held for sale" and carried at fair value due to the irrevocable nature of the fair value option. Substantially all of the remaining balance of these loans were sold in the first quarter of 2013.

Securities  - Under U.S. GAAP, the credit loss component of an other-than-temporary impairment of a debt security is recognized in earnings while the remaining portion of the impairment loss is recognized in accumulated other comprehensive income (loss) provided we have concluded we do not intend to sell the security and it is more-likely-than-not that we will not have to sell the security prior to recovery. Under IFRSs, there is no bifurcation of other-than-temporary impairment and the entire amount is recognized in earnings. Also under IFRSs, recoveries in other-than-temporary impairment related to improvement in the underlying credit characteristics of the investment are recognized immediately in earnings while under U.S. GAAP, they are amortized to income over the remaining life of the security. There are also less significant differences in measuring impairment under IFRSs versus U.S. GAAP.

Under IFRSs, securities include HSBC shares held for stock plans at fair value. These shares held for stock plans are measured at fair value through other comprehensive income. If it is determined these shares have become impaired, the unrealized loss in accumulated other comprehensive income is reclassified to profit or loss. There is no similar requirement under U.S. GAAP.

Derivatives - Effective January 1, 2008, U.S. GAAP removed the observability requirement of valuation inputs to allow up-front recognition of the difference between transaction price and fair value in the consolidated statement of income (loss). Under IFRSs, recognition is permissible only if the inputs used in calculating fair value are based on observable inputs. If the inputs are not observable, profit and loss is deferred and is recognized (1) over the period of contract, (2) when the data becomes observable, or (3) when the contract is settled.

Loan impairment - IFRSs requires a discounted cash flow methodology for estimating impairment on pools of homogeneous customer loans which requires the discounting of cash flows including recovery estimates at the original effective interest rate of the pool of customer loans. The amount of impairment relating to the discounting of future cash flows unwinds with the passage of time, and is recognized in interest income. Also under IFRSs, if the recognition of a write-down to fair value on secure loans decreases because collateral values have improved and the improvement can be related objectively to an event occurring after recognition of the write-down, such write-down is reversed, which is not permitted under U.S. GAAP. Additionally under IFRSs, future recoveries on charged-off loans or loans written down to fair value less cost to obtain title and sell are accrued for on a discounted basis and a recovery asset is recorded. Subsequent recoveries are recorded to earnings under U.S. GAAP, but are adjusted against the recovery asset under IFRSs. Under IFRSs, interest on impaired loans is recorded at the effective interest rate on the customer loan balance net of impairment allowances, and therefore reflects the collectibility of the loans.

As discussed above, under U.S. GAAP, the credit risk component of the lower of amortized cost or fair value adjustment related to the transfer of receivables to held for sale is recorded in the consolidated statement of income (loss) as provision for credit losses. There is no similar requirement under IFRSs.

Credit loss reserves on TDR Loans under U.S. GAAP are established based on the present value of expected future cash flows discounted at the loans' original effective interest rate.

For loans collectively evaluated for impairment under U.S. GAAP, bank industry practice which we adopted in the fourth quarter of 2012 generally results in a loss emergence period for these loans using a roll rate migration analysis which results in 12 months of losses in our allowance for credit losses.  Under IFRSs, we concluded that the estimated average period of time from last current status to write-off for real estate loans collectively evaluated for impairment using a roll rate migration analysis was 10 months which was also adopted in the fourth quarter of 2012. In the second quarter of 2013, we updated our review under IFRSs to reflect the period of time after a loss event a loan remains current before delinquency is observed which resulted in an estimated average period of time from a loss event occurring and its ultimate migration from current status through to delinquency and ultimately write-off for real estate loans collectively evaluated for impairment using a roll rate migration analysis of 12 months.

Property - The sale of our 452 Fifth Avenue property, including the 1 W. 39th Street building in April 2010, resulted in the recognition of a gain under IFRSs while under U.S. GAAP, such gain is deferred and recognized over eight years due to our continuing involvement.

Pension costs - Pension expense under U.S. GAAP is generally higher than under IFRSs as a result of the amortization of the amount by which actuarial losses exceeds the higher of 10 percent of the projected benefit obligation or fair value of plan assets (the "corridor"). As a result of amendments to the applicable IFRSs effective January 1, 2013, interest cost and expected return on plan assets is replaced by a finance cost component comprising the net interest on the net defined benefit liability.  This has resulted in an increase in pension expense as the net interest does not reflect the benefit from the expectation of higher returns on the riskier plan assets. In 2010, changes to future accruals for legacy participants under the HSBC North America Pension Plan were accounted for as a plan curtailment under IFRSs, which resulted in immediate income recognition. Under U.S. GAAP, these changes were considered to be a negative plan amendment which resulted in no immediate income recognition.

Transfer of credit card receivables to held for sale and subsequent sale - For receivables transferred to held for sale subsequent to origination, IFRSs requires these receivables to be reported separately on the balance sheet when certain criteria are met which are generally more stringent than those under U.S. GAAP, but does not change the recognition and measurement criteria. Accordingly for IFRSs purposes, such loans continue to be accounted for in accordance with IAS 39, with any gain or loss recognized at the time of sale. U.S. GAAP requires loans that meet the held for sale classification requirements be transferred to a held for sale category at the lower of amortized cost or fair value. As a result, any loss is recorded prior to sale.

Gain on sale of branches - Under U.S. GAAP, the amount of goodwill allocated to the retail branch disposal group is higher as goodwill amortization ceased under U.S. GAAP in 2002 while under IFRSs, goodwill was amortized until 2005.  This resulted in a lower gain under U.S. GAAP.

Litigation accrual - Under U.S. GAAP litigation accruals are recorded when it is probable a liability has been incurred and the amount is reasonably estimable.  Under IFRSs, a present obligation must exist for an accrual to be recorded.  In certain cases, this creates differences in the timing of accrual recognition between IFRSs and U.S. GAAP. 

Other - Other includes the net impact of certain adjustments which represent differences between U.S. GAAP and IFRSs that were not individually material, including deferred loan origination costs and fees, interest recognition, restructuring costs, depreciation expense, share based payments, precious metals and loans held for sale.

Balance Sheet Review

We utilize deposits and borrowings from various sources to provide liquidity, fund balance sheet growth, meet cash and capital needs, and fund investments in subsidiaries. Balance sheet totals at June 30, 2013 and increases (decreases) over prior periods are summarized in the table below:

					Increase (Decrease) From
					March 31, 2013							December 31, 2012
	June 30, 2013				Amount				%			Amount				%
	(dollars are in millions)
Period end assets:
Short-term investments....................................................	$	32,530			$	7,872			31.9	%		$	14,743			82.9	%
Loans, net..........................................................................	66,100				3,736				6.0			3,489				5.6
Loans held for sale...........................................................	359				(40		)		(10.0	)		(659		)		(64.7	)
Trading assets...................................................................	27,448				(7,210		)		(20.8	)		(8,547		)		(23.7	)
Securities............................................................................	54,396				(6,496		)		(10.7	)		(14,940		)		(21.5	)
Other assets.......................................................................	11,553				1,514				15.1			1,733				17.6
	$	192,386			$	(624	)		(.3	)%		$	(4,181	)		(2.1	)%
Funding sources:
Total deposits...................................................................	$	111,735			$	(5,314	)		(4.5	)%		$	(5,936	)		(5.0	)%
Trading liabilities..............................................................	15,337				(4,151		)		(21.3	)		(4,483		)		(22.6	)
Short-term borrowings.....................................................	21,394				9,592				81.3			6,461				43.3
All other liabilities.............................................................	5,584				790				16.5			1,022				22.4
Long-term debt..................................................................	20,934				(1,105		)		(5.0	)		(811		)		(3.7	)
Shareholders' equity........................................................	17,402				(436		)		(2.4	)		(434		)		(2.4	)
	$	192,386			$	(624	)		(.3	)%		$	(4,181	)		(2.1	)%

Short-Term Investments  Short-term investments include cash and due from banks, interest bearing deposits with banks and securities purchased under resale agreements. Balances will fluctuate from period to period depending upon our liquidity position at the time. Overall balances increased from both periods as we manage our short-term liquidity to maximize earnings while retaining liquidity.

Loans, Net  Loan balances at June 30, 2013, and increases (decreases) over prior periods, are summarized in the table below:

					Increase (Decrease) From
					March 31, 2013							December 31, 2012
	June 30, 2013				Amount				%			Amount				%
	(dollars are in millions)
Commercial loans:
Construction and other real estate.................................	$	8,529			$	210			2.5	%		$	72			.9	%
Business and corporate banking....................................	12,391				(334		)		(2.6	)		(217		)		(1.7	)
Global banking(1).................................................................	23,339				3,621				18.4			3,330				16.6
Other commercial loans....................................................	3,005				128				4.4			(71		)		(2.3	)
Total commercial loans....................................................	47,264				3,625				8.3			3,114				7.1
Consumer loans:
Residential mortgages, excluding home equity mortgages..........................................................................	15,837				107				.7			466				3.0
Home equity mortgages...................................................	2,172				(64		)		(2.9	)		(152		)		(6.5	)
Total residential mortgages.............................................	18,009				43				.2			314				1.8
Credit Card.........................................................................	858				109				14.6			43				5.3
Other consumer.................................................................	574				(4		)		(.7	)		(24		)		(4.0	)
Total consumer loans.......................................................	19,441				148				.8			333				1.7
Total loans.............................................................................	66,705				3,773				6.0			3,447				5.4
Allowance for credit losses.................................................	605				37				6.5			(42		)		(6.5	)
Loans, net..............................................................................	$	66,100			$	3,736			6.0	%		$	3,489			5.6	%

⁽¹⁾        Represents large multinational firms including globally focused U.S. corporate and financial institutions and USD lending to selected high quality Latin American and other multinational customers managed by HSBC on a global basis as well as to HSBC affiliates.

Commercial loan balances increased compared with both March 31, 2013 and December 31, 2012 due to new business activity, largely in global banking, including an increase of $2.2 billion and $2.5 billion, respectively, in affiliate loans. These increases were partially offset by paydowns and managed reductions in certain exposures.

Residential mortgage loans remained relatively flat compared with March 31, 2013, and increased compared with December 31, 2012, primarily due to the inclusion of approximately $310 million in guaranteed loans purchased from GNMA which had previously been recorded in other assets. Repayments on these purchased GNMA loans are predominantly insured by the FHA and as such, these loans have different risk characteristics from the rest of our consumer loan portfolio. As a result of balance sheet initiatives to manage interest rate risk and improve the structural liquidity of HSBC Bank USA, we continue to sell a substantial portion of our new residential loan originations and target new residential mortgage loan originations, with our Premier customer relationships.

Over the past several years, real estate markets in a large portion of the United States have been affected by stagnation or declines in property values. As a result, while the loan-to-value ("LTV") ratios for our mortgage loan portfolio has declined since origination, we have recently seen a general improvement in refreshed loan-to-value ratios ("Refreshed LTVs"). Refreshed LTVs for our mortgage loan portfolio, excluding subprime residential mortgage loans held for sale, are presented in the table below.

	Refreshed LTVs(1)(2) at June 30, 2013						Refeshed LTVs(1)(2) at December 31, 2012
	First Lien			Second Lien			First Lien			Second Lien
LTV < 80%.........................................................................................	82.4	%		60.3	%		79.5	%		59.4	%
80% < LTV < 90%.............................................................................	7.7	%		13.1	%		8.6	%		13.3	%
90% < LTV < 100%...........................................................................	4.8	%		11.3	%		5.7	%		11.5	%
LTV > 100%.......................................................................................	5.1	%		15.3	%		6.2	%		15.8	%
Average LTV for portfolio...............................................................	65.0	%		70.4	%		62.4	%		71.9	%

⁽¹⁾        Refreshed LTVs for first liens are calculated using the loan balance as of the reporting date. Refreshed LTVs for second liens are calculated using the loan balance as of the reporting date plus the senior lien amount at origination. Current estimated property values are derived from the property's appraised value at the time of loan origination updated by the change in the Federal Housing Finance Agency's (formerly known as the Office of Federal Housing Enterprise Oversight) house pricing index ("HPI") at either a Core Based Statistical Area ("CBSA") or state level. The estimated value of the homes could vary from actual fair values due to changes in condition of the underlying property, variations in housing price changes within metropolitan statistical areas and other factors. As a result, actual property values associated with loans that end in foreclosure may be significantly lower than the estimates used for purposes of this disclosure.

⁽²⁾        Current property values are calculated using the most current HPIs available and applied on an individual loan basis, which results in an approximate three month delay in the production of reportable statistics. Therefore, the information in the table above reflects current estimated property values using HPIs as of March 31, 2013 and September 30, 2012, respectively.

Credit card receivable balances, which represent our legacy HSBC Bank USA credit card portfolio, increased compared with March 31, 2013 and remained relatively flat compared with December 31, 2012. The increase since March 31, 2013 reflects the impact of seasonal improvements in our collection activities during the first quarter as customers use their tax refunds to make payments.

Other consumer loans have decreased from both March 31, 2013 and December 31, 2012 reflecting the discontinuation of student loan originations and the run-off of our installment loan and auto finance portfolios.

Loans Held for Sale  Loans held for sale at June 30, 2013 and increases (decreases) over prior periods are summarized in the following table.

					Increase (Decrease) From
					March 31, 2013							December 31, 2012
	June 30, 2013				Amount				%			Amount				%
	(dollars are in millions)
Total commercial loans........................................................	$	20			$	(38	)		(65.5	)%		$	(461	)		(95.8	)%
Consumer loans:
Residential mortgages................................................	275				(2		)		(0.7	)		(197		)		(41.7	)
Other consumer...........................................................	64				-				-			(1		)		(1.5	)
Total consumer loans....................................................	339				(2		)		(0.6	)		(198		)		(36.9	)
Total loans held for sale......................................................	$	359			$	(40	)		(10.0	)%		$	(659	)		(64.7	)%

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans are originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale. During the first quarter of 2013, we completed the sale of substantially all of our remaining leveraged acquisition finance syndicated loans which we had been holding since the financial crisis. Commercial loans held for sale under this program were $3 million, $3 million and $465 million at June 30, 2013, March 31, 2013 and December 31, 2012, respectively, all of which are recorded at fair value as we have elected to designate these loans under fair value option.  See Note 11, "Fair Value Option," in the accompanying consolidated financial statements for further information. Commercial loans held for sale also includes commercial real estate loans of $55 million and $16 million at March 31, 2013 and December 31, 2012, respectively, which are originated with the intent to sell to government sponsored enterprises. There were no such loans held for sale at June 30, 2013.

Residential mortgage loans held for sale historically included first mortgage loans originated and held for sale primarily to various government sponsored enterprises. Upon conversion of our mortgage processing and servicing operations to PHH Mortgage in the second quarter of 2013, beginning with May 2013 applications we no longer retain the servicing rights in relation to the mortgages upon sale. Also included in residential mortgage loans held for sale are subprime residential mortgage loans of $54 million, $51 million and $52 million at June 30, 2013, March 31, 2013 and December 31, 2012, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties. 

Other consumer loans held for sale in all periods also include certain student loans which we no longer originate.

Consumer loans held for sale are recorded at the lower of cost or fair value. The valuation adjustment on loans held for sale was $95 million and $114 million at June 30, 2013 and December 31, 2012, respectively.

Trading Assets and Liabilities  Trading assets and liabilities balances at June 30, 2013, and increases (decreases) over prior periods, are summarized in the following table.

					Increase (Decrease) From
					March 31, 2013							December 31, 2012
	June 30, 2013				Amount				%			Amount				%
	(dollars are in millions)
Trading assets:
Securities(1)........................................................................	$	9,050			$	(1,381	)		(13.2	)%		$	(4,109	)		(31.2	)%
Precious metals.................................................................	9,397				(6,478		)		(40.8	)		(2,935		)		(23.8	)
Derivatives(2).....................................................................	9,001				649				7.8			(1,503		)		(14.3	)
	$	27,448			$	(7,210	)		(20.8	)%		$	(8,547	)		(23.7	)%
Trading liabilities:
Securities sold, not yet purchased.....................................	491				(350		)		(41.6	)%		284				100+
Payables for precious metals..............................................	4,545				(1,641		)		(26.5	)		(1,222		)		(21.2	)
Derivatives(3).........................................................................	10,301				(2,160		)		(17.3	)		(3,545		)		(25.6	)
	$	15,337			$	(4,151	)		(21.3	)%		$	(4,483	)		(22.6	)%

⁽¹⁾        Includes U.S. Treasury securities, securities issued by U.S. Government agencies and U.S. Government sponsored enterprises, other asset-backed securities, corporate and foreign bonds and debt securities.

⁽²⁾        At June 30, 2013, March 31, 2013 and December 31, 2012, the fair value of derivatives included in trading assets has been reduced by $5.0 billion, $5.3 billion and $5.1 billion, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

⁽³⁾        At June 30, 2013, March 31, 2013 and December 31, 2012, the fair value of derivatives included in trading liabilities has been reduced by $1.9 billion, $1.4 billion and $1.3 billion, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative.

Securities balances decreased since both March 31, 2013 and December 31, 2012 due to a decrease in U.S. Treasury, corporate and foreign sovereign positions held to mitigate the risks of interest rate products issued to customers of domestic and emerging markets. Balances of securities sold, not yet purchased decreased since March 31, 2013 due to reduction in short US Treasury positions related to hedges of derivatives in the interest rate trading portfolio. Balances of securities sold, not yet purchased increased since December 31, 2012 due to an increase in short U.S. Treasury positions related to hedges of derivatives in the interest rate trading portfolio.

Precious metals trading assets decreased at June 30, 2013 compared with both March 31, 2013 and December 31, 2012 due primarily to a decrease in our own inventory positions held as hedges for client activity, declines in spot rates and, to a lesser extent, a decrease in unallocated metal balances held for customers. The lower payable for precious metals compared with both March 31, 2013 and December 31, 2012 was primarily due to a decrease in unallocated customer balances.

Precious metal positions may not represent our net underlying exposure as we may use derivatives contracts to reduce our risk associated with these positions, where the fair value would appear in the derivative line in the table above.

Derivative assets balances at June 30, 2013 increased compared with March 31, 2013 and decreased compared with December 31, 2012.  Derivative liabilities balances at June 30, 2013 decreased compared with both March 31, 2013 and December 31, 2012. The decreases were mainly due to market movements as valuations of interest rate, foreign exchange and credit derivatives all declined. The balances also reflect the continued decrease in credit derivative positions as a number of transaction unwinds and commutations reduced the outstanding market value as we continue to actively reduce the exposure in the legacy structured credit business. More than offsetting these decreases as it relates to derivative assets balances compared with March 31, 2013 were increases in emerging markets and metal derivatives as short positions increased as prices reduced offsetting positions in securities and metals.

Securities   Securities include securities available-for-sale and securities held-to-maturity. Balances will fluctuate between periods depending upon our liquidity position at the time. The decline in balances since both March 31, 2013 and December 31, 2012 reflect the sale of $10.0 billion and $22.3 billion, respectively, of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment. Partially offsetting the decline was the addition of $218 million of securities held-to-maturity as a result of the consolidation of a VIE in the second quarter of 2013. See Note 4, "Securities," in the accompanying consolidated financial statements for additional information.

Deposits  Deposit balances by major depositor categories at June 30, 2013, and increases (decreases) over prior periods are summarized in the following table.

					Increase (Decrease) From
					March 31, 2013							December 31, 2012
	June 30, 2013				Amount				%			Amount				%
	(dollars are in millions)
Individuals, partnerships and corporations.....................	$	91,430			$	(4,724	)		(4.9	)%		$	(4,420	)		(4.6	)%
Domestic and foreign banks...............................................	18,827				(376		)		(2.0	)%		(1,432		)		(7.1	)%
U.S. government and states and political subdivisions.	972				3				.3	%		279				40.3	%
Foreign governments and official institutions.................	506				(217		)		(30.0	)%		(363		)		(41.8	)%
Total deposits.......................................................................	$	111,735			$	(5,314	)		(4.5	)%		$	(5,936	)		(5.0	)%
Total core deposits(1)...........................................................	$	86,711			$	(2,460	)		(2.8	)%		(3,370		)		(3.7	)%

⁽¹⁾        We monitor "core deposits" as a key measure for assessing results of our core banking network. Core deposits generally include all domestic demand, money market and other savings accounts, as well as time deposits with balances not exceeding $100,000.

Deposits continued to be a significant source of funding during the first quarter of 2013. Deposits at June 30, 2013 declined compared with March 31, and December 31, 2012. Core domestic deposits which are a substantial source of our core liquidity, also decreased compared with both March 31, 2013 and December 31, 2012 driven largely by a strategic decision to actively reduce deposit interest rates particularly in the non-premier segments. The strategy for our core retail banking business, includes building relationship deposits and wealth management across multiple markets, channels and segments. This strategy includes various initiatives, such as:

•       HSBC Premier, a premium service wealth and relationship banking proposition designed for the internationally-minded client with a dedicated premier relationship manager. Total Premier deposits have decreased to $21.6 billion at June 30, 2013 as compared with $22.5 billion and $22.8 billion at March 31, 2013 and December 31, 2012, respectively, primarily as a result of the impact of the deposit rate reductions; and

•       Expanding our existing customer relationships by needs-based sales of wealth, banking and mortgage products.

We continue to actively manage our balance sheet to increase profitability while maintaining adequate liquidity. We have made reductions to rates on certain deposits and, while we have seen declines in the associated deposit balances, we still retain substantial levels of liquidity.

Short-Term Borrowings  Short-term borrowings at June 30, 2013 increased compared with both March 31, 2013 and December 31, 2012 largely as a result of increased levels of securities sold under agreements to repurchase. Short-term borrowings at June 30, 2013 also reflects $400 million of commercial paper due to the consolidation of a VIE in the second quarter of 2013. 

Long-Term Debt  Long-term debt at June 30, 2013 decreased as compared with both March 31, 2013 and December 31, 2012, due to the impact of debt retirements partially offset by debt issuances which included $1.7 billion and $3.5 billion, respectively, of medium-term notes, of which $922 million and $1.9 billion, respectively, was issued by HSBC Bank USA. 

Incremental issuances from the $40 billion HSBC Bank USA Global Bank Note Program totaled $922 million and $1.9 billion during the three and six months ended June 30, 2013, respectively, compared with $55 million and $202 million during the three and six months ended June 30, 2012, respectively. Total debt outstanding under this program was $4.6 billion and $4.8 billion at June 30, 2013 and December 31, 2012.  Given the adequate liquidity of HSBC Bank USA, we do not anticipate the Global Bank Note Program being heavily used in the future as deposits will continue to be the primary funding source for HSBC Bank USA.

Incremental long-term debt issuances from our shelf registration statement with the Securities and Exchange Commission totaled $750 million and $1.6 billion during the three and six months ended June 30, 2013 compared with $1.2 billion and $4.5 billion during the three and six months ended June 30, 2012, respectively. Total long-term debt outstanding under this shelf was $10 billion and $10.1 billion at June 30, 2013 and December 31, 2012, respectively.

Borrowings from the Federal Home Loan Bank of New York ("FHLB") totaled $1.0 billion at June 30, 2013 and December 31, 2012. At June 30, 2013, we had the ability to access further borrowings of up to $4.3 billion based on the amount pledged as collateral with the FHLB.

Residential Real Estate Owned

We obtain real estate by taking possession of the collateral pledged as security for residential mortgage loans. Residential mortgage loan  real estate owned ("REO") totaled $27 million and $28 million at June 30, 2013 and December 31, 2012, respectively. REO properties are made available for sale in an orderly fashion with the proceeds used to reduce or repay the outstanding receivable balance. The following table provides quarterly information regarding our REO properties:

	Three Months Ended
	June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012
Number of REO properties at end of period...............	246			240			221			203			188
Number of properties added to REO inventory in the period.........................................................................	86			119			96			87			88
Average loss on sale of REO properties(1).................	4.6	%		5.0	%		1.6	%		2.1	%		8.0	%
Average total loss on foreclosed properties(2)..........	46.8	%		47.8	%		45.4	%		46.8	%		48.7	%
Average time to sell REO properties (in days)...........	197			280			285			296			273

⁽¹⁾        Property acquired through foreclosure is initially recognized at the lower of amortized cost or its fair value less estimated costs to sell ("Initial REO Carrying Amount"). The average loss on sale of REO properties is calculated as cash proceeds less the Initial REO Carrying Amount divided by the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimbursable from the cash proceeds (e.g., real estate tax advances) and were incurred prior to our taking title to the property and does not include holding costs on REO properties. This ratio represents the portion of our total loss on foreclosed properties that occurred after we took title to the property.

⁽²⁾        The average total loss on foreclosed properties sold each quarter includes both the loss on sale of the REO property as discussed above and the cumulative write-downs recognized on the loans up to the time we took title to the property. This calculation of the average total loss on foreclosed properties uses the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimbursable from the cash proceeds (e.g., real estate tax advances) and were incurred prior to the date we took title to the property and does not include holding costs on REO properties.

Our methodology for determining the fair values of the underlying collateral as described in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements" in our 2012 Form 10-K is continuously validated by comparing our net investment in the loan subsequent to charging the loan down to the lower of amortized cost or fair value less cost to sell, or our net investment in the property upon completing the foreclosure process, to the updated broker's price opinion and once the collateral has been obtained, any adjustments that have been made to lower the expected selling price, which may be lower than the broker's price opinion. Adjustments in our expectation of the ultimate proceeds that will be collected are recognized as they occur based on market information at that time and consultation with our listing agents for the properties.

As previously reported, beginning in late 2010 we temporarily suspended all new foreclosure proceedings and in early 2011 temporarily suspended foreclosures in process where judgment had not yet been entered while we enhanced foreclosure documentation and processes for foreclosures and re-filed affidavits where necessary. During the first and second quarter of 2013, we added 119 properties and 86 properties, respectively, to REO inventory. We expect that the number of REO properties added to inventory may increase during 2013 although the number of new REO properties added to inventory will continue to be impacted by our ongoing refinements to our foreclosure processes as well as the extended foreclosure timelines in all states as discussed below.

In addition, certain courts and state legislatures have issued new rules or statutes relating to foreclosures. Scrutiny of foreclosure documentation has increased in some courts. Also, in some areas, officials are requiring additional verification of information filed prior to the foreclosure proceeding. The combination of these factors has led to a significant backlog of foreclosures which will take time to resolve. If  a significant number of foreclosures come to market at the same time, due to the backlog or other delays in processing, it could have an adverse impact upon home prices.

The number of REO properties at June 30, 2013 increased as compared with March 31, 2013 and December 31, 2012.  We have resumed processing suspended foreclosure actions in substantially all states and have referred the majority of the backlog of loans for foreclosure. We have also begun initiating new foreclosure activities in substantially all states.

The average loss on sale of REO properties and the average total loss on foreclosed properties improved during the second quarter of 2013 as compared with the first quarter of 2013 due to improvements in home prices. Compared with the fourth quarter of 2012, these ratios increased as we had taken title by accepting a deed-in-lieu for fewer REO properties sold during the current period.  Total losses on deed-in-lieu are typically lower than losses from REO properties acquired through the standard foreclosure process.

Results of Operations

Unless noted otherwise, the following discusses amounts from continuing operations as reported in our consolidated statement of income.

Net Interest Income  Net interest income is the total interest income on earning assets less the total interest expense on deposits and borrowed funds. In the discussion that follows, interest income and rates are presented and analyzed on a taxable equivalent basis to permit comparisons of yields on tax-exempt and taxable assets. An analysis of consolidated average balances and interest rates on a taxable equivalent basis is presented in this MD&A under the caption "Consolidated Average Balances and Interest Rates - Continuing Operations."

In the following table which summarizes the significant components of net interest income, interest expense includes $10 million and $50 million in the three and six months ended June 30, 2012, respectively, that has been allocated to our discontinued operations in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by these transactions.

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Yield on total earning assets.....................................................................................................	1.89	%		1.97	%		1.90	%		2.06	%
Expense on interest bearing liabilities......................................................................................	.81			.89			.82			.88
Interest rate spread.....................................................................................................................	1.08			1.08			1.08			1.18
Benefit from net non-interest paying funds(1).........................................................................	.22			.21			.22			.17
Net interest margin......................................................................................................................	1.30	%		1.29	%		1.30	%		1.35	%

⁽¹⁾       Represents the benefit associated with interest earning assets in excess of interest bearing liabilities.  The increased percentages reflect growth in this excess.

Significant trends affecting the comparability of the three and six months ended June 30, 2013 and 2012 net interest income and interest rate spread are summarized in the following table. Net interest income in the table is presented on a taxable equivalent basis.

	Three Months Ended June 30, 2013							Six Months Ended June 30, 2013
	Amount				Interest Rate Spread			Amount				Interest Rate Spread
	(dollars are in millions)
Net interest income/interest rate spread from prior year.....................................	$	529			1.08	%		$	1,081			1.18	%
Increase (decrease) in net interest income associated with:
Trading related activities...................................................................................	7							1
Balance sheet management activities(1)...........................................................	10							(19		)
Commercial loans................................................................................................	37							111
Deposits...............................................................................................................	(21		)					(31		)
Residential mortgage banking..........................................................................	(7		)					(7		)
Interest on estimated tax exposures.................................................................	(8		)					(12		)
Other activity.......................................................................................................	(24		)					(91		)
Net interest income/interest rate spread for current year.............................	$	523			1.08	%		$	1,033			1.08	%

⁽¹⁾        Represents our activities to manage interest rate risk associated with the repricing characteristics of balance sheet assets and liabilities. Interest rate risk, and our approach to managing such risk, are described under the caption "Risk Management" in this Form 10-Q.

Trading related activities  Net interest income for trading related activities increased during the three and six months ended June 30, 2013 as lower funding costs were partially offset by lower average balances as well as, in the year-to-date period, lower rates earned on interest earning trading assets.

Balance sheet management activities  Higher net interest income from balance sheet management activities during the three months ended June 30, 2013 reflects lower funding costs.  Net interest income from balance sheet management activities was lower during the six months ended June 30, 2013 as lower funding costs were more than offset by the impact of the sale of certain securities for risk management purposes and a lower interest rate environment.

Commercial loans  Net interest income on commercial loans increased during the three and six months ended June 30, 2013 primarily due to higher average loan balances due to new business activity as well as lower levels of nonperforming loans which was partially offset by a lower average yield on these loans.

Deposits Lower net interest income during the three and six months ended June 30, 2013 primarily reflects the impact of lower rates of return on invested capital and, to a lesser extent, lower average balances and lower rates paid on interest bearing deposits.

Residential mortgage banking revenue  Net interest income on residential mortgage banking revenue was lower in both periods as lower residential mortgage average outstanding balances (and the associated net interest income) primarily as a result of the sale of branches to First Niagara in 2012 and continued higher portfolio prepayments were partially offset by widening interest spreads largely as a result of lower portfolio funding costs.

Interest on estimated tax exposures  Net interest income during the three and six months ended June 30, 2013 reflects the impact of higher interest expense associated with tax reserves on estimated exposures.

Other activity  Net interest income on other activity was lower during the three and six months ended June 30, 2013, largely driven by lower rates of return on invested capital related to short-term and long-term borrowing.

Provision for Credit Losses  The provision for credit losses associated with our various loan portfolios is summarized in the following table: 

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Commercial:
Construction and other real estate...........................................................................	$	(14	)		$	(5	)		$	(9	)		(100+)
Business and corporate banking..............................................................................	15				15				-				-
Global banking.............................................................................................................	29				19				10				52.6
Other commercial.........................................................................................................	(4		)		(7		)		3				42.9
Total commercial..........................................................................................................	$	26			$	22			$	4			18.2	%
Consumer:
Residential mortgages, excluding home equity mortgages...................................	14				24				(10		)		(41.7	)%
Home equity mortgages.............................................................................................	13				34				(21		)		(61.8	)
Credit card receivables...............................................................................................	13				9				4				44.4
Other consumer...........................................................................................................	1				-				1				100+
Total consumer	41				67				(26		)		(38.8	)
Total provision for credit losses...................................................................................	$	67			$	89			$	(22	)		(24.7	)%
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Commercial:
Construction and other real estate...........................................................................	$	(5	)		$	(25	)		$	20			80.0	%
Business and corporate banking..............................................................................	17				21				(4		)		(19.0	)
Global banking.............................................................................................................	28				(3		)		31				100+
Other commercial.........................................................................................................	(4		)		(9		)		5				55.6
Total commercial..........................................................................................................	$	36			$	(16	)		$	52			100+
Consumer:
Residential mortgages, excluding home equity mortgages...................................	11				39				(28		)		(71.8	)%
Home equity mortgages.............................................................................................	30				42				(12		)		(28.6	)
Credit card receivables...............................................................................................	11				20				(9		)		(45.0	)
Other consumer...........................................................................................................	-				4				(4		)		(100.0	)
Total consumer............................................................................................................	52				105				(53		)		(50.5	)
Total provision for credit losses...................................................................................	$	88			$	89			$	(1	)		(1.1	)%

During the three months ended June 30, 2013, our provision for credit losses decreased $22 million driven by a lower provision or credit losses in our consumer loan portfolio, while our commercial loan credit loss provision increased modestly. Our provision for credit losses decreased $1 million during the six months ended June 30, 2013 driven by a higher provision for credit losses in our commercial loan portfolio partially offset by a lower credit loss provision in our consumer loan portfolio. Our provision as a percentage of average receivables was .10 percent and .14 percent during the three and six months ended June 30, 2013, respectively. During the three months ended June 30, 2013, we increased credit loss reserves as the provision for credit losses was $37 million higher than net charge-offs. During the six months ended June 30, 2013, we decreased our credit loss reserves as the provision for credit losses was lower than net charge-offs by $42 million.

In our commercial portfolio, the provision for credit losses increased in both periods reflecting higher levels of reserves for risk factors primarily associated with large Global Banking and Markets loan exposures. In addition, while we experienced continued improvements in economic and credit conditions including lower nonperforming loans and criticized asset levels in 2013,  reductions in higher risk rated loan balances and stabilization in credit downgrades, including managed reductions in certain exposures and improvements in the financial circumstances of certain customer relationships in both years resulted in a higher overall release in our credit loss reserves in the prior year periods.

The provision for credit losses on residential mortgages including home equity mortgages decreased $31 million and $40 million during the three and six months ended June 30, 2013, respectively, as compared with the year-ago periods driven by continued improvements in economic and credit conditions including lower dollars of delinquency on reservable accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates.

The provision for credit losses associated with credit card receivables increased $4 million during the three month period ended June 30, 2013 due to increases in late stage delinquency roll rates, partially offset by lower dollars of delinquency and lower receivable levels. In the six months ended June 30, 2013, the provision for credit losses associated with credit card receivables decreased $9 million reflecting improved economic conditions, including lower dollars of delinquency, improvements in loan delinquency roll rates and lower receivable levels.

Our methodology and accounting policies related to the allowance for credit losses are presented in "Critical Accounting Policies and Estimates" in this MD&A and in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements" in our 2012 Form 10-K. See "Credit Quality" in this MD&A for additional discussion on the allowance for credit losses associated with our various loan portfolios.

Other Revenues  The components of other revenues are summarized in the following tables.

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Credit card fees................................................................................................................	$	21			$	22			$	(1	)		(4.5	)%
Other fees and commissions..........................................................................................	176				185				(9		)		(4.9	)
Trust income....................................................................................................................	31				25				6				24.0
Trading revenue..............................................................................................................	107				84				23				27.4
Other securities gains, net.............................................................................................	23				65				(42		)		(64.6	)
HSBC affiliate income:
Fees and commissions.............................................................................................	44				36				8				22.2
Other affiliate income...............................................................................................	15				10				5				50.0
Total HSBC affiliate income....................................................................................	59				46				13				28.3
Residential mortgage banking revenue(1)....................................................................	9				2				7				100+
Gain on instruments designated at fair value and related derivatives....................	115				141				(26		)		(18.4	)
Gain on sale of branches................................................................................................	-				330				(330		)		(100.0	)%
Other income:
Valuation of loans held for sale..............................................................................	6				(2		)		8				100+
Insurance...................................................................................................................	3				2				1				50.0
Earnings from equity investments.........................................................................	1				(3		)		4				100+
Miscellaneous income.............................................................................................	15				(18		)		33				100+
Total other income....................................................................................................	25				(21		)		46				100+
Total other revenues.......................................................................................................	$	566			$	879			$	(313	)		(35.6	)%
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Credit card fees................................................................................................................	$	34			$	52			$	(18	)		(34.6	)%
Other fees and commissions..........................................................................................	346				396				(50		)		(12.6	)
Trust income....................................................................................................................	63				50				13				26.0
Trading revenue..............................................................................................................	271				282				(11		)		(3.9	)
Other securities gains, net.............................................................................................	154				95				59				62.1
HSBC affiliate income:
Fees and commissions.............................................................................................	86				82				4				4.9
Other affiliate income...............................................................................................	27				20				7				35.0
Total HSBC affiliate income....................................................................................	113				102				11				10.8
Residential mortgage banking revenue(1)....................................................................	55				27				28				100+
Gain (loss) on instruments designated at fair value and related derivatives.........	88				(71		)		159				100+
Gain on sale of branches................................................................................................	-				330				(330		)		(100.0	)%
Other income:
Valuation of loans held for sale..............................................................................	9				(3		)		12				100+
Insurance...................................................................................................................	4				4				-				-
Earnings from equity investments.........................................................................	2				(1		)		3				100+
Miscellaneous income.............................................................................................	19				-				19				100+
Total other income....................................................................................................	34				-				34				100+
Total other revenues.......................................................................................................	$	1,158			$	1,263			$	(105	)		(8.3	)%

⁽¹⁾        Includes servicing fees received from HSBC Finance of less than $1 million and $2 million during the three months ended March 31, 2013 and 2012, respectively.

Credit card fees  Credit card fees declined during both periods largely due to lower outstanding balances driven by the sale of a portion of the portfolio as part of the sale of 195 retail branches in 2012 as well as a trend towards lower late fees due to improved customer behavior.

Other fees and commissions  Other fee-based income decreased during the three and six months ended June 30, 2013. The decrease in both periods was due to lower account service related fees primarily due to the impact of the sale of 195 retail branches as discussed above and a decline in custodial fees due to decrease in precious metal related fees.  Also impacting the six months ended June 30, 2013 was a decrease in credit facility related fees primarily due to a decrease in syndication fees as well as a decrease in other fees due to the impact of the sale of 195 retail branches. The components of other fees and commissions are summarized in the following table.

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Account services......................................................................................................	$	71			$	77			(6		)		(7.8	)
Credit facilities...........................................................................................................	52				52				-				-
Custodial fees............................................................................................................	14				17				(3		)		(17.6	)
Other fees...................................................................................................................	39				39				-				-
Total other fees and commissions................................................................................	$	176			$	185			$	(9	)		(4.9	)%
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Account services......................................................................................................	$	140			$	159			(19		)		(11.9	)
Credit facilities...........................................................................................................	104				117				(13		)		(11.1	)
Custodial fees............................................................................................................	32				36				(4		)		(11.1	)
Other fees...................................................................................................................	70				84				(14		)		(16.7	)
Total other fees and commissions................................................................................	$	346			$	396			$	(50	)		(12.6	)%

Trust income  Trust income increased during both periods due to an increase in fee income associated with our management of fixed income assets, partially offset by reduced fee income associated with the continued decline in money market assets under management.

Trading revenue  Trading revenue is generated by participation in the foreign exchange, rates, credit and precious metals markets. The following table presents trading related revenue by business. The data in the table includes net interest income earned on trading instruments, as well as an allocation of the funding benefit or cost associated with the trading positions. The trading related net interest income component is included in net interest income on the consolidated statement of income. Trading revenues related to the mortgage banking business are included in residential mortgage banking revenue.

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Trading revenue..............................................................................................................	$	107			$	84			$	23			27.4	%
Net interest income.........................................................................................................	(5		)		(11		)		6				54.5
Trading related revenue.................................................................................................	$	102			$	73			$	29			39.7	%
Business:
Derivatives(1).............................................................................................................	$	26			$	25			$	1			4.0	%
Balance sheet management.....................................................................................	7				(14		)		21				100+
Foreign exchange......................................................................................................	43				51				(8		)		(15.7	)
Precious metals.........................................................................................................	22				9				13				100+
Global banking..........................................................................................................	1				(1		)		2				100+
Other trading.............................................................................................................	3				3				-				-
Trading related revenue.................................................................................................	$	102			$	73			$	29			39.7	%
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Trading revenue..............................................................................................................	$	271			$	282			$	(11	)		(3.9	)%
Net interest income.........................................................................................................	(15		)		(17		)		2				11.8
Trading related revenue.................................................................................................	$	256			$	265			$	(9	)		(3.4	)%
Business:
Derivatives(1).............................................................................................................	$	95			$	89			$	6			6.7	%
Balance sheet management.....................................................................................	4				(3		)		7				100+
Foreign exchange......................................................................................................	108				122				(14		)		(11.5	)
Precious metals.........................................................................................................	48				41				7				17.1
Global banking..........................................................................................................	1				2				(1		)		(50.0	)
Other trading.............................................................................................................	-				14				(14		)		(100.0	)
Trading related revenue.................................................................................................	$	256			$	265			$	(9	)		(3.4	)%

⁽¹⁾        Includes derivative contracts related to credit default and cross-currency swaps, equities, interest rates and structured credit products.

Trading revenue during the three and six months ended June 30, 2013 reflects higher revenue from economic hedges employed by balance sheet management to manage interest rate risk as well as higher precious metals and derivatives revenue. Foreign exchange revenue was lower driven by a reduction in trade volumes and price volatility.  In the year-to-date period, declines in foreign exchange revenue and other trading revenue more than offset the improvements in revenue associated with balance sheet management, precious metals and derivatives. Revenue increased in precious metals from greater price volatility and in derivatives from valuation gains in structured credit products.  Derivative performance also reflects a change in estimation methodology beginning in the fourth quarter of 2012 with respect to credit valuation adjustments and debit valuation adjustments to be based on a market-implied probability of default calculation rather than a ratings-based historical counterparty probability of default calculation consistent with evolving market practices. Lower revenue from other trading activities in the year-to-date period reflects valuation adjustments that were previously included in other trading that are now being included in other business lines. 

Trading revenue related to derivatives products increased during the three and six months ended June 30, 2013, impacted by a change in credit risk adjustment estimates. Derivatives revenue was also impacted by higher valuation gains from structured credit products in both periods, partially offset by declines in emerging markets related derivatives revenue, which was impacted by weakening economic conditions in Latin America.

Trading revenue related to balance sheet management activities increased during the three and six months ended June 30, 2013 primarily due to higher revenue from economic hedge positions used to manage interest rate risk.

Foreign exchange trading revenue decreased during the three and six months ended June 30, 2013 due to lower revenue from a reduction in trade volumes and price volatility.

Precious metals trading revenues increased during the three and six months ended June 30, 2013 as a result of increased metals price volatility.

Other trading revenue was flat during the three months ended June 30, 2013 and decreased during the six months ended June 30, 2013.  The decrease in the year-to-date period reflects valuation adjustments that were previously included in other trading that are now being included in other business lines.

Other securities gains, net  We maintain various securities portfolios as part of our balance sheet diversification and risk management strategies. In the second quarter and first six months of 2013, we sold $10.0 billion and $22.3 billion, respectively, of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment and recognized gains of $83 million and $207 million and losses of $60 million  and $61 million, respectively, which is included as a component of other security gains, net above. In the second quarter and first six months of 2012, we sold $3.0 billion and $7.4 billion, respectively, of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a strategy to adjust portfolio risk duration as well as to reduce risk-weighted asset levels and recognized gains of $132 million and $201 million and losses of $67 million and $106 million, respectively.

HSBC affiliate income  Affiliate income increased in both the three and six months ended June 30, 2013 primarily due to higher billings associated with internal audit activities performed for other HSBC affiliates.

Residential mortgage banking revenue  The following table presents the components of residential mortgage banking revenue. The net interest income component reflected in the table is included in net interest income in the consolidated statement of income and reflects actual interest earned, net of interest expense and corporate transfer pricing.

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Net interest income.........................................................................................................	$	44			$	51			$	(7	)		(13.7	)%
Servicing related income:
Servicing fee income................................................................................................	21				22				(1		)		(4.5	)
Changes in fair value of MSRs due to:..................................................................
Changes in valuation, including inputs or assumptions...............................	42				(31		)		73				100+
Realization of cash flows....................................................................................	(13		)		(16		)		3				18.8
Trading - Derivative instruments used to offset changes in value of MSRs.....................................................................................................................	(34		)		38				(72		)		(100+)
Total servicing related income................................................................................	16				13				3				23.1
Originations and sales related income:
Gains on sales of residential mortgages................................................................	8				15				(7		)		(46.7	)
Provision for repurchase obligations....................................................................	(23		)		(32		)		9				28.1
Trading and hedging activity.................................................................................	4				(3		)		7				100+
Total originations and sales related income.........................................................	(11		)		(20		)		9				45.0
Other mortgage income..................................................................................................	4				9				(5		)		(55.6	)
Total residential mortgage banking revenue included in other revenues..............	9				2				7				100+
Total residential mortgage banking related revenue..................................................	$	53			$	53			$	-			-	%
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Net interest income.........................................................................................................	$	95			$	102			$	(7	)		(6.9	)%
Servicing related income:
Servicing fee income................................................................................................	42				47				(5		)		(10.6	)
Changes in fair value of MSRs due to:..................................................................
Changes in valuation, including inputs or assumptions...............................	68				(15		)		83				100+
Realization of cash flows....................................................................................	(23		)		(32		)		9				28.1
Trading - Derivative instruments used to offset changes in value of MSRs.....................................................................................................................	(41		)		26				(67		)		(100+)
Total servicing related income................................................................................	46				26				20				76.9
Originations and sales related income:
Gains on sales of residential mortgages................................................................	32				33				(1		)		(3.0	)
Provision for repurchase obligations....................................................................	(36		)		(53		)		17				32.1
Trading and hedging activity.................................................................................	4				4				-				-
Total originations and sales related income.........................................................	-				(16		)		16				100.0
Other mortgage income..................................................................................................	9				17				(8		)		(47.1	)
Total residential mortgage banking revenue included in other revenues..............	55				27				28				100+
Total residential mortgage banking related revenue..................................................	$	150			$	129			$	21			16.3	%

Net interest income in both periods was lower compared with the year-ago periods as lower residential mortgage average outstanding balances (and the associated net interest income) primarily as a result of the sale of branches to First Niagara in 2012 and continued higher portfolio prepayments were partially offset by widening interest spreads largely the result of lower portfolio funding costs. Consistent with our Premier strategy, additions to our residential mortgage portfolio are primarily to our Premier customers, while sales of loans consist primarily of conforming non-premier loans sold to government sponsored enterprises.

Total servicing related income increased in the three and six months ended June 30, 2013 driven by improved net hedged MSR performance partially offset by lower net servicing fees driven by a lower serviced loan portfolio as a result of prepayments in excess of new additions to the serviced portfolio. As a result of our strategic relationship with PHH Mortgage, beginning in May 2013 we no longer add new volume to our serviced portfolio as all loans are now sold on a servicing released basis. Changes in MSR valuations are driven by updated market based assumptions such as interest rates, expected prepayments, primary-secondary spreads and cost of servicing. Consequently, primarily as a result of rising mortgage rates, the MSR asset fair value increased in the three and six months ended June 30, 2013 partially offset by losses on instruments used to hedge changes in the fair value of the MSRs.

Originations and sales related income improved in the three and six months ended June 30, 2013 largely due to lower loss provisions for loan repurchase obligations associated with loans previously sold. During the three and six months ended June 30, 2013, we recorded a charge of $23 million and $36 million, respectively, due to an increase in our estimated exposure associated with repurchase obligations on loans previously sold compared with a charge of $32 million and $53 million, respectively, in the year-ago periods.

Gain (loss) on instruments designated at fair value and related derivatives  We have elected to apply fair value option accounting to commercial leveraged acquisition finance loans, unfunded commitments, certain own fixed-rate debt issuances and all structured notes and structured deposits issued after January 1, 2006 that contain embedded derivatives. We also use derivatives to economically hedge the interest rate risk associated with certain financial instruments for which fair value option has been elected. See Note 11, "Fair Value Option," in the accompanying consolidated financial statements for additional information including a breakout of these amounts by individual component.

Gain on sale of branches  As discussed above, in May 2012 we completed the sale of 138 non-strategic retail branches to First Niagara and recognized a pre-tax gain, net of allocated non-deductible goodwill, of $330 million. We completed the sale of the remaining 57 branches in the third quarter of 2012.  See Note 2, "Discontinued Operations" for additional information.

Valuation of loans held for sale  Valuation adjustments on loans held for sale improved during the three and six months ended June 30, 2013 due to lower average balances and reduced volatility. Valuations on loans held for sale relate primarily to residential mortgage loans purchased from third parties and HSBC affiliates with the intent of securitization or sale. Included in this portfolio are subprime residential mortgage loans with a fair value of $54 million and $52 million as of June 30, 2013 and December 31, 2012, respectively. Loans held for sale are recorded at the lower of their aggregate cost or fair value, with adjustments to fair value being recorded as a valuation allowance. Valuations on residential mortgage loans held for sale that we originate are recorded as a component of residential mortgage banking revenue in the consolidated statement of income.

Other income Other income, excluding the valuation of loans held for sale as discussed above, increased during the three and six months ended June 30, 2013 driven by higher income associated with fair value hedge ineffectiveness related to securities available-for-sale.

Operating Expenses  The components of operating expenses are summarized in the following table. 

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Salary and employee benefits........................................................................................	$	247			$	246			1				.4	%
Occupancy expense, net................................................................................................	57				57				-				-
Support services from HSBC affiliates:
Fees paid to HSBC Finance for loan servicing and other administrative support.......................................................................................................................	5				7				(2		)		(28.6	)
Fees paid to HMUS..................................................................................................	54				79				(25		)		(31.6	)
Fees paid to HTSU...................................................................................................	242				240				2				.8
Fees paid to other HSBC affiliates.........................................................................	61				60				1				1.7
Total support services from HSBC affiliates........................................................	362				386				(24		)		(6.2	)
Expense related to certain regulatory matters.............................................................	-				700				(700		)		(100.0	)
Other expenses:
Equipment and software..........................................................................................	13				11				2				18.2
Marketing...................................................................................................................	8				11				(3		)		(27.3	)
Outside services.......................................................................................................	31				27				4				14.8
Professional fees.......................................................................................................	29				31				(2		)		(6.5	)
Postage, printing and office supplies....................................................................	2				3				(1		)		(33.3	)
Off-balance sheet credit reserves...........................................................................	(21		)		(4		)		(17		)		(100+)
FDIC assessment fee................................................................................................	20				26				(6		)		(23.1	)
Insurance business..................................................................................................	1				2				(1		)		(50.0	)
Miscellaneous...........................................................................................................	39				71				(32		)		(45.1	)
Total other expenses................................................................................................	122				178				(56		)		(31.5	)
Total operating expenses...............................................................................................	$	788			$	1,567			$	(779	)		(49.7	)%
Personnel - average number..........................................................................................	6,589				6,837
Efficiency ratio.................................................................................................................	72.7		%		110.8		%
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(dollars are in millions)
Salary and employee benefits........................................................................................	$	499			$	526			(27		)		(5.1	)
Occupancy expense, net................................................................................................	116				116				-				-
Support services from HSBC affiliates:
Fees paid to HSBC Finance for loan servicing and other administrative support.......................................................................................................................	9				17				(8		)		(47.1	)
Fees paid to HMUS..................................................................................................	106				161				(55		)		(34.2	)
Fees paid to HTSU...................................................................................................	475				474				1				.2
Fees paid to other HSBC affiliates.........................................................................	96				119				(23		)		(19.3	)
Total support services from HSBC affiliates........................................................	686				771				(85		)		(11.0	)
Expense related to certain regulatory matters.............................................................	-				700				(700		)		(100.0	)
Other expenses:
Equipment and software..........................................................................................	28				22				6				27.3
Marketing...................................................................................................................	18				25				(7		)		(28.0	)
Outside services.......................................................................................................	53				47				6				12.8
Professional fees.......................................................................................................	54				61				(7		)		(11.5	)
Postage, printing and office supplies....................................................................	4				8				(4		)		(50.0	)
Off-balance sheet credit reserves...........................................................................	(17		)		(12		)		(5		)		(41.7	)
FDIC assessment fee................................................................................................	42				54				(12		)		(22.2	)
Insurance business..................................................................................................	1				2				(1		)		(50.0	)
Miscellaneous...........................................................................................................	93				120				(27		)		(22.5	)
Total other expenses................................................................................................	276				327				(51		)		(15.6	)
Total operating expenses...............................................................................................	$	1,577			$	2,440			$	(863	)		(35.4	)%
Personnel - average number..........................................................................................	6,707				8,526
Efficiency ratio.................................................................................................................	72.3		%		102.3		%

Salaries and employee benefits  Salaries and employee benefits expense remained relatively flat during the three months ended June 30, 2013, but declined during the six months ended June 30, 2013. While both 2013 periods benefited from the impact of the sale of 195 non-strategic retail branches completed in 2012 and continued cost management efforts, these improvements were partially offset by higher salaries expense relating to expansion activities associated with certain businesses, an increase to the incentive accrual and higher severance costs in the second quarter of 2013.

Occupancy expense, net  Occupancy expense remained flat during the three and six months ended June 30, 2013.

Support services from HSBC affiliates  includes technology and certain centralized support services, including human resources, corporate affairs and other shared services, legal, compliance, tax and finance charged to us by HTSU. Support services from HSBC affiliates also includes services charged to us by an HSBC affiliate located outside of the United States which provides operational support to our businesses, including among other areas, customer service, systems, risk management, collection and accounting functions as well as servicing fees paid to HSBC Finance for servicing nonconforming residential mortgage loans and, prior to May 1, 2012, certain credit card receivables. Lower support services from HSBC affiliates during the three and six months ended June 30, 2013 reflects lower fees paid to HMUS largely related to lower compliance costs as the prior year periods reflect investment in AML process enhancements and infrastructure which did not occur at the same level in 2013 and lower fees paid to HSBC Finance, which no longer services our credit card portfolio. Compliance costs reflected in support services from affiliates totaled $68 million and $135 million during the three and six months ended June 30, 2013, respectively, compared with $85 million and $164 million in the year-ago periods.

Expense related to certain regulatory matters Included in the three and six months ended June 30, 2012 is an expense of $700 million related to certain regulatory matters.  See Note 21, "Litigation and Regulatory Matters" for additional information.

Marketing expenses  Lower marketing and promotional expenses in the three and six months ended June 30, 2013 resulted from continued optimization of marketing spend as a result of general cost saving initiatives.

Other expenses  Other expenses (excluding marketing expenses) decreased during the three and six months ended June 30, 2013 primarily due to lower loss estimates associated with off-balance credit exposures, lower FDIC assessment fees, lower professional fees associated with compliance and lower litigation costs and fraud related losses.

Efficiency ratio  Our efficiency ratio from continuing operations was 72.7 percent and 72.3 percent during the three and six months ended June 30, 2013, respectively, compared with 110.8 percent and 102.3 percent during the year-ago periods. Our efficiency ratio was impacted in each period by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting. Excluding the impact of this item, our efficiency ratio for the three and six months ended June 30, 2013 improved to 76.4 percent and 72.7 percent, respectively, compared with 122.1 percent and 98.6 percent in the year-ago periods due to a decrease in operating expenses partially offset by a decrease in net interest income and in other revenues as the prior year periods include a $330 million pre-tax gain from the sale of certain branches to First Niagara. While operating expenses declined in both periods driven by the impact of our retail branch divestitures, cost mitigation efforts and the non-recurrence of a $700 million expense in the second quarter of 2012 related certain regulatory matters, they continue to reflect elevated levels of compliance costs.

Segment Results - IFRS

We have four distinct business segments that are utilized for management reporting and analysis purposes which are aligned with HSBC's global businesses and business strategy. The segments, which are generally based upon customer groupings and global businesses, are described under Item 1, "Business" in our 2012 Form 10-K. Our segment results are reported on a continuing operations basis. There have been no changes in the basis of our segmentation or measurement of segment profit as compared with the presentation in our 2012 Form 10-K except as noted below.

Commercial Banking has historically held investments in low income housing tax credits.  The financial benefit from these investments is obtained through lower taxes. Since business segment returns are measured on a pre-tax basis, a revenue share has historically been in place in the form of a funding credit to provide CMB with an exact and equal offset booked to the Other segment.   Beginning in 2013, this practice has been eliminated and the low income housing tax credit investments and related financial impact are being recorded entirely in the Other segment. We have reclassified prior period results in both the CMB and Other segments to conform to the revised current year presentation.

Our segment results are reported on a continuing operations basis. As previously discussed, in the second quarter of 2012 we sold our GM and UP credit card receivables as well as our private label credit card and closed-end receivables to Capital One. Because the credit card and private label receivables sold had been classified as held for sale prior to disposition and the operations and cash flows from these receivables are eliminated from our ongoing operations post-disposition without any significant continuing involvement, we have determined we have met the requirements to report the results of these credit card and private label card and closed-end receivables being sold, as discontinued operations for all periods presented. Prior to being reported as discontinued operations beginning in the third quarter of 2011, these receivables were previously included in our Retail Banking and Wealth Management segment.

We report financial information to our parent, HSBC, in accordance with International Financial Reporting Standards ("IFRSs"). As a result, our segment results are presented on an IFRSs basis (a non-U.S. GAAP financial measure) as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources such as employees are made almost exclusively on an IFRSs basis. However, we continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP basis. The significant differences between U.S. GAAP and IFRSs as they impact our results are summarized in Note 16, "Business Segments," in the accompanying consolidated financial statements and under the caption "Basis of Reporting" in the MD&A.

 Retail Banking and Wealth Management ("RBWM")  Our RBWM segment provides a full range of banking and wealth products and services through our branches and direct channels to individuals. During the first half of 2013, we continued to direct resources towards the development and delivery of premium service, client needs based wealth and banking services with particular focus on HSBC Premier, HSBC's global banking service that offers customers a seamless international service. In order to align our retail network to our strategic focus on internationally connected markets and customers, in 2012 we sold 195 branches, primarily in our non-strategic upstate New York region and closed and/or consolidated a further 13 branches in Connecticut and New Jersey.

Consistent with our strategy, additions to our residential mortgage portfolio are primarily to our Premier customers, while sales of loans historically consist primarily of conforming loans sold to GSEs and beginning in May 2013, PHH Mortgage. In addition to normal sales activity, at times we have historically sold prime adjustable and fixed rate mortgage loan portfolios to third parties. Historically, we retained the servicing rights in relation to the mortgages upon sale. Beginning with May 2013 applications, new conforming loans will be sold servicing released to PHH Mortgage. Upon conversion of our mortgage processing and servicing operations to PHH Mortgage, we now sell our agency eligible originations beginning with May 2013 applications directly to PHH Mortgage on a servicing released basis which will result in no new mortgage servicing rights being recognized going forward.

The following table summarizes the IFRS results for our RBWM segment:

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest income..........................................................................................................	$	206			$	197			$	9			4.6	%
Other operating income..................................................................................................	82				262				(180		)		(68.7	)
Total operating income...................................................................................................	288				459				(171		)		(37.3	)
Loan impairment charges................................................................................................	21				61				(40		)		(65.6	)
	267				398				(131		)		(32.9	)
Operating expenses.........................................................................................................	300				321				(21		)		(6.5	)
Profit (loss) before tax.....................................................................................................	$	(33	)		$	77			$	(110	)		(100+)
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest income..........................................................................................................	$	421			$	444			$	(23	)		(5.2	)%
Other operating income..................................................................................................	189				359				(170		)		(47.4	)
Total operating income...................................................................................................	610				803				(193		)		(24.0	)
Loan impairment charges................................................................................................	53				102				(49		)		(48.0	)
	557				701				(144		)		(20.5	)
Operating expenses.........................................................................................................	591				642				(51		)		(7.9	)
Profit (loss) before tax.....................................................................................................	$	(34	)		$	59			$	(93	)		(100+)

Our RBWM segment reported a lower profit before tax during the three and six months ended June 30, 2013, as both prior year periods include a gain of $180 million relating to the sale of certain branches to First Niagara. Excluding the gain on the sale of these branches, profit before tax improved $70 million and $87 million, respectively, during the three and six month periods ended June 30, 2013 as compared with the corresponding prior year periods driven by lower loan impairment charges and lower operating expenses. 

Net interest income was lower during the six months ended June 30, 2013 driven by lower deposit levels as a result of the branch sale to First Niagara.  Partially offsetting the impact of branch sale to First Niagara in the year-to-date period and favorably impacting the three months ended June 30, 2013 were margin improvements due to active pricing of the deposit base especially in the non-premier segments. Residential mortgage average balances were lower than the year-ago period due to the impact of the branch sales partially offset by an increase in residential mortgage loans to our Premier customers.

Other operating income included a gain from the partial completion of the sale of certain branches to First Niagara totaling $180 million in the three and six months ended June 30, 2012.  Excluding the gain on the sale of branches, other operating income increased in the year-to-date period driven by lower provisions for mortgage loan repurchase obligations associated with previously sold loans and improved net hedged mortgage servicing rights results.

Loan impairment charges decreased during the three and six months ended June 30, 2013 driven by significant improvements in market value adjustments on loan collateral due to improvements in home prices as well as continued improvements in economic and credit conditions including lower delinquency levels on accounts less than 180 days contractually delinquent,  improvements in delinquency roll rates as well as lower charge offs in the current year. In the second quarter of 2013, we updated our review under IFRS to reflect the period of time after a loss event a loan remains current before delinquency is observed which resulted in an estimated average period of time from a loss event occurring and its ultimate migration from current status through to delinquency and ultimately write-off for real estate loans collectively evaluated for impairment using a roll rate migration analysis of 12 months. This resulted in an incremental loan impairment charge of approximately $15 million under IFRS during the second quarter of 2013.

Operating expenses were lower in both periods primarily due to the sale of the 195 branches to First Niagara as well as lower compliance costs and decreases in expenses driven by several cost reduction initiatives relating to our retail branch network, primarily optimizing staffing and administrative areas, as well as reduced marketing expenditures. Partially offsetting these improvements was the impact of a reduction in the amount of branch costs allocated to Commercial Banking and the non-recurrence of $12 million in costs in both prior year periods associated with penalties related to foreclosure delays involving loans serviced for GSEs. 

Commercial Banking ("CMB")  CMB's business strategy is to be the leading international trade and business bank in the U.S. CMB strives to execute this vision and strategy in the U.S. by focusing on key markets with high concentration of internationally minded customers. Our Commercial Banking segment serves the markets through three client groups, notably Corporate Banking, Business Banking and Commercial Real Estate which allows us to align our resources in order to efficiently deliver suitable products and services based on the client's needs. Whether it is  through commercial centers, retail branch network, or via HSBCnet, CMB provides customers with the products and services needed to grow their businesses internationally. Our relationship managers operate within a robust, customer focused compliance and risk culture, and collaborate across HSBC to capture a larger percentage of a relationship. In first half of 2013, an increase in the number of relationship managers and product partners is enabling us to gain a larger presence in key growth markets, including the West Coast, Southeast and Midwest.

During the first half of 2013, new loan originations have resulted in a 15 percent increase in average loans outstanding to Corporate Banking customers since June 30, 2012. The Commercial Real Estate group is focusing on selective business opportunities in markets with strong portfolio expertise, which resulted in a 13 percent increase in average outstanding loans for this portfolio since June 30, 2012. Total average loans increased 10 percent across all CMB business lines as compared with June 30, 2012.

The following table summarizes the IFRS results for our CMB segment:

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest income..........................................................................................................	$	172			$	160			$	12			7.5	%
Other operating income..................................................................................................	77				267				(190		)		(71.2	)
Total operating income...................................................................................................	249				427				(178		)		(41.7	)
Loan impairment charges (recoveries)..........................................................................	1				8				(7		)		(87.5	)
	248				419				(171		)		(40.8	)
Operating expenses.........................................................................................................	171				168				3				1.8
Profit before tax................................................................................................................	$	77			$	251			$	(174	)		(69.3	)%
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest income..........................................................................................................	$	342			$	330			$	12			3.6	%
Other operating income..................................................................................................	142				335				(193		)		(57.6	)
Total operating income...................................................................................................	484				665				(181		)		(27.2	)
Loan impairment charges (recoveries)..........................................................................	15				(9		)		24				100+
	469				674				(205		)		(30.4	)
Operating expenses.........................................................................................................	333				332				1				.3
Profit before tax................................................................................................................	$	136			$	342			$	(206	)		(60.2	)%

Our CMB segment reported a lower profit before tax during the three and six months ended June 30, 2013 as both prior year periods include a gain of $213 million relating to the sale of certain branches to First Niagara. Excluding the gain on the sale of these branches, profit before tax improved $39 million and $7 million, respectively, during the three and six months ended June 30, 2013 as compared with the corresponding prior year periods driven by higher other operating income and higher net interest income, partially offset in the year-to-date period by higher loan impairment charges.

Net interest income during both periods increased as the favorable impact of higher loan balances in expansion markets were partially offset by lower business banking revenue due to the branch sale.

Other operating income included a gain from the partial completion of the sale of certain branches to First Niagara totaling $213 million in the three and six months ended June 30, 2012.  Excluding the gain on the sale of branches, other operating income was higher during both periods due to higher fees generated from trade services, foreign currency revenue and credit commitments, as well as an increase in debt and leverage acquisition financing activity was partially offset by lower interchange and deposit service fees primarily due to the branch sale.

Loan impairment charges were lower during the three months ended June 30, 2013 due to loan recoveries primarily in the commercial real estate portfolio.  Loan impairment charges were higher during the six months ended June 30, 2013 compared with the year-ago periods due to a lower level of recoveries and higher provisions as a result of loan growth in expansion markets.

Operating expenses increased slightly during the three and six months ended June 30, 2013 as additional expenses relating to staffing increases in growth markets as well as higher technology infrastructure costs were partially offset by a reduction in network costs due to the branch sale and a reduction in the amount of branch costs allocated from RBWM.

Global Banking and Markets  Our Global Banking and Markets business segment supports HSBC's emerging markets-led and financing-focused global strategy by leveraging HSBC Group advantages and scale, strength in developed and emerging markets and Global Markets products expertise in order to focus on delivering international products to U.S. clients and local products to international clients, with New York as the hub for the Americas business, including Canada and Latin America. Global Banking and Markets provides tailored financial solutions to major government, corporate and institutional clients as well as private investors worldwide. Managed as a global business, Global Banking and Markets clients are served by sector-focused teams that bring together relationship managers and product specialists to develop financial solutions that meet individual client needs. With a focus on providing client connectivity between the emerging markets and developed markets, we ensure that a comprehensive understanding of each client's financial requirements is developed with a long-term relationship management approach. In addition to Global Banking and Markets clients, Global Banking and Markets works with RBWM, CMB and PB to meet their domestic and international banking needs.

Within client-focused business lines, Global Banking and Markets offers a full range of capabilities, including:

Ÿ Corporate and investment banking and financing solutions for corporate and institutional clients, including loans, working capital, investment banking, trade services, payments and cash management, and leveraged and acquisition finance; and

Ÿ One of the largest markets business of its kind, with 24-hour coverage and knowledge of world-wide local markets and providing services in credit and rates, foreign exchange, derivatives, money markets, precious metals trading, cash equities and securities services. 

Also included in our Global Banking and Markets segment is Balance Sheet Management, which is responsible for managing liquidity and funding under the supervision of our Asset and Liability Policy Committee.  Balance Sheet Management also manages our structural interest rate position within a limit structure. 

We continue to proactively target U.S. companies with international banking requirements and foreign companies with banking needs in the Americas. Furthermore, we have seen higher average corporate loan balances as well as growth in revenue from the cross-sale of our products to CMB and RBWM customers consistent with our global strategy of cross-sale to other global businesses. Global Banking and Markets segment results during the first half of 2013 benefited from more stable U.S. financial market conditions, which reflected continued low interest rates and generally less volatile credit spreads and foreign exchange prices. Economic factors in Latin America, however, were more volatile and marked  broadly by higher interest rates and wider credit spreads. This environment led to improved results from domestic related rates and credit products but resulted in a decline in emerging markets related revenue within rates and credit products. Balance sheet management revenue increased from higher gains from the sale of securities associated with a continued re-balancing of the portfolio for risk management purposes based on the low interest rate environment, while other global markets performance improved due to fair value adjustment gains on our structured note liabilities and debit valuation adjustment gains related to derivative contracts, which were made to reflect fair value changes in our own credit risk. The liquidity costs on unused credit commitments decreased resulting in a slight widening of the average spread on the corporate loan portfolio.  This change coupled with continued corporate loan growth resulted in higher Financing revenue growth during the three and six months ending June 30, 2013. Partially offsetting these revenue gains were reductions in foreign exchange and transaction services.

The following table summarizes IFRS results for the Global Banking and Markets segment.

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest income..........................................................................................................	$	125			$	167			$	(42	)		(25.1	)%
Other operating income..................................................................................................	295				165				130				78.8
Total operating income...................................................................................................	420				332				88				26.5
Loan impairment charges (recoveries)..........................................................................	6				23				(17		)		(73.9	)
	414				309				105				34.0
Operating expenses.........................................................................................................	250				236				14				5.9
Profit before tax................................................................................................................	$	164			$	73			$	91			100+
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest income..........................................................................................................	$	234			$	310			$	(76	)		(24.5	)%
Other operating income..................................................................................................	677				491				186				37.9
Total operating income...................................................................................................	911				801				110				13.7
Loan impairment charges (recoveries)..........................................................................	9				(8		)		17				100+
	902				809				93				11.5
Operating expenses.........................................................................................................	480				495				(15		)		(3.0	)
Profit before tax................................................................................................................	$	422			$	314			$	108			34.4	%

The following table summarizes the impact of key activities on total operating income of the Global Banking and Markets segment.

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Foreign exchange and metals....................................................................................	$	96			$	80			$	16			20.0	%
Credit(1).........................................................................................................................	38				(13		)		51				100+
Rates.............................................................................................................................	21				54				(33		)		(61.1	)
Equities.........................................................................................................................	7				3				4				100+
Other Global Markets.................................................................................................	7				(51		)		58				100+
Total Global Markets.........................................................................................................	169				73				96				100+
Financing......................................................................................................................	57				46				11				23.9
Payments and cash management..............................................................................	84				87				(3		)		(3.4	)
Other transaction services.........................................................................................	13				22				(9		)		(40.9	)
Total Global Banking.........................................................................................................	154				155				(1		)		(.6	)
Balance Sheet Management(2).........................................................................................	91				110				(19		)		(17.3	)
Other....................................................................................................................................	6				(6		)		12				(100+)
Total operating income.....................................................................................................	$	420			$	332			$	88			26.5	%
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Foreign exchange and metals....................................................................................	$	190			$	206			$	(16	)		(7.8	)%
Credit(1).........................................................................................................................	66				10				56				100+
Rates.............................................................................................................................	65				97				(32		)		(33.0	)
Equities.........................................................................................................................	10				8				2				25.0
Other Global Markets.................................................................................................	23				(42		)		65				100+
Total Global Markets.........................................................................................................	354				279				75				26.9
Financing......................................................................................................................	103				78				25				32.1
Payments and cash management..............................................................................	162				170				(8		)		(4.7	)
Other transaction services.........................................................................................	29				51				(22		)		(43.1	)
Total Global Banking.........................................................................................................	294				299				(5		)		(1.7	)
Balance Sheet Management(2).........................................................................................	257				228				29				12.7
Other....................................................................................................................................	6				(5		)		11				(100+)
Total operating income.....................................................................................................	$	911			$	801			$	110			13.7	%

⁽¹⁾        Credit includes gains of $34 million and $66 million in the three and six months ended June 30, 2013, respectively, compared with a loss of $8 million and a gain of $19 million in the three and six months ended June 30, 2012, respectively, of revenue related to valuation adjustments on structured credit products and mortgage loans held for sale which we no longer offer.

⁽²⁾        Includes gains on the sale of securities of $23 million and $154 million in the three and six months ended June 30, 2013, respectively, compared with gains on the sale of securities of $65 million and $90 million in the three and six months ended June 30, 2012, respectively.

Our GBM segment reported a higher profit before tax during the three and six months ended June 30, 2013 driven by higher other operating  income, partially offset by lower net interest income.  Profit before tax during the three months ended June 30. 2013  was also impacted by lower loan impairment charges (recoveries) partially offset by higher operating expenses.  Profit before tax during the six months ended June 30, 2013 was also impacted by lower operating expenses partially offset by higher loan impairment charges (recoveries).

Net interest income decreased in both periods due to lower rates on investment balances including the impact of security sales, partially offset by an increase due to growth of corporate loan balances.

 Other operating income increased during the three and six months ended June 30, 2013 due to an increase from fair value adjustments on our structured note liabilities and debit value adjustments on derivative contracts, which both reflect changes in our own credit risk. Revenue from Credit improved during both periods, substantially due to valuation adjustments on legacy structured credit and mortgage held for sale. In addition, revenues increased in both periods from the performance of economic hedges employed by Balance Sheet Management to manage interest rate risk, and in Financing related to loan activities.  These improvements were partially offset by lower revenue during both periods in Rates, mainly from emerging markets related products due to weaker economic conditions in Latin America and a decline in other transaction services revenue resulting from the transfer of our fund services business to an affiliate entity. Balance Sheet Management also reflected lower gains from the sale of securities during the three month period, but higher gains from the sales of securities during the six months ended June 30, 2013 due to sales associated with a continued re-balancing of the portfolio for risk management purposes based on the low interest rate environment. Foreign exchange revenue declined during the six month period ended June 30, 2013, from a reduction in trading volumes and price volatility.

Other operating income reflected gains on structured credit products of $26 million and $57 million during the three and six months ended June 30, 2013, respectively, compared with losses of $6 million and gains of $25 million during the three and six months ended June 30, 2012, respectively. Included in structured credit products were exposures to monoline insurance companies that resulted in gains of $21 million and $41 million during the three and six months ended June 30, 2013, respectively, compared with losses of $18 million and $10 million during the year-ago periods. Valuation gains of $6 million and $8 million during the three and six months ended June 30, 2013, respectively, were recorded against the fair values of sub-prime residential mortgage loans held for sale compared with valuation losses of $2 million and $4 million during the year-ago periods.

Loan impairment charges increased during the six months ended June 30, 2013 compared with the year-ago period reflecting higher levels of impairment allowances for risk factors primarily associated with large loan exposures as well as a lower level of recoveries partially offset by lower loss estimates associated with off-balance credit exposures in the second quarter of 2013 and an impairment of an individual customer relationship in the second quarter of 2012.  Loan impairment charges decreased during the three months ended June 30, 2013 compared with the year-ago period due to lower loss estimates associated with off-balance credit exposures in the second quarter of 2013 and an impairment of a credit facility in the second quarter of 2012 which more than offset the increases due to the factors discussed above.

Operating expenses increased during the three months ended June 30, 2013 and decreased during the six months ended June 30, 2013 as reduced staff costs due to lower headcount and lower compliance costs associated with our AML/BSA remediation activities in both periods were more than offset in the three month period by higher performance based compensation accruals and litigation related costs associated with our legacy credit business.

Private Banking ("PB")  PB provides wealth management and trustee services to high net worth individuals and families with local and international needs. Accessing the most suitable products from the marketplace, PB works with its clients to offer both traditional and innovative ways to manage and preserve wealth while optimizing returns. Managed as a global business, PB offers a wide range of wealth management and specialist advisory services, including banking, liquidity management, investment services, custody services, tailored lending, wealth planning, trust and fiduciary services, insurance, family wealth and philanthropy advisory services. PB also works to ensure that its clients have access to other products and services, capabilities, resources and expertise available throughout HSBC, such as credit cards, investment banking, commercial real estate lending and middle market lending, to deliver services and solutions for all aspects of their wealth management needs.

During the first half of 2013, we continued to dedicate resources to strengthen product and service leadership in the wealth management market. Areas of focus are banking and cash management, investment advice including discretionary portfolio management, investment and structured products, residential mortgages, as well as wealth planning for trusts and estates.  Also in the first half of 2013, our compliance and risk framework was strengthened by the establishment of a Global Private Banking Global Standards Committee and a revised risk appetite framework. Client deposit levels decreased $500 million or 4 percent compared with June 30, 2012 from domestic and international market customers. Total loans increased $500 million or 10 percent compared with prior year primarily in the residential mortgage portfolio. Overall period end client assets were lower than June 2012 by $2.9 billion and $1.7 billion lower than December 31, 2012 primarily due to reduction in highly active institutional custody balances partially offset by higher PB wealth management and investment products. Total operating income was slightly higher due to improved loans balances and higher managed and investment products fees, partially offset by lower net interest margins in deposits. Higher impairment charges are due to lower levels of recoveries.

The following table provides additional information regarding client assets during the first six months of 2013 and 2012:

Six Months Ended June 30,	2013				2012
	(in billions)
Client assets at beginning of the period.......................................................................................................	$	46.5			$	47.7
Net new money (outflows).........................................................................................................................	(1.6		)		.4
Value change................................................................................................................................................	(.1		)		(.4		)
Client assets at end of period.........................................................................................................................	$	44.8			$	47.7

The following table summarizes IFRS results for the PB segment. 

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest income..........................................................................................................	$	49			$	47			$	2			4.3	%
Other operating income..................................................................................................	30				28				2				7.1
Total operating income...................................................................................................	79				75				4				5.3
Loan impairment charges (recoveries)..........................................................................	-				(3		)		3				100.0
	79				78				1				1.3
Operating expenses.........................................................................................................	67				63				4				6.3
Profit (loss) before tax.....................................................................................................	$	12			$	15			$	(3	)		(20.0	)%
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest income..........................................................................................................	$	94			$	92			$	2			2.2	%
Other operating income..................................................................................................	58				57				1				1.8
Total operating income...................................................................................................	152				149				3				2.0
Loan impairment charges (recoveries)..........................................................................	1				(5		)		6				100+
	151				154				(3		)		(1.9	)
Operating expenses.........................................................................................................	127				121				6				5.0
Profit (loss) before tax.....................................................................................................	$	24			$	33			$	(9	)		(27.3	)%

Our PB segment reported lower profit before tax during the three and six months ended June 30, 2013 primarily driven by higher loan impairment charges (recoveries) and higher operating expenses, partially offset by higher net interest income and higher other operating income. 

Net interest income was higher in both periods as improved volumes in lending, primarily in residential mortgages, were partially offset by lower net interest from the reduction in deposit balances.

Other operating income was higher during both periods reflecting higher volumes and fees on managed and structured investment products as well as higher funds fees.

Loan impairment charges increased during the three and six months ended June 30, 2013 compared with the year-ago periods due to a lower level of recoveries and higher provisions as a result of loan growth.

Operating expenses increased during both periods primarily due to costs associated with the closure of a foreign branch as well as higher compliance and regulatory costs.

Other  The other segment primarily includes adjustments made at the corporate level for fair value option accounting related to certain debt issued, income and expense associated with certain affiliate transactions, adjustments to the fair value on HSBC shares held for stock plans and interest expense associated with certain tax exposures.

The following table summarizes IFRSs Basis results for the Other segment.

									Increase (Decrease)
Three Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest expense........................................................................................................	$	(14	)		$	(7	)		$	(7	)		(100.0	)%
Gain (loss) on own debt designated at fair value and related derivatives..............	45				149				(104		)		(69.8	)
Other operating income (loss).......................................................................................	15				16				(1		)		(6.3	)
Total operating income (loss)........................................................................................	46				158				(112		)		(70.9	)
Loan impairment charges................................................................................................	-				-				-				-
	46				158				(112		)		(70.9	)
Operating expenses.........................................................................................................	44				745				(701		)		(94.1	)
Profit (loss) before tax.....................................................................................................	$	2			$	(587	)		$	589			100+
									Increase (Decrease)
Six Months Ended June 30,	2013				2012				Amount				%
	(in millions)
Net interest expense........................................................................................................	$	(28	)		$	(18	)		$	(10	)		(55.6	)%
Gain (loss) on own debt designated at fair value and related derivatives..............	4				(103		)		107				100+
Other operating income (loss).......................................................................................	31				33				(2		)		(6.1	)
Total operating income (loss)........................................................................................	7				(88		)		95				100+
Loan impairment charges................................................................................................	-				-				-				-
	7				(88		)		95				100+
Operating expenses.........................................................................................................	86				785				(699		)		(89.0	)
Profit (loss) before tax.....................................................................................................	$	(79	)		$	(873	)		$	794			91.0	%

Profit (loss) before tax increased $589 million and $794 million during the three and six months ended June 30, 2013, respectively, driven largely by an expense accrual related to certain regulatory matters totaling $700 million recorded in the second quarter of 2012 that did not re-occur. Excluding the impact of this item on both prior year periods, profit (loss) before tax declined $111 million and improved $94 million during the three and six month periods ended June 30, 2013, respectively. The changes in both periods was primarily due to revenue associated with changes in fair value and related derivatives of our own debt for which fair value option was elected. During the three month period revenue associated with these positions declined, while in the six month period, revenue associated with these positions improved.  Also impacting both periods was lower net interest expense largely due to an increase in interest expense associated with changes in estimated tax exposures.

Reconciliation of Segment Results  As previously discussed, segment results are reported on an IFRS Basis. See Note 16, "Business Segments," in the accompanying consolidated financial statements for a discussion of the differences between IFRSs and U.S. GAAP. For segment reporting purposes, intersegment transactions have not been eliminated, and we generally account for transactions between segments as if they were with third parties. Also see Note 16, "Business Segments," in the accompanying consolidated financial statements for a reconciliation of our IFRS Basis segment results to U.S. GAAP consolidated totals.

Credit Quality

In the normal course of business, we enter into a variety of transactions that involve both on and off-balance sheet credit risk. Principal among these activities is lending to various commercial, institutional, governmental and individual customers. We participate in lending activity throughout the U.S. and, on a limited basis, internationally.

Allowance for Credit Losses  For a substantial majority of commercial loans, we conduct a periodic assessment on a loan-by-loan basis of losses we believe to be inherent in the loan portfolio. When it is deemed probable based upon known facts and circumstances that full contractual interest and principal on an individual loan will not be collected in accordance with its contractual terms, the loan is considered impaired. An impairment reserve is established based on the present value of expected future cash flows, discounted at the loan's original effective interest rate, or as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Updated appraisals for collateral dependent loans are generally obtained only when such loans are considered troubled and the frequency of such updates are generally based on management judgment under the specific circumstances on a case-by-case basis. Problem commercial loans are assigned various obligor grades under the allowance for credit losses methodology. Each credit grade has a probability of default estimate.

Our credit grades for commercial loans align with U.S. regulatory risk ratings and are mapped to our probability of default master scale. These probability of default estimates are validated on an annual basis using back-testing of actual default rates and benchmarking of the internal ratings with external rating agency data like Standard and Poor's ratings and default rates. Substantially all appraisals in connection with commercial real estate loans are ordered by the independent real estate appraisal unit at HSBC. The appraisal must be reviewed and accepted by this unit. For loans greater than $250 thousand, an appraisal is generally ordered when the loan is classified as Substandard as defined by the Office of the Comptroller of the Currency (the "OCC"). On average, it takes approximately four weeks from the time the appraisal is ordered until it is completed and the values accepted by HSBC's independent appraisal review unit. Subsequent provisions or charge-offs are completed shortly thereafter, generally within the quarter in which the appraisal is received.

In situations where an external appraisal is not used to determine the fair value of the underlying collateral of impaired loans, current information such as rent rolls and operating statements of the subject property are reviewed and presented in a standardized format. Operating results such as net operating income and cash flows before and after debt service are established and reported with relevant ratios. Third-party market data is gathered and reviewed for relevance to the subject collateral. Data is also collected from similar properties within the portfolio. Actual sales levels of condominiums, operating income and expense figures and rental data on a square foot basis are derived from existing loans and, when appropriate, used as comparables for the subject property. Property specific data, augmented by market data research, is used to project a stabilized year of income and expense to create a 10-year cash flow model to be discounted at appropriate rates to present value. These valuations are then used to determine if any impairment on the underlying loans exists and an appropriate allowance is recorded when warranted.

For loans identified as troubled debt restructures ("TDR Loans"), an allowance for credit losses is maintained based on the present value of expected future cash flows discounted at the loans' original effective interest rate or in the case of certain commercial loans which are solely dependent on the collateral for repayment, the estimated fair value of the collateral less costs to sell.  The circumstances in which we perform a loan modification involving a TDR Loans at a then current market interest rate for a borrower with similar credit risk would include other changes to the terms of the original loan made as part of the restructure (e.g. principal reductions, collateral changes, etc.) in order for the loan to be classified as a TDR Loans.

For pools of homogeneous consumer loans which do not qualify as troubled debt restructures, probable losses are estimated using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge-off based upon recent historical performance experience of other loans in our portfolio.  This migration analysis incorporates estimates of the period of time between a loss occurring and the confirming event of its charge-off.  This analysis considers delinquency status, loss experience and severity and takes into account whether loans have filed for bankruptcy, have been re-aged or are subject to an external debt management plan, hardship, modification, extension or deferment. The allowance for credit losses on consumer receivables also takes into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default based on historical and recent trends which are updated monthly based on a rolling average of several months' data using the most recently available information and is typically in the range of 25-35 percent for first lien mortgage loans and 80-100 percent for second lien home equity loans.  At June 30, 2013, approximately 1 percent of our second lien mortgages where the first lien mortgage is held or serviced by us and has a delinquency status of 90 days or more delinquent, were less than 90 days delinquent and not considered to be a troubled debt restructure or already recorded at fair value less costs to sell. 

 The roll rate methodology is a migration analysis based on contractual delinquency and rolling average historical loss experience which captures the increased likelihood of an account migrating to charge-off as the past due status of such account increases. The roll rate models used were developed by tracking the movement of delinquencies by age of delinquency by month (bucket) over a specified time period. Each "bucket" represents a period of delinquency in 30-day increments. The roll from the last delinquency bucket results in charge-off. Contractual delinquency is a method for determining aging of past due accounts based on the status of payments under the loan. The roll percentages are converted to reserve requirements for each delinquency period (i.e., 30 days, 60 days, etc.). Average roll rates are developed to avoid temporary aberrations caused by seasonal trends in delinquency experienced by some product types. We have determined that a 12-month average roll rate balances the desire to avoid temporary aberrations, while at the same time analyzing recent historical data. The calculations are performed monthly and are done consistently from period to period. In addition, loss reserves on consumer receivables are maintained to reflect our judgment of portfolio risk factors which may not be fully reflected in the statistical roll rate calculation.

Our allowance for credit losses methodology and our accounting policies related to the allowance for credit losses are presented in further detail under the caption "Critical Accounting Policies and Estimates" and in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2012 Form 10-K. Our approach toward credit risk management is summarized under the caption "Risk Management" in our 2012 Form 10-K.  There have been no material revisions to our policies or methodologies during the first half of 2013.

The following table sets forth the allowance for credit losses for the periods indicated:

	June 30, 2013				March 31, 2013				December 31, 2012
	(dollars are in millions)
Allowance for credit losses.....................................................................................................	$	605			$	568			$	647
Ratio of Allowance for credit losses to:
Loans:(1)
Commercial..................................................................................................................................	.63		%		.62		%		.72		%
Consumer:
Residential mortgages, excluding home equity mortgages...........................................	1.24		%		1.22		%		1.37		%
Home equity mortgages.....................................................................................................	2.39		%		2.24		%		1.94		%
Credit card receivables.......................................................................................................	5.24		%		5.61		%		6.75		%
Other consumer loans.........................................................................................................	2.26		%		2.60		%		3.34		%
Total consumer loans.........................................................................................................	1.57		%		1.55		%		1.73		%
Total.............................................................................................................................................	.91		%		.90		%		1.02		%
Net charge-offs(1)(2):
Commercial(3)........................................................................................................................	NM%				114.47		%		173.22		%
Consumer..............................................................................................................................	225.00				175.88				129.92
Total.............................................................................................................................................	504.17		%		140.25		%		148.05		%
Nonperforming loans(1):
Commercial...........................................................................................................................	117.72		%		81.02		%		63.40		%
Consumer..............................................................................................................................	26.87				26.23				28.16
Total.............................................................................................................................................	43.43		%		38.59		%		38.70		%

⁽¹⁾        Ratios exclude loans held for sale as these loans are carried at the lower of cost or fair value.

⁽²⁾        Quarter-to-date net charge-offs, annualized.

⁽³⁾        The ratio of allowance for credit losses to net charge-offs for commercial loans is not meaningful (NM) for June 30, 2013 because recoveries exceeded charge-offs in the quarter.

Changes in the allowance for credit losses by general loan categories for the three months ended June 30, 2013 and 2012 are summarized in the following table:

	Commercial																Consumer
	Construction and Other Real Estate				Business and Corporate Banking				Global Banking				Other Comm'l				Residential Mortgage, Excl Home Equity Mortgages				Home Equity Mortgages				Credit Card				Other Consumer				Total
	(in millions)
Three Months Ended June 30, 2013
Allowance for credit losses - beginning of period............................................	$	116			$	96			$	40			$	17			$	192			$	50			$	42			$	15			$	568
Provision charged to income..............	(14		)		15				29				(4		)		14				13				13				1				67
Charge offs.....................................	(1		)		(9		)		-				-				(13		)		(11		)		(11		)		(3		)		(48		)
Recoveries......................................	9				1				-				4				3				-				1				-				18
Net (charge offs) recoveries...............	8				(8		)		-				4				(10		)		(11		)		(10		)		(3		)		(30		)
Allowance for credit losses - end of period.................................................	$	110			$	103			$	69			$	17			$	196			$	52			$	45			$	13			$	605
Three Months Ended June 30, 2012
Allowance for credit losses - beginning of period............................................	$	205			$	76			$	25			$	20			$	182			$	43			$	35			$	17			$	603
Provision charged to income..............	(5		)		15				19				(7		)		24				34				9				-				89
Charge offs.....................................	(2		)		(13		)		-				-				(23		)		(30		)		(16		)		(7		)		(91		)
Recoveries......................................	-				2				-				5				5				-				3				3				18
Net (charge offs) recoveries...............	(2		)		(11		)		-				5				(18		)		(30		)		(13		)		(4		)		(73		)
Allowance for credit losses - end of period.................................................	$	198			$	80			$	44			$	18			$	188			$	47			$	31			$	13			$	619
Six Months Ended June 30, 2013
Allowance for credit losses - beginning of period............................................	$	162			$	97			$	41			$	17			$	210			$	45			$	55			$	20			$	647
Provision charged to income..............	(5		)		17				28				(4		)		11				30				11				-				88
Charge offs.....................................	(59		)		(15		)		-				-				(29		)		(23		)		(23		)		(9		)		(158		)
Recoveries......................................	12				4				-				4				4				-				2				2				28
Net (charge offs) recoveries...............	(47		)		(11		)		-				4				(25		)		(23		)		(21		)		(7		)		(130		)
Allowance for credit losses - end of period.................................................	$	110			$	103			$	69			$	17			$	196			$	52			$	45			$	13			$	605
Six Months Ended June 30, 2012
Allowance for credit losses - beginning of period............................................	$	212			$	78			$	131			$	21			$	192			$	52			$	39			$	18			$	743
Provision charged to income..............	(25		)		21				(3		)		(9		)		39				42				20				4				89
Charge offs.....................................	(3		)		(23		)		(84		)		-				(49		)		(47		)		(33		)		(14		)		(253		)
Recoveries......................................	14				4				-				6				6				-				5				5				40
Net (charge offs) recoveries...............	11				(19		)		(84		)		6				(43		)		(47		)		(28		)		(9		)		(213		)
Allowance for credit losses - end of period.................................................	$	198			$	80			$	44			$	18			$	188			$	47			$	31			$	13			$	619

The allowance for credit losses at June 30, 2013 increased $37 million, or 7 percent as compared with March 31, 2013 and decreased $42 million, or 6 percent as compared with December 31, 2012.  The increase since March 31, 2013 was largely driven by increased levels of reserves for commercial loan risk factors primarily associated with large Global Banking and Markets loan exposures, while consumer reserve levels increased modestly driven by higher loss estimates in a small segment of our residential mortgage loan portfolio. The decrease from December 31, 2012 was due to lower loss estimates in both our commercial and consumer loan portfolios. Our commercial allowance for credit losses decreased $18 million in the first six months of 2013 due to reductions in certain loan exposures including the charge-off of a single client relationship and continued improvements in economic conditions which led to lower levels of non-performing loans and criticized assets.  These reductions were partially offset by higher allowances for certain portfolio risk factors associated primarily with large loan exposure as discussed above.  Our consumer allowance for credit losses decreased $24 million in the first six months of 2013, driven primarily by lower loss estimates in our residential mortgage loan portfolio due to continued improvements in credit quality including lower delinquency levels on accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates. Our residential mortgage loan allowance for credit losses in all periods reflects consideration of certain risk factors relating to trends such as recent portfolio performance as compared with average roll rates and economic uncertainty, including housing market trends and foreclosure timeframes. Also contributing to the decrease was lower loss estimates in our credit card portfolio due to improvements in credit quality including improved loan delinquency roll rates. Reserve levels for all consumer loan categories however continue to be impacted by the slow pace of the economic recovery in the U.S. economy, including elevated unemployment rates and, as it relates to residential mortgage loans, a housing market which is in the early stages of recovery.

The allowance for credit losses as a percentage of total loans at June 30, 2013 increased slightly compared with March 31, 2013 but decreased compared with December 31, 2012 for the reasons discussed above.

The allowance for credit losses as a percentage of net charge-offs increased as compared with March 31, 2013 largely due to lower dollars of commercial loan net charge-offs as the prior quarter reflected higher commercial loan charge-offs driven by the charge-off of a single commercial real estate relationship, which was fully reserved and higher reserve levels as discussed above. Also impacting the ratio was an increase in the allowance for credit losses as a percentage of net charge-offs for consumer loans as consumer loan net charge-offs decreased while the allowance for credit losses increased. The allowance for credit losses as a percentage of net charge-offs also increased as compared with December 31, 2012 largely due to lower dollars of both commercial and consumer loan net charge-offs as the decline outpaced the decrease in the allowance.

The allowance for credit losses by major loan categories, excluding loans held for sale, is presented in the following table:

	Amount				% of Loans to Total Loans(1)			Amount				% of Loans to Total Loans(1)			Amount				% of Loans to Total Loans(1)
	June 30, 2013							March 31, 2013							December 31, 2012
	(dollars are in millions)
Commercial(2)............................................................................................	$	299			70.9	%		$	269			69.3	%		$	317			69.8	%
Consumer:
Residential mortgages, excluding home equity mortgages........	196				23.7			192				25.0			210				24.3
Home equity mortgages...................................................................	52				3.3			50				3.6			45				3.7
Credit card receivables.....................................................................	45				1.3			42				1.2			55				1.3
Other consumer.................................................................................	13				.8			15				.9			20				0.9
Total consumer..................................................................................	306				29.1			299				30.7			330				30.2
Total...........................................................................................................	$	605			100.0	%		$	568			100.0	%		$	647			100.0	%

⁽¹⁾        Excluding loans held for sale.

⁽²⁾        Components of the commercial allowance for credit losses, including exposure relating to off-balance sheet credit risk, and the movements in comparison with prior years, are summarized in the following table:

⁽³⁾       

	June 30, 2013				March 31, 2013				December 31, 2012
	(in millions)
On-balance sheet commercial allowance:
Specific..................................................................................................................................	$	31			$	34			$	94
Collective...............................................................................................................................	268				235				223
Total on-balance sheet commercial allowance................................................................	299				269				317
Off-balance sheet commercial allowance..........................................................................	63				145				139
Total commercial allowances..............................................................................................	$	362			$	414			$	456

While our allowance for credit loss is available to absorb losses in the entire portfolio, we specifically consider the credit quality and other risk factors for each of our products in establishing the allowance for credit loss.

Reserves for Off-Balance Sheet Credit Risk  We also maintain a separate reserve for credit risk associated with certain off-balance sheet exposures, including letters of credit, unused commitments to extend credit and financial guarantees. This reserve, included in other liabilities, was $63 million, $145 million and $139 million at June 30, 2013, March 31, 2013 and December 31, 2012, respectively. The related provision is recorded as a component of other expense within operating expenses. The decrease in off-balance sheet reserves June 30, 2013 as compared with March 31, 2013 and December 31, 2013 largely reflects the impact of an upgrade to an individual monoline which resulted in an improvement to our expectation of cash flows from an off-balance sheet liquidity facility and the consolidation of a previously unconsolidated commercial paper VIE in the second quarter of 2013 which resulted in the reclassification of a $61 million reserve on our balance sheet.  Off-balance sheet exposures are summarized under the caption "Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations" in this MD&A.

Delinquency  The following table summarizes dollars of two-months-and-over contractual delinquency and two-months-and-over contractual delinquency as a percent of total loans and loans held for sale ("delinquency ratio"):

	June 30, 2013				March 31, 2013				December 31, 2012
	(dollars are in millions)
Delinquent loans:
Commercial......................................................................................................................................	$	197			$	160			$	339
Consumer:
Residential mortgages, excluding home equity mortgages(1)...........................................	1,170				1,158				1,233
Home equity mortgages.........................................................................................................	77				85				75
Total residential mortgages(2)................................................................................................	1,247				1,243				1,308
Credit card receivables...........................................................................................................	15				18				21
Other consumer.......................................................................................................................	26				24				30
Total consumer........................................................................................................................	1,288				1,285				1,359
Total.................................................................................................................................................	$	1,485			$	1,445			$	1,698
Delinquency ratio:
Commercial......................................................................................................................................	.42		%		.37		%		.76		%
Consumer:
Residential mortgages, excluding home equity mortgages...............................................	7.26				7.23				7.78
Home equity mortgages.........................................................................................................	3.55				3.80				3.23
Total residential mortgages(2)................................................................................................	6.82				6.81				7.20
Credit card receivables...........................................................................................................	1.75				2.40				2.58
Other consumer.......................................................................................................................	4.08				3.74				4.25
Total consumer........................................................................................................................	6.51				6.54				6.92
Total.................................................................................................................................................	2.21		%		2.29		%		2.64		%

⁽¹⁾        At June 30, 2013, March 31, 2013 and December 31, 2012, residential mortgage loan delinquency includes $1.1 billion, $1.1 billion and $1.0 billion, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less costs to sell, including $33 million, $35 million and $39 million, respectively, relating to loans held for sale.

⁽²⁾        The following reflects dollars of contractual delinquency and delinquency ratios for interest-only loans and ARM loans:

⁽³⁾       

	June 30, 2013				March 31, 2013				December 31, 2012
	(dollars are in millions)
Dollars of delinquent loans:
Interest-only loans.........................................................................................................	$	68			$	74			$	87
ARM loans.....................................................................................................................	338				337				356
Delinquency ratio:
Interest-only loans.........................................................................................................	1.78		%		1.92		%		2.18		%
ARM loans.....................................................................................................................	3.19				3.24				3.43

Compared with March 31, 2013, our two-months-and-over contractual delinquency ratio decreased driven by higher outstanding loan balances. Our consumer loan two-month-and-over contractual delinquency ratio at June 30, 2013 decreased 3 basis points from March 31, 2013 primarily due to lower levels levels of credit card delinquency on higher loan balances while total residential mortgage loan delinquency remained relatively flat as outstanding loan balances grew modestly. Residential mortgage loan delinquency levels continue to be impacted by an elongated foreclosure process which has resulted in loans which would otherwise have been foreclosed and transferred to REO remaining in loan account. Overall consumer loan delinquency levels also continue to be impacted by elevated unemployment levels and, as it relates to residential mortgages, a housing market which is slowly recovering. Compared with March 31, 2013, our commercial two-months-and-over contractual delinquency ratio increased 5 basis points due to a specific commercial real estate credit partially offset by continued improvements in the credit quality of the portfolio and higher outstanding loan balances. 

Compared with December 31, 2012, our two-months-and-over contractual delinquency ratio decreased 43 basis points driven by lower delinquency levels in both our commercial and consumer loan portfolios. Compared with December 31, 2012, our consumer loan two-months-and-over contractual delinquency ratio decreased 41 basis points primarily due to lower levels of residential mortgage loan delinquency on accounts less than 180 days contractually delinquent due to improvements in credit quality, including improved delinquency roll rates partially offset by higher late stage delinquency. Credit card delinquency also improved due to continued improvements in economic conditions. Our commercial loan two-months-and-over contractual delinquency ratio decreased 34 basis points compared with December 31, 2012 due to higher outstanding loan balances as well as improved credit quality including reductions in certain exposures and the resolution of certain matured loans which were in the process of refinancing or paydown at year-end.

Residential mortgage first lien delinquency is significantly higher than second lien home equity mortgage delinquency in all periods largely due to the inventory of loans which are held at the lower of amortized cost or fair value of the collateral less cost to sell and are in the foreclosure process.  Given the extended foreclosure time lines, particularly in those states where HUSI has a large footprint, the first lien residential mortgage portfolio has a substantial inventory of loans which are greater than 180 days past due and have been written down to the fair value of the collateral less cost to sell.  There is a substantially lower volume of second lien home equity mortgage loans where we pursue foreclosure less frequently given the subordinate position of the lien.  In addition, our legacy business originated through broker channels and loan transfers from HSBC is of a lower credit quality and, therefore, contributes to an overall higher weighted average delinquency rate for our first lien residential mortgages.  Both of these factors are expected to diminish significantly in future periods as the foreclosure backlog resulting from extended foreclosure time lines is managed down and the portfolio mix continues to shift to higher quality loans as the legacy broker originated business and prior loan transfers run off. 

Net Charge-offs of Loans  The following table summarizes net charge-off (recovery) dollars as well as the net charge-off (recovery) of loans for the quarter, annualized, as a percentage of average loans, excluding loans held for sale, ("net charge-off ratio"):

	June 30, 2013				March 31, 2013				June 30, 2012
	(dollars are in millions)
Net Charge-off Dollars:
Commercial:
Construction and other real estate...............................................................................	$	(8	)		$	55			$	2
Business and corporate banking..................................................................................	8				3				11
Global banking................................................................................................................	-				-				-
Other commercial............................................................................................................	(4		)		-				(5		)
Total commercial.................................................................................................................	(4		)		58				8
Consumer:
Residential mortgages, excluding home equity mortgages......................................	10				15				18
Home equity mortgages.................................................................................................	11				12				30
Total residential mortgages...........................................................................................	21				27				48
Credit card receivables...................................................................................................	10				11				13
Other consumer...............................................................................................................	3				4				4
Total consumer...................................................................................................................	34				42				65
Total......................................................................................................................................	$	30			$	100			$	73
Net Charge-off Ratio:........................................................................................................
Commercial:
Construction and other real estate...............................................................................	(.38		)%		2.62		%		.10		%
Business and corporate banking..................................................................................	.26				.13				.39
Global banking................................................................................................................	-				-				-
Other commercial............................................................................................................	(.52		)		-				(.65		)
Total commercial.................................................................................................................	(.04		)		.55				.09
Consumer:
Residential mortgages, excluding home equity mortgages......................................	.25				.40				.50
Home equity mortgages.................................................................................................	2.00				2.15				4.87
Total residential mortgages...........................................................................................	.47				.62				1.14
Credit card receivables...................................................................................................	4.90				5.84				6.55
Other consumer...............................................................................................................	2.05				2.71				2.41
Total consumer...................................................................................................................	.70				.89				1.41
Total......................................................................................................................................	.19		%		.65		%		.54		%

 Our net charge-off ratio as a percentage of average loans decreased 46 basis points for the quarter ended June 30, 2013 compared with the quarter ended March 31, 2013, due primarily to lower levels of commercial loan charge-offs as the prior quarter reflects the charge-off of a large client relationship. Also contributing to the decrease was lower consumer loan charge-offs primarily due to lower residential mortgage loan charge-offs. The lower residential mortgage charge-off levels reflect the impact of improved credit quality including the impact of lower levels of delinquency on accounts less than 180 days delinquent experienced in prior quarters.

Compared with the year-ago quarter, our charge off ratio decreased 35 basis points, driven by lower charge-offs in our residential mortgage loan portfolio as discussed above and, to a lesser extent, lower charge-off levels in our commercial portfolio.

Nonperforming Assets  Nonperforming assets are summarized in the following table. 

	June 30, 2013				March 31, 2013				December 31, 2012
	(dollars are in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans..............................................................................................	$	47			$	47			$	104
Other real estate...................................................................................................................	132				218				281
Business and corporate banking............................................................................................	44				30				47
Global banking...........................................................................................................................	18				18				18
Other commercial.......................................................................................................................	5				14				13
Total commercial........................................................................................................................	246				327				463
Consumer:
Residential mortgages, excluding home equity mortgages.................................................	1,013				1,026				1,038
Home equity mortgages...........................................................................................................	89				74				86
Total residential mortgages(1)(2)...................................................................................................	1,102				1,100				1,124
Others..........................................................................................................................................	5				5				5
Total consumer loans...............................................................................................................	1,107				1,105				1,129
Nonaccrual loans held for sale....................................................................................................	50				34				37
Total nonaccruing loans..............................................................................................................	1,403				1,466				1,629
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans..............................................................................................	$	-			$	-			$	-
Other real estate...................................................................................................................	1				2				8
Business and corporate banking............................................................................................	6				2				28
Other commercial.......................................................................................................................	1				1				1
Total commercial........................................................................................................................	8				5				37
Consumer:
Credit card receivables.............................................................................................................	11				13				15
Other consumer.........................................................................................................................	21				22				28
Total consumer loans...............................................................................................................	32				35				43
Total accruing loans contractually past due 90 days or more..............................................	40				40				80
Total nonperforming loans.........................................................................................................	1,443				1,506				1,709
Other real estate owned................................................................................................................	-				88				80
Total nonperforming assets........................................................................................................	$	1,443			$	1,594			$	1,789
Allowance for credit losses as a percent of nonperforming loans(3):
Commercial.................................................................................................................................	117.72		%		81.02		%		63.40		%
Consumer....................................................................................................................................	26.87				26.23				28.16

⁽¹⁾        At June 30, 2013, March 31, 2013 and December 31, 2012, residential mortgage loan nonaccrual balances include $1.1 billion, $1.1 billion and $1.0 billion, respectively, of loans that are carried at the lower of amortized cost or fair value less cost to sell.

⁽²⁾        Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7 bankruptcy and not re-affirmed and second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.

⁽³⁾        Represents our commercial or consumer allowance for credit losses, as appropriate, divided by the corresponding outstanding balance of total nonperforming loans held for investment. Nonperforming loans include accruing loans contractually past due 90 days or more. Ratio excludes nonperforming loans associated with loan portfolios which are considered held for sale as these loans are carried at the lower of amortized cost or fair value.

Nonaccrual loans at June 30, 2013 decreased as compared with March 31, 2013 and December 31, 2012 due to lower levels of commercial non-accrual loans. Commercial non-accrual loans decreased due to credit risk rating upgrades outpacing credit risk rating downgrades, managed reductions in certain exposures, as well as payments and charge-offs within our portfolio. Our consumer nonaccrual loans remained relatively flat compared with March 31, 2013 and decreased modestly compared with December 31, 2012 as lower nonaccrual first lien residential mortgage loans in both periods was offset by higher nonaccrual home equity mortgages. Residential mortgage loan nonaccrual levels however continue to be impacted by an elongated foreclosure process as previously discussed. Accruing loans past due 90 days or more remained flat since March 31, 2013 but decreased compared with December 31, 2012 driven by lower commercial loan balances due to the resolution of certain loans which were refinanced in early 2013 at market rates.

Our policies and practices for problem loan management and placing loans on nonaccrual status are summarized in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in our 2012 Form 10-K.

Accrued but unpaid interest on loans placed on nonaccrual status generally is reversed and reduces current income at the time loans are so categorized. Interest income on these loans may be recognized to the extent of cash payments received. In those instances where there is doubt as to collectability of principal, any cash interest payments received are applied as reductions of principal. Loans are not reclassified as accruing until interest and principal payments are brought current and future payments are reasonably assured.

Impaired Commercial Loans  A commercial loan is considered to be impaired when it is deemed probable that all principal and interest amounts due according to the contractual terms of the loan agreement will not be collected. Probable losses from impaired loans are quantified and recorded as a component of the overall allowance for credit losses. Generally, impaired commercial loans include loans in nonaccrual status, loans that have been assigned a specific allowance for credit losses, loans that have been partially charged off and loans designated as troubled debt restructurings. Impaired commercial loan statistics are summarized in the following table:

	June 30, 2013				March 31, 2013				December 31, 2012
	(in millions)
Impaired commercial loans:
Balance at end of period.........................................................................................................	$	615			$	532			$	697
Amount with impairment reserve..........................................................................................	282				131				250
Impairment reserve..................................................................................................................	38				35				96

Criticized Loan  Criticized loan classifications are based on the risk rating standards of our primary regulator. Problem loans are assigned various criticized facility grades under our allowance for credit losses methodology. The following facility grades are deemed to be criticized.

•       Special Mention - generally includes loans that are protected by collateral and/or the credit worthiness of the customer, but are potentially weak based upon economic or market circumstances which, if not checked or corrected, could weaken our credit position at some future date.

•       Substandard - includes loans that are inadequately protected by the underlying collateral and/or general credit worthiness of the customer. These loans present a distinct possibility that we will sustain some loss if the deficiencies are not corrected. This category also includes certain non-investment grade securities, as required by our principal regulator.

•       Doubtful - includes loans that have all the weaknesses exhibited by substandard loans, with the added characteristic that the weaknesses make collection or liquidation in full of the recorded loan highly improbable. However, although the possibility of loss is extremely high, certain factors exist which may strengthen the credit at some future date, and therefore the decision to charge off the loan is deferred. Loans graded as doubtful are required to be placed in nonaccruing status.

Criticized loans are summarized in the following table. 

	June 30, 2013				March 31, 2013				December 31, 2012
	(in millions)
Special mention:
Commercial loans.................................................................................................................	$	909			$	1,144			$	1,125
Substandard:
Commercial loans.................................................................................................................	818				810				916
Consumer loans...................................................................................................................	1,005				1,001				1,031
Total substandard...............................................................................................................	1,823				1,811				1,947
Doubtful:
Commercial loans.................................................................................................................	36				40				117
Total..........................................................................................................................................	$	2,768			$	2,995			$	3,189

The overall decreases in criticized loans in the first half of 2013 resulted primarily from improved levels of criticized commercial loans due to changes in the financial circumstances of certain customers  as well as paydowns and charge-off related to certain exposures and general improvement in market conditions.

Geographic Concentrations Regional exposure at June 30, 2013 for certain loan portfolios is summarized in the following table.

	Commercial Construction and Other Real Estate Loans			Residential Mortgage Loans			Credit Card Receivables
New York State...................................................................................................	40.5	%		34.1	%		56.6	%
North Central United States..............................................................................	4.6			6.3			3.7
North Eastern United States, excluding New York State..............................	10.9			9.4			12.3
Southern United States.....................................................................................	22.5			15.3			13.9
Western United States......................................................................................	21.5			34.9			11.3
Others...................................................................................................................	-			-			2.2
Total.....................................................................................................................	100.0	%		100.0	%		100.0	%

Exposures to Certain Countries in the Eurozone There have been no significant changes to our exposures to the countries of Greece, Ireland, Italy, Portugal and Spain from the amounts disclosed in our 2012 Form 10-K under caption "Credit Quality".

Credit Risks Associated with Derivative Contracts  Credit risk associated with derivatives is measured as the net replacement cost in the event the counterparties with contracts in a gain position to us fail to perform under the terms of those contracts. In managing derivative credit risk, both the current exposure, which is the replacement cost of contracts on the measurement date, as well as an estimate of the potential change in value of contracts over their remaining lives are considered. Counterparties to our derivative activities include financial institutions, foreign and domestic government agencies, corporations, funds (mutual funds, hedge funds, etc.), insurance companies and private clients as well as other HSBC entities. These counterparties are subject to regular credit review by the credit risk management department. To minimize credit risk, we enter into legally enforceable master netting agreements which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon occurrence of certain events. In addition, we reduce credit risk by obtaining collateral from counterparties. The determination of the need for and the levels of collateral will vary based on an assessment of the credit risk of the counterparty.

The total risk in a derivative contract is a function of a number of variables, such as:

•       volatility of interest rates, currencies, equity or corporate reference entity used as the basis for determining contract payments;

•       current market events or trends;

•       country risk;

•       maturity and liquidity of contracts;

•       credit worthiness of the counterparties in the transaction;

•       the existence of a master netting agreement among the counterparties; and

•       existence and value of collateral received from counterparties to secure exposures.

The table below presents total credit risk exposure measured using rules contained in the risk-based capital guidelines published by U.S. banking regulatory agencies. Risk-based capital guidelines recognize that bilateral netting agreements reduce credit risk and, therefore, allow for reductions of risk-weighted assets when netting requirements have been met. As a result, risk-weighted amounts for regulatory capital purposes are a portion of the original gross exposures.

The risk exposure calculated in accordance with the risk-based capital guidelines potentially overstates actual credit exposure because the risk-based capital guidelines ignores collateral that may have been received from counterparties to secure exposures; and the risk-based capital guidelines compute exposures over the life of derivative contracts. However, many contracts contain provisions that allow us to close out the transaction if the counterparty fails to post required collateral. In addition, many contracts give us the right to break the transactions earlier than the final maturity date. As a result, these contracts have potential future exposures that are often much smaller than the future exposures derived from the risk-based capital guidelines.

	June 30, 2013				December 31, 2012
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure.................................................................................................................................	$	38,867			$	41,248
Less: collateral held against exposure...........................................................................................................	5,232				7,530
Net credit risk exposure....................................................................................................................................	$	33,635			$	33,718

Liquidity and Capital Resources

Effective liquidity management is defined as ensuring we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, we have guidelines that require sufficient liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. Guidelines are set for the consolidated balance sheet of HSBC USA to ensure that it is a source of strength for our regulated, deposit-taking banking subsidiary, as well as to address the more limited sources of liquidity available to it as a holding company. Similar guidelines are set for the balance sheet of HSBC Bank USA to ensure that it can meet its liquidity needs in various stress scenarios. Cash flow analysis, including stress testing scenarios, forms the basis for liquidity management and contingency funding plans.

During the first half of 2013, marketplace liquidity continued to remain available for most sources of funding except mortgage securitization. However credit spreads continue to be impacted by concerns regarding government spending and the budget deficit as well as in the second quarter of 2013, concern that the Federal Reserve would begin to slow its quantitative easing program later this year if the economy continues to strengthen, earlier than had previously been expected, which together have caused long-term interest rates to rise. The prolonged period of low interest rates also continues to put pressure on spreads earned on our deposit base.

On June 27, 2013, HSBC and HBUS submitted an initial resolution plan jointly to the FRB and the FDIC as required under Dodd-Frank and a rule issued by those bank regulators relating to the resolution of bank holding companies with assets of $50 billion or more and a FDIC rule relating to the resolution of insured depository institutions with assets of $50 billion or more.

Interest Bearing Deposits with Banks  totaled $29.8 billion and $13.3 billion at June 30, 2013 and December 31, 2012, respectively, which includes $26.2 billion and 10.7 billion, respectively, held with the Federal Reserve Bank. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Securities Purchased under Agreements to Resell  totaled $1.4 billion and $3.1 billion at June 30, 2013 and December 31, 2012, respectively. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Short-Term Borrowings  totaled $21.4 billion and $14.9 billion at June 30, 2013 and December 31, 2012, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on short-term borrowing trends.

Deposits  totaled $111.7 billion and $117.7 billion at June 30, 2013 and December 31, 2012, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on deposit trends.

Long-Term Debt  decreased to $20.9 billion at June 30, 2013 from $21.7 billion at December 31, 2012. The following table summarizes issuances and retirements of long-term debt during the six months ended June 30, 2013 and 2012:

Six Months Ended June 30,	2013				2012
	(in millions)
Long-term debt issued............................................................................................................................................	$	3,637			$	4,739
Long-term debt retired............................................................................................................................................	(4,054		)		(1,465		)
Net long-term debt issued......................................................................................................................................	$	(417	)		$	3,274

Issuances of long-term debt during the first half of 2013 included $3.5 billion of medium term notes, of which $1.9 billion was issued by HSBC Bank USA.

Under our shelf registration statement on file with the Securities and Exchange Commission, we may issue debt securities or preferred stock. The shelf has no dollar limit, but the amount of debt outstanding is limited by the authority granted by the Board of Directors. At June 30, 2013, we were authorized to issue up to $21 billion, of which $11 billion was available. HSBC Bank USA also has a $40 billion Global Bank Note Program of which $14.1 billion was available at June 30, 2013.

As a member of the New York Federal Home Loan Bank ("FHLB"), we have a secured borrowing facility which is collateralized by real estate loans and investment securities. At June 30, 2013 and December 31, 2012, long-term debt included $1.0 billion under this facility. The facility also allows access to further borrowings of up to $4.3 billion based upon the amount pledged as collateral with the FHLB.

Preferred Equity  See Note 20, "Preferred Stock," in our 2012 Form 10-K for information regarding all outstanding preferred share issues.

Common Equity  During the first quarter of 2013, we did not receive any cash capital contributions from HNAI. During the first half of 2013, we did not make any capital contributions to our subsidiary, HSBC Bank USA.

Selected Capital Ratios  Capital amounts and ratios are calculated in accordance with current banking regulations. In managing capital, we develop targets for Tier 1 capital to risk weighted assets, Tier 1 common equity to risk weighted assets, Total capital to risk weighted assets and Tier 1 capital to average assets (this latter ratio, also known as the "leverage ratio"). Our targets may change from time to time to accommodate changes in the operating environment, regulatory requirements or other considerations such as those listed above. Selected capital ratios are summarized in the following table:

	June 30, 2013			December 31, 2012
Tier 1 capital to risk weighted assets...........................................................................................................	12.43	%		13.61	%
Tier 1 common equity to risk weighted assets............................................................................................	10.65			11.63
Total capital to risk weighted assets............................................................................................................	17.42			19.52
Tier 1 capital to average assets (leverage ratio).........................................................................................	8.09			7.70
Total equity to total assets............................................................................................................................	9.05			9.07

HSBC USA manages capital in accordance with the HSBC Group policy. The HNAH Internal Capital Adequacy Assessment Process ("ICAAP") works in conjunction with the HSBC Group's ICAAP. HNAH's ICAAP evaluates regulatory capital adequacy, economic capital adequacy and capital adequacy under various stress scenarios. Our initial approach is to meet our capital needs for these stress scenarios locally through activities which reduce risk. To the extent that local alternatives are insufficient or unavailable, we will rely on capital support from our parent in accordance with HSBC's capital management policy. HSBC has indicated that they are fully committed and have the capacity to provide capital as needed to run operations, maintain sufficient regulatory capital ratios and fund certain tax planning strategies.

In June 2012, the U.S. regulators issued three joint Notices of Proposed Rulemaking ("NPRs") which would both implement many of the capital provisions of Basel III for U.S. banking institutions and substantially revise the U.S. banking regulators' Basel I risk-based guidelines to make them more risk sensitive. For further information regarding the NPRs, see "Regulation and Competition - Regulatory Capital Requirements" and "Liquidity and Capital Resources" in our 2012 Form 10-K.

In July 2013, the U.S. banking regulators adopted a final rule which consolidates the three NPRs released in June 2012 and implements the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision, and certain changes required by Dodd-Frank.  The final rule establishes an integrated regulatory capital framework to improve the quality and quantity of regulatory capital and introduces the "Standardized Approach" for risk weighted assets, which will replace the Basel I risk-based guidance for determining risk-weighted assets as of January 1, 2015.  For the largest banking organizations, such as HSBC USA, the final rule is largely unchanged from the three NPRs and will take effect from January 1, 2014, but with a number of the provisions being phased in through to 2019. The final rule is also largely consistent with regard to the Standardized Approach, although it did not adopt modifications from the Basel I standards to the calculation of risk-weighting for mortgages as proposed.

With regard to the elements of capital, the final rule will require HSBC USA to phase trust preferred securities issued prior to May 19, 2010 out of Tier 1 Capital by January 1, 2016, with 50% of these capital instruments includable in Tier 1 Capital in 2014 and 25% includable in 2015. The trust preferred securities excluded from Tier 1 Capital may be included fully in Tier 2 Capital during those two years, but must be phased out of Tier 2 Capital by January 1, 2022. As previously noted (see "Liquidity and Capital Resources-Long-Term Debt" in our 2012 Form 10-K), we exercised our option to call and redeem the trust preferred securities issued by HSBC USA Capital Trust VII. We continue to consider options for redeeming other trust preferred securities issued which total $550 million at June 30, 2013.

In connection with the final rule, the regulatory agencies provided certain information with regard to the appropriate subordination standard for Tier 2 qualifying subordinated debt.  This information represents a modification of current guidance on the subordination standards to qualify for Tier 2 regulatory capital treatment at the bank holding company level. Under the final rule, any nonconforming Tier 2 subordinated debt issued prior to May 19, 2010 will be required to be phased out by January 1, 2016, and issuances after May 19, 2010 will be required to be excluded from capital as of January 1, 2014.  We intend to review any clarifying guidance from the regulatory agencies and assess the impact, if any, on our currently outstanding Tier 2 qualifying subordinated debt of approximately $1.2 billion. Also under the final rule, Tier 1 capital is expected to include only noncumulative perpetual preferred stock, in addition to common stock and the final rule removes the limitation on the amount of Tier 2 capital that may be recognized relative to Tier 1 capital.

As previously disclosed, Advanced Approaches banking organizations such as HSBC North America and HSBC Bank USA participate in a "parallel run" wherein they must report both their Basel I (and in 2015, their Standardized Approach) risk-based ratios as well as their Advanced Approaches ratios to their primary federal regulator, and publicly disclose only their Basel I (or in 2015, their Standardized Approach) ratios.  Upon receiving approval to exit parallel run, Advanced Approaches banking organizations would then publicly disclose both their risk-based and Advanced Approaches capital ratios. Although we began a parallel run period in January 2010, it is unclear as to when approval from the appropriate regulators will be received to exit parallel run.

The final rule has only recently been issued, is not yet in effect, and has not yet been the subject of regulatory guidance or interpretation.  We continue to review the final rule and its impact on our regulatory capital.

In August 2012, U.S. regulators published a final rule (known in the industry as Basel 2.5), that would change the U.S. regulatory market risk capital rules to better capture positions for which the market risk capital rules are appropriate, reduce procyclicality, enhance the sensitivity to risks that are not adequately captured under current methodologies and increase transparency through enhanced disclosures. This final rule became effective January 1, 2013. This change is reflected in our June 30, 2013 Basel I risk-weighted asset levels. In July 2013, the U.S. banking regulators proposed changes to the Basel 2.5 rule that would conform to changes in the final capital rules. We are currently reviewing the proposed changes to assess the impact on our regulatory capital.

U.S. regulators have issued regulations on capital planning for bank holding companies. Under the regulations, from January 1, 2012, U.S. bank holding companies with $50 billion or more in total consolidated assets need to obtain approval of their annual capital plans prior to making capital distributions. Additionally, there are certain circumstances in which a bank holding company is required to provide prior notice for approval of capital distributions, even if included in an approved plan.

In October 2012, the Federal Reserve Board published a final rule setting out the stress testing requirements for bank holding companies with $50 billion or more in total consolidated assets. HSBC North America becomes subject to the rule from October 2013 and is expected to have to comply with the Federal Reserve Bank's Comprehensive Capital Analysis and Review ("CCAR") program for its capital plan submission in January 2014. HSBC Bank USA is also subject to stress testing requirements under OCC rules finalized in October 2012.

We and HSBC Bank USA are required to meet minimum capital requirements by our principal regulators. Risk-based capital amounts and ratios are presented in Note 17, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements.

2013 Funding Strategy  Our current estimate for funding needs and sources for 2013 are summarized in the following table.

	Actual January 1 through June 30, 2013				Estimated July 1 through December 31, 2013				Estimated Full Year 2013
	(in billions)
Funding needs:
Net loan growth....................................................................................................................	$	5			$	4			$	9
Long-term debt maturities...................................................................................................	4				1				5
Total funding needs.................................................................................................................	$	9			$	5			$	14
Funding sources:
Net change in short-term investments..............................................................................	$	5			$	2			$	7
Long-term debt issuance.....................................................................................................	4				3				7
Total funding sources..............................................................................................................	$	9			$	5			$	14

The above table reflects a long-term funding strategy. Daily balances fluctuate as we accommodate customer needs, while ensuring that we have liquidity in place to support the balance sheet maturity funding profile. Should market conditions deteriorate, we have contingency plans to generate additional liquidity through the sales of assets or financing transactions. Our prospects for growth continue to be dependent upon our ability to attract and retain deposits and, to a lesser extent, access to the global capital markets. We remain confident in our ability to access the market for long-term debt funding needs in the current market environment. We continue to seek well-priced and stable customer deposits as customers move funds to larger, well-capitalized institutions.

We will continue to sell a substantial portion of new mortgage loan originations going forward, largely to PHH Mortgage. 

HSBC Finance ceased issuing under its commercial paper program in the second quarter of 2012 and instead is relying on its affiliates, including HSBC USA Inc., to satisfy its funding needs.

HSBC Bank USA is subject to significant restrictions imposed by federal law on extensions of credit to, and certain other "covered transactions" with, HSBC USA and other affiliates. Covered transactions include loans and other extensions of credit, investments and asset purchases, and certain other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. Pursuant to amendments included in Dodd-Frank, a bank's credit exposure to an affiliate as a result of a derivative, securities lending or repurchase agreement is also subject to these restrictions.  Once regulations are issued (originally forecasted for July 2012) to implement these amendments, we may be required to change the method by which we calculate credit exposure. A bank's transactions with its non-bank affiliates are also required to be on arm's length terms.

For further discussion relating to our sources of liquidity and contingency funding plan, see the caption "Risk Management" in this MD&A.

Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations

As part of our normal operations, we enter into credit derivatives and various off-balance sheet arrangements with affiliates and third parties. These arrangements arise principally in connection with our lending and client intermediation activities and involve primarily extensions of credit and, in certain cases, guarantees.

As a financial services provider, we routinely extend credit through loan commitments and lines and letters of credit and provide financial guarantees, including derivative transactions having characteristics of a guarantee. The contractual amounts of these financial instruments represent our maximum possible credit exposure in the event that a counterparty draws down the full commitment amount or we are required to fulfill our maximum obligation under a guarantee.

The following table provides maturity information related to our credit derivatives and off-balance sheet arrangements. Many of these commitments and guarantees expire unused or without default. As a result, we believe that the contractual amount is not representative of the actual future credit exposure or funding requirements.

	Balance at June 30, 2013
	One Year or Less				Over One through Five Years				Over Five Years				Total				Balance at December 31, 2012
	(in billions)
Standby letters of credit, net of participations(1)........................	$	5.4			$	2.8			$	-			$	8.2			$	8.4
Commercial letters of credit............................................................	.7				.2				-				0.9				1.0
Credit derivatives(2).........................................................................	62.5				131.0				12.8				206.3				237.5
Other commitments to extend credit:
Commercial....................................................................................	14.0				47.2				3.2				64.4				57.7
Consumer......................................................................................	6.8				-				-				6.8				7.0
Total...................................................................................................	$	89.4			$	181.2			$	16.0			$	286.6			$	311.6

⁽¹⁾        Includes $846 million and $808 million issued for the benefit of HSBC affiliates at June 30, 2013 and December 31, 2012, respectively.

⁽²⁾        Includes $39.4 billion and $44.2 billion issued for the benefit of HSBC affiliates at June 30, 2013 and December 31, 2012, respectively.

Other Commitments to Extend Credit  Other commitments to extend credit include arrangements whereby we are contractually obligated to extend credit in the form of loans, participations in loans, lease financing receivables, or similar transactions. Consumer commitments are comprised of certain unused MasterCard/Visa credit card lines and commitments to extend credit secured by residential properties. We have the right to change or terminate any terms or conditions of a customer's credit card or home equity line of credit account, for cause, upon notification to the customer. Commercial commitments comprise primarily those related to secured and unsecured loans and lines of credit and certain asset purchase commitments. In connection with our commercial lending activities, we provide liquidity support to a number of multi-seller and single-seller asset backed commercial paper conduits ("ABCP conduits") sponsored by affiliates and third parties. See Note 18, "Variable Interest Entities," in the accompanying the consolidated financial statements for additional information regarding these ABCP conduits and our variable interests in them.

Liquidity support is provided to certain ABCP conduits in the form of liquidity loan agreements and liquidity asset purchase agreements. Liquidity facilities provided to multi-seller conduits support transactions associated with a specific seller of assets to the conduit and we would only be expected to provide support in the event the multi-seller conduit is unable to issue or rollover maturing commercial paper. Liquidity facilities provided to single-seller conduits are not identified with specific transactions or assets and we would be required to provide support upon the occurrence of a commercial paper market disruption or the breach of certain triggers that affect the single-seller conduit's ability to issue or rollover maturing commercial paper. Our obligations have generally the same terms as those of other institutions that also provide liquidity support to the same conduit or for the same transactions. We do not provide any program-wide credit enhancements to ABCP conduits.

Under the terms of these liquidity agreements, the ABCP conduits may call upon us to lend money or to purchase certain assets in the event the ABCP conduits are unable to issue or rollover maturing commercial paper if certain trigger events occur. These trigger events are generally limited to performance tests on the underlying portfolios of collateral securing the conduits' interests. With regard to a multi-seller liquidity facility, the maximum amount that we could be required to advance upon the occurrence of a trigger event is generally limited to the lesser of the amount of outstanding commercial paper related to the supported transaction and the balance of the assets underlying that transaction adjusted by a funding formula that excludes defaulted and impaired assets. Under a single-seller liquidity facility, the maximum amount that we and other liquidity providers could be required to advance is also generally limited to each provider's pro-rata share of the lesser of the amount of outstanding commercial paper and the balance of unimpaired performing assets held by the conduit. As a result, the maximum amount that we would be required to fund may be significantly less than the maximum contractual amount specified by the liquidity agreement.

The tables below present information on our liquidity facilities with ABCP conduits at June 30, 2013. The maximum exposure to loss presented in the first table represents the maximum contractual amount of loans and asset purchases we could be required to make under the liquidity agreements. This amount does not reflect the funding limits discussed above and also assumes that we suffer a total loss on all amounts advanced and all assets purchased from the ABCP conduits. As such, we believe that this measure significantly overstates our expected loss exposure.

					Conduit Assets(1)							Conduit Funding(1)
Conduit Type	Maximum Exposure to Loss				Total Assets				Weighted Average Life (Months)			Commercial Paper				Weighted Average Life (Days)
	(dollars are in millions)
HSBC affiliate sponsored (multi-seller)...................................	$	3,139			$	1,618			15			$	1,618			16
Third-party sponsored:
Single-seller.............................................................................	299				5,029				40			4,809				60
Total..............................................................................................	$	3,438			$	6,647						$	6,427

⁽¹⁾        For multi-seller conduits, the amounts presented represent only the specific assets and related funding supported by our liquidity facilities. For single-seller conduits, the amounts presented represent the total assets and funding of the conduit.

	Average Asset Mix			Average Credit Quality(1)
Asset Class				AAA			AA+/AA			A			A-			BB/BB-
Multi-seller conduits
Debt securities backed by:
Auto loans and leases...........................................	33	%		51	%		-	%		-	%		-	%		-	%
Trade receivables....................................................	24			-			100			24			-			-
Credit card receivables...........................................	11			-			-			76			-			-
Equipment loans.....................................................	32			49			-			-			-			-
	100	%		100	%		100	%		100	%		-	%		-	%

⁽¹⁾        Credit quality is based on Standard and Poor's ratings at June 30, 2013 except for loans and trade receivables held by single-seller conduits, which are based on our internal ratings. For the single-seller conduits, external ratings are not available; however, our internal credit ratings were developed using similar methodologies and rating scales equivalent to the external credit ratings.

We receive fees for providing these liquidity facilities. Credit risk on these obligations is managed by subjecting them to our normal underwriting and risk management processes.

During the first six months of 2013, U.S. asset-backed commercial paper volumes continued to be stable as most major bank conduit sponsors continue to extend new financing to clients but at a slow pace. Credit spreads in the multi-seller conduit market generally trended lower during the first six months of 2013 following a pattern that was prevalent across the U.S. credit markets. The low supply of ABCP has led to continued investor demand for the ABCP issued by large bank-sponsored ABCP programs. The improved demand for higher quality ABCP programs has led to less volatility in issuance spreads.

The preceding tables do not include information on liquidity facilities that we previously provided to certain Canadian multi-seller ABCP conduits that have been subject to restructuring agreements. As part of the enhanced collateral pool established for the restructuring, we have provided a $301 million Margin Funding Facility to new Master Conduit Vehicles, which expires in July  2017 and is currently undrawn.

We have established and manage a number of constant net asset value ("CNAV") money market funds that invest in shorter-dated highly-rated money market securities to provide investors with a highly liquid and secure investment. These funds price the assets in their portfolio on an amortized cost basis, which enables them to create and liquidate shares at a constant price. The funds, however, are not permitted to price their portfolios at amortized cost if that amount varies by more than 50 basis points from the portfolio's market value. In that case, the fund would be required to price its portfolio at market value and consequently would no longer be able to create or liquidate shares at a constant price. We do not consolidate the CNAV funds because we do not absorb the majority of the expected future risk associated with the fund's assets, including interest rate, liquidity, credit and other relevant risks that are expected to affect the value of the assets.

Fair Value

Fair value measurement accounting principles require a reporting entity to take into consideration its own credit risk in determining the fair value of financial liabilities. The incorporation of our own credit risk accounted for a increase of $107 million and $98 million in the fair value of financial liabilities during the three and six months ended June 30, 2013, respectively, compared with a increase of $75 million and an decrease of $113 million during the prior year periods.

Net income volatility arising from changes in either interest rate or credit components of the mark-to-market on debt designated at fair value and related derivatives affects the comparability of reported results between periods. Accordingly, the gain (loss) on debt designated at fair value and related derivatives during the six months ended June 30, 2013 should not be considered indicative of the results for any future period.

Control Over Valuation Process and Procedures  We have established a control framework which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. See Note 20, "Fair Value Measurements" for further details on our valuation control framework.

Fair Value Hierarchy  Fair value measurement accounting principles establish a fair value hierarchy structure that prioritizes the inputs to determine the fair value of an asset or liability (the "Fair Value Framework"). The Fair Value Framework distinguishes between inputs that are based on observed market data and unobservable inputs that reflect market participants' assumptions. It emphasizes the use of valuation methodologies that maximize observable market inputs. For financial instruments carried at fair value, the best evidence of fair value is a quoted price in an actively traded market (Level 1). Where the market for a financial instrument is not active, valuation techniques are used. The majority of our valuation techniques use market inputs that are either observable or indirectly derived from and corroborated by observable market data for substantially the full term of the financial instrument (Level 2). Because Level 1 and Level 2 instruments are determined by observable inputs, less judgment is applied in determining their fair values. In the absence of observable market inputs, the financial instrument is valued based on valuation techniques that feature one or more significant unobservable inputs (Level 3). The determination of the level of fair value hierarchy within which the fair value measurement of an asset or a liability is classified often requires judgment and may change over time as market conditions evolve. We consider the following factors in developing the fair value hierarchy:

•           whether the asset or liability is transacted in an active market with a quoted market price;

•           the level of bid-ask spreads;

•           a lack of pricing transparency due to, among other things, complexity of the product and market liquidity;

•           whether only a few transactions are observed over a significant period of time;

•           whether the pricing quotations vary substantially among independent pricing services;

•           whether inputs to the valuation techniques can be derived from or corroborated with market data; and

•           whether significant adjustments are made to the observed pricing information or model output to determine the fair value.

Level 1 inputs are unadjusted quoted prices in active markets that the reporting entity has the ability to access for identical assets or liabilities. A financial instrument is classified as a Level 1 measurement if it is listed on an exchange or is an instrument actively traded in the over-the-counter ("OTC") market where transactions occur with sufficient frequency and volume. We regard financial instruments such as equity securities and derivative contracts listed on the primary exchanges of a country to be actively traded. Non-exchange-traded instruments classified as Level 1 assets include securities issued by the U.S. Treasury or by other foreign governments, to-be-announced ("TBA") securities and non-callable securities issued by U.S. government sponsored entities.

Level 2 inputs are those that are observable either directly or indirectly but do not qualify as Level 1 inputs. We classify mortgage pass-through securities, agency and certain non-agency mortgage collateralized obligations, certain derivative contracts, asset-backed securities, corporate debt, preferred securities and leveraged loans as Level 2 measurements. Where possible, at least two quotations from independent sources are obtained based on transactions involving comparable assets and liabilities to validate the fair value of these instruments. We have established a process to understand the methodologies and inputs used by the third party pricing services to ensure that pricing information met the fair value objective. Where significant differences arise among the independent pricing quotes and the internally determined fair value, we investigate and reconcile the differences. If the investigation results in a significant adjustment to the fair value, the instrument will be classified as Level 3 within the fair value hierarchy. In general, we have observed that there is a correlation between the credit standing and the market liquidity of a non-derivative instrument.

Level 2 derivative instruments are generally valued based on discounted future cash flows or an option pricing model adjusted for counterparty credit risk and market liquidity. The fair value of certain structured derivative products is determined using valuation techniques based on inputs derived from observable benchmark index tranches traded in the OTC market. Appropriate control processes and procedures have been applied to ensure that the derived inputs are applied to value only those instruments that share similar risks to the relevant benchmark indices and therefore demonstrate a similar response to market factors. In addition, a validation process has been established, which includes participation in peer group consensus pricing surveys, to ensure that valuation inputs incorporate market participants' risk expectations and risk premium.

Level 3 inputs are unobservable estimates that management expects market participants would use to determine the fair value of the asset or liability. That is, Level 3 inputs incorporate market participants' assumptions about risk and the risk premium required by market participants in order to bear that risk. We develop Level 3 inputs based on the best information available in the circumstances. As of June 30, 2013 and December 31, 2012, our Level 3 instruments included the following: collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs") for which there is a lack of pricing transparency due to market illiquidity, certain structured deposits as well as certain structured credit and structured equity derivatives where significant inputs (e.g., volatility or default correlations) are not observable, credit default swaps with certain monoline insurers where the deterioration in the creditworthiness of the counterparty has resulted in significant adjustments to fair value, U.S. subprime mortgage loans and subprime related asset-backed securities, mortgage servicing rights, and derivatives referenced to illiquid assets of less desirable credit quality. See Note 20, "Fair Value Measurements" in the accompanying consolidated financial statements for additional information on Level 3 inputs.

Transfers between leveling categories are recognized at the end of each reporting period.

Material Transfers Between Level 1 and Level 2 Measurements  During the six months ended June 30, 2013 and 2012, there were no transfers between Level 1 and Level 2 measurements.

Level 3 Measurements  The following table provides information about Level 3 assets/liabilities in relation to total assets/liabilities measured at fair value as of June 30, 2013 and December 31, 2012.

	June 30, 2013				December 31, 2012
	(dollars are in millions)
Level 3 assets(1)(2).............................................................................................................................................	$	3,597			$	4,701
Total assets measured at fair value(3)............................................................................................................	157,032				189,449
Level 3 liabilities................................................................................................................................................	3,860				3,854
Total liabilities measured at fair value(1)........................................................................................................	102,113				116,728
Level 3 assets as a percent of total assets measured at fair value............................................................	2.3		%		2.5		%
Level 3 liabilities as a percent of total liabilities measured at fair value...................................................	3.8		%		3.3		%

⁽¹⁾        Presented without netting which allows the offsetting of amounts relating to certain contracts if certain conditions are met.

⁽²⁾        Includes $3.4 billion of recurring Level 3 assets and $242 million of non-recurring Level 3 assets at June 30, 2013.  Includes $4.5 billion of recurring Level 3 assets and $222 million of non-recurring Level 3 assets at December 31, 2012.

⁽³⁾        Includes $156.4 billion of assets measured on a recurring basis and $647 million of assets measured on a non-recurring basis at June 30, 2013. Includes $189.2 billion of assets measured on a recurring basis and $256 million of assets measured on a non-recurring basis at December 31, 2012.

Material Changes in Fair Value for Level 3 Assets and Liabilities

Derivative Assets and Counterparty Credit Risk We have entered into credit default swaps with monoline insurers to hedge our credit exposure in certain asset-backed securities and synthetic CDOs. We made $41 million positive and $10 million negative credit risk adjustments to the fair value of our credit default swap contracts during the six months ended June 30, 2013 and 2012, respectively, which is reflected in trading revenue. We have recorded a cumulative credit adjustment reserve of $77 million and $136 million against our monoline exposure at June 30, 2013 and December 31, 2012, respectively. The fair value of our monoline exposure net of cumulative credit adjustment reserves equaled $327 million and $534 million at June 30, 2013 and December 31, 2012, respectively. The decrease since December 31, 2012 reflects both reductions in our outstanding positions and improvements in exposure estimates.

Loans As of June 30, 2013 and December 31, 2012, we have classified $54 million and $52 million, respectively, of mortgage whole loans held for sale as a non-recurring Level 3 financial asset. These mortgage loans are accounted for on a lower of amortized cost or fair value basis. Based on our assessment, we recorded gain of $5 million and $7 million during the three and six months ended June 30, 2013, respectively, compared with a loss of $2 million and $3 million during the three and six months ended June 30, 2012, respectively. The changes in fair value are recorded as other revenues in the consolidated statement of income.

Material Additions to and Transfers Into (Out of) Level 3 Measurements During the six months ended June 30, 2013, we transferred $46 million of credit derivatives from Level 2 to Level 3 as result of including specific fair value adjustments related to certain credit default swaps. During the three and six months ended June 30, 2013, we transferred $208 million and $287 million, respectively, of deposits in domestic offices and $136 million and $138 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility. Additionally, during the three and six months ended June 30, 2013, we transferred $177 million and $160 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

During the three and six months ended June 30, 2012, we transferred $313 million and $475 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility.

See Note 20, "Fair Value Measurements," in the accompanying consolidated financial statements for information on additions to and transfers into (out of) Level 3 measurements during the three and six months ended June 30, 2013 and 2012 as well as for further details including the classification hierarchy associated with assets and liabilities measured at fair value.

Credit Quality of Assets Underlying Asset-backed Securities  The following tables summarize the types and credit quality of the assets underlying our asset-backed securities as well as certain collateralized debt obligations and collateralized loan obligations held as of June 30, 2013:

Asset-backed securities backed by consumer finance collateral:

Credit Quality of Collateral: 

						Commercial Mortgages								Prime								Alt-A								Subprime
Year of Issuance:		Total				Prior to 2006				2006 to Present				Prior to 2006				2006 to Present				Prior to 2006				2006 to Present				Prior to 2006				2006 to Present
		(in millions)
Rating of securities:(1)	Collateral type:
AAA	Residential mortgages..	$	257			$	51			$	115			$	-			$	-			$	91			$	-			$	-			$	-
AA	Residential mortgages..	6				-				-				-				-				6				-				-				-
A	Residential mortgages..	23				-				-				-				-				23				-				-				-
	Home equity loans......	106				-				-				-				-				-				106				-				-
	Total A.......................	129				-				-				-				-				23				106				-				-
BBB	Residential mortgages..	3				-				-				-				-				3				-				-				-
	Other..........................	104				-				-				-				-				104				-				-				-
	Total BBB..................	107				-				-				-				-				107				-				-				-
B	Home equity loans......	152				-				-				-				-				-				78				-				74
CCC	Home equity loans......	61				-				-				-				-				-				61				-				-
	Residential mortgages..	-				-				-				-				-				-				-				-				-
	Total CCC..................	61				-				-				-				-				-				61				-				-
Unrated	Residential mortgages..	1				-				-				-				-				1				-				-				-
		$	713			$	51			$	115			$	-			$	-			$	228			$	245			$	-			$	74

Collateralized debt obligations (CDO) and collateralized loan obligations (CLO): 

Credit quality of collateral:		Total				A or Higher				BBB				BB/B				CCC				Unrated
		(in millions)
Rating of securities:(1)	Collateral type:
	Corporate loans......................	$	-			$	-			$	-			$	-			$	-			$	-
	Trust preferred........................	228				-				228				-				-				-
	Others......................................	74				$	74			-				-				-				-
		$	302			$	74			$	228			$	-			$	-			$	-
	Total asset-backed securities..................................................	$	1,015

⁽¹⁾  We utilize Standard & Poor's ("S&P") as the primary source of credit ratings in the tables above.  If S&P ratings are not available, ratings by Moody's and Fitch are used, in that order. 

Effect of Changes in Significant Unobservable Inputs  The fair value of certain financial instruments is measured using valuation techniques that incorporate pricing assumptions not supported by, derived from or corroborated by observable market data. The resultant fair value measurements are dependent on unobservable input parameters which can be selected from a range of estimates and may be interdependent. Changes in one or more of the significant unobservable input parameters may change the fair value measurements of these financial instruments. For the purpose of preparing the financial statements, the final valuation inputs selected are based on management's best judgment that reflect the assumptions market participants would use in pricing similar assets or liabilities.

The unobservable input parameters selected are subject to the internal valuation control processes and procedures. When we perform a test of all the significant input parameters to the extreme values within the range at the same time, it could result in an increase of the overall fair value measurement of approximately $66 million or a decrease of the overall fair value measurement of approximately $82 million as of June 30, 2013. The effect of changes in significant unobservable input parameters are primarily driven by mortgage servicing rights, certain asset-backed securities including CDOs, and the uncertainty in determining the fair value of credit derivatives executed against monoline insurers.

Risk Management

Overview  Some degree of risk is inherent in virtually all of our activities. Accordingly, we have comprehensive risk management policies and practices in place to address potential risks, which include the following:

•           Credit risk is the potential that a borrower or counterparty will default on a credit obligation, as well as the impact on the value of credit instruments due to changes in the probability of borrower default; Credit risk includes risk associated with cross-border exposures.

•           Liquidity risk is the potential that an institution will be unable to meet its obligations as they become due or fund its customers because of inadequate cash flow or the inability to liquidate assets or obtain funding itself;

•           Interest rate risk is the potential impairment of net interest income due to mismatched pricing between assets and liabilities as well as losses in value due to rate movements;

•           Market risk is the  risk that movements in market risk factors, including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices, will reduce HSBC USA's income or the value of its portfolios;

•           Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events (including legal risk but excluding strategic and reputational risk);

•           Compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations, regulatory requirements and standards of good market practice, and incur fines and penalties and suffer damage to our business as a consequence;

•           Fiduciary risk is the risk of breaching fiduciary duties where we act in a fiduciary capacity as trustee, investment manager or as mandated by law or regulation. 

•           Reputational risk is the risk arising from a failure to safeguard our reputation by maintaining the highest standards of conduct at all times and by being aware of issues, activities and associations that might pose a threat to the reputation of HSBC locally, regionally or internationally;

•           Strategic risk is the risk that the business will fail to identify, execute, and react appropriately to opportunities and/or threats arising from changes in the market, some of which may emerge over a number of years such as changing economic and political circumstances, customer requirements, demographic trends, regulatory developments or competitor action;

•           Security and Fraud risk is the risk to the business from terrorism, crime, incidents/disasters, and groups hostile to HSBC interests;

•           Model risk is the risk of incorrect implementation or inappropriate application of models.  Model risk occurs when a model does not properly capture risk(s) or perform functions as designed; and

•           Pension risk is the risk that the cash flows associated with pension assets will not be enough to cover the pension benefit obligations required to be paid.

See "Risk Management" in MD&A in our 2012 Form 10-K for a more complete discussion of the objectives of our risk management system as well as our risk management policies and practices. Our risk management process involves the use of various simulation models. We believe that the assumptions used in these models are reasonable, but actual events may unfold differently than what is assumed in the models. Consequently, model results may be considered reasonable estimates, with the understanding that actual results may vary significantly from model projections.

Credit Risk Management  Credit risk is the potential that a borrower or counterparty will default on a credit obligation, as well as the impact on the value of credit instruments due to changes in the probability of borrower default. Credit risk includes risk associated with cross-border exposures.  There have been no material changes to our approach towards operational risk since December 31, 2012.  See "Risk Management" in MD&A in our 2012 Form 10-K for a more complete discussion of our approach to credit risk.

Credit risk is inherent in various on- and off-balance sheet instruments and arrangements, such as:

•           loan portfolios;

•           investment portfolios;

•           unfunded commitments such as letters of credit and lines of credit that customers can draw upon; and

•           treasury instruments, such as interest rate swaps which, if more valuable today than when originally contracted, may represent an exposure to the counterparty to the contract.

While credit risk exists widely in our operations, diversification among various commercial and consumer portfolios helps to lessen risk exposure. Day-to-day management of credit and market risk is performed by the Chief Credit Officer / Head of Wholesale Credit and Market Risk North America and the HSBC North America Chief Retail Credit Officer, who report directly to the HSBC North America Chief Risk Officer and maintain independent risk functions.  The credit risk associated with commercial portfolios is managed by the Chief Credit Officer, while credit risk associated with retail consumer loan portfolios, such as credit cards, installment loans and residential mortgages, is managed by the HSBC North America Chief Retail Credit Officer. Further discussion of credit risk can be found under the "Credit Quality" caption in this MD&A.

Credit risk associated with derivatives is measured as the net replacement cost in the event the counterparties with contracts in a gain position to us fail to perform under the terms of those contracts. In managing derivative credit risk, both the current exposure, which is the replacement cost of contracts on the measurement date, as well as an estimate of the potential change in value of contracts over their remaining lives are considered. Counterparties to our derivative activities include financial institutions, foreign and domestic government agencies, corporations, funds (mutual funds, hedge funds, etc.), insurance companies and private clients as well as other HSBC entities. These counterparties are subject to regular credit review by the credit risk management department. To minimize credit risk, we enter into legally enforceable master netting agreements which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon occurrence of certain events. In addition, we reduce credit risk by obtaining collateral from counterparties. The determination of the need for and the levels of collateral will vary based on an assessment of the credit risk of the counterparty.

The total risk in a derivative contract is a function of a number of variables, such as:

•       volatility of interest rates, currencies, equity or corporate reference entity used as the basis for determining contract payments;

•       current market events or trends;

•       country risk;

•       maturity and liquidity of contracts;

•       credit worthiness of the counterparties in the transaction;

•       the existence of a master netting agreement among the counterparties; and

•       existence and value of collateral received from counterparties to secure exposures.

The table below presents total credit risk exposure measured using rules contained in the risk-based capital guidelines published by U.S. banking regulatory agencies. Risk-based capital guidelines recognize that bilateral netting agreements reduce credit risk and, therefore, allow for reductions of risk-weighted assets when netting requirements have been met. As a result, risk-weighted amounts for regulatory capital purposes are a portion of the original gross exposures.

The risk exposure calculated in accordance with the risk-based capital guidelines potentially overstates actual credit exposure because the risk-based capital guidelines ignore collateral that may have been received from counterparties to secure exposures; and the risk-based capital guidelines compute exposures over the life of derivative contracts. However, many contracts contain provisions that allow us to close out the transaction if the counterparty fails to post required collateral. In addition, many contracts give us the right to break the transactions earlier than the final maturity date. As a result, these contracts have potential future exposures that are often much smaller than the future exposures derived from the risk-based capital guidelines.

	June 30, 2013				December 31, 2012
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure..................................................................................................................................	$	38,867			$	41,248
Less: collateral held against exposure.............................................................................................................	5,232				7,530
Net credit risk exposure.....................................................................................................................................	$	33,635			$	33,718

Liquidity Risk Management  There have been no material changes to our approach towards liquidity risk management since December 31, 2012. See "Risk Management" in MD&A in our 2012 Form 10-K for a more complete discussion of our approach to liquidity risk. Although our overall approach to liquidity management has not changed, we continue to enhance our implementation of that approach to reflect best practices. The past few years have suggested that in a market crisis, traditional sources of crisis liquidity such as secured lending and deposits with other banks may not be available. Similarly, the current regulatory initiatives are suggesting banks need to retain a portfolio of extremely high quality liquid assets. Consistent with these items, we are expanding our portfolio of high quality sovereign and sovereign guaranteed securities.

We continuously monitor the impact of market events on our liquidity positions. In general terms, the strains due to the recent credit crisis have been concentrated in the wholesale market as opposed to the retail market (the latter being the market from which we source core demand and time deposit accounts). Financial institutions with less reliance on the wholesale markets were in many respects less affected by those conditions. Our limited dependence upon the wholesale markets for funding has been a significant competitive advantage through the most recent period of financial market turmoil.

Our liquidity management approach includes increased deposits and potential sales (e.g. residential mortgage loans) in liquidity contingency plans. As previously discussed, HSBC Finance is currently winding down its commercial paper program during 2012 and instead will rely on its affiliates, including HSBC USA to satisfy its short-term funding needs.

Our ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit ratings agencies. At June 30, 2013, we and HSBC Bank USA maintained the following long and short-term debt ratings:

	Moody's	S&P	Fitch	DBRS(1)
HSBC USA Inc.:
Short-term borrowings................................................................	P-1	A-1	F1+	R-1 (middle)
Long-term/senior debt................................................................	A2	A+	AA-	AA (low)
HSBC Bank USA:
Short-term borrowings................................................................	P-1	A-1+	F1+	R-1 (middle)
Long-term/senior debt................................................................	A1	AA-	AA-	AA (low)

(1)   Dominion Bond Rating Service.

On February 8, 2013, DBRS downgraded the HSBC USA and HSBC Bank USA senior debt ratings to AA (low) from AA, and corresponding short-term instrument rating to R-1 (middle) from R-1 (high), and removed these ratings from "rating under review with negative implications".  DBRS cited concerns with recent regulatory and compliance remediation costs, which despite HSBC's ongoing reforms and organizational changes still represent a significant challenge to implement in such a large, complex banking organization.

As of June 30, 2013, there were no pending actions in terms of changes to ratings on the debt of HSBC USA  or HSBC Bank USA from any of the rating agencies.

Interest Rate Risk Management  Various techniques are utilized to quantify and monitor risks associated with the repricing characteristics of our assets, liabilities and derivative contracts. Our approach to managing interest rate risk is summarized in MD&A in our 2012 Form 10-K under the caption "Risk Management". There have been no material changes to our approach towards interest rate risk management since December 31, 2012.

Present value of a basis point  is the change in value of the balance sheet for a one basis point upward movement in all interest rates. The following table reflects the PVBP position at June 30, 2013 and December 31, 2012.

	June 30, 2013				December 31, 2012
	(in millions)
Institutional PVBP movement limit................................................................................................	$	8.0			$	8.0
PVBP position at period end..........................................................................................................	4.9				1.7

Economic value of equity  is the change in value of the assets and liabilities (excluding capital and goodwill) for either a 200 basis point immediate rate increase or decrease. The following table reflects the economic value of equity position at June 30, 2013 and December 31, 2012.

	June 30, 2013			December 31, 2012
	(values as a percentage)
Institutional economic value of equity limit.................................................................................	+/-15			+/-15
Projected change in value (reflects projected rate movements on January 1):
Change resulting from an immediate 200 basis point increase in interest rates.................	(1	)		1
Change resulting from an immediate 200 basis point decrease in interest rates................	(10	)		(10	)

The gain or loss in value for a 200 basis point increase or decrease in rates is a result of the negative convexity of the residential whole loan and mortgage backed securities portfolios. If rates decrease, the projected prepayments related to these portfolios will accelerate, causing less appreciation than a comparable term, non-convex instrument. If rates increase, projected prepayments will slow, which will cause the average lives of these positions to extend and result in a greater loss in market value.

Dynamic simulation modeling techniques  are utilized to monitor a number of interest rate scenarios for their impact on net interest income. These techniques include both rate shock scenarios, which assume immediate market rate movements by as much as 200 basis points, as well as scenarios in which rates rise or fall by as much as 200 basis points over a twelve month period. The following table reflects the impact on net interest income of the scenarios utilized by these modeling techniques.

	June 30, 2013							December 31, 2012
	Amount				%			Amount				%
	(dollars are in millions)
Projected change in net interest income (reflects projected rate movements on January 1):					(10	)						(10	)
Change resulting from a gradual 100 basis point increase in the yield curve.....	$	94			4			$	107			5
Change resulting from a gradual 100 basis point decrease in the yield curve....	(150		)		(7	)		(155		)		(8	)
Change resulting from a gradual 200 basis point increase in the yield curve.....	147				7			128				6
Change resulting from a gradual 200 basis point decrease in the yield curve....	(275		)		(13	)		(210		)		(10	)
Other significant scenarios monitored (reflects projected rate movements on January 1):
Change resulting from an immediate 100 basis point increase in the yield curve..............................................................................................................................	135				6			182				9
Change resulting from an immediate 100 basis point decrease in the yield curve..............................................................................................................................	(243		)		(11	)		(200		)		(10	)
Change resulting from an immediate 200 basis point increase in the yield curve..............................................................................................................................	235				11			158				8
Change resulting from an immediate 200 basis point decrease in the yield curve..............................................................................................................................	(440		)		(21	)		(234		)		(12	)

The projections do not take into consideration possible complicating factors such as the effect of changes in interest rates on the credit quality, size and composition of the balance sheet. Therefore, although this provides a reasonable estimate of interest rate sensitivity, actual results will vary from these estimates, possibly by significant amounts.

Capital Risk/Sensitivity of Other Comprehensive Income  Large movements of interest rates could directly affect some reported capital balances and ratios. The mark-to-market valuation of available-for-sale securities is credited on a tax effective basis to accumulated other comprehensive income. Although this valuation mark is currently excluded from Tier 1 and Tier 2 capital ratios, it is included in two important accounting based capital ratios: the tangible common equity to tangible assets and the tangible common equity to risk weighted assets. Under the final rule adopting the Basel III regulatory capital reforms, the valuation mark will no longer be excluded from Tier 1 and Tier 1 capital ratios and the impact of this change for HSBC USA will be assessed along with the other Basel III changes being introduced. As of June 30, 2013, we had an available-for-sale securities portfolio of approximately $52.9 billion with a positive mark-to-market of $425 million included in tangible common equity of $13.4 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $295 million to a net gain of $130 million with the following results on our tangible capital ratios.  As of December 31, 2012, we had an available-for-sale securities portfolio of approximately $67.7 billion with a positive mark-to-market of $1.7 billion included in tangible common equity of $13.2 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $238 million to a net gain of $1.4 billion with the following results on our tangible capital ratios

	June 30, 2013						December 31, 2012
	Actual			Proforma(1)			Actual			Proforma(1)
Tangible common equity to tangible assets..................................................	7.06	%		6.98	%		6.79	%		6.72	%
Tangible common equity to risk weighted assets.........................................	11.29			11.14			12.39			12.26

⁽¹⁾        Proforma percentages reflect a 25 basis point increase in interest rates.

Market Risk Management  We have incorporated the qualitative and quantitative requirements of Basel 2.5, including stressed VAR, Incremental Risk Charge and Comprehensive Risk Measure into our process and received regulatory approval to initiate these enhancements effective January 1, 2013. See "Risk Management" in MD&A in our 2012 Form 10-K for a more complete discussion of our approach to market risk. There have been no material changes to our approach towards market risk management since December 31, 2012.

Value at Risk  VAR analysis is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. VAR calculations are performed for all material trading activities and as a tool for managing risk inherent in non-trading activities. VAR is calculated daily for a one-day holding period to a 99 percent confidence level.

Trading Activities Our management of market risk is based on a policy of restricting individual operations to trading within an authorized list of permissible instruments, enforcing new product approval procedures and restricting trading in the more complex derivative products to offices with appropriate levels of product expertise and robust control systems. Market making trading is undertaken within Global Banking and Markets.

In addition, at both portfolio and position levels, market risk in trading portfolios is monitored and managed using a complementary set of techniques, including VAR and a variety of interest rate risk monitoring techniques as discussed above. These techniques quantify the impact on capital of defined market movements.

Trading portfolios reside primarily within the Markets unit of the Global Banking and Markets business segment, which include warehoused residential mortgage loans purchased with the intent of selling them, and within the mortgage banking subsidiary included within the RBWM business segment. Portfolios include foreign exchange, interest rate swaps and credit derivatives, precious metals (i.e. gold, silver, platinum), equities and money market instruments including "repos" and securities. Trading occurs as a result of customer facilitation, proprietary position taking and economic hedging. In this context, economic hedging may include forward contracts to sell residential mortgages and derivative contracts which, while economically viable, may not satisfy the hedge accounting requirements.

The trading portfolios have defined limits pertaining to items such as permissible investments, risk exposures, loss review, balance sheet size and product concentrations. "Loss review" refers to the maximum amount of loss that may be incurred before senior management intervention is required.

The following table summarizes trading VAR for the six months ended June 30, 2013:

	June 30, 2013				Six Months Ended June 30, 2013												December 31, 2012
					Minimum				Maximum				Average
	(in millions)
Total trading.....................................................................	$	10			$	6			$	19			$	9			$	8
Foreign exchange............................................................	7				4				12				7				5
Interest rate directional and credit spread...................	10				7				15				10				6

 The following table summarizes the frequency distribution of daily market risk-related revenues for trading activities during the six months ended June 30, 2013. Market risk-related trading revenues include realized and unrealized gains (losses) related to trading activities, but exclude the related net interest income. Analysis of the gain (loss) data for the six months ended June 30, 2013 shows that the largest daily gain was $10 million and the largest daily loss was $9 million.

Ranges of daily trading revenue earned from market risk-related activities

Below $(5)

$(5) to $0

$0 to $5

$5 to $10

Over $10

(dollars are in millions)

Number of trading days market risk-related revenue was within the stated range.....................................................................................

7

53

58

5

2

VAR - Non-trading Activities  Interest rate risk in non-trading portfolios arises principally from mismatches between the future yield on assets and their funding cost as a result of interest rate changes. Analysis of this risk is complicated by having to make assumptions on embedded optionality within certain product areas such as the incidence of mortgage repayments, and from behavioral assumptions regarding the economic duration of liabilities which are contractually repayable on demand such as current accounts. The prospective change in future net interest income from non-trading portfolios will be reflected in the current realizable value of these positions if they were to be sold or closed prior to maturity. In order to manage this risk optimally, market risk in non-trading portfolios is transferred to Global Markets or to separate books managed under the supervision of the local ALCO. Once market risk has been consolidated in Global Markets or ALCO-managed books, the net exposure is typically managed through the use of interest rate swaps within agreed upon limits.

Non-trading VAR also includes the impact of asset market volatility on the current investment portfolio of financial investments including assets held on an available for sale (AFS) and held to maturity (HTM) basis. The main holdings of AFS securities are held by Balance Sheet Management within GB&M. These positions which are originated in order to manage structural interest rate and liquidity risk are treated as non-trading risk for the purpose of market risk management. The main holdings of AFS assets include U.S. Treasuries and Government backed GNMA securities.

The following table summarizes non-trading VAR for the six months ended June 30, 2013, assuming a 99 percent confidence level for a two-year observation period and a one-day "holding period."

	June 30, 2013				Six Months Ended June 30, 2013												December 31, 2012
					Minimum				Maximum				Average
	(in millions)
Total Accrual VAR..........................................................	$	119			$	78			$	125			$	91			$	92

Trading Activities MSRs - Trading occurs in mortgage banking operations as a result of an economic hedging program intended to offset changes in the value of mortgage servicing rights and the salable loan pipeline. Economic hedging may include, for example, forward contracts to sell residential mortgages and derivative instruments used to protect the value of MSRs.

MSRs are assets that represent the present value of net servicing income (servicing fees, ancillary income, escrow and deposit float, net of servicing costs). MSRs are separately recognized upon the sale of the underlying loans or at the time that servicing rights are purchased. MSRs are subject to interest rate risk, in that their value will decline as a result of actual and expected acceleration of prepayment of the underlying loans in a falling interest rate environment.

Interest rate risk is mitigated through an active hedging program that uses trading securities and derivative instruments to offset changes in value of MSRs. Since the hedging program involves trading activity, risk is quantified and managed using a number of risk assessment techniques.

Modeling techniques, primarily rate shock analyses, are used to monitor certain interest rate scenarios for their impact on the economic value of net hedged MSRs, as reflected in the following table.  

	June 30, 2013				December 31, 2012
	(in millions)
Projected change in net market value of hedged MSRs portfolio (reflects projected rate movements on April 1 and January 1):
Value of hedged MSRs portfolio...............................................................................................................	$	225			$	168
Change resulting from an immediate 50 basis point decrease in the yield curve:
Change limit (no worse than)................................................................................................................	(20		)		(20		)
Calculated change in net market value................................................................................................	(1		)		4
Change resulting from an immediate 50 basis point increase in the yield curve:
Change limit (no worse than)................................................................................................................	(8		)		(8		)
Calculated change in net market value................................................................................................	2				8
Change resulting from an immediate 100 basis point increase in the yield curve:
Change limit (no worse than)................................................................................................................	(12		)		(12		)
Calculated change in net market value................................................................................................	3				28

The economic value of the net hedged MSRs portfolio is monitored on a daily basis for interest rate sensitivity. If the economic value declines by more than established limits for one day or one month, various levels of management review, intervention and/or corrective actions are required.

The following table summarized the frequency distribution of the weekly economic value of the MSR asset during the six months ended June 30, 2013. This includes the change in the market value of the MSR asset net of changes in the market value of the underlying hedging positions used to hedge the asset. The changes in economic value are adjusted for changes in MSR valuation assumptions that were made during the course of the year.

Ranges of mortgage economic value from market risk-related activities

Below $(2)

$(2) to $0

$0 to $2

$2 to $4

Over $4

(dollars are in millions)

Number of trading weeks market risk-related revenue was within the stated range.....................................................................................

2

6

15

3

-

Operational Risk  There have been no material changes to our approach toward operational risk since December 31, 2012.

Compliance Risk  There have been no material changes to our approach toward compliance risk since December 31, 2012.

Fiduciary Risk  There have been no material changes to our approach toward fiduciary risk since December 31, 2012.

Reputational Risk  There have been no material changes to our approach toward reputational risk since December 31, 2012.

Strategic Risk  There have been no material changes to our approach toward strategic risk since December 31, 2012.

Security and Fraud Risk There have been no material changes to our approach toward security and fraud risk since December 31, 2012.

Model Risk There have been no material changes to our approach toward model risk since December 31, 2012.

Pension Risk  There have been no material changes to our approach toward pension risk since December 31, 2012.

CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES

The following tables show the quarter-to-date and year-to-date average daily balances of the principal components of assets, liabilities and shareholders' equity together with their respective interest amounts and rates earned or paid, presented on a taxable equivalent basis. Net interest margin is calculated by dividing annualized net interest income by the average interest earning assets from which interest income is earned. The calculation of net interest margin includes interest expense of $10 million and $50 million for the three and six months ended June 30, 2012, respectively, which has been allocated to our discontinued operations. This allocation of interest expense to our discontinued operations was in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by these transactions.

Three Months Ended June 30,	2013											2012
	Average Balance				Interest				Rate(1)			Average Balance				Interest				Rate(1)
	(dollars are in millions)
Assets
Interest bearing deposits with banks....................................	$	23,168			$	14			.26	%		$	25,198			$	17			.28	%
Federal funds sold and securities purchased under resale agreements................................................................................	1,862				2				.37			10,315				15				.59
Trading assets..........................................................................	10,524				27				1.04			10,786				26				.97
Securities...................................................................................	57,794				230				1.60			58,074				285				1.97
Loans:
Commercial............................................................................	45,421				295				2.60			37,071				254				2.76
Consumer:
Residential mortgages....................................................	16,031				140				3.49			15,442				148				3.87
HELOCs and home equity mortgages..........................	2,197				18				3.27			3,017				25				3.37
Credit cards......................................................................	817				17				8.45			1,045				17				6.37
Other consumer...............................................................	649				8				4.67			827				12				5.67
Total consumer.....................................................................	19,694				183				3.72			20,331				202				4.00
Total loans.............................................................................	65,115				478				2.94			57,402				456				3.20
Other...........................................................................................	2,847				11				1.49			3,677				10				1.26
Total earning assets.................................................................	161,310				$	762			1.89	%		165,452				$	809			1.97	%
Allowance for credit losses....................................................	(573		)									(604		)
Cash and due from banks........................................................	1,133											1,595
Other assets..............................................................................	25,370											28,641
Assets of discontinued operations.......................................	-											6,605
Total assets...............................................................................	$	187,240										$	201,689
Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits..................................................................	$	43,964			$	18			.16	%		$	54,539			$	53			.39	%
Other time deposits..............................................................	19,942				36				.71			15,109				28				.73
Deposits in foreign offices:
Foreign banks deposits.......................................................	7,183				1				.07			9,437				2				.07
Other interest bearing deposits..........................................	7,432				1				.08			13,960				4				.11
Deposits held for sale..............................................................	-				-				-			9,745				6				.26
Total interest bearing deposits..............................................	78,521				56				.28			102,790				93				.40
Short-term borrowings.............................................................	16,688				8				.20			12,841				7				.21
Long-term debt.........................................................................	21,997				166				3.01			19,757				179				3.65
Total interest bearing deposits and debt..............................	117,206				230							135,388				279
Other...........................................................................................	504				9				7.76			466				1				1.67
Total interest bearing liabilities..............................................	117,710				239				.81			135,854				280				.89
Net interest income/Interest rate spread...............................					$	523			1.08	%						$	529			1.08	%
Noninterest bearing deposits.................................................	30,853											25,485
Other liabilities..........................................................................	20,892											20,469
Liabilities of discontinued operations...................................	-											1,052
Total shareholders' equity......................................................	17,785											18,829
Total liabilities and shareholders' equity..........................	$	187,240										$	201,689
Net interest margin on average earning assets....................									1.30	%										1.29	%
Net interest income to average total assets.........................									1.12	%										1.10	%

Six Months Ended June 30,	2013											2012
	Average Balance				Interest				Rate(1)			Average Balance				Interest				Rate(1)
	(dollars are in millions)
Assets
Interest bearing deposits with banks....................................	$	20,292			$	26			.26	%		$	24,001			$	34			.28	%
Federal funds sold and securities purchased under resale agreements.................................................................................	1,886				4				.43			6,801				25				.74
Trading assets...........................................................................	10,991				51				.93			12,087				59				.98
Securities....................................................................................	60,107				463				1.55			57,318				594				2.08
Loans:
Commercial.............................................................................	44,375				568				2.58			36,529				498				2.74
Consumer:
Residential mortgages....................................................	15,895				286				3.62			15,392				298				3.90
HELOCs and home equity mortgages..........................	2,237				37				3.30			3,199				54				3.42
Credit cards......................................................................	794				35				8.84			1,123				42				7.34
Other consumer...............................................................	648				16				5.06			881				27				6.18
Total consumer.....................................................................	19,574				374				3.85			20,595				421				4.11
Total loans.............................................................................	63,949				942				2.97			57,124				919				3.23
Other...........................................................................................	3,034				21				1.43			3,781				21				1.21
Total earning assets.................................................................	160,259				$	1,507			1.90	%		161,112				$	1,652			2.06	%
Allowance for credit losses.....................................................	(603		)									(666		)
Cash and due from banks........................................................	1,130											1,595
Other assets...............................................................................	27,056											29,264
Assets of discontinued operations.......................................	-											13,508
Total assets...............................................................................	$	187,842										$	204,813
Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits..................................................................	$	44,260			$	37			.17	%		$	56,561			$	113			.40	%
Other time deposits..............................................................	20,495				56				.55			14,994				62				.83
Deposits in foreign offices:
Foreign banks deposits.......................................................	7,434				3				.07			8,801				3				.07
Other interest bearing deposits..........................................	6,756				3				.09			14,810				8				.11
Deposits held for sale..............................................................	-				-				-			12,418				16				.26
Total interest bearing deposits...............................................	78,945				99				.25			107,584				202				.43
Short-term borrowings.............................................................	16,442				17				.21			15,283				15				.20
Long-term debt..........................................................................	22,036				333				3.04			18,923				341				3.62
Total interest bearing deposits and debt..............................	117,423				449							141,790				558
Other...........................................................................................	504				25				10.09			466				13				5.88
Total interest bearing liabilities..............................................	117,927				474				.82			142,256				571				.88
Net interest income/Interest rate spread...............................					$	1,033			1.08	%						$	1,081			1.18	%
Noninterest bearing deposits.................................................	30,984											22,899
Other liabilities..........................................................................	21,130											19,926
Liabilities of discontinued operations...................................	-											994
Total shareholders' equity......................................................	17,801											18,738
Total liabilities and shareholders' equity..........................	$	187,842										$	204,813
Net interest margin on average earning assets....................									1.30	%										1.35	%
Net interest income to average total assets..........................									1.11	%										1.14	%

⁽¹⁾        Rates are calculated on amounts that have not been rounded to the nearest million.

The total weighted average rate earned on earning assets is interest and fee earnings divided by daily average amounts of total interest earning assets, including the daily average amount on nonperforming loans. Loan interest for the three and six months ended June 30, 2013 included fees of $19 million and $43 million, respectively compared with fess of $19 million and $34 million during the three and six months ended June 30, 2012, respectively.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Information required by this Item is included within Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Risk Management section under the captions "Interest Rate Risk Management" and "Market Risk Management" of this Form 10-Q.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures We maintain a system of internal and disclosure controls and procedures designed to ensure that information required to be disclosed by HSBC USA in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported on a timely basis. Our Board of Directors, operating through its Audit Committee, which is composed entirely of independent outside directors, provides oversight to our financial reporting process.

We conducted an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report so as to alert them in a timely fashion to material information required to be disclosed in reports we file under the Exchange Act.

Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II 

Item 1.    Legal Proceedings.

See "Litigation and Regulatory Matters" in Note 21, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements beginning on page  for our legal proceedings disclosure, which is incorporated herein by reference.

Item 5.    Other Information.

Disclosures Pursuant to Section 13(R) of the Securities Exchange Act  Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added a new subsection (r) to section 13 of the Securities Exchange Act, requiring each issuer registered with the SEC to disclose in its annual or quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions with persons or entities targeted by U.S. sanctions programs relating to Iran, terrorism, or the proliferation of weapons of mass destruction, even if those activities are not prohibited by U.S. law and are conducted outside the U.S. by non-U.S. affiliates in compliance with local laws and regulations.

In order to comply with this requirement, HSBC Holdings plc (together with its affiliates, "HSBC") has requested relevant information from its affiliates globally. During the period covered by this Form 10-Q, HSBC USA Inc. ("HUSI") did not engage in any activities or transactions requiring disclosure pursuant to Section 13(r) other than those activities related to frozen accounts and transactions permitted under relevant U.S. sanction programs described under "Frozen Accounts and Transactions" below.  The following activities conducted by our affiliates are disclosed in response to Section 13(r):

Loans in repayment  Between 2001 and 2005, the Project and Export Finance ("PEF") division of HSBC arranged or participated in a portfolio of loans to Iranian energy companies and banks. All of these loans were guaranteed by European and Asian export credit agencies, and they have varied maturity dates with final maturity in 2018. For those loans that remain outstanding, HSBC continues to seek repayment in accordance with its obligations to the supporting export credit agencies and, in all cases, with appropriate regulatory approvals. Details of these loans follow.

HSBC has 13 loans outstanding to an Iranian petrochemical and energy company. These loans are supported by the official Export Credit Agencies of the following countries: the United Kingdom, France, Germany, Spain, The Netherlands, South Korea and Japan. HSBC continues to seek repayments from the company under the existing loans in accordance with the original maturity profiles. All repayments made by the Iranian company have received a license or an authorization from relevant authorities.  Repayments have been received under a number of the loans during the second quarter of 2013. 

Bank Melli and Bank Saderat acted as sub-participants in three of the aforementioned loans. In the second quarter of 2013, the repayments due to these banks under the loan agreements were paid into frozen accounts under licenses or authorizations from relevant European governments.

In 2002, HSBC provided a loan to Bank Tejarat with a guarantee from the Government of Iran to fund the construction of a petrochemical plant undertaken by a U.K. contractor. This loan was supported by the U.K. Export Credit Agency. One repayment was received in the second quarter of 2013 under license from the relevant Europe Government.

HSBC also maintains sub-participations in five loans provided by other international banks to Bank Tejarat and Bank Mellat with guarantees from the Government of Iran. These sub-participations were supported by the Export Credit Agencies of Italy, The Netherlands, France, and Spain. The repayments due under the sub-participations were not received during the second quarter of 2013, and claims are being processed and settled by the relevant European Export Credit Agencies. Licenses and relevant authorizations have been obtained from the competent authorities of the European Union in respect of the transactions.

Estimated gross revenue to HSBC generated by these loans in repayment for the second quarter of 2013, which includes interest and fees, was $307,000. Estimated net profit for HSBC during the second quarter of 2013 was $133,000. While HSBC intends to continue to seek repayment, it does not intend to extend any new loans.

Legacy contractual obligations related to guarantees Between 1996 and 2007, HSBC provided guarantees to a number of its non-Iranian customers in Europe and the Middle East for various business activities in Iran. In a number of cases, HSBC issued counter indemnities in support of guarantees issued by Iranian banks as the Iranian beneficiaries of the guarantees required that they be backed directly by Iranian banks. The Iranian banks to which HSBC provided counter indemnities included Bank Tejarat, Bank Melli, and the Bank of Industry and Mine.

HSBC worked with relevant regulatory authorities to obtain licenses where required and ensure compliance with laws and regulations while seeking to cancel the guarantees and counter indemnities. None were canceled during the second quarter of 2013.

Estimated gross revenue to HSBC for the second quarter of 2013, which includes fees and/or commissions, was $3,000. HSBC does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure. HSBC is seeking to cancel all relevant guarantees and does not intend to provide any new guarantees involving Iran.

Check clearing Certain Iranian banks sanctioned by the United States continue to participate in official clearing systems in the UAE, Bahrain, Oman, Lebanon, Qatar, and Turkey. HSBC has a presence in these countries and, as such, participates in the clearing systems. The Iranian banks participating in the clearing systems vary by location and include Bank Saderat, Bank Melli, Future Bank, and Bank Mellat.

While HSBC has attempted to restrict or terminate its role as paying or collecting bank, some check transactions with U.S.-sanctioned Iranian financial institutions have been settled. HSBC's ability to effectively terminate or implement check-clearing restrictions is dependent on the relevant central banks permitting it to do so unilaterally. Where permitted, HSBC has terminated the activity altogether, implementing both automated and manual controls. There was no measurable gross revenue or net profit generated by this activity in the second quarter of 2013.

Other relationships with Iranian banks  Activity related to U.S.-sanctioned Iranian banks not covered elsewhere in this disclosure includes the following:

Ÿ      HSBC maintains a frozen account in the U.K. for an Iranian-owned, FSA-regulated financial institution. In April 2007, the U.K. government issued a license to allow HSBC to handle certain transactions (operational payments and settlement of pre-sanction transactions) for this institution. There was some licensed activity in the second quarter of 2013.

Ÿ      HSBC acts as the trustee and administrator for pension schemes involving three employees of a U.S.-sanctioned Iranian bank in Hong Kong. Under the rules of these schemes, HSBC accepts contributions from the Iranian bank each month and allocates the funds into the pension accounts of the three Iranian bank employees. HSBC runs and operates these pension schemes in accordance with Hong Kong laws and regulations.

Ÿ      In 2010, HSBC closed its representative office in Iran. HSBC maintains a local account with a U.S.-sanctioned Iranian bank in Tehran in order to facilitate residual activity related to the closure. There was no activity in the second quarter of 2013.

Estimated gross revenue to HSBC for the second quarter of 2013 for all Iranian bank-related activity described in this section, which includes fees and/or commissions, was $2,000. HSBC does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure. HSBC intends to continue to wind down this Iranian bank-related activity and not enter into any new such activity.

Iranian embassy-related activity HSBC maintained a bank account in London for the Iranian embassy in London, which was used to support Iranian students studying in the U.K. The account was closed in the second quarter of 2013, and the funds were moved into unclaimed balances.

2013 Activity related to U.S. Executive Order 13224 HSBC maintained a frozen personal account for an individual sanctioned under Executive Order 13224, and by the U.K. and the U.N. Security Council. Activity on this account in the second quarter of 2013 was permitted by a license issued by the U.K. There was no measurable gross revenue or net profits generated to HSBC in the second quarter of 2013.

2013 Activity related to U.S. Executive Order 13382 HSBC held an account for a customer in the United Arab Emirates that was sanctioned under Executive Order 13382 in the second quarter of 2013.  HSBC has notified the customer that the account is being closed, and there has been minimal activity in the second quarter of 2013. There was no measurable gross revenue or net profits generated to HSBC in the second quarter of 2013.

Frozen accounts and transactions HSBC and HSBC Bank USA (a subsidiary of HUSI) maintain several accounts that are frozen under relevant sanctions programs and on which no activity took place during the second quarter of 2013. In the second quarter of 2013, HSBC and HSBC Bank USA also froze payments where required under relevant sanctions programs. There was no gross revenue or net profit to HSBC.

Item 6. Exhibits.

Exhibits included in this Report:

12	Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.
31	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
101.INS	XBRL Instance Document(2)
101.SCH	XBRL Taxonomy Extension Schema Document(2)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document(2)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document(2)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document(2)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document(2)

^1.         This exhibit shall be not be deemed "filed" for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

^2.         Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in HSBC USA Inc.'s Quarterly  Report on Form 10-Q for the quarter ended June   30, 2013, formatted in eXentsible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income for the three and six months ended June 30, 2013 and 2012, (ii) the Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iii) the Consolidated Balance Sheet as of June 30, 2013 and December 31. 2012, (iv) the Consolidated Statement of Changes in Shareholders' Equity for the six months ended June 30, 2013 and 2012, (v) the Consolidated Statement of Cash Flows for the six months ended June 30, 2013 and 2012, and (vi) the Notes to Consolidated Financial Statements.

Index

Assets:	Equity securities available-for-sale
by business segment	Estimates and assumptions
consolidated average balances	Eurozone exposures
fair value measurements	Executive overview
nonperforming	Fair value measurements:
trading	assets and liabilities recorded at fair value on a recurring basis
Asset-backed commercial paper conduits	assets and liabilities recorded at fair value on a non-recurring basis
Asset-backed securities	control over valuation process
Balance sheet:	financial instruments
consolidated	hierarchy
consolidated average balances	transfers into/out of level one and two
review	transfers into/out of level two and three
Basel 2.5	valuation techniques
Basel III	Fiduciary risk
Basis of reporting	Financial assets:
Business:	designated at fair value
consolidated performance review	reclassification under IFRSs
Capital:	Financial highlights metrics
2013 funding strategy	Financial liabilities:
common equity movements	designated at fair value
consolidated statement of changes	fair value of financial liabilities
regulatory capital	Forward looking statements
selected capital ratios	Funding
Cash flow (consolidated)	Gain on instruments designated at fair value and related derivatives
Cautionary statement regarding forward-looking statements	Gains (losses) from securities
Collateral - pledged assets	Global Banking and Markets
Collateralized debt obligations	Geographic concentration of receivables
Commercial banking segment results (IFRSs)	Goodwill
Compliance risk	Guarantee arrangements
Controls and procedures	Impairment:
Credit card fees	available-for-sale securities
Credit quality	credit losses
Credit risk:	nonperforming loans
adjustment	impaired loans
component of fair value option	Income (loss) from financial instruments designated at fair value, net
concentration	Income tax expenses
exposure	Intangible assets
management	Interest rate risk
related contingent features	Internal control
related arrangements	Key performance indicators
Current environment	Legal proceedings
Deferred tax assets	Leveraged finance transactions
Deposits	Liabilities:
Derivatives:	commitments, lines of credit
cash flow hedges	deposits
fair value hedges	financial liabilities designated at fair value
notional value	trading
trading and other	long-term debt
Discontinued operations	short-term borrowings
Equity:
consolidated statement of changes
ratios
Liquidity and capital resources	Reconciliation of U.S. GAAP results to IFRSs
Liquidity risk	Refreshed loan-to-value
Litigation and regulatory matters	Regulation
Loans:	Related party transactions
by category	Reputational risk
by charge-off (net)	Results of operations
by delinquency	Retail banking and wealth management segment results (IFRSs)
criticized assets	Risk elements in the loan portfolio
geographic concentration	Risk management:
held for sale	credit
impaired	compliance
nonperforming	fiduciary
overall review	interest rate
purchases from HSBC Finance	liquidity
risk concentration	market
troubled debt restructures	operational
Loan impairment charges - see Provision for credit losses	reputational
Loan-to-deposits ratio	strategic
Market risk	Securities:
Market turmoil:	fair value
exposures	impairment
impact on liquidity risk	maturity analysis
Monoline insurers	Segment results - IFRS basis:
Mortgage lending products	retail banking and wealth management
Mortgage servicing rights	commercial banking
Net interest income	global banking and markets
New accounting pronouncements	private banking
Off balance sheet arrangements	other
Operating expenses	overall summary
Operational risk	Selected financial data
Other revenue	Sensitivity:
Other segment results (IFRSs)	projected net interest income
Pension and other postretirement benefits	Statement of changes in shareholders' equity
Performance, developments and trends	Statement of changes in comprehensive income (loss)
Pledged assets	Statement of income (loss)
Private banking segment results (IFRSs)	Strategic risk
Profit (loss) before tax:	Stress testing
by segment - IFRSs	Table of contents
consolidated	Tax expense
Provision for credit losses	Trading:
Ratios:	assets
capital	derivatives
charge-off (net)	liabilities
credit loss reserve related	portfolios
delinquency	Trading revenue (net)
earnings to fixed charges - Exhibit 12	Troubled debt restructures
efficiency	Value at risk
Residential real estate owned	Variable interest entities

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 5, 2013

HSBC USA Inc. (Registrant)

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

Exhibit Index

12	Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.
31	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
101.INS	XBRL Instance Document(2)
101.SCH	XBRL Taxonomy Extension Schema Document(2)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document(2)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document(2)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document(2)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document(2)

^1.         This exhibit shall be not be deemed "filed" for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

^2.         Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in HSBC USA Inc.'s Quarterly  Report on Form 10-Q for the quarter ended June   30, 2013, formatted in eXentsible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income for the three and six months ended June 30, 2013 and 2012, (ii) the Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iii) the Consolidated Balance Sheet as of June 30, 2013 and December 31. 2012, (iv) the Consolidated Statement of Changes in Shareholders' Equity for the six months ended June 30, 2013 and 2012, (v) the Consolidated Statement of Cash Flows for the six months ended June 30, 2013 and 2012, and (vi) the Notes to Consolidated Financial Statements.

EXHIBIT 12

HSBC USA INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND

EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

	Six Months Ended June 30,
	2013				2012
	(dollars are in millions)
Ratios excluding interest on deposits:
Income (loss) from continuing operations.....................................................................................................	$	363			$	(513	)
Income tax expense........................................................................................................................................	153				369
Less: Undistributed equity earnings..........................................................................................................	-				-
Fixed charges:
Interest on:
Borrowed funds...................................................................................................................................	17				15
Long-term debt....................................................................................................................................	333				332
Others...................................................................................................................................................	25				13
One third of rents, net of income from subleases................................................................................	17				15
Total fixed charges, excluding interest on deposits.................................................................................	392				375
Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings...........................................................................................................................................................	908				231
Ratio of earnings to fixed charges...............................................................................................................	2.32				.62
Total preferred stock dividend factor(1)......................................................................................................	$	51			$	51
Fixed charges, including the preferred stock dividend factor.................................................................	$	443			$	426
Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends........................................................................................................................................................	2.05				.54
Ratios including interest on deposits:
Total fixed charges, excluding interest on deposits.................................................................................	$	392			$	375
Add: Interest on deposits............................................................................................................................	99				161
Total fixed charges, including interest on deposits.................................................................................	$	491			$	536
Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings.........................................................................................................................................	$	908			$	231
Add: Interest on deposits............................................................................................................................	99				161
Total.................................................................................................................................................................	$	1,007			$	392
Ratio of earnings to fixed charges...............................................................................................................	2.05				.73
Fixed charges, including the preferred stock dividend factor.................................................................	$	443			$	426
Add: Interest on deposits............................................................................................................................	99				161
Fixed charges, including the preferred stock dividend factor and interest on deposits.....................	$	542			$	587
Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends........................................................................................................................................................	1.86				.67

(1)   Preferred stock dividends grossed up to their pretax equivalents.

EXHIBIT 31

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer

I, Irene M. Dorner, President, Chief Executive Officer and Chairman of the Board of HSBC USA Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of HSBC USA Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 5, 2013

/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

Certification of Chief Financial Officer

I, John T. McGinnis, Senior Executive Vice President and Chief Financial Officer of HSBC USA Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of HSBC USA Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 5, 2013

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

EXHIBIT 32

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted in connection with the HSBC USA Inc. (the "Company") quarterly report on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code.

I, Irene M. Dorner, President, Chief Executive Officer and Chairman of the Board of the Company, certify that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of HSBC USA Inc.

Date: August 5, 2013

/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted in connection with the HSBC USA Inc. (the "Company") quarterly report on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code.

I, John T. McGinnis, Senior Executive Vice President and Chief Financial Officer of the Company, certify that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of HSBC USA Inc.

Date: August 5, 2013

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

These certifications accompany each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by HSBC USA Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Signed originals of these written statements required by Section 906 of the Sarbanes-Oxley Act of 2002 have been provided to HSBC USA Inc. and will be retained by HSBC USA Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

END

 

 

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