HSBC USA Inc Form 10-K. Part 1

RNS Number : 9305B

HSBC Holdings PLC

27 February 2011

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to ______________

Commission file number 1-7436

HSBC USA Inc.

(Exact name of registrant as specified in its charter)

Maryland

13-2764867

(State of incorporation)

452 Fifth Avenue, New York

(I.R.S. Employer Identification No.)

10018

(Address of principal executive offices)

(Zip Code)

(212) 525-5000

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Floating Rate Notes due June 17, 2011	New York Stock Exchange
3.125% Guaranteed Notes due December 16, 2011	New York Stock Exchange
Floating Rate Guaranteed Notes due December 19, 2011	New York Stock Exchange
Depositary Shares (each representing a one-fourth share of	New York Stock Exchange
Adjustable Rate Cumulative Preferred Stock, Series D)
$2.8575 Cumulative Preferred Stock	New York Stock Exchange
Floating Rate Non-Cumulative Preferred Stock, Series F	New York Stock Exchange
Depositary Shares (each representing a one-fortieth share of	New York Stock Exchange
Floating Rate Non-Cumulative Preferred Stock, Series G)
Depositary Shares (each representing a one-fortieth share of	New York Stock Exchange
6.5% Non-Cumulative Preferred Stock, Series H)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer x	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of February 25, 2011, there were 712 shares of the registrant's common stock outstanding, all of which are owned by HSBC North America Inc.

DOCUMENTS INCORPORATED BY REFERENCE

None.

HSBC USA Inc.

TABLE OF CONTENTS

		Page
Part I
Item 1.	Business	4
	Organization History and Acquisition by HSBC	4
	HSBC North America Operations	4
	HSBC USA Inc. - General	4
	Funding	6
	Employees and Customers	6
	Operations	6
	Regulation and Competition	8
	Corporate Governance and Controls	14
	Cautionary Statement on Forward-Looking Statements	14
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	22
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Part II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.	Selected Financial Data	22
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Executive Overview	24
	Basis of Reporting	31
	Critical Accounting Policies and Estimates	33
	Balance Sheet Review	40
	Results of Operations	45
	Segment Results - IFRS Basis	54
	Credit Quality	63
	Liquidity and Capital Resources	75
	Off-Balance Sheet Arrangements and Contractual Obligations	79
	Fair Value	82
	Risk Management	87
	New Accounting Pronouncements to be Adopted in Future Periods	104
	Glossary of Terms	105
	Consolidated Average Balances and Interest Rates - Continuing Operations	108
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	109
Item 8.	Financial Statements and Supplementary Data	109
Part III
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	216
Item 9A.	Controls and Procedures	216
Item 9B.	Other Information	216
Item 10.	Directors, Executive Officers and Corporate Governance	216
Item 11.	Executive Compensation	227
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	255
Item 13.	Certain Relationships and Related Transactions, and Director Independence	256
Item 14.	Principal Accounting Fees and Services	258
Part IV
Item 15.	Exhibits and Financial Statement Schedules and Reports on Form 8-K	258
Index		260
Signatures		267

PART I

Item 1. Business.

Organization History and Acquisition by HSBC

HSBC USA Inc. ("HSBC USA" and, together with its subsidiaries, "HUSI"), incorporated under the laws of the State of Maryland in 1973 as Republic New York Corporation, traces its origin to 1850 and The Marine Trust Company in Buffalo, New York, which later became Marine Midland Bank. In 1980, The Hongkong and Shanghai Banking Corporation Limited (now HSBC Holdings plc, hereinafter referred to as "HSBC") acquired 51 percent of the common stock of Marine Midland Banks, Inc., the holding company for Marine Midland Bank, and the remaining 49 percent in 1987. In December 1999, HSBC acquired Republic New York Corporation through a merger with RNYC Merger Corporation, a wholly owned subsidiary of HSBC, with Republic New York Corporation surviving the merger and merged Marine Midland Banks, Inc., then known as HSBC USA Inc., with and into Republic New York Corporation. In January 2000, Republic New York Corporation changed its name to "HSBC USA Inc."

HSBC North America Operations

HSBC North America Holdings Inc. ("HSBC North America") is the holding company for HSBC's operations in the United States. The principal subsidiaries of HSBC North America at December 31, 2010 were HSBC USA Inc., HSBC Markets (USA) Inc., a holding company for certain global banking and markets subsidiaries, HSBC Finance Corporation ("HSBC Finance"), a holding company for consumer finance businesses, and HSBC Technology & Services (USA) Inc. ("HTSU"), a provider of information technology and centralized operational and support services including human resources, tax, finance, compliance, legal, corporate affairs and other services shared among the subsidiaries of HSBC North America. In late January 2010, HSBC North America sold HSBC Bank Canada, a Federal bank chartered under the laws of Canada ("HBCA"), to an affiliate as part of an internal HSBC reorganization. As a result, HBCA is no longer a subsidiary of HSBC North America. Under the oversight of HSBC North America, HUSI works with its affiliates to maximize opportunities and efficiencies in HSBC's operations in the United States. These affiliates do so by providing each other with, among other things, alternative sources of liquidity to fund operations and expertise in specialized corporate functions and services. This has been demonstrated by purchases and sales of receivables between HSBC Bank USA, National Association ("HSBC Bank USA") and HSBC Finance and a pooling of resources within HTSU to provide shared, allocated support functions to all HSBC North America subsidiaries. In addition, clients of HSBC Bank USA, HSBC USA's principal U.S. banking subsidiary, and other affiliates are investors in debt and preferred securities issued by HSBC USA and/or HSBC Bank USA, providing significant sources of liquidity and capital to both entities. HSBC Securities (USA) Inc., a Delaware corporation, a registered broker dealer and a subsidiary of HSBC Markets (USA) Inc., leads or participates as underwriter of all HUSI domestic issuances of term debt and HSBC Finance term debt and, historically, asset-backed securities. While neither HSBC USA nor HSBC Bank USA has received advantaged pricing, the underwriting fees and commissions payable to HSBC Securities (USA) Inc. benefit HSBC as a whole.

HSBC USA Inc. - General

HSBC Bank USA, HSBC USA's principal U.S. banking subsidiary, is a national banking association with banking branch offices and/or representative offices in California, Connecticut, Delaware, Florida, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Texas, Virginia, Washington and the District of Columbia. In addition to its domestic offices, HSBC Bank USA maintains foreign branch offices, subsidiaries and/or representative offices in the Caribbean, Europe, Asia, Latin America and Canada. In this Form 10-K, HSBC USA and its subsidiaries are referred to as "we", "us" or "our". Through HSBC Bank USA, we offer our customers a full range of commercial and consumer banking products and related financial services. Our customers include individuals, including high net worth individuals, small businesses, corporations, institutions and governments. HSBC Bank USA also engages in mortgage banking, and is an international dealer in derivative instruments denominated in U.S. dollars and other currencies, focusing on structuring of transactions to meet clients' needs. HSBC Bank USA's main office is in McLean, Virginia, and its principal executive offices are located at 452 Fifth Avenue, New York, New York. Its domestic operations are located primarily in the state of New York.

In 2005, HSBC USA incorporated a nationally chartered limited purpose bank subsidiary, HSBC Trust Company (Delaware), National Association ("HTCD"), the primary activities of which are serving as custodian of investment securities for other HSBC affiliates and providing personal trust services. Prior to HSBC Finance exiting the Taxpayer Financial Services business in December 2010, HTCD also originated refund anticipation loans and checks in support of that program. The impact of HTCD's operations on HSBC USA's consolidated balance sheets and results of operations for the years ended December 31, 2010, 2009 and 2008 was not material.

In 2006, HSBC USA formed HSBC National Bank USA ("HBMD"), a national banking association established to support HSBC USA's retail branch expansion strategy. HBMD was merged with and into HSBC Bank USA in December 2008, at which time HSBC Bank USA relocated our main office to McLean, Virginia. The impact of HBMD's operations on HSBC USA's consolidated balance sheet and results of operations for the year ended December 31, 2008 was not material.

Income Before Income Tax Expense - Significant Trends Income (loss) for continuing operations before income tax expense, and various trends and activity affecting operations, are summarized in the following table.

Year Ended December 31,	2010	2009	2008
	(in millions)
Income (loss) from continuing operations before income tax from prior year	$(299)	$(2,676)	$86
Increase (decrease) in income from continuing operations before income tax attributable to:
Balance sheet management activities (1)	(238)	676	127
Trading revenue (2)	265	2,925	(2,689)
Credit card fees (3)	(446)	477	62
Loans held for sale (4)	297	263	(9)
Residential mortgage banking related revenue (loss) (5)	(294)	183	(85)
Gain (loss) on own debt designated at fair value and related derivatives (6)	733	(1,164)	670
Gain (loss) on instruments designated at fair value and related derivatives, excluding own debt (6)	(186)	625	(384)
Provision for credit losses (7)	3,011	(1,601)	(1,021)
Goodwill impairment loss (8)	-	54	(54)
All other activity (9)	(543)	(61)	621
	2,599	2,377	(2,762)
Income (loss) from continuing operations before income tax for current year	$2,300	$(299)	$(2,676)

____________

(1)	Balance sheet management activities are comprised primarily of net interest income and, to a lesser extent, gains or losses on sales of investments, 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 the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section of this Form 10-K.

(2)	For additional discussion regarding trading revenue, see the caption "Results of Operations" in the MD&A section of this Form 10-K.

(3)	For additional discussion regarding credit card fees, see the caption "Results of Operations" in the MD&A section of this Form 10-K.

(4)	For additional discussion regarding loans, see the caption "Balance Sheet Review" in the MD&A section of this Form 10-K.

(5)	For additional discussion regarding residential mortgage banking revenue, see the caption "Results of Operations" in the MD&A section of this Form 10-K.

(6)	For additional discussion regarding fair value option and fair value measurement, see Note 17 "Fair Value Option," in the accompanying consolidated financial statements.

(7)	For additional discussion regarding provision for credit losses, see the caption "Results of Operations" in the MD&A section of this Form 10-K.

(8)	For additional discussion regarding goodwill impairment, see Note 12, "Goodwill," in the accompanying consolidated financial statements.

(9)	Represents other banking activities.

Funding

We fund our operations using a diversified deposit base, supplemented by issuing short-term and long-term debt, borrowing under unsecured and secured financing facilities, issuing preferred equity, selling liquid assets and, as necessary, receiving capital contributions from our immediate parent, HSBC North America Inc. ("HNAI"). Our continued success is primarily dependent upon our ability to attract and retain deposits. Emphasis is placed on maintaining stability in core deposit balances. Numerous factors, both internal and external, may impact our access to, and the costs associated with, both retail and wholesale sources of funding. These factors may include our debt ratings, overall economic conditions, overall capital markets volatility, the counterparty credit limits of investors to the HSBC Group and the effectiveness of our management of the credit risks inherent in our business and customer base.

In 2010, our primary source of funds continued to be deposits, augmented by issuances of commercial paper and term debt. We have continued to reduce our reliance on debt capital markets by increasing stable deposits. We have increased our emphasis on relationship deposits where clients have purchased multiple products from us such as HSBC Premier for individuals, as those balances will tend to be significantly more stable than non-relationship deposits. We issued a total of $4.7 billion of long-term debt at various points during 2010, including $2.0 billion in subordinated term funding which provided additional capital and liquidity support. We also retired long-term debt of $5.4 billion in 2010. We did not receive any capital contributions from our parent, HNAI, in 2010, while maintaining capital at levels we believe are prudent in the current market conditions.

A detailed description of our sources and availability of funding are set forth in the "Liquidity and Capital Resources" and "Off Balance Sheet Arrangements" sections of the MD&A.

We use the cash generated by these funding sources to service our debt obligations, originate and purchase new loans, purchase investment securities and pay dividends to our preferred shareholders and, as available and appropriate, to our parent.

Employees and Customers

At December 31, 2010, we had approximately 12,000 employees, which reflects the centralization of certain staff function employees to HTSU effective as of January 1, 2010 and the transfer of certain real estate servicing employees from HSBC Finance to HUSI in July 2010.

At December 31, 2010, we had over 4 million customers, some of which are customers of more than one of our businesses. Customers residing in the state of New York accounted for 27 percent of our outstanding loans.

Operations

We have five reportable segments: Personal Financial Services ("PFS"), Consumer Finance ("CF"), Commercial Banking ("CMB"), Global Banking and Markets and Private Banking ("PB"). Our segments are managed separately and are based upon customer groupings as well as products and services offered. Adjustments made at the corporate level for fair value option accounting related to certain debt issued are included under the "Other" caption within our segment disclosure. We are currently in the process of re-evaluating the financial information used to manage our business, including the scope and content of the financial data being reported to our management and Board of Directors. To the extent we make changes to this reporting in 2011, we will evaluate any impact such changes may have to our segment reporting.

Corporate goals and individual goals of executives are currently calculated in accordance with International Financial Reporting Standards ("IFRSs") under which HSBC prepares its consolidated financial statements. As a result, operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources, such as employees, are made almost exclusively on an IFRS basis (a non-U.S. GAAP financial measure). Accordingly, in accordance with applicable accounting standards, our segment reporting is on an IFRS basis. However, we continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP basis. For additional financial information relating to our businesses and operating segments and a summary of the significant differences between U.S. GAAP and IFRSs as they impact our results, see Note 24, "Business Segments," in the accompanying consolidated financial statements.

Personal Financial Services Segment Through its 477 branches, 117 of which are in New York City, PFS provides banking and wealth products and services, including personal loans, MasterCard¹ and Visa² credit card loans, deposits, branch services and financial planning products and services such as mutual funds, investments and insurance. In recent years, we have expanded our branch network into the states of California, Pennsylvania, Connecticut, Washington, Florida, New Jersey, Maryland, Oregon, Washington, Virginia and the District of Columbia.

Our lead customer proposition, HSBC Premier, is a premium service wealth and relationship banking proposition designed for the internationally minded mass affluent consumer. HSBC Premier provides customers access to a broad selection of local and international banking and wealth products and services that have been tailored to the needs of our HSBC Premier customers. HSBC Premier enables customers to access all their accounts from a single on-line view and includes free international funds transfers between these accounts and access to a range of wealth management solutions. The Premier service is delivered by a personal Premier relationship manager, supported by a 24-hour priority telephone and internet service.

Consumer Finance Segment The CF segment includes point of sale and other lending activities primarily to meet the financial needs of individuals. Specifically, operating activity within the CF segment relates primarily to credit card receivables, including private label credit card receivables, purchased from HSBC Finance. In December 2004, we purchased the portfolio of credit card ("PLCC") receivables originated under HSBC Finance's private label credit card business. In January 2009, we purchased portfolios of credit card receivables originated under HSBC Finance's General Motors MasterCard program and Union Plus MasterCard and Visa credit card program, as well as certain auto finance receivables, from HSBC Finance. We will also purchase additional receivable originations generated under existing and future PLCC, General Motors and Union Plus accounts. In 2010, the purchased auto finance loans were sold to Santander Consumer USA ("SC USA"). Prior to HSBC Finance exiting the Taxpayer Financial Services business in December 2010, the CF segment included lending activities as an originator of refund anticipation loans and checks in support of that program. These activities have historically not had a significant impact on our results of operations.

Commercial Banking Segment In support of HSBC's strategy to be the leader in international banking in target markets, CMB serves the growing number of U.S. companies that are increasingly in need of international banking and financial products and services. CMB offers comprehensive domestic and international services and banking, insurance and investment products to companies, government entities and non-profit organizations, with a particular emphasis on geographical collaboration to meet the banking needs of its international business customers. CMB provides loan and deposit products, payments and cash management services, merchant services, trade and supply chain, corporate finance, global markets and risk advisory products and services to small businesses and middle-market corporations, including specialized products such as real estate financing. CMB also offers various credit and trade related products such as standby facilities, performance guarantees and acceptances. These products and services are offered through multiple delivery systems, including our branch banking network.

Global Banking and Markets Segment 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. 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, we also work with other segments such as PFS, 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:

• 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;

• One of the largest markets businesses of its kind, with 24-hour coverage and knowledge of local markets and providing services in credit and rates, foreign exchange, derivatives, money markets, precious metals trading, cash equities, equity derivatives and securities services; and

• Global asset management solutions for institutions, financial intermediaries and private investors worldwide.

Private Banking Segment PB provides private banking 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. 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.

Regulation and Competition

Regulation We are subject to, among other things, the elements of an extensive statutory and regulatory framework applicable to bank holding companies, financial holding companies and banks. U.S. regulation of banks, bank holding companies and financial holding companies is intended primarily for the protection of depositors, the federal Deposit Insurance Fund and the banking system as a whole rather than the protection of security holders and creditors. Events since early 2008 affecting the financial services industry and, more generally, the financial markets and the economy have led to a significant number of initiatives regarding reform of the financial services industry. The following discussion describes the current regulatory framework in which HSBC USA operates and anticipated changes to that framework.

Financial Regulatory Reform On July 21, 2010, the "Dodd-Frank Wall Street Reform and Consumer Protection Act" ("Dodd-Frank") was signed into law. This legislation is a sweeping overhaul of the financial regulatory system. The new law is comprehensive and includes many provisions specifically relevant to our businesses and the businesses of our affiliates.

For instance, over a transition period from 2013 to 2015, the Federal Reserve Board will apply more stringent capital and risk management requirements on bank holding companies such as HSBC North America, which will require a minimum leverage ratio of five percent and a minimum total risk-based capital ratio of ten percent. The legislation also phases out the use of trust preferred securities for Tier 1 capital treatment by bank holding companies, which may negatively impact our capital ratios.

In order to preserve financial stability in the industry, the legislation has created the Financial Stability Oversight Council which may take certain actions, including precluding mergers, restricting financial products offered, restricting or terminating activities or imposing conditions on activities or requiring the sale or transfer of assets, against any bank holding company with assets greater than $50.0 billion that is found to pose a grave threat to financial stability. Large bank holding companies, such as HSBC North America, will also be required to file resolution plans and identify how insured bank subsidiaries are adequately protected from risk of other affiliates. The Federal Reserve Board will also adopt a series of increased supervisory standards to be followed by large bank holding companies. Additionally, activities of bank holding companies, such as the ability to acquire U.S. banks or to engage in non-banking activities, will be more directly tied to examination ratings of "well-managed" and "well capitalized." There are also provisions in Dodd-Frank that relate to governance of executive compensation, including disclosures evidencing the relationship between compensation and performance and a requirement that some executive incentive compensation is forfeitable in the event of an accounting restatement.

In relation to requirements for bank transactions with affiliates, the legislation, which will be in effect beginning in July 2012, extends current quantitative limits on credit transactions to now include credit exposure related to repurchase agreements, derivatives and securities lending transactions. This provision may limit the use of intercompany transactions between us and our affiliates, which may impact our current funding and hedging strategies.

The legislation has numerous provisions addressing derivatives. There is the imposition of comprehensive regulation of over-the-counter ("OTC") derivatives markets, including credit default and interest rate swaps, as well as limits on FDIC-insured banks' overall OTC derivatives activities. Most of the significant provisions are to be implemented within two to three years of the enactment of the legislation. There is also the requirement for the use of mandatory derivative clearing houses and exchanges, which will significantly change the derivatives industry.

The "Volcker Rule" provisions of the legislation impose certain restrictions and parameters on the ability of covered banking entities, such as HSBC Bank USA and our affiliates, to engage in proprietary trading activities and to sponsor or invest in hedge funds or private equity funds. Rulemaking to implement the provisions of the Volcker Rule has not been completed, and covered banking entities will be granted a certain period of time following the enactment of these rules to conform their activities to the new requirements. We believe the provisions of the Volcker Rule will require changes to the conduct of certain existing businesses.

The legislation also provides for an increase in FDIC insurance assessments on FDIC-insured banks, such as HSBC Bank USA. The FDIC reserve ratio has been increased from 1.15 to 1.35, with the target of 1.35 to be reached by 2020, with the incremental cost charged to banks with more than $10.0 billion in assets. The assessment methodology will be revised to a methodology based on assets, and the change take effect beginning with second quarter 2011 assessments. This shift will have financial implications for all FDIC-insured banks, including HSBC Bank USA.

The legislation has created the Bureau of Consumer Financial Protection (the "CFPB"). The CFPB will be a new independent bureau within the Federal Reserve Board and will act as a single primary Federal consumer protection supervisor to regulate credit, savings, payment and other consumer financial products and services and providers of those products and services. Establishment of the CFPB is underway and the agency expects to be operational as of July 21, 2011. The CFPB will have the authority to issue regulations to prevent unfair, deceptive or abusive practices in connection with consumer financial products or services and to ensure features of any consumer financial products or services are fully, accurately and effectively disclosed to consumers. The CFPB will also have authority to examine large banks, including HSBC Bank USA, and their affiliates for compliance with those regulations.

With respect to certain state laws governing the provision of consumer financial products by national banks such as HSBC Bank USA, the legislation codifies the current judicial standard of federal preemption with respect to national banks, but adds procedural steps which must be followed by the Office of the Comptroller of the Currency ("OCC") when considering preemption determinations after July 21, 2011. Furthermore, the legislation removes the ability of subsidiaries or agents of a national bank to claim federal preemption of consumer financial laws after July 21, 2011, although the legislation does not purport to affect existing contracts. These limitations on federal preemption may elevate our costs of compliance, while increasing litigation expenses as a result of potential Attorney General or plaintiff challenges and the risk of courts not giving deference to the OCC, as well as increasing complexity due to the lack of uniformity in state law. At this time, we are unable to determine the extent to which the limitations on federal preemption will impact our businesses and those of our competitors.

The legislation contains many other consumer-related provisions, including provisions addressing mortgage reform. In the area of mortgage origination, there is a requirement to apply a net tangible benefit test for all refinancing transactions. There are also numerous revised servicing requirements for mortgage loans.

The legislation authorizes the Federal Reserve to implement standards for assessing debit interchange fees that are reasonable and proportionate to the actual processing costs of the issuer. The Federal Reserve recently released proposed regulations that would limit interchange fees to no more than 12 cents per transaction and would, if adopted, result in a substantial reduction in interchange revenue to us.

The legislation will have a significant impact on the operations of many financial institutions in the U.S., including HSBC USA and HSBC Bank USA and our affiliates. As the legislation calls for extensive regulations to be promulgated to interpret and implement the legislation, we are unable to determine precisely the impact that Dodd-Frank and related regulations will have on financial results at this time.

Bank Holding Company Supervision As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended ("BHC Act"), and to inspection, examination and supervision by our primary regulator, the Federal Reserve Board. We are also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the Securities and Exchange Commission (the "SEC").

We have registered as a financial holding company pursuant to the BHC Act and, accordingly, may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. "Financial in nature" activities include securities underwriting, dealing and market making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board, in consultation with the Secretary of the U.S. Treasury, determines from time to time to be financial in nature or incidental to such financial activity. "Complementary activities" are activities that the Federal Reserve determines upon application to be complementary to a financial activity and do not pose a safety and soundness risk.

Because we are a financial holding company, if either of our subsidiary banks fails to maintain a satisfactory rating under the Community Reinvestment Act of 1977, as amended ("CRA"), we would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies, which are limited to activities that are closely related to banking under the BHC Act. In addition, should the Federal Reserve Board determine that either of our subsidiary banks fails to meet applicable capital and management standards, we would be required to enter into an agreement with the Federal Reserve Board to comply with all applicable capital and management requirements (which may contain additional limitations or conditions). Until corrected, we would be prohibited from engaging in the broader range of financial activities permissible for financial holding companies and any new activity or acquisition of companies engaged in activities that are not closely related to banking under the BHC Act would require prior approval of the Federal Reserve Board. If we were to fail to correct any such condition within a prescribed period, the Federal Reserve Board could order us to divest our banking subsidiaries or, in the alternative, to cease engaging in activities other than those closely related to banking under the BHC Act. As of December 31, 2010, our subsidiary banks satisfied the capital, management and CRA requirements necessary to permit us to conduct the broader activities permissible for financial holding companies.

We are generally prohibited under the BHC Act from acquiring, directly or indirectly, ownership or control of more than five percent of any class of voting shares of, or substantially all the assets of, or exercising control over, any U.S. bank, bank holding company or many other types of depository institutions and/or their holding companies without the prior approval of the Federal Reserve Board and, potentially, other U.S. banking regulatory agencies.

The Gramm-Leach-Bliley Act of 1999 ("GLB Act") and the regulations issued thereunder contain a number of other provisions that affect our operations and those of our subsidiary banks. One such provision contained detailed requirements relating to the financial privacy of consumers. In addition, the so-called 'push-out' provisions of the GLB Act removed the blanket exemption from registration for securities activities conducted in banks (including HSBC Bank USA) under the Exchange Act of 1934, as amended. New rules have been published to implement these changes and, when effective, will allow banks to continue to avoid registration as a broker or dealer only if they conduct securities activities that fall within a set of defined exceptions. A narrowed 'dealer' definition took effect in September 2003, and a narrowed 'broker' definition took effect for each bank on the first day of its fiscal year following September 30, 2008. Pursuant to the new regulations, certain securities activities currently conducted by HSBC Bank USA were restructured or transferred to one or more U.S.-registered broker-dealer affiliates effective January 1, 2009.

Our consumer lending businesses operate in a highly regulated environment. In addition to the establishment of the CFPB and the other consumer-related provisions of Dodd-Frank described above, these businesses are subject to laws relating to consumer protection including, without limitation, fair lending, fair debt collection practices, use of credit reports, privacy matters, and disclosure of credit terms and correction of billing errors. Local, state and national regulatory and enforcement agencies continue efforts to address perceived problems within the mortgage lending and credit card industries through broad or targeted legislative or regulatory initiatives aimed at lenders' operations in consumer lending markets. There continues to be a significant amount of legislative activity, nationally, locally and at the state level, designed to limit certain lending practices while mandating servicing activities.

On May 22, 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act") was signed into law and we have implemented all applicable provisions. The CARD Act has required us to make changes to our business practices, and will require us and our competitors to manage risk differently than has historically been the case. Pricing, underwriting and product changes have either been implemented or are under continuing analysis. The implementation of the new rules did not have a material adverse impact on us as any impact is limited to only a portion of the existing credit card loan portfolio as the purchase price on future credit card sales volume paid to HSBC Finance has been adjusted to reflect the new requirements and the impact on future cash flows. See "Segment Results - IFRSs Basis" in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") within this Form 10-K for further discussion of the impact of the CARD Act on our business.

Due to the turmoil in the mortgage lending markets, there has also been a significant amount of federal and state legislative and regulatory focus on this industry. Increased regulatory oversight over residential mortgage lenders has occurred, including through state and federal examinations and periodic inquiries from state attorneys general for information. Several regulators, legislators and other governmental bodies have promoted particular views of appropriate or "model" loan modification programs, suitable loan products and foreclosure and loss mitigation practices. We have developed a modification program that employs procedures which we believe are most responsive to our customers needs and continue to enhance and refine these practices as other programs are announced, and we evaluate the results of our customer assistance efforts. We continue to be active in various home preservation initiatives through participation at local events sponsored by public officials, community leaders and consumer advocates.

State and federal officials are investigating the procedures followed by mortgage servicing companies and banks, including HSBC Bank USA and certain of our affiliates, relating to foreclosures. We and our affiliates have responded to all related inquiries and cooperated with all applicable investigations, including a joint examination by staffs of the Office of the Comptroller of the Currency (the "OCC") and the Federal Reserve Board (the "Federal Reserve") as part of their broad horizontal review of industry foreclosure practices. Following the examination, the OCC issued a supervisory letter to HSBC Bank USA noting certain deficiencies in the processing, preparation and signing of affidavits and other documents supporting foreclosures and in governance of and resources devoted to our foreclosure processes, including the evaluation and monitoring of third party law firms retained to effect our foreclosures. Certain other processes were deemed adequate. The Federal Reserve issued a similar supervisory letter to HSBC Finance and HSBC North America. We have suspended foreclosures until such time as we have substantially addressed the noted deficiencies in our processes. We are also reviewing foreclosures where judgment has not yet been entered and will correct deficient documentation and re-file affidavits where necessary. See "Executive Overview" in MD&A for further discussion.

We and our affiliates are engaged in discussions with the OCC and the Federal Reserve regarding the terms of consent cease and desist orders, which will prescribe actions to address the deficiencies noted in the joint examination. We expect the consent orders will be finalized shortly after the date this Form 10-K is filed. While the impact of the OCC consent order on HSBC Bank USA depends on the final terms, we believe it has the potential to increase our operational, reputational and legal risk profiles and expect implementation of its provisions will require significant financial and managerial resources. In addition, the consent orders will not preclude further actions against HSBC Bank USA or our affiliates by bank regulatory or other agencies, including the imposition of fines and civil money penalties. We are unable at this time, however, to determine the likelihood of any further action or the amount of penalties or fines, if any, that may be imposed by the regulators or agencies.

As a result of publicized foreclosure practices of certain servicers, certain courts have issued new rules relating to foreclosures and we anticipate that scrutiny of foreclosure documentation and practices, including practices of foreclosure law firms, will increase. In some areas, court officials are requiring additional verification of information filed prior to the foreclosure proceeding. If these trends continue after we have reinstituted foreclosures, there could be additional delays in the processing of foreclosures.

Supervision of Bank Subsidiaries Our subsidiary national banks, HSBC Bank USA and HTCD, are subject to regulation and examination primarily by the Office of the Comptroller of the Currency ("OCC"), secondarily by the FDIC, and by the Federal Reserve. HSBC Bank USA and HTCD are subject to banking laws and regulations that place various restrictions on and requirements regarding their operations and administration, including the establishment and maintenance of branch offices, capital and reserve requirements, deposits and borrowings, investment and lending activities, compliance activities, payment of dividends and numerous other matters.

Federal law imposes limitations on the payment of dividends by national banks. Dividends payable by HSBC Bank USA and HTCD are limited to the lesser of the amounts calculated under a "recent earnings" test and an "undivided profits" test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year's net income combined with the retained net income of the two preceding years, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may not be paid in excess of a bank's undivided profits account. In addition, the OCC, the Federal Reserve Board, and the FDIC have authority to prohibit or to limit the payment of dividends by the banking organizations they supervise, including HSBC USA and HSBC Bank USA, if they would consider payment of such dividend to constitute an unsafe or unsound practice in light of the financial condition of the banking organization. HSBC Bank USA is also required to maintain reserves in the form of vault cash and deposits with the Federal Reserve Bank.

HSBC Bank USA and HTCD are subject to certain restrictions imposed by federal law on extensions of credit to, and certain other "covered transactions" with, HSBC USA or 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. Unless an exemption applies, or a specific waiver is granted by the Federal Reserve Board, covered transactions by a bank with a single affiliate are limited to 10 percent of the bank's capital and surplus, and all covered transactions with affiliates in the aggregate are limited to 20 percent of the bank's capital and surplus. Where HSBC USA or another HSBC affiliate provides cash collateral for an extension or credit to an affiliate, that loan would be excluded from the 10 and 20 percent limitations. Loans and extensions of credit to affiliates by a bank generally are required to be secured in specified amounts with specific types of collateral. Starting July 2012, a bank's credit exposure to an affiliate as a result of a derivative, securities lending or repurchase transaction, will be subject to these limits. A bank's transactions with its non-bank affiliates are also generally required to be on arm's length terms.

The types of activities in which the non-U.S. branches of HSBC Bank USA may engage are subject to various restrictions imposed by the Federal Reserve Board. These branches are also subject to the laws and regulatory authorities of the countries in which they operate.

Under current Federal Reserve Board policy, HSBC USA is expected to act as a source of financial and managerial strength to its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank in circumstances where it might not do so absent such policy.

Regulatory Capital Requirements As a bank holding company, we are subject to regulatory capital requirements and guidelines imposed by the Federal Reserve Board, which are substantially similar to those imposed by the OCC and the FDIC on banks such as HSBC Bank USA and HTCD. A bank or bank holding company's failure to meet minimum capital requirements can result in certain mandatory actions and possibly additional discretionary actions by its regulators. Under current capital guidelines, a bank or a bank holding company's assets and certain specified off-balance sheet commitments and obligations are assigned to various risk categories. A bank or bank holding company's capital, in turn, is classified into one of three tiers. Tier 1 capital includes common equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock at the holding company level, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other deductions. Tier 2 capital includes, among other things, perpetual preferred stock not qualified as Tier 1 capital, subordinated debt, and allowances for loan and lease losses, subject to certain limitations. Tier 3 capital includes qualifying unsecured subordinated debt. At least one-half of a bank's total capital must qualify as Tier 1 capital. To be categorized as "well capitalized," a banking institution must have the minimum ratios reflected in the table included in Note 25, "Retained Earnings and Regulatory Capital Requirements" of the consolidated financial statements and must not be subject to a directive, order or written agreement to meet and maintain specific capital levels. The federal bank regulatory agencies may, however, set higher capital requirements for an individual bank or when a bank's particular circumstances warrant. The Federal Reserve Board may also set higher capital requirements for bank holding companies whose circumstances warrant it. As part of the regulatory approvals with respect to the credit card and auto receivable portfolio purchases completed in January 2009, HSBC USA and its ultimate parent, HSBC, committed, among other things, that HSBC Bank USA will hold sufficient capital with respect to the purchased receivables that are or become "low-quality assets," as defined by the Federal Reserve Act. See Note 25, "Retained Earnings and Regulatory Capital Requirements," in the consolidated financial statements for further discussion.

In December 2007, U.S. regulators published a final rule regarding Risk-Based Capital Standards: Advanced Capital Adequacy Framework - Basel II. This final rule represents the U.S. adoption of the Basel II International Capital Accord ("Basel II"). The final rule became effective April 1, 2008, and requires large bank holding companies, including HSBC North America, to adopt its provisions subject to regulatory approval no later than April 1, 2011, in accordance with current regulatory timelines. HSBC North America has established a comprehensive Basel II infrastructure. The formal adoption of Basel II will impact our capital requirements as well as those of HSBC North America. As a result, HSBC North America and its subsidiaries took a series of actions in 2010 to achieve targeted total capital levels under these new regulations, including the issuance by HSBC USA and HSBC Bank USA of collectively $2.0 billion in additional subordinated debt. Further increases in regulatory capital may be required prior to HSBC North America's Basel II adoption date. The exact amount of additional capital required, however, will depend upon both our prevailing risk profile and that of our North America affiliates under various stress scenarios.

HSBC North America and HSBC USA also continue to support the HSBC implementation of the Basel II framework, as adopted by the U.K. Financial Services Authority ("FSA"). We supply data regarding credit risk, operational risk and market risk to support HSBC's regulatory capital and risk weighted asset calculations. Revised FSA capital adequacy rules for HSBC became effective January 1, 2008.

In December 2010, the Basel Committee on Banking Supervision (the "Basel Committee") issued final rules on "A global regulatory framework for more resilient banks and banking systems," commonly referred to as Basel III, which presents details of a bank capital and liquidity reform program to address both firm-specific and broader, systemic risks to the banking sector. HSBC North America is in the process of evaluating the Basel III framework for liquidity risk management. Although the Basel Committee has issued guidance, we are still awaiting formal instructions as to how the ratios will be calculated by the U.S. regulators. The proposals include both a Liquidity Coverage Ratio ("LCR") designed to ensure banks have sufficient high-quality liquid assets to survive a significant stress scenario lasting 30 days and a Net Stable Funding Ratio ("NSFR") with a time horizon of one year to ensure a sustainable maturity structure of assets and liabilities. For both ratios, HSBC North America will be expected to achieve a ratio of 100 percent or better. The observation period for the ratios begins in 2012 with LCR introduced by 2015 and NSFR by 2018. Based on the results of the observation periods, the Basel Committee and the regulators may make further changes by 2013 and 2016 for LCR and NSFR, respectively. We anticipate meeting these requirements well in advance of their formal introduction. HSBC USA may need to increase its liquidity profile to support HSBC North America's compliance with the new rules. We are unable at this time, however, to determine the extent of changes HSBC USA will need to make to its liquidity position, if any.

In addition, U.S. bank regulatory agencies have maintained the 'leverage' regulatory capital requirements that generally require United States banks and bank holding companies to maintain a minimum amount of capital in relation to their balance sheet assets (measured on a non-risk-weighted basis).

Our capital resources are summarized under "Liquidity and Capital Resources" in MD&A. Capital amounts and ratios for HSBC USA and HSBC Bank USA are summarized in Note 25, "Retained Earnings and Regulatory Capital Requirements" of the consolidated financial statements. From time to time, bank regulators propose amendments to or issue interpretations of risk-based capital guidelines. Such proposals or interpretations could, upon implementation, affect reported capital ratios and net risk weighted assets.

Deposit Insurance Deposits placed at HSBC Bank USA and HTCD are insured by the FDIC, subject to the limitations and conditions of applicable law and the FDIC's regulations. In 2009, FDIC insurance coverage limits were increased temporarily from $100,000 to $250,000 per depositor and this increased limit was made permanent on July 21, 2010. Beginning on December 31, 2010 and continuing through December 31, 2012, Dodd-Frank requires FDIC insurance for deposits exceeding $250,000 in noninterest-bearing transaction accounts. HSBC Bank USA and HTCD are subject to risk-based assessments from the FDIC. Currently, depository institutions subject to assessment are categorized based on supervisory ratings, financial ratios and, in the case of larger institutions, long-term debt issuer ratings, with those in the highest rated categories paying lower assessments. While the assessments are generally payable quarterly, the FDIC also has the authority to impose special assessments to prevent the deposit insurance fund from declining to an unacceptable level. Pursuant to this authority, the FDIC imposed a 5 basis point special assessment on June 30, 2009. In November 2009, the FDIC amended its regulations to require depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 on or before December 30, 2009. Beginning with the second quarter 2011, FDIC assessments will be based on average consolidated total assets and risk profile, but we estimate that the change in assessment base will not increase our FDIC assessment materially.

Bank Secrecy Act/Anti-Money Laundering The USA Patriot Act (the "Patriot Act"), effective October 26, 2001, imposed significant record keeping and customer identity requirements, expanded the government's powers to freeze or confiscate assets and increased the available penalties that may be assessed against financial institutions for violation of the requirements of the Patriot Act intended to detect and deter money laundering. The Patriot Act required the U.S. Treasury Secretary to develop and adopt final regulations with regard to the anti-money laundering ("AML") compliance obligations of financial institutions (a term which includes insured U.S. depository institutions, U.S. branches and agencies of foreign banks, U.S. broker-dealers and numerous other entities). The U.S. Treasury Secretary delegated certain authority to a bureau of the U.S. Treasury Department known as the Financial Crimes Enforcement Network ("FinCEN").

Many of the anti-money laundering compliance requirements of the Patriot Act, as implemented by FinCEN, are generally consistent with the anti-money laundering compliance obligations that applied to HSBC Bank USA under the Bank Secrecy Act ("BSA") and applicable Federal Reserve Board regulations before the Patriot Act was adopted. These include requirements to adopt and implement an anti-money laundering program, report suspicious transactions and implement due diligence procedures for certain correspondent and private banking accounts. Certain other specific requirements under the Patriot Act involve compliance obligations. The Patriot Act has improved communication between law enforcement agencies and financial institutions. The Patriot Act and other recent events have also resulted in heightened scrutiny of the Bank Secrecy Act and anti-money laundering compliance programs by bank regulators.

As previously disclosed, 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 Board in the first week of October 2010. These actions require improvements for an effective compliance risk management program across our U.S. businesses, including BSA and AML compliance. HSBC USA Inc. is committed to fully addressing the requirements of the consent orders, and to maintaining compliant and effective BSA and AML policies and procedures, and efforts to strengthen related functions will continue.

Competition Following the enactment of the GLB Act, HSBC USA elected to be treated as a financial holding company. The GLB Act also eliminated many of the regulatory restrictions on providing financial services. The GLB Act allows for financial institutions and other providers of financial products to enter into combinations that permit a single organization to offer a complete line of financial products and services. Therefore, we face intense competition in all of the markets we serve, competing with both other financial institutions and non-banking institutions such as insurance companies, major retailers, brokerage firms and investment companies. The financial services industry has experienced consolidation in recent years as financial institutions involved in a broad range of products and services have merged, been acquired or dispersed. This trend is expected to continue and has resulted in, among other things, greater concentrations of deposits and other resources. It is likely that competition will become more intense as our businesses compete with other financial institutions that have or may acquire access to greater liquidity or that may have a stronger presence in certain geographies.

Corporate Governance and Controls

We maintain a website at www.us.hsbc.com on which we make available, as soon as reasonably practicable after filing with or furnishing to the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports. Our website also contains our Corporate Governance Standards and committee charters for the Audit and Risk Committee, the Compliance Committee and the Fiduciary Committees of our Board of Directors. We have a Statement of Business Principles and Code of Ethics that expresses the principles upon which we operate our businesses. Integrity is the foundation of all our business endeavors and is the result of continued dedication and commitment to the highest ethical standards in our relationships with each other, with other organizations and individuals who are our customers. Our Statement of Business Principles and Code of Ethics can be found on our corporate website. We also have a Code of Ethics for Senior Financial Officers that applies to our finance and accounting professionals that supplements the Statement of Business Principles. That Code of Ethics is incorporated by reference in Exhibit 14 to this Form 10-K. Printed copies of this information can be requested at no charge. Requests should be made to HSBC USA Inc., 26525 North Riverwoods Boulevard, Mettawa, Illinois 60045, Attention: Corporate Secretary.

Certifications In addition to certifications from our Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (attached to this report on Form 10-K as Exhibits 31 and 32), we also file a written affirmation of an authorized officer with the New York Stock Exchange (the "NYSE") certifying that such officer is not aware of any violation by HSBC USA of the applicable NYSE corporate governance listing standards in effect as of February 28, 2011.

Cautionary Statement on Forward-Looking Statements

Certain matters discussed throughout this Form 10-K constitute forward-looking statements 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 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 was 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. We undertake no obligation to update any forward-looking statement to reflect subsequent circumstances or events.

Item 1A. Risk Factors

The following discussion provides a description of some of the important risk factors that could affect our actual results and could cause our results to vary materially from those expressed in public statements or documents. However, other factors besides those discussed below or elsewhere in other of our reports filed or furnished with the SEC could affect our business or results. The reader should not consider any description of such factors to be a complete set of all potential risks that we may face.

The current uncertain market and economic conditions may continue to affect our business, results of operations and financial condition. Our business and earnings are affected by general business, economic and market conditions in the United States and abroad. Given our concentration of business activities in the United States, we are particularly exposed to any additional turmoil in the economy, housing downturns, high unemployment, tighter credit conditions and reduced economic growth that have occurred over the past three years and appear likely to continue in 2011. General business, economic and market conditions that could continue to affect us include:

• low consumer confidence and reduced consumer spending;

• a "double dip" recession;

• unemployment levels;

• wage income levels and declines in wealth;

• market value of residential and commercial real estate throughout the United States;

• inflation;

• monetary supply;

• fluctuations in both debt and equity capital markets in which we fund our operations;

• unexpected geopolitical events;

• fluctuations in the value of the U.S. dollar;

• short-term and long-term interest rates;

• availability of liquidity;

• tight consumer credit conditions;

• higher bankruptcy filings; and

• new laws, regulations or regulatory initiatives.

In a challenging economic environment such as currently being experienced in the United States, more of our customers are likely to, and have in fact become, delinquent on their loans or other obligations as compared to historical periods as many of our customers are experiencing reductions in cash flow available to service their debt. These delinquencies, in turn, have adversely affected our earnings. The problems in the housing markets in the United States in the last four years have been exacerbated by continued high unemployment rates. If businesses remain cautious to hire, additional losses are likely to be significant in all types of our consumer loans, including credit cards, due to decreased consumer income.

Although during the first half of 2010, housing prices began to stabilize and even recover in certain markets, housing prices started to decline again in the later half of 2010. If housing prices continue to decline, there may be increased delinquency and losses in our real estate portfolio.

Mortgage lenders have substantially tightened lending standards. These actions have impacted borrowers' abilities to refinance existing mortgage loans. This in turn, impacted both credit performance and run-off rates and has resulted in elevated delinquency rates for real estate secured loans in our portfolio. Additionally, the high levels of inventory of homes for sale combined with depressed property values in many markets has resulted in higher loss severities on homes that are foreclosed and remarketed. Despite our cessation in processing foreclosures in December, our inventory of foreclosed properties ("REO") continued to increase.

In the event economic conditions continue to be depressed or become further depressed and lead to a "double dip" recession, there would be a significant negative impact on delinquencies, charge-offs and losses in all loan portfolios with a corresponding impact on our results of operations.

We may incur additional costs and expenses relating to mortgage loan repurchases and other mortgage loan securitization - related activities. In connection with our loan sale and securitization activities with Fannie Mae and Freddie Mac (the "Government Sponsored Entities" or "GSEs") and loan sale and private-label securitization transactions, HUSI has made representations and warranties that the loans sold meet certain requirements. For transactions with the GSEs, these representations include type of collateral, underwriting standards, validity of certain borrower representations in connection with the loan, that primary mortgage insurance is in force for any mortgage loan with a loan-to-value ratio ("LTV") greater than 80 percent, and the use of the GSEs' standard legal documentation. We may be, and have been, required to repurchase loans and/or indemnify the GSEs and other private investors for losses due to breaches of these representations and warranties. Substantially all of the repurchase demands we have resolved to date, however, are related to loans sold to the GSEs.

In estimating our repurchase liability arising from breaches of representations and warranties, we consider several factors, including the level of outstanding repurchase demands in inventory and our historical defense rate, the level of outstanding demands for loan files and the related historical repurchase request conversion rate and defense rate, and the level of potential future demands based on historical conversion rates of loans which we have not received a repurchase demand. While we believe that our current repurchase liability reserves are adequate, the factors referred to above are subject to change in light of market developments, the economic environment and other circumstances, some of which are beyond our control and, accordingly, there can be no assurance that such reserves will not need to be increased in the future.

We have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by our affiliate, HSBC Securities (USA) Inc. ("HSI"). 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 inquires, which have been directed at groups within the U.S. mortgage market, such as servicers, originators, trustees or sponsors of securitizations, and at particular participants within these groups. We expect this level of focus will continue and, potentially, intensify, so long as the U.S. real estate markets continue to be distressed. As a result, we may be subject to additional litigation and governmental and regulatory scrutiny related to our participation in the U.S. mortgage securitization market, either individually or as a member of group. For additional discussion, see the caption "Mortgage Loan Repurchase Obligations" in Note 27, "Guarantee Arrangements," in the accompanying consolidated financial statements.

We may incur additional costs and expenses in ensuring that we satisfy requirements relating to our mortgage foreclosure processes and the industry-wide delay in processing foreclosures may have a significant impact upon loss severity. State and federal officials are investigating the procedures followed by mortgage servicing companies and banks, including HSBC Bank USA and certain of our affiliates, relating to foreclosures. We and our affiliates have responded to all related inquiries and cooperated with all applicable investigations, including a joint examination by staffs of the OCC and the Federal Reserve as part of their broad horizontal review of industry foreclosure practices. Following the examination, the OCC issued a supervisory letter to HSBC Bank USA noting certain deficiencies in the processing, preparation and signing of affidavits and other documents supporting foreclosures and in governance of and resources devoted to our foreclosure processes, including the evaluation and monitoring of third party law firms retained to effect our foreclosures. Certain other processes were deemed adequate. The Federal Reserve issued a similar supervisory letter to HSBC Finance and HSBC North America. We have suspended foreclosures until such time as we have substantially addressed the noted deficiencies in our processes. We are also reviewing foreclosures where judgment has not yet been entered and will correct deficient documentation and re-file affidavits where necessary.

We expect to incur additional costs and expenses in connection with the correction or affirmation of previously-filed foreclosure paperwork and the resulting delays in foreclosures, including costs associated with the maintenance of properties while foreclosures are delayed, legal expenses associated with re-filing documents or, as necessary, re-filing foreclosure cases, and costs associated with fluctuations in home prices while foreclosures are delayed. These costs could increase depending on the length of the delay. In addition, we may incur additional costs and expenses as a result of legislative, administrative or regulatory investigations or actions relating to our foreclosure processes or with respect to the mortgage servicing industry in general. We may also see an increase in private litigation concerning our practices. However, it is not possible at this time to predict the ultimate outcome of these matters or the impact that they will have on our financial results.

Due to the significant slow-down in foreclosures, and in some instances, cessation of all foreclosure processing by numerous loan servicers, including us, for some period of time in 2011 there may be some reduction in the number of properties being marketed following foreclosure. The impact of that decrease may increase demand for properties currently on the market resulting in a stabilization of home prices but could also result in a larger number of vacant properties in communities creating downward pressure on general property values. As a result, the short term impact of the foreclosure processing delay is highly uncertain. However, the longer term impact is even more uncertain as eventually servicers will again begin to foreclose and market properties in large numbers which is likely to create a significant over-supply of housing inventory. This could lead to a significant increase in loss severity on REO properties.

Recently implemented Federal and state laws and regulations may significantly impact our operations. We operate in a highly regulated environment. Changes in federal, state and local laws and regulations, including changes in tax rates, affecting banking, consumer credit, bankruptcy, privacy, consumer protection or other matters could materially impact our performance. Ensuring compliance with increasing regulatory requirements and initiatives could affect operational costs and negatively impact our overall results. Specifically, attempts by local, state and national regulatory agencies to address perceived problems with the credit card industry and more recently, to additionally address perceived problems in the financial services industry generally through broad or targeted legislative or regulatory initiatives aimed at lenders' operations in consumer lending markets, could affect us in substantial and unpredictable ways, including limiting the types of products we can offer, how these products may be originated, the fees and charges that may be applied to accounts and how accounts may be collected or security interests enforced, which ultimately could negatively impact our results. There is also significant focus on loss mitigation and foreclosure activity for real estate loans. We cannot fully anticipate the response by national regulatory agencies, state attorneys generals, or certain legislators, or if significant changes to our operations and practices will be required as a result.

On July 21, 2010, the "Dodd-Frank Wall Street Reform and Consumer Protection Act," a sweeping overhaul of the financial services industry, was signed into law. For a description of the law, see the "Regulation - Financial Regulatory Reform" section under the "Regulation and Competition" section of Item 1. Business. The law will have significant impact on the operations of financial institutions in the U.S., including HSBC USA, HSBC Bank USA and our affiliates. We are unable at this time, however, to determine the full impact of the law due to the significant number of new rules and regulations that will be promulgated in order to implement the law. Also, specifically and of utmost relevance to our consumer business, we do not know what will be the far-reaching effect on our business of the newly created Consumer Financial Protection Bureau ("CFPB"), since the CFPB has been given broad based authority over consumer products and services such as those provided by our consumer businesses.

On May 22, 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 was signed into law and we have implemented all of its applicable provisions. The CARD Act required changes to our business practices, and will require us and our competitors to manage risk differently than has historically been the case. Pricing, underwriting and product changes have either been implemented or are under continuing analysis. The implementation of these new rules did not have a material adverse impact to us as any impact is limited to only a portion of the existing credit card loan portfolio as the purchase price on future credit card sales volume paid to HSBC Finance has been adjusted to fully reflect the new requirements and the impact on future cash flows.

The transition to Basel II in 2011 will continue to put significant pressure on regulatory capital. Subject to regulatory approval, HSBC North America will be required to adopt Basel II provisions no later than April 1, 2011, in accordance with current regulatory timelines. HSBC USA Inc. will not report separately under the new rules, but HSBC Bank USA will report under the new rules on a stand-alone basis. Further increases in regulatory capital may be required prior to the Basel II adoption date; however, the exact amount will depend upon our prevailing risk profile and that of our North America affiliates under various stress scenarios. Adoption of the Basel II provisions must be preceded by a parallel run period of at least four quarters, and requires the approval of U.S. regulators. This parallel run, which was initiated in January 2010, encompasses enhancements to a number of risk policies, processes and systems to align HSBC Bank USA with the Basel II final rule requirements. HSBC Bank USA will seek regulatory approval for adoption when the program enhancements have been completed which may extend beyond April 1, 2011.

Operational risks, such as systems disruptions or failures, breaches of security, human error, changes in operational practices or inadequate controls may adversely impact our business and reputation. Operational risk is inherent in virtually all of our activities. While we have established and maintain an overall risk framework that is designed to balance strong corporate oversight with well-defined independent risk management, we continue to be subject to some degree of operational risk. Our businesses are dependent on our ability to process a large number of complex transactions. If any of our financial, accounting, or other data processing and other recordkeeping systems and management controls fail or have other significant shortcomings, we could be materially adversely affected. HSBC North America will continue the implementation of several high priority systems improvements and enhancements in 2011, each of which may present increased or additional operational risk that may not be known until their implementation is complete. Also, in order to react quickly to newly-implemented regulatory requirements, implementation of changes to systems and enhancements may be required to be completed within very tight time frames, which would increase operational risk.

We may also be subject to disruptions of our operating systems infrastructure arising from events that are wholly or partially beyond our control, which may include:

• computer viruses or electrical or telecommunications outages;

• natural disasters, such as hurricanes and earthquakes;

• events arising from local, regional or international politics, including terrorist acts;

• unforeseen problems encountered while implementing major new computer systems; or

• global pandemics, which could have a significant effect on our business operations as well as on HSBC affiliates world-wide.

Such disruptions may give rise to losses in service to customers, an inability to collect our receivables in affected areas and other loss or liability to us.

We are similarly dependent on our employees. We could be materially adversely affected if an employee causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. Third parties with which we do business could also be sources of operational risk to us, including risks relating to break-downs or failures of such parties' own systems or employees. Any of these occurrences could result in diminished ability by us to operate one or more of our businesses, potential liability to clients, reputational damage and regulatory intervention, all of which could materially adversely affect us. In a company as large and complex as ours, lapses or deficiencies in internal control over financial reporting are likely to occur from time to time.

In recent years, instances of identity theft and fraudulent attempts to obtain personal and financial information from individuals and from companies that maintain such information pertaining to their customers have become more prevalent. Use of the internet for these purposes has also increased. Such acts can have the following possible impacts:

• threaten the assets of our customers;

• negatively impact customer credit ratings;

• impact customers' ability to repay loan balances;

• increase costs for us to respond to such threats and to enhance our processes and systems to ensure maximum security of data; or

• damage our reputation from public knowledge of intrusion into our systems and databases.

In addition, there is the risk that our controls and procedures as well as business continuity and data security systems could prove to be inadequate. Any such failure could affect our operations and could have a material adverse effect on our results of operations by requiring us to expend significant resources to correct the defect, as well as by exposing us to litigation or losses not covered by insurance.

Changes to operational practices from time to time could materially positively or negatively impact our performance and results. Such changes may include:

• raising the minimum payment or fees to be charged on credit card accounts;

• determining to acquire or sell credit card receivables, residential mortgage loans and other loans;

• changes to our customer account management and risk management/collection policies and practices;

• increasing investment in technology, business infrastructure and specialized personnel; or

• outsourcing of various operations.

Competition in the financial services industry may have a material adverse impact on our future results. We operate in a highly competitive environment. Competitive conditions are expected to continue to intensify as continued merger activity in the financial services industry produces larger, better-capitalized and more geographically diverse companies. New products, customers and channels of distribution are constantly emerging. Such competition may impact the terms, rates, costs and/or profits historically included in the financial products we offer and purchase. There is no assurance that the significant and increasing competition within the financial services industry will not materially adversely affect our future results.

Lawsuits and regulatory investigations and proceedings may continue and increase in the current economic and regulatory environment. HSBC USA and our subsidiaries are or may be named as defendants in various legal actions, including class actions and other litigation or disputes with third parties, as well as investigations or proceedings brought by regulatory agencies. We saw continued litigation in 2010 resulting from the deterioration of customers' financial condition, the mortgage market downturn and general economic conditions. There is no certainty that the litigation will decrease in the near future, especially in the event of continued high unemployment rates, a resurgent recession or additional regulatory investigations by federal and state governmental agencies. With the increased regulatory environment, particularly in the financial services industry, there may be additional regulatory investigations and reviews conducted by banking regulators, state attorneys general or state regulators which may cause financial or reputational harm. With the increased regulatory environment, particularly in the financial services industry, there may be additional regulatory investigations and reviews conducted by regulators and other enforcement agencies that, if determined adversely, may result in judgments, settlements, fines, penalties or other results, including additional compliance requirements, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm.

Unanticipated risks may impact our results. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems, including models and programs that predict loan delinquency and loss. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques and prepare contingency plans in anticipation of developments, those techniques and plans and the judgments that accompany their application are complex and cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Accordingly, our ability to successfully identify and manage all significant risks we face is an important factor that can significantly impact our results.

Our inability to meet funding requirements due to deposit attrition or ratings could impact operations. Adequate liquidity is critical to our ability to operate our businesses. Despite the apparent improvements in market liquidity and our liquidity position, potential conditions remain that would negatively affect our liquidity, including:

• an inability to attract or retain deposits;

• diminished access to capital markets;

• unforeseen cash or capital requirements;

• an inability to sell assets; and

• an inability to obtain expected funding from HSBC subsidiaries and clients.

HSBC has provided capital support in the past and has indicated its commitment and capacity to fund the needs of the business in the future.

Our credit ratings are an important part of maintaining our liquidity. Any downgrade in credit ratings could potentially increase borrowing costs, impact the ability to issue commercial paper and, depending on the severity of the downgrade, substantially limit access to capital markets, require cash payments or collateral posting, and permit termination of certain significant contracts.

Management projections, estimates and judgments based on historical performance may not be indicative of our future performance. Our management is required to use certain estimates in preparing our financial statements, including accounting estimates to determine loan loss reserves, reserves related to litigation, deferred tax assets and the fair market value of certain assets and liabilities, including goodwill and intangibles, among other items. Loan loss reserve estimates and certain asset and liability valuations are judgmental and are influenced by factors outside our control. To the extent historical averages of the progression of loans into stages of delinquency and the amount of loss realized upon charge-off are not predictive of future losses and management is unable to accurately evaluate the portfolio risk factors not fully reflected in historical models, unexpected additional losses could result. Similarly, to the extent assumptions employed in measuring fair value of assets and liabilities not supported by market prices or other observable parameters do not sufficiently capture their inherent risk, unexpected additional losses could result.

Another example in which management judgment is significant is in the evaluation of the recognition of deferred tax assets and in the determination of whether there is a need for a related valuation allowance. We are required to establish a valuation allowance for deferred tax assets and record a charge to income or shareholders' equity if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC as a necessary part of such plans and strategies. This process involves significant management judgment about assumptions that are subject to change from period to period. The recognition of deferred tax assets requires management to make significant judgments about future earnings, the periods in which items will impact taxable income, and the application of inherently complex tax laws. However, since market conditions have created losses in HSBC North America in recent periods and volatility on our pre-tax book income, the analysis of the realizability of the deferred tax asset significantly discounts any future taxable income expected from continuing operations and relies to a greater extent on continued capital support from our parent, HSBC, including tax planning strategies implemented in relation to such support. Included in our forecasts are assumptions regarding our estimate of future expected credit losses. The use of different estimates can result in changes in the amounts of deferred tax items recognized, which can result in equity and earnings volatility because such changes are reported in current period earnings. See Note 18, "Income Taxes," in the accompanying consolidated financial statements for additional discussion of our deferred taxes/assets.

Changes in accounting standards are beyond our control and may have a material impact on how we report our financial results and condition. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board ("FASB"), the International Accounting Standards Board ("IASB"), the SEC and our bank regulators, including the Office of Comptroller of the Currency and the Federal Reserve Board, change the financial accounting and reporting standards, or the interpretation thereof, and guidance that govern the preparation and disclosure of external financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report and disclose our financial results and condition, including our segment results. We could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts. We may, in certain instances, change a business practice in order to comply with new or revised standards.

Key employees may be difficult to retain due to contraction of the business and limits on promotional activities. Our employees are our most important resource and, in many areas of the financial services industry, competition for qualified personnel is intense. If we were unable to continue to attract and retain qualified key employees to support the various functions of our businesses, our performance, including our competitive position, could be materially adversely affected. Our recent financial performance, reductions in variable compensation and other benefits and the expectation of continued weakness in the general economy could raise concerns about key employees' future compensation and promotional opportunities. As economic conditions improve, there will be increased risk to retaining top performers and critical skill employees. If key personnel were to leave us and equally knowledgeable or skilled personnel are unavailable within HSBC or could not be sourced in the market to fill these roles, our ability to manage through the difficult economy may be hindered or impaired.

Our reputation has a direct impact on our financial results and ongoingoperations. Our ability to attract and retain customers and conduct business transactions with our counterparties could be adversely affected to the extent our reputation, or the reputation of affiliates operating under the HSBC brand, is damaged. Our failure to address, or to appear to fail to address, various issues that could give rise to reputational risk could cause harm to us and our business prospects. Reputational issues include, but are not limited to:

• appropriately addressing potential conflicts of interest;

• legal and regulatory requirements;

• ethical issues;

• anti-money laundering and economic sanctions programs;

• privacy issues;

• fraud issues;

• data security issues related to our customers or employees;

• recordkeeping;

• sales and trading practices;

• the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our businesses; and

• general company performance.

The failure to address these issues appropriately could make our customers unwilling to do business with us or give rise to increased regulatory action, which could adversely affect our results of operations.

Significant reductions in pension assets may require additional financial contributions from us. Effective January 1, 2005, our previously separate qualified defined benefit pension plan was combined with that of HSBC Finance's into a single HSBC North America qualified defined benefit plan. We are responsible for providing approximately 41 percent of the financial support required by the plan. In 2010 and 2009, the plan had allocated assets between three primary strategies: domestic equities, international equities and fixed income securities. At December 31, 2010, plan assets were lower than projected plan liabilities resulting in an under-funded status. During 2010, domestic and international equity indices increased between 11 percent and 17 percent while interest rates decreased. After expenses, the combination of positive equity returns and fixed income returns along with a $187 million contribution to the plan by HSBC North America in 2010 resulted in an overall increase in plan assets of 20 percent in 2010. This increase, when combined with an increase in the projected benefit obligation continued to result in an under-funded status. At December 31, 2010, the defined benefit plan was frozen, significantly reducing future benefit accruals. The accumulated benefit obligation exceeded the fair value of the plan assets by approximately $820 million. As these obligations relate to the HSBC North America pension plan, only a portion of this deficit should be considered our responsibility. We and other HSBC North American affiliates with employees participating in this plan will be required to make up this shortfall over a number of years as specified under the Pension Protection Act. This can be accomplished through direct contributions, appreciation in plan assets and/or increases in interest rates resulting in lower liability valuations. See Note 22, "Pension and Other Postretirement Benefits," in the accompanying consolidated financial statements for further information concerning the HSBC North America defined benefit plan.

The inability to integrate business and portfolio acquisitions successfully could undermine the realization of the anticipated benefits of the acquisition and have a material adverse impact on our results of operation. We have in the past, and may again in the future, seek to grow our business by acquiring other businesses or loan portfolios. There can be no assurance that acquisitions will have the anticipated positive results, including results relating to:

• the total cost of integration;

• the time required to complete the integration;

• the amount of longer-term cost savings; or

• the overall performance of the combined entity.

Integration of an acquired business can be complex and costly, and may sometimes include combining relevant accounting, data processing and other record keeping systems and management controls, as well as managing relevant relationships with clients, suppliers and other business partners, as well as with employees.

There is no assurance that any businesses or portfolios acquired in the future will be successfully integrated and will result in all of the positive benefits anticipated. If we are not able to successfully integrate acquisitions, there is the risk that its results of operations could be materially and adversely affected.

Item 1B. Unresolved Staff Comments.

We have no unresolved written comments from the Securities and Exchange Commission Staff that have been outstanding for more than 180 days at December 31, 2010.

Item 2. Properties.

The principal executive offices of HSBC USA and HSBC Bank USA are located at 452 Fifth Avenue, New York, New York 10018, which HSBC Bank USA owned until April 2010. In April 2010, HSBC Bank USA sold our headquarters building at 452 Fifth Avenue and entered into a lease for the entire building for one year and eleven floors of the building for a total of 10 years. The main office of HSBC Bank USA is located at 1800 Tysons Blvd., Suite 50, McLean, Virginia 22102. HSBC Bank USA has 370 branches in New York, 36 branches in California, 18 branches in Florida, 21 branches in New Jersey, 10 branches in Connecticut, six branches in Virginia, seven branches in Maryland and the District of Columbia, four branches in Washington, two branches in Pennsylvania and one branch in each of Delaware, Illinois, and Oregon. We also have one representative office each in Massachusetts and Texas. Approximately 26 percent of these offices are located in buildings owned by HSBC Bank USA and the remaining are located in leased premises. In addition, there are offices and locations for other activities occupied under various types of ownership and leaseholds in New York and other states, none of which are materially important to our operations. HSBC Bank USA also owns properties in Montevideo, Uruguay.

Item 3. Legal Proceedings

See "Litigation and Regulatory Matters" in Note 29, "Collateral, Commitments and Contingent Liabilities," in the accompanying consolidated financial statements beginning on page 210 for our legal proceedings, disclosure which is incorporated herein by reference.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

Item 5. Market for the Registrant's Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities

Not applicable.

Item 6. Selected Financial Data

In June 2010, we decided to exit our wholesale banknotes business. During the fourth quarter of 2010, we completed the exit of substantially all of this business and as a result, this business is now reported as discontinued operations for all periods presented. The following selected financial data presented below excludes the results of our discontinued operations for all periods presented unless otherwise noted.

Year Ended December 31	2010	2009	2008	2007	2006
	(dollars are in millions)
Statement of Income (Loss) Data:
Net interest income	$4,519	$5,136	$4,333	$3,405	$3,085
Provision for credit losses	1,133	4,144	2,543	1,522	823
Total other revenues (losses)	2,947	2,589	(921)	1,735	2,476
Total operating expenses	4,033	3,880	3,545	3,532	3,205
Income (loss) from continuing operations before income tax expense (benefit)	2,300	(299)	(2,676)	86	1,533
Income tax expense (benefit)	742	(110)	(943)	(19)	516
Income (loss) from continuing operations	1,558	(189)	(1,733)	105	1,017
Income from discontinued operations, net of tax	6	47	44	33	19
Net income (loss)	$1,564	$(142)	$(1,689)	$138	$1,036
Balance Sheet Data as of December 31:
Loans:
Commercial loans	$30,271	$30,304	$37,427	$36,835	$29,380
Consumer loans	42,798	49,185	43,686	53,721	56,134
Total loans	73,069	79,489	81,113	90,556	85,514
Loans held for sale	2,390	2,908	4,431	5,270	4,723
Total assets	183,813	171,079	185,569	187,965	164,817
Total tangible assets	181,168	168,406	182,889	185,225	162,054
Total deposits	120,651	118,234	118,979	116,074	102,048
Long-term debt	17,230	18,008	22,089	28,268	29,252
Preferred stock	1,565	1,565	1,565	1,565	1,690
Common shareholder's equity	15,168	13,612	11,152	9,672	10,571
Total shareholders' equity	16,733	15,177	12,717	11,237	12,261
Tangible common shareholder's equity	12,522	11,110	9,258	7,297	8,034
Selected Financial Ratios:
Total shareholders' equity to total assets	9.10%	8.87%	6.85%	5.98%	7.44%
Tangible common shareholder's equity to total tangible assets	6.91	6.60	5.06	3.94	4.96
Total capital to risk weighted assets	18.14	14.19	12.04	11.29	12.58
Tier 1 capital to risk weighted assets	11.80	9.61	7.60	7.12	8.58
Rate of return on average :
Total assets	.84	(.11)	(.94)	.06	.62
Total common shareholder's equity	10.06	(2.05)	(18.02)	.06	8.98
Net interest margin	2.80	3.36	2.92	2.36	2.26
Loans to deposits ratio (1)	80.56	94.36	120.89	147.25	155.33
Efficiency ratio	54.02	50.23	103.90	68.71	57.66
Commercial allowance as a percent of loans (2)	1.77	3.10	1.53	.81	.73
Commercial net charge-off ratio (2)	1.12	.88	.42	.39	.35
Consumer allowance as a percent of loans (2)	3.82	5.94	4.18	2.07	1.22
Consumer two-months-and-over contractual delinquency	5.04	6.02	4.62	2.56	1.33
Consumer net charge-off ratio (2)	5.54	5.35	2.83	1.65	1.19

____________

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

(2)	Excludes loans held for sale.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

Organization and Basis of Reporting 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 Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") as "we", "us" or "our".

Through our subsidiaries, we offer a comprehensive range of personal and commercial banking products and related financial services. HSBC Bank USA, National Association ("HSBC Bank USA"), our principal U.S. banking subsidiary, is a national banking association with banking branch offices and/or representative offices in 14 states and the District of Columbia. In addition to our domestic offices, we maintain foreign branch offices, subsidiaries and/or representative offices in the Caribbean, Europe, Asia, Latin America and Canada. Our customers include individuals, including high net worth individuals, small businesses, corporations, institutions and governments. We also engage in mortgage banking and serve as an international dealer in derivative instruments denominated in U.S. dollars and other currencies, focusing on structuring of transactions to meet clients' needs.

The following discussion of our financial condition and results of operations excludes the results of our discontinued operations unless otherwise noted. See Note 3, "Discontinued Operations," in the accompanying consolidated financial statements for further discussion.

Current Environment During 2010, economic conditions in the United States generally improved, although the pace of improvement continued to be slow. Liquidity returned to the financial markets for most sources of funding except for mortgage securitization. Companies in the financial sector are generally able to issue debt with credit spreads approaching levels historically seen prior to the financial crisis, despite the expiration of some of the U.S. government's support programs. European sovereign debt fears first triggered by Greece in May and again by Ireland in November, continue to pressure borrowing costs in the U.S. and the prolonged period of low Federal funds rates continues to put pressure on spreads earned on our deposit base. During the first half of 2010, housing prices stabilized in many markets and began to recover in others as the first-time homebuyer tax credit and low interest rates attributable to government monetary policy actions served as stabilizing forces improving home sales. However, beginning in the third quarter of 2010 and continuing to the end of the year, we again began to see home price declines in many markets as the homebuyer tax credit ended and housing prices remain under pressure due to elevated foreclosure levels. Improved market conditions also resulted during 2010 in recovery of some of the valuation losses recorded during 2008 and into 2009 on several asset classes. How sustainable these improvements will be in the absence of government actions remains to be seen.

Despite positive job creation overall in 2010, the economy began to lose jobs again in the third quarter of 2010 as job creation in the private sector, while positive, slowed and was more than offset by reductions in government-related jobs. While job creation again turned positive in the fourth quarter, fear remains as to how pronounced any economic recovery may be. Such fear appeared to lessen, however, towards the end of 2010 as consumer spending began to increase and retail sales showed signs of improvement. U.S. unemployment rates, which have been a major factor in the deterioration of credit quality in the U.S. improved, but remained high at 9.4 percent in December 2010, decreasing from a rate of 10.2 percent in December 2009. However, 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 rates in 18 states are at or above the U.S. national average and unemployment rates in five states are at or above 11 percent while in New York, where approximately 27 percent of our loan portfolio is concentrated, unemployment remained lower than the national average at 8.2 percent. High unemployment rates have generally been most pronounced in the markets which had previously experienced the highest appreciation in home values. Unemployment has continued to have an impact on the provision for credit losses in our loan portfolios 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, volatility in energy prices, credit market volatility 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 and a sustained recovery of the housing markets remain critical components of a broader U.S. economic recovery. Further weakening in these components as well as in consumer confidence may result in additional deterioration in consumer payment patterns and credit quality. Weak consumer fundamentals including consumer spending, declines in wage income and wealth, as well as a difficult job market continue to depress consumer confidence. Additionally, there is uncertainty as to the future course of monetary policy and uncertainty as to the impact on the economy and consumer confidence when the remaining actions taken by the government to restore faith in the capital markets and stimulate consumer spending end, including the recent extension of unemployment insurance benefits and the prior presidential administration's tax cuts. These conditions in combination with general economic weakness and the impact of recent regulatory changes will continue to impact our results in 2011, the degree of which is largely dependent upon the nature and extent of the economic recovery.

As discussed in prior filings, on May 22, 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act") was signed into law. For a discussion of the CARD Act as well as the impact to our operations, see "Segment Results - IFRSs Basis."

Financial Regulatory Reform On July 21, 2010, the "Dodd-Frank Wall Street Reform and Consumer Protection Act" was signed into law and is a sweeping overhaul of the financial regulatory system. For a full description of the law see "Regulation - Financial Regulatory Reform" section under the "Regulation and Competition" section in Item 1. Business. The legislation will have a significant impact on the operations of many financial institutions in the U.S., including our affiliates. As the legislation calls for extensive regulations to be promulgated to interpret and implement the legislation, it is not possible to precisely determine the impact to operations and financial results at this time.

2010 Events

• The improvements in market conditions described above and reduced outstanding exposure have resulted in a recovery of carrying value of several asset classes, including derivative products with monoline insurance companies and other structured credit products as well as subprime residential mortgage loans held for sale compared to valuation losses experienced in prior years due to the adverse market conditions which existed at that time.

A summary of the significant valuation adjustments associated with these market conditions that impacted revenue in 2010, 2009 and 2008 is presented in the following table:

Year Ended December 31,	2010	2009	2008
	(in millions)
Gains (Losses)
Insurance monoline structured credit products (1)	$93	$(152)	$(1,020)
Other structured credit products (1)	126	(217)	(1,439)
Mortgage whole loans held for sale including whole loan purchase settlement (predominantly subprime) (2)	50	(233)	(505)
Other-than-temporary impairment on securities available-for-sale(3)	(79)	(124)	(231)
Leverage acquisition finance loans held for sale (4)	42	284	(431)
Total gains (losses)	$232	$(442)	$(3,626)

____________

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

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

(3) Reflected in Net other-than-temporary impairment losses in the consolidated statement of income (loss).

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

The market turmoil experienced over the past couple of years has created stress for certain counterparties with whom we conduct business as part of our lending and client intermediation activities. We assess, monitor and manage credit risk with formal standards, policies and procedures that are designed to ensure credit risks are assessed accurately, approved properly, monitored regularly and managed actively. Consequently, we believe any loss exposure related to counterparties with whom we conduct business has been adequately reflected in our financial statements for all periods presented.

• Improvements in the U.S. economy have positively impacted the credit quality of our consumer loan portfolio throughout 2010, which resulted in a significant decrease in our provision for credit losses. The improvements in economic and credit conditions have resulted in improved outlook on future loss estimates for our consumer loan portfolio. The provision for credit losses in our commercial loan portfolio also decreased as improvements in economic conditions has led to lower levels of criticized loans, including lower levels of nonperforming loans and improvements in the financial circumstance of several customer relationships which led to credit upgrades on certain loans.

• In the ordinary course of business, we originate and sell mortgage loans primarily to government sponsored entities ("GSEs") and provide various representations and warranties related to these loans. In 2010, we saw a significant increase in repurchase demands on these loans and on loans sold across the industry. As a result, we increased our repurchase reserve to $262 million at December 31, 2010 as compared to $66 million at December 31, 2009, due to the increased repurchase demand volume.

• In February 2010, we completed the sale of our interest in Wells Fargo HSBC Trade Bank ("WHTB") to Wells Fargo and recorded a gain of $66 million. The sale allows our Commercial Banking business to fully and directly serve internationally connected trade related clients located in the eighteen western states previously served by WHTB.

• In April 2010, we completed the sale of our 452 Fifth Avenue property in New York City, including the 1 W. 39th Street building, for $330 million in cash. Under the terms of the sale, we will lease back the entire 452 Fifth Avenue property for one year and floors one to eleven for a total of 10 years. In addition, we subsequently agreed to temporarily lease back floors 12-15 for various terms the last of which expires on April 30, 2012. The sale resulted in a gain of approximately $155 million; however, it has been deferred and is being recognized over ten years due to our continuing involvement. The headquarters of HSBC Bank USA remains in New York.

• In June 2010, we decided that the wholesale banknotes business within our Global Banking and Markets segment did not fit with our core strategy in the U.S. and, therefore, made the decision to exit this business. This business, which has been managed out of the U.S. with operations in key locations worldwide, arranged for the physical distribution of banknotes globally to central banks, large commercial banks and currency exchanges. During the fourth quarter of 2010, we completed the exit of substantially all of this business and as a result, these operations are now included in discontinued operations. Discontinued operations include closure costs of $14 million relating to this business and a lower of cost or fair value adjustment of $12 million relating to the Asian Banknotes Operations which were classified as held for sale in September and sold to an unaffiliated third party during the fourth quarter. See Note 3, "Discontinued Operations," in the accompanying consolidated financial statements for additional information regarding this business.

• In August 2010, we sold auto finance loans with a carrying value of $1.2 billion at the date of sale and other related assets to Santander Consumer USA ("SC USA") for $1.2 billion in cash. As a result of this transaction, we recognized a gain of $9 million during the third quarter of 2010.

• In August 2010, we announced to employees that we are considering strategic options for our mortgage operations, with the objective of recommending the future course of our prime mortgage lending and mortgage servicing platforms. Strategic options may include, but are not limited to, the sale or outsourcing of all, or part, of these platforms. Under all options being explored, we plan to continue offering mortgages to our customers. Our review of strategic options is continuing.

• In December 2010, as a result of recent Internal Revenue Service decisions to stop providing information regarding certain unpaid taxpayer obligations which historically served as a significant part of the underwriting process, it was determined that tax refund anticipation loans could no longer be offered in a safe and sound manner and, therefore, we would no longer offer such loans and related products going forward. These products have historically had an insignificant impact to our results of operations. See Note 4, "Exit from Taxpayer Financial Services Loan Program," for further discussion.

• Effective January 1, 2010, we adopted new guidance issued by the Financial Accounting Standards Board which amended the accounting for the consolidation of variable interest entities. The adoption of the new guidance resulted in the consolidation of one commercial paper conduit ("Bryant Park") managed by HSBC Bank USA. The impact of consolidating this entity beginning on January 1, 2010 resulted in an increase to our assets and liabilities of $3.2 billion and $3.5 billion, respectively, and a net reduction to common shareholder's equity of $245 million. See Note 26, "Variable Interest Entities," for further discussion on the adoption of this guidance.

In order to consolidate and streamline conduit administration across HSBC to reduce risk and achieve operational efficiencies, we have decided to assign substantially all of our Bryant Park liquidity facilities to HSBC Bank plc. Upon completion of this assignment, we will no longer have a controlling financial interest in Bryant Park and, therefore, we will no longer be required to consolidate Bryant Park Funding LLC. We expect the assignments will be completed by March 31, 2011.

Performance, Developments and Trends Income from continuing operations was $1.6 billion in 2010 compared to a loss from continuing operations of $189 million in 2009 and $1.7 billion in 2008. Income from continuing operations before income tax was $2.3 billion in 2010 compared to a loss from continuing operations before income tax of $299 million in 2009 and $2.7 billion in 2008. Our results in all years were impacted by the change in the fair value of our own debt and the related derivatives for which we have elected fair value option and other non-recurring items which distort the ability of investors to compare the underlying performance trends of our business. The following table summarizes the collective impact of these items on our income (loss) from continuing operations before income tax for all periods presented:

Year Ended December 31,	2010	2009	2008
	(in millions)
Income (loss) from continuing operations before income tax, as reported	$2,300	$(299)	$(2,676)
Change in value of own fair value option debt and related derivatives	(239)	494	(670)
Gain on sale of MasterCard Class B or Visa Class B shares	-	(48)	(83)
Gain relating to resolution of lawsuit (1)	(5)	(85)	-
Release of VISA litigation accrual	(16)	(9)	(36)
Gain on sale of equity interest in Wells Fargo HSBC Trade Bank	(66)	-	-
Revenue associated with whole loan purchase settlement (2)	(89)	-	-
Gain on sale of equity interest in HSBC Private Bank (Suisse) S.A.	-	(33)	-
Income (loss) from continuing operations before income tax, excluding above items (3)	$1,885	$20	$(3,465)

____________

(1)	The proceeds of the resolution of this lawsuit were used to redeem 100 preferred shares held by CT Financial Services, Inc. as provided under the terms of the preferred shares.

(2)	Represents loans previously purchased for resale from a third party.

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

Our overall results for 2010 improved significantly as lower provisions for credit losses and higher other revenues were partially offset by lower net interest income and higher operating expenses. During 2010, we continued to reduce legacy and other risk positions as opportunities arose, including the sale of $276 million in subprime residential mortgage loans previously held for sale and continued reductions in monoline counterparty exposures.

Other revenues (losses) improved during 2010, driven by significantly higher gains on instruments designated at fair value and related derivatives due largely to changes in the value of our own debt and related derivatives as well as higher trading revenue. Improved market conditions in 2010 and reduced outstanding exposure have resulted in a reduction in valuation losses recorded in prior years. Other revenues during 2010 also reflect several non-recurring items as presented in the table above as well as the impact of changes in value of our own debt and related derivatives for which we elected fair value option. Excluding the impact of all these items, other revenue decreased $376 million during 2010 due primarily to lower credit card fees, lower mortgage banking revenue and lower securities gains, partially offset by higher trading revenue. Lower credit card fees were due to lower levels of credit card and private label receivables, changes in customer behavior, lower delinquency levels and the implementation of certain provisions of the CARD Act which resulted in lower over limit, late and payment processing fees. The lower mortgage banking revenue was driven by an increase in our estimated exposure on repurchase obligations associated with previously sold loans. Securities gains were lower in 2010 as the prior year period reflects gains of $236 million on the sale of securities in the second quarter of 2009 as part of a strategy to reduce risk.

Net interest income was $4.5 billion in 2010, a decrease of 12 percent over 2009. The decrease reflects the impact of lower average loan balances and rates earned on these balances. These reductions were partially offset by commercial loan repricings and repricing initiatives on private label cards and credit cards as well as a lower cost of funds, including lower overall average rates on deposits.

Our provision for credit losses decreased $3.0 billion during 2010 primarily due to declines in loan balances and improvements in economic and credit conditions, including lower dollars of delinquency and reduced volatility in the housing markets which has resulted in a moderation of loss severities on real estate secured loans. These conditions have resulted in improved outlook on future loss estimates for our credit card and private label receivables as well as for our residential mortgage loan portfolio as compared with the prior year. Provision for credit losses also decreased for both loans and loan commitments in the commercial loan portfolio due to lower outstanding balances including managed reductions in certain exposures and improvements in the financial circumstances of several customer relationships which led to credit upgrades on certain problem credits and lower levels of nonperforming loans and criticized assets. Also contributing to the decrease were fewer customer downgrades across all business lines as compared to the prior year. The combination of all of these factors led to an overall net recovery in our provision for commercial loans during 2010.

Operating expenses increased $153 million in 2010, an increase of 4 percent over 2009. The increase largely resulted from higher fees paid to HTSU and other affiliates due to the centralization of additional shared services across North America including higher compliance costs and higher fees paid to HSBC Finance related to a change in how the refund anticipation loan program was managed in 2010. These increases were partially offset by lower salaries and employee benefit expense which reflects the centralization of additional shared services in North America within HTSU and continued cost management efforts, partially offset by increased salaries associated with the transfer of certain employees of HSBC Finance to the default mortgage loan servicing department (which cost is offset in other revenues). Compared with 2009 we also experienced lower occupancy expense, lower insurance costs, improved loss estimates on off-balance sheet credit exposure and significantly lower FDIC assessment fees as the prior year included an $82 million special assessment recorded in the second quarter of 2009.

Our efficiency ratio from continuing operations was 54.02 percent during 2010 as compared to 50.23 percent in 2009. The deterioration in the efficiency ratio in 2010 reflects higher operating expenses while the total of net interest income and other revenues declined.

Our effective tax rate for continuing operations was 32.3 percent in 2010 as compared to (36.8) percent in 2009. The effective tax rate for 2010 reflects a substantially higher level of pre-tax income, an increased level of low-income housing tax credits, an adjustment of uncertain tax positions, the release of valuation reserves on previously unrealizable deferred tax assets related to loss carry forwards and an adjustment of the tax rate used to record deferred taxes.

2009 vs. 2008 Although our overall results for 2009 improved compared to 2008, they continued to be impacted by reductions in other revenues (losses), largely trading revenue associated with credit derivative products due to the adverse financial market conditions which existed at the time, although the magnitude of such reductions declined significantly in 2009. Overall, our 2009 results improved compared to 2008, as higher net interest income and higher other revenues (losses) more than offset higher provisions for credit losses and higher operating expenses including higher FDIC insurance premiums. In 2008, our results declined markedly, largely relating to a significant decrease in trading revenue due to the adverse financial market conditions described above.

Net interest income was $5.1 billion in 2009, an increase of 19 percent over 2008. This increase primarily resulted from the impact of higher credit card receivable levels associated with the purchase of the GM and UP Portfolios in January 2009, lower promotional balances on private label credit cards, a reduction in the amortization of private label credit card premiums due largely to lower premiums being paid and a lower cost of funds, all of which contributed to higher net interest margin. These increases were partially offset by a narrowing of interest rate spreads on deposit products primarily due to lower market interest rates and competitive pressures as customers migrated to higher yielding deposit products, higher amortization of credit card premium due to the purchase of the GM and UP portfolios and the runoff of the residential mortgage and other consumer loan portfolios, including the sale of $4.5 billion of residential mortgage loans in 2009.

The increase in other revenues (losses) during 2009 reflects increased credit card fees resulting from the purchase of the GM and UP Portfolios, higher gains on sales of mortgage backed and asset backed securities due to our efforts to reduce exposure to these investments, higher trading revenue, higher transaction fees in Global Banking and Markets and higher gains on leveraged acquisition finance loans held for sale for which we elected to apply fair value option. Although other revenues (losses) were overall higher during 2009, we continue to be impacted by reductions in other revenues (losses), largely trading revenue associated with credit derivative products due to the adverse financial market conditions which existed at that time, although the magnitude of such reductions declined significantly from 2008. Partially offsetting the increase in other revenues (losses) was $537 million in losses on the fair value of financial instruments and the related derivative contracts (excluding leveraged acquisition finance loans held for sale) for which fair value option was elected as compared to gains of $717 million in 2008.

Our provision for credit losses increased $1.6 billion in 2009 primarily due to a higher provision for credit card receivables due to significantly higher credit card balances as a result of the purchase of the GM and UP Portfolios from HSBC Finance, higher delinquency and credit loss estimates relating to prime residential mortgage loans as conditions in the housing markets worsened and the U.S. economy deteriorated and higher credit loss provision in our commercial loan portfolio. Partially offsetting these increases was the impact from stabilization in the credit performance of private label credit card loans in the second half of the year and an improved outlook on future loss estimates as the impact of higher unemployment levels on losses was not as severe as previously anticipated. Provision for credit losses increased for both loans and loan commitments in the commercial loan portfolio due to higher delinquency and loss estimates and higher levels of criticized loans, including higher levels of substandard loans caused by customer credit downgrades and deteriorating economic conditions, particularly in real estate lending and corporate banking.

Operating expenses increased $335 million in 2009, an increase of 9 percent over 2008. Lower salaries and employee benefit expense due to continued cost management efforts, including the impact of global resourcing initiatives, which have resulted in lower headcount were more than offset by higher FDIC insurance premiums which were $208 million in 2009, as compared to $58 million in 2008, an increase of $150 million (including $82 million relating to a special assessment), higher pension costs, higher servicing fees paid to HSBC Finance as a result of the purchase of the GM, UP and Auto finance portfolios, higher fees paid to HTSU and increased costs related to the expansion of the retail banking network. Additionally in 2009, operating expenses includes an impairment write down of a data center building as part of our ongoing strategy to consolidate operations and improve efficiencies. Additionally, operating expenses in 2008 reflects a goodwill impairment charge of $54 million relating to the residential mortgage reporting unit in PFS and, in both 2009 and 2008, a release in the VISA litigation accrual that reduced operating expenses by $9 million in 2009 and $36 million in 2008.

Our efficiency ratio from continuing operations was 50.23 percent during 2009 as compared to 103.90 percent in 2008. The improvement in the efficiency ratio in 2009 resulted primarily from a significant increase in revenues as discussed more fully above.

Our effective tax rate for continuing operations was (36.8) percent in 2009 as compared to (35.2) percent in 2008. The effective tax rate for 2009 was impacted by the relative level of pre-tax income, the sale of a minority stock interest that was treated as a dividend for tax purposes, the effective settlement of an IRS audit with respect to agreed-upon items, an increase in the state and local income tax valuation allowance and an increased level of low income housing credits.

Loans Loans, excluding loans held for sale, were $73.1 billion at December 31, 2010 compared to $79.5 billion at December 31, 2009. The decrease in loans as compared to December 31, 2009 was driven by run-off in all of our consumer portfolios, including the sale in August 2010 of auto finance loans to SC USA as discussed above. We continue to sell the majority of new residential mortgage loan originations to government sponsored enterprises. The decline in credit card and private label receivables reflects fewer active customer accounts, the continued impact from actions previously taken to reduce risk in these portfolios and an increased focus by customers to reduce outstanding credit card debt. Commercial loans also decreased as compared to December 31, 2009 although increased paydowns and managed reductions in certain exposures were largely offset by the adoption of new accounting guidance on the consolidation of variable interest entities which resulted in the consolidation of an incremental $1.2 billion of commercial loans at December 31, 2010. See "Balance Sheet Review" for a more detailed discussion of the changes in loan balances.

Credit Quality Our allowance for credit losses as a percentage of total loans decreased to 2.97 percent at December 31, 2010, as compared to 4.86 percent at December 31, 2009. The decrease in our allowance ratio reflects a lower allowance on all of our consumer loan portfolios due to improved credit quality, lower delinquency levels and improvement in economic conditions. Our commercial loan allowance for credit losses ratio also fell as economic conditions began to stabilize and related credit quality and future loss estimates improved.

Our consumer two-months-and-over contractual delinquency as a percentage of loans and loans held for sale ("delinquency ratio") decreased to 5.04 percent at December 31, 2010 as compared to 6.02 percent at December 31, 2009. Dollars of delinquency fell across virtually all consumer portfolios while outstanding loan balances also declined. The decrease in the consumer delinquency ratio was driven largely by our residential mortgage, private label card and credit card portfolios, including the sale of $276 million of delinquent subprime mortgage whole loans during 2010. See "Credit Quality" for a more detailed discussion of the increase in our delinquency ratios.

Net charge-offs as a percentage of average loans ("net charge-off ratio") increased to 3.76 percent in 2010, compared to 3.59 percent in 2009 driven by higher credit card charge-offs as charge-off levels in 2009 were positively impacted by the purchase of the GM and UP portfolios, a portion of which was recorded at fair value net of future anticipated losses at the time of acquisition, while average receivable levels declined. We experienced lower dollars of charge-off in all other consumer loan categories during 2010 driven by lower receivable levels and improved credit quality. These favorable trends were partially offset by the impact from continued weakness in the U.S. economy including continued high unemployment levels. See "Credit Quality" for a more detailed discussion of the increase in net charge-offs and the net charge-off ratio.

Funding and Capital Capital amounts and ratios are calculated in accordance with current banking regulations. Our Tier 1 capital ratio was 11.80 percent and 9.61 percent at December 31, 2010 and 2009, respectively. Our capital levels remain well above levels established by current banking regulations as "well capitalized." We received no capital contributions from our immediate parent, HSBC North America Inc. ("HNAI") during 2010 as compared to $2.2 billion during 2009.

As part of the regulatory approvals with respect to the affiliate receivable purchases completed in January 2009, HSBC Bank USA and HSBC made certain additional capital commitments to ensure that HSBC Bank USA holds sufficient capital with respect to the purchased receivables that are or may become "low-quality assets," as defined by the Federal Reserve Act. These capital requirements, which require a risk-based capital charge of 100 percent for each "low-quality asset" transferred or arising in the purchased portfolios rather than a typical eight percent capital charge applied to similar assets that are not part of the transferred portfolios, are applied both for purposes of satisfying the terms of the commitments and for purposes of measuring and reporting HSBC Bank USA's risk-based capital and related ratios. This treatment applies as long as the low-quality assets are owned by HSBC Bank USA. During 2010, HSBC Bank USA sold low quality auto finance loans with a net book value of approximately $178 million to a non-bank subsidiary of HSBC USA Inc. to reduce this capital requirement. These loans were subsequently sold to SC USA in August 2010. At December 31, 2010, the remaining purchased receivables subject to this requirement total $3.2 billion, of which $651 million were considered low-quality assets. We have exceeded the minimum capital ratios required at December 31, 2010.

During the third quarter of 2010, ten year subordinated debt of $1.3 billion and $750 million was issued by HSBC Bank USA and HSBC USA Inc., respectively, to support our capital position under Basel II and replace Tier 2 capital lost due to reduced capital treatment for future maturities of subordinated debt.

Subject to regulatory approval, HSBC North America will be required to implement Basel II provisions no later than April 1, 2011 in accordance with current regulatory timelines. HSBC USA Inc. will not report separately under the new rules, but HSBC Bank USA will report under the new rules on a stand-alone basis. Further increases in regulatory capital may be required prior to the Basel II adoption date; however, the exact amount will depend upon our prevailing risk profile and that of our North America affiliates under various stress scenarios. Adoption must be preceded by a parallel run period of at least four quarters, and requires the approval of U.S. regulators. This parallel run, which was initiated in January 2010, encompasses enhancements to a number of risk policies, processes and systems to align HSBC Bank USA with the Basel II final rule requirements. HSBC Bank USA will seek regulatory approval for adoption when the program enhancements have been completed which may extend beyond April 1, 2011.

Future Prospects Our operations are dependent upon our ability to attract and retain deposits and, to a lesser extent, access to the global capital markets. Numerous factors, both internal and external, may impact our access to, and the costs associated with, both sources of funding. These factors may include our debt ratings, overall economic conditions, overall market volatility, the counterparty credit limits of investors to the HSBC Group and the effectiveness of our management of credit risks inherent in our customer base.

Our results are also impacted by general economic conditions, including unemployment, housing market conditions, property valuations, interest rates and legislative and regulatory changes, all of which are beyond our control. Changes in interest rates generally affect both the rates we charge to our customers and the rates we must pay on our borrowings. The primary risks to achieving our business goals in 2011 are largely dependent upon macro-economic conditions which include a weak housing market, high unemployment rates, the nature and extent of the economic recovery, the level of consumer spending, volatility in the capital and debt markets and our ability to attract and retain customers, loans and deposits, all of which could impact trading and other revenue, net interest income, loan volume, charge-offs and ultimately our results of operations.

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 results in accordance with IFRSs and IFRSs 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.

Year Ended December 31,	2010	2009	2008
	(in millions)
Net income (loss) - U.S. GAAP basis	$1,564	$(142)	$(1,689)
Adjustments, net of tax:
Unquoted equity securities	-	(19)	(65)
Reclassification of financial assets	(102)	(398)	576
Securities	82	(79)	(61)
Derivatives	11	17	10
Loan impairment	5	9	1
Property	28	-	-
Pension costs	77	38	1
Purchased loan portfolios	(53)	66	-
Servicing assets	1	2	10
Return of capital	(3)	(55)	-
Interest recognition	3	(2)	3
Gain on sale of auto finance loans	26	-	-
Other	5	(9)	6
Net income (loss) - IFRSs basis	1,644	(572)	(1,208)
Tax benefit (expense) - IFRSs basis	(792)	254	648
Profit (loss) before tax - IFRSs basis	$2,436	$(826)	$(1,856)

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

Unquoted equity securities - Under IFRSs, equity securities which are not quoted on a recognized exchange, but for which fair value can be reliably measured, are required to be measured at fair value. Securities measured at fair value under IFRSs are classified as either available-for-sale securities, with changes in fair value recognized in shareholders' equity, or as trading securities, with changes in fair value recognized in income. Under U.S. GAAP, equity securities that are not quoted on a recognized exchange are not considered to have a readily determinable fair value and are required to be measured at cost, less any provisions for known impairment, in other assets.

Reclassification of financial assets - 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.

Securities - Effective January 1, 2009 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 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 other-than-temporary 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 recorded at fair value through other comprehensive income. If it is determined these shares have become impaired, the fair value loss is recognized in profit and loss and any fair value loss recorded in other comprehensive income is reversed. There is no similar requirement under U.S. GAAP. During the 2009 under IFRSs, we recorded income for the value of additional shares attributed to HSBC shares held for stock plans as a result of HSBC's rights offering. The additional shares are not recorded 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 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 consumer loans which requires the incorporation of the time value of money relating to recovery estimates. Also under IFRSs, future recoveries on charged-off loans are accounted 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.

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 US GAAP, such gain is deferred and recognized over ten years due to our continuing involvement.

Pension costs - Net income under U.S. GAAP is lower than under IFRSs as a result of the amortization of the amount by which actuarial losses exceed gains beyond the 10 percent "corridor". Furthermore, 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 US GAAP, these changes were considered to be a negative plan amendment which resulted in no immediate income recognition.

Purchased loan portfolios - Under US GAAP, purchased loans for which there has been evidence of credit deterioration at the time of acquisition are recorded at an amount based on the net cash flows expected to be collected. This generally results in only a portion of the loans in the acquired portfolio being recorded at fair value. Under IFRSs, the entire purchased portfolio is recorded at fair value. When recording purchased loans at fair value, the difference between all estimated future cash collections and the purchase price paid is recognized into income using the effective interest method. An allowance for loan loss is not established unless the original estimate of expected future cash collections declines.

Servicing assets - Under IAS 38, servicing assets are initially recorded on the balance sheet at cost and amortized over the projected life of the assets. Servicing assets are periodically tested for impairment with impairment adjustments charged against current earnings. Under U.S. GAAP, we generally record servicing assets on the balance sheet at fair value. Subsequent adjustments to fair value are generally reflected in current period earnings.

Return of capital - Reflects payments to CT Financial Services, Inc. in connection with the resolution of a lawsuit which for IFRSs was treated as the satisfaction of a liability and not as revenue and a subsequent capital transaction as was the case under U.S. GAAP.

Interest recognition - The calculation of effective interest rates under IAS 39 requires an estimate of "all fees and points paid or recovered between parties to the contract" that are an integral part of the effective interest rate be included. U.S. GAAP generally prohibits recognition of interest income to the extent the net interest in the loan would increase to an amount greater than the amount at which the borrower could settle the obligation. Also under U.S. GAAP, prepayment penalties are generally recognized as received.

Gain on sale of auto finance loans - The differences in the gain on sale of the auto finance loans primarily reflects differences in the basis of the purchased loans sold between IFRSs and U.S. GAAP as well as differences in loan impairment provisioning as discussed above. The combination of these differences resulted in a higher gain under IFRSs.

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, restructuring costs, depreciation expense and loans held for sale. In 2008, other also includes the impact of a difference in the write off amount of goodwill related to our residential mortgage banking business unit and a timing difference with respect to the adoption of fair value measurement accounting principles for U.S. GAAP which resulted in the recognition of $10 million of net income relating to structured products.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. We believe our policies are appropriate and fairly present the financial position of HSBC USA Inc.

The significant accounting policies used in the preparation of our consolidated financial statements are more fully described in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," to the accompanying consolidated financial statements. Certain critical accounting policies, which affect the reported amounts of assets, liabilities, revenues and expenses, are complex and involve significant judgment by our management, including the use of estimates and assumptions. We base and establish our accounting estimates on historical experience, observable market data, inputs derived from or corroborated by observable market data by correlation or other means and on various other assumptions including those based on unobservable inputs that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. In addition, to the extent we use certain modeling techniques to assist us in measuring the fair value of a particular asset or liability, we strive to use such techniques which are consistent with those used by other market participants. Actual results may differ from these estimates due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. The impact of estimates and assumptions on the financial condition or operating performance may be material.

We believe that of the significant accounting policies used in the preparation of our consolidated financial statements, the items discussed below require critical accounting estimates involving a high degree of judgment and complexity. Our management has discussed these critical accounting policies with the Audit Committee of our Board of Directors, including certain underlying estimates and assumptions, and the Audit Committee has reviewed our disclosure relating to these accounting policies and practices in this MD&A.

Allowance for Credit Losses Because we lend money to others, we are exposed to the risk that borrowers may not repay amounts owed when they become contractually due. Consequently, we maintain an allowance for credit losses at a level that we consider adequate, but not excessive, to cover our estimate of probable incurred losses in the existing loan portfolio. Allowance estimates are reviewed periodically and adjustments are reflected through the provision for credit losses in the period when they become known. The accounting estimate relating to the allowance for credit losses is a "critical accounting estimate" for the following reasons:

• Changes in the provision can materially affect our financial results;

• Estimates related to the allowance for credit losses require us to project future delinquency and charge off trends, which are uncertain and require a high degree of judgment; and

• The allowance for credit losses is influenced by factors outside of our control such as customer payment patterns, economic conditions such as national and local trends in housing markets, interest rates, unemployment rates, bankruptcy trends and changes in laws and regulations all of which have an impact on our estimates.

Because our estimate of the allowance for credit losses involves judgment and is influenced by factors outside of our control, there is uncertainty inherent in these estimates, making it reasonably possible such estimates could change. Our estimate of probable incurred credit losses is inherently uncertain because it is highly sensitive to changes in economic conditions which influence growth, portfolio seasoning, bankruptcy trends, trends in housing markets, delinquency rates and the flow of loans through various stages of delinquency, the realizability of any collateral and actual loss exposure. Changes in such estimates could significantly impact our allowance and provision for credit losses. For example, a 10 percent change in our projection of probable net credit losses on our loans would have resulted in a change of approximately $217 million in our allowance for credit losses at December 31, 2010. The allowance for credit losses is a critical accounting estimate for our Consumer Finance, Personal Financial Services, Commercial Banking, Global Banking and Markets and Private Banking segments.

Our allowance for credit losses is based on estimates and is intended to be adequate but not excessive. The allowance for credit losses is regularly assessed for adequacy through a detailed review of the loan portfolio. The allowance is comprised of two balance sheet components:

• The allowance for credit losses, which is carried as a reduction to loans on the balance sheet, includes reserves for inherent probable credit losses associated with all loans outstanding; and

• The reserve for off-balance sheet risk, which is recorded in other liabilities, includes probable and reasonably estimable credit losses arising from off-balance sheet arrangements such as letters of credit and undrawn commitments to lend.

Both components include amounts calculated for specific individual loan balances and for collective loan portfolios depending on the nature of the exposure and the manner in which risks inherent in that exposure are managed.

• All commercial loans that exceed $500,000 are evaluated individually for impairment. When a loan is found to be "impaired," a specific reserve is calculated. Reserves against impaired loans are determined primarily by an analysis of discounted expected cash flows with reference to independent valuations of underlying loan collateral and considering secondary market prices for distressed debt where appropriate.

• Loans which are not individually evaluated for impairment and those evaluated and found not to be impaired are pooled into homogeneous categories of loans and evaluated to determine if it is deemed probable, based on historical data and other environmental factors, that a loss has been realized even though it has not yet been manifested in a specific loan.

For consumer receivables and certain small business loans, we utilize a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency and ultimately be charged-off based on recent historical experience. These estimates also take into consideration the loss severity expected based on the underlying collateral for the loan, if any, in the event of default. In addition, loss reserves are maintained on consumer receivables to reflect our judgment of portfolio risk factors which may not be fully reflected in the statistical roll rate calculation or when historical trends are not reflective of current inherent losses in the loan portfolio. Risk factors considered in establishing the allowance for credit losses on consumer receivables include growth, product mix and risk selection, unemployment rates, bankruptcy trends, geographic concentrations, loan product features such as adjustable rate loans, economic conditions such as national and local trends in unemployment, housing markets and interest rates, portfolio seasoning, changes in underwriting practices, current levels of charge-offs and delinquencies, changes in laws and regulations and other items which can affect consumer payment patterns on outstanding receivables such as natural disasters. We also consider key ratios such as number of months of loss coverage in developing our allowance estimates. The resulting loss coverage ratio varies by portfolio based on inherent risk and, where applicable, regulatory guidance. Roll rates are regularly updated and benchmarked against actual outcomes to ensure that they remain appropriate.

An advanced credit risk methodology is utilized to support the estimation of incurred losses inherent in pools of homogeneous commercial loans, leases and off-balance sheet risk. This methodology uses the probability of default from the customer rating assigned to each counterparty, the "Loss Given Default" rating assigned to each transaction or facility based on the collateral securing the transaction, and the measure of exposure based on the transaction. A suite of models, tools and templates is maintained using quantitative and statistical techniques, which are combined with management's judgment to support the assessment of each transaction. These were developed using internal data and supplemented with data from external sources which was judged to be consistent with our internal credit standards. These advanced measures are applied to the homogeneous credit pools to estimate the required allowance for credit losses.

The results from the commercial analysis, consumer roll rate analysis and the specific impairment reserving process are reviewed each quarter by the Credit Reserve Committee. This committee also considers other observable factors, both internal and external to us in the general economy, to ensure that the estimates provided by the various models adequately include all known information at each reporting period. Loss reserves are maintained to reflect the committee's judgment of portfolio risk factors which may not be fully reflected in statistical models or when historical trends are not reflective of current inherent incurred losses in the loan portfolio. The allowance for credit losses are reviewed with our Risk Management Committee and the Audit Committee of the Board of Directors each quarter.

Goodwill Impairment Goodwill is not subject to amortization but is tested for possible impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value of each reporting unit be compared to its carrying amount, including the goodwill. Significant and long-term changes in industry and economic conditions are considered to be primary indicators of potential impairment due to their impact on expected future cash flows. In addition, shorter-term changes may impact the discount rate applied to such cash flows based on changes in investor requirements or market uncertainties.

The impairment testing of our goodwill is a "critical accounting estimate" due to the significant judgment required in the use of discounted cash flow models to determine fair value. Discounted cash flow models include such variables as revenue growth rates, expense trends, interest rates and terminal values. Based on an evaluation of key data and market factors, management's judgment is required to select the specific variables to be incorporated into the models. Additionally, the estimated fair value can be significantly impacted by the risk adjusted cost of capital used to discount future cash flows. The risk adjusted cost of capital percentage is generally derived from an appropriate capital asset pricing model, which itself depends on a number of financial and economic variables which are established on the basis of that used by market participants which involves management's judgment. Because our fair value estimate involves judgment and is influenced by factors outside our control, it is reasonably possible such estimate could change. When management's judgment is that the anticipated cash flows have decreased and/or the cost of capital has increased, the effect will be a lower estimate of fair value. If the fair value is determined to be lower than the carrying value, an impairment charge may be recorded and net income will be negatively impacted.

Impairment testing of goodwill requires that the fair value of each reporting unit be compared to its carrying amount. Reporting units were identified based upon an analysis of each of our individual operating segments. A reporting unit is defined as any distinct, separately identifiable component of an operating segment for which complete, discrete financial information is available that management regularly reviews. Goodwill was allocated to the carrying value of each reporting unit based on its relative fair value.

We have established July 1 of each year as the date for conducting our annual goodwill impairment assessment. The goodwill impairment analysis is a two step process. The first step, used to identify potential impairment, involves comparing each reporting unit's fair value to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, including allocated goodwill, there is no indication of impairment and no further procedures are required. If the carrying value including allocated goodwill exceeds fair value, the second step is performed to quantify the impairment amount, if any. If the implied fair value of goodwill as determined using the same methodology as used in a business combination is less than the carrying value of goodwill, an impairment charge is recorded for the excess. An impairment recognized cannot exceed the amount of goodwill assigned to a reporting unit. Subsequent reversals of goodwill impairment are not permitted. At July 1, 2010, the estimated fair value of each reporting unit exceeded its carrying value and, as such, none of our recorded goodwill was deemed to be impaired.

As a result of the continued focus on economic and credit conditions in the U.S., we performed interim impairment tests of the goodwill associated with our Global Banking and Markets and Private Banking reporting units as of December 31, 2010, September 30, 2010, June 30, 2010 and March 31, 2010. As a result of these tests, the fair value of our Global Banking and Markets and Private Banking reporting units continue to exceed their carrying value, including goodwill at each of these testing dates. At December 31, 2010, goodwill totaling $612 million and $415 million has been allocated to our Global Banking and Markets and Private Banking reporting units, respectively. As of the December 31, 2010 interim impairment testing date, the fair value of our Global Banking and Markets reporting unit did not significantly exceed its carrying value including goodwill, while the fair value of our Private Banking reporting unit significantly exceeded its carrying value, including goodwill. Our goodwill impairment testing is however, highly sensitive to certain assumptions and estimates used as discussed above. We continue to perform periodic analyses of the risks and strategies of our business and product offerings. If significant deterioration in the economic and credit conditions occur, or changes in the strategy or performance of our business or product offerings occur, an interim impairment test will again be required in 2011.

Valuation of Financial Instruments A substantial portion of our financial assets and liabilities are carried at fair value. These include trading assets and liabilities, including derivatives held for trading, derivatives used for hedging and securities available-for-sale. Certain loans held for sale, which are carried at the lower of amortized cost or fair value, are also reported at fair value when their amortized cost exceeds their current fair value.

Where available, we use quoted market prices to determine fair value. If quoted market prices are not available, fair value is determined using internally developed valuation models based on inputs that are either directly observable or derived from and corroborated by market data. These inputs include, but are not limited to, interest rate yield curves, option volatilities, option adjusted spreads and currency rates. Where neither quoted market prices nor observable market parameters are available, fair value is determined using valuation models that feature one or more significant unobservable inputs based on management's expectation that market participants would use in determining the fair value of the asset or liability. However, these unobservable inputs must incorporate market participants' assumptions about risks in the asset or liability and the risk premium required by market participants in order to bear the risks. The determination of appropriate unobservable inputs requires exercise of management judgment. A significant majority of our assets and liabilities that are reported at fair value are measured based on quoted market prices and observable market-based or independently-sourced inputs.

We review and update our fair value hierarchy classifications at the end of each quarter. Quarterly changes related to the observability of the inputs to a fair value measurement may result in a reclassification between hierarchy levels. Level 3 assets as a percentage of total assets measured at fair value were approximately four percent at December 31, 2010. Imprecision in estimating unobservable market inputs can impact the amount of revenue, loss or changes in other comprehensive income recorded for a particular financial instrument. Furthermore, while we believe our valuation methods are appropriate, the use of different methodologies or assumptions to determine the fair value of certain financial assets and liabilities could result in a different estimate of fair value at the reporting date. For a more detailed discussion of the determination of fair value for individual financial assets and liabilities carried at fair value see "Fair Value" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

The following is a description of the significant estimates used in the valuation of financial assets and liabilities for which quoted market prices and observable market parameters are not available.

Complex derivatives held for trading - Fair value for the majority of our derivative instruments are based on internally developed models that utilize independently sourced market parameters. For complex or long-dated derivative products where market data is not available, fair value may be affected by the choice of valuation model and the underlying assumptions about the timing of cash flows and credit spreads. The fair values of certain structured credit and structured equity derivative products are sensitive to unobservable inputs such as default correlations and volatilities. These estimates are susceptible to significant changes in future periods as market conditions evolve.

We may adjust certain fair value estimates to ensure that those estimates appropriately represent fair value. These adjustments, which are applied consistently over time, are generally required to reflect factors such as market liquidity and counterparty credit risk. Where relevant, a liquidity adjustment is applied to determine the measurement of an asset or a liability that is required to be reported at fair value. Assessing the appropriate level of liquidity adjustment requires management judgment and is often affected by the product type, transaction-specific terms and the level of liquidity for the product in the market. For financial liabilities, including derivatives measured at fair value, we consider the effect of our own non-performance risk on fair values. In assessing the credit risk relating to derivative assets and liabilities, we take into account the impact of risk mitigants including, but not limited to, master netting and collateral arrangements. Finally, other transaction specific factors such as the selection of valuation models available, the range of unobservable model inputs and other model assumptions can affect fair value estimates. Imprecision in estimating these factors can impact the amount of revenue or loss recorded for a particular position.

Loans held for sale - Certain residential mortgage whole loans are classified as held for sale and are accounted for at lower of cost or fair value. The fair value of certain of these loans have historically been determined based on valuations of mortgage-backed securities that would be observed in a hypothetical securitization adjusted for dissimilarity in the underlying collateral, market liquidity, and direct transaction costs to convert mortgage loans into securities. During the recent market turmoil, pricing information on mortgage related assets became less available. In an inactive market where securitizations of mortgage whole loans may not regularly occur, we utilize alternative market information by reference to different exit markets to determine or validate the fair value of our mortgage whole loans. The determination of fair value for mortgage whole loans takes into account factors such as the location of the collateral, the loan-to-value ratio, the estimated rate and timing of delinquency, the probability of foreclosure and loss severity if foreclosure does occur.

Loans elected for the fair value option - We elected to measure certain leveraged finance loans and commercial loans at fair value under the fair value option provided by U.S. GAAP. Where available, market-based consensus pricing obtained from independent sources is used to estimate the fair value of leveraged loans. Where consensus pricing information is not available, fair value is estimated using observable market prices of similar instruments, 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 estimates of prepayments, defaults, and recoveries, discounted at management's estimate of the rate that would be required by market participants in the current market conditions. We attempt to corroborate estimates of prepayments, defaults, and recoveries using observable data by correlation or other means. We also consider the specific loan characteristics and inherent credit risk and risk mitigating factors such as the nature and characteristics of the collateral arrangements in determining fair value. Continued lack of liquidity in credit markets has resulted in a significant decrease in the availability of observable market data, which has resulted in an increased level of management judgment required to estimate fair value for loans held for sale.

Structured deposits and structured notes - Certain hybrid instruments, primarily structured notes and structured certificates of deposit, were elected to be measured at fair value in their entirety under the fair value option provided by U.S. GAAP. As a result, derivative features embedded in those instruments are included in the fair value measurement of the instrument. Depending on the complexity of the embedded derivative, the same elements of valuation uncertainty and adjustments described in the derivative sections above would apply to hybrid instruments. Additionally, cash flows for the funded notes and deposits 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 be charged for issuing similar structured instruments as of the measurement date.

Own debt issuances for which the fair value option has been elected are traded in the OTC market. The fair value of our own debt issuances is determined based on the observed prices for the specific debt instrument transacted in the secondary market. To the extent the inputs are observable, less judgment is required in determining the fair value. In many cases, management can obtain quoted prices for identical or similar liabilities. However, the markets may become inactive at various times where prices are not current or price quotations vary over time or among market makers. In these situations, valuation estimates involve using inputs other than quoted prices to value both the interest rate component and the credit component of the debt. Changes in such estimates, and in particular the credit component of the valuation, can be volatile from period to period and may markedly impact the total mark-to-market on debt designated at fair value recorded in our consolidated statement of income (loss).

Asset-backed securities - Mortgage-backed securities and other asset-backed securities including Collateralized Debt Obligations ("CDOs") and Collateralized Loan Obligations ("CLOs") are classified as either available-for-sale or held for trading and are measured at fair value. The fair value measurements of these asset classes are primarily determined or validated by inputs obtained from independent pricing sources adjusted for the differences in the characteristics and performance of the underlying collateral, such as prepayments and defaults. During the recent credit crisis, the valuations of certain mortgage-backed and asset-backed securities have become less transparent. For these securities, internal valuation estimates are used to validate the pricing information obtained from independent pricing sources which measure fair value based on information derived from both observable and unobservable inputs.

We have established a control framework designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. Controls over the valuation process are summarized in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Fair Value."

Because the fair value of certain financial assets and liabilities are significantly impacted by the use of estimates, the use of different assumptions can result in changes in the estimated fair value of those assets and liabilities, which can result in equity and earnings volatility as follows:

• Changes in the fair value of trading assets and liabilities are recorded in current period earnings;

• Changes in the fair value of securities available-for-sale are recorded in other comprehensive income;

• Changes in the fair value of loans held for sale when their amortized cost exceeds fair value are recorded in current period earnings;

• Changes in the fair value of a derivative that has been designated and qualifies as a fair value hedge, along with the changes in the fair value of the hedged asset or liability (including losses or gains on firm commitments), are recorded in current period earnings; and

• Changes in the fair value of a derivative that has been designated and qualifies as a cash flow hedge are recorded in other comprehensive income to the extent of its effectiveness, until earnings are impacted by the variability of cash flows from the hedged item.

Derivatives held for hedging Derivatives designated as qualified hedges are tested for effectiveness of the hedge. For these transactions, assessments are made at the inception of the hedge and on a recurring basis, whether the derivative used in the hedging transaction has been and is expected to continue to be highly effective in offsetting changes in fair values or cash flows of the hedged item. This assessment is conducted using statistical regression analysis.

If we determine as a result of this assessment that a derivative is not expected to be a highly effective hedge or that it has ceased to be a highly effective hedge, hedge accounting is discontinued as of the quarter in which such determination was made. The assessment of the effectiveness of the derivatives used in hedging transactions is considered to be a "critical accounting estimate" due to the use of statistical regression analysis in making this determination. Similar to discounted cash flow modeling techniques, statistical regression analysis requires the use of estimates regarding the amount and timing of future cash flows which are susceptible to significant changes in future periods based on changes in market rates. Statistical regression analysis also involves the use of additional assumptions including the determination of the period over which the analysis should occur as well as selecting a convention for the treatment of credit spreads in the analysis.

The outcome of the statistical regression analysis serves as the foundation for determining whether or not a derivative is highly effective as a hedging instrument. This can result in earnings volatility as the mark-to-market on derivatives which do not qualify as effective hedges and the ineffectiveness associated with qualifying hedges are recorded in current period earnings.

Impairment of securities available for sale Securities available-for-sale are measured at fair value and changes in fair value, net of related income taxes, are recognized in equity in other comprehensive income until the securities are either sold or an other-than-temporary impairment loss is recognized. Where the amount recognized in other comprehensive income related to a security available-for-sale represents a loss, the security is deemed to be impaired. To the extent that the impairment is deemed to be other-than-temporary, an other-than-temporary impairment loss is recognized. However for financial statement presentation purposes, only the credit loss component of such difference is recognized in earnings for a debt security that we do not intend to sell and for which it is not more-likely-than-not that we will be required to sell prior to recovery of its amortized cost basis. We do not consider impairment of held-to-maturity securities to be a critical accounting estimate as such security holdings are not significant.

Total securities available-for-sale amounted to $45.5 billion and $27.8 billion at December 31, 2010 and 2009, respectively, of which $45.4 billion or 99.8 percent at December 31, 2010 and $26.5 billion or 95.5 percent at December 31, 2009 were debt securities. The amount recorded in other comprehensive income relating to debt securities available-for-sale amounted to an increase of $211 million and $526 million during December 31, 2010 and 2009, respectively. A reduction in other comprehensive income relating to a debt security available-for-sale occurs when the fair value of the security is less than the security's acquisition cost (net of any principal repayments and amortization) less any other-than-temporary impairment loss recognized in earnings.

Management is required to exercise judgment in determining whether an impairment is other-than-temporary or reflects a credit loss that must be recognized in earnings. For debt securities available-for-sale, the objective evidence required to determine whether an impairment is other-than-temporary or reflects a credit loss comprises evidence of the occurrence of a loss event that results in a decrease in estimated future cash flows. Where cash flows are readily determinable, a low level of judgment may be involved. Where determination of estimated future cash flows requires consideration of a number of variables, some of which may be unobservable in current market conditions, more significant judgment is required.

The most significant judgments concern more complex instruments, such as asset-backed securities ("ABSs"), where it is necessary to consider factors such as the estimated future cash flows on underlying pools of collateral, the extent and depth of market price declines and changes in credit ratings. The review of estimated future cash flows on underlying collateral is subject to estimation uncertainties where the assessment is based on historical information on pools of assets, and judgment is required to determine whether historical performance is likely to be representative of current economic and credit conditions.

There is no single factor to which our charge for other-than-temporary impairment of debt securities available-for-sale is particularly sensitive, because of the range of different types of securities held, the range of geographical areas in which those securities are held, and the wide range of factors which can affect the occurrence of loss events and cash flows of securities, including different types of collateral.

Management's current assessment of the holdings of available-for-sale ABSs with the most sensitivity to possible future impairment is focused on subprime and Alt-A residential mortgage-backed securities ("MBSs"). Our principal exposure to these securities is in the Global Banking and Markets' business. Excluding holdings in certain special purpose entities where significant first loss risks are borne by external investors, the available-for-sale holdings in these categories within Global Banking and Markets amounted to $4 million at December 31, 2010 ($136 million at December 31, 2009). The available-for-sale fair value adjustment as at December 31, 2010 in relation to these securities was an unrealized gain of $1 million and at December 31, 2009, an unrealized gain of $7 million.

The main factors in the reduction in fair value of these securities over the period were the effects of reduced market liquidity and negative market sentiment. The level of actual credit losses experienced was relatively low in both 2010 and 2009, notwithstanding the deterioration in the performance of the underlying mortgages in the period as U.S. home prices remained under pressure and defaults increased. The absence of significant credit losses is judged to be attributable to the seniority of the tranches we held as well as the priority for cash flow held by these tranches. In 2010, we recognized other-than-temporary impairment on held-to-maturity and available-for-sale securities of $79 million in earnings. In 2009, we recognized other than temporary impairment on available-for-sale securities of $124 million in earnings.

It is reasonably possible that outcomes in the future could be different from the assumptions and estimates used in identifying impairment on available-for-sale debt securities and, as a result, impairment may be identified in available-for-sale debt securities which had previously been determined not to be impaired. It is possible that this could result in the recognition of material impairment losses in future periods.

Mortgage Servicing Rights We recognize retained rights to service mortgage loans as a separate and distinct asset at the time the loans are sold. We initially value Mortgage Servicing Rights ("MSRs") at fair value at the time the related loans are sold and subsequently measure MSRs at fair value at each reporting date with changes in fair value reflected in income in the period that the changes occur.

MSRs are subject to interest rate risk in that their fair value will fluctuate as a result of changes in the interest rate environment. Fair value is determined based upon the application of valuation models and other inputs. The valuation models incorporate assumptions market participants would use in estimating future cash flows. These assumptions include expected prepayments, default rates and market-based option adjusted spreads. The estimate of fair value is considered to be a "critical accounting estimate" because the assumptions used in the valuation models involve a high degree of subjectivity that is dependent upon future interest rate movements. The reasonableness of these pricing models is validated on a quarterly basis by reference to external independent broker valuations and industry surveys.

Because the fair values of MSRs are significantly impacted by the use of estimates, the use of different estimates can result in changes in the estimated fair values of those MSRs, which can result in equity and earnings volatility because such changes are reported in current period earnings.

Deferred Tax Assets We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax credits and state net operating losses. Our deferred tax assets, net of valuation allowances, totaled $1.6 billion and $2.2 billion as of December 31, 2010 and 2009, respectively. We evaluate our deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences and any carryback availability. We are required to establish a valuation allowance for deferred tax assets and record a charge to income or shareholders' equity if we determine, based on available evidence at the time the determination is made, that it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC necessary as part of such plans and strategies. This process involves significant management judgment about assumptions that are subject to change from period to period. Because the recognition of deferred tax assets requires management to make significant judgments about future earnings, the periods in which items will impact taxable income, and the application of inherently complex tax laws, we have included the assessment of deferred tax assets and the need for any related valuation allowance as a critical accounting estimate.

Since recent market conditions have created significant downward pressure and volatility on HSBC North America's near-term pretax book income, our analysis of the realizability of deferred tax assets significantly discounts any future taxable income expected from operations and relies to a greater extent on continued liquidity and capital support from our parent, HSBC, including tax planning strategies implemented in relation to such support. We are included in HSBC North America's consolidated Federal income tax return and in certain combined state returns. As we have entered into tax allocation agreements with HSBC North America and its subsidiary entities included in the consolidated return which govern the current amount of taxes to be paid or received by the various entities, we look at HSBC North America and its affiliates, together with the tax planning strategies identified, in reaching our conclusion on recoverability. Absent capital support from HSBC and implementation of the related tax planning strategies, we would be required to record a valuation allowance against our deferred tax assets.

The use of different estimates can result in changes in the amounts of deferred tax items recognized, which can result in equity and earnings volatility because such changes are reported in current period earnings. Furthermore, if future events differ from our current forecasts, valuation allowances may need to be established or adjusted, which could have a material adverse effect on our results of operations, financial condition and capital position. We will continue to update our assumptions and forecasts of future taxable income and assess the need and adequacy of any valuation allowance.

Additional detail on our assumptions with respect to the judgments made in evaluating the realizability of our deferred tax assets and on the components of our deferred tax assets and deferred tax liabilities as of December 31, 2010 and 2009 can be found in Note 18, "Income Taxes," in the accompanying consolidated financial statements.

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 December 31, 2010 and increases (decreases) over prior periods are summarized in the table below:

		Increase (Decrease) From
		December 31,		December 31,
	December 31,	2009		2008
	2010	Amount	%	Amount	%
	(dollars are in millions)
Period end assets:
Short-term investments	$18,014	$(5,240)	(22.5)%	$(10,521)	(36.9)%
Loans, net	70,899	(4,729)	(6.3)	(7,817)	(9.9)
Loans held for sale	2,390	(518)	(17.8)	(2,041)	(46.1)
Trading assets	32,402	6,599	25.6	1,113	3.6
Securities	48,713	18,145	59.4	20,930	75.3
Other assets	11,395	(1,523)	(11.8)	(3,420)	(23.1)
	$183,813	$12,734	7.4%	$(1,756)	(.9)%
Funding sources:
Total deposits	$120,651	$2,417	2.0%	$1,672	1.4%
Trading liabilities	10,528	2,618	33.1	(5,791)	(35.5)
Short-term borrowings	15,187	8,675	100+	4,692	44.7
Interest, taxes and other liabilities	3,484	(1,754)	(33.5)	(1,486)	(29.9)
Long-term debt	17,230	(778)	(4.3)	(4,859)	(22.0)
Shareholders' equity	16,733	1,556	10.3	4,016	31.6
	$183,813	$12,734	7.4%	$(1,756)	(.9)%

Short-Term Investments Short-term investments include cash and due from banks, interest bearing deposits with banks, Federal funds sold and securities purchased under resale agreements. Balances will fluctuate from year to year depending upon our liquidity position at the time. Overall balances decreased in 2010 as excess liquidity was redeployed into higher yielding securities.

Loans, Net Loan balances at December 31, 2010, and increases (decreases) over prior periods are summarized in the table below:

		Increase (Decrease) From
		December 31,		December 31,
	December 31,	2009		2008
	2010	Amount	%	Amount	%
	(dollars are in millions)
Commercial loans:
Construction and other real estate	$8,228	$(630)	(7.1)%	$(657)	(7.4)%
Business banking and middle market enterprises	7,942	424	5.6	(2,352)	(22.8)
Large corporate	10,745	1,020	10.5	(3,314)	(23.6)
Other commercial loans	3,356	(847)	(20.2)	(833)	(19.9)
Total commercial loans	30,271	(33)	(0.1)	(7,156)	(19.1)
Consumer loans:
Residential mortgages excluding home equity mortgages	13,697	(25)	(0.2)	(4,251)	(23.7)
Home equity mortgages	3,820	(344)	(8.3)	(729)	(16.0)
Total residential mortgages	17,517	(369)	(2.1)	(4,980)	(22.1)
Auto finance	-	(1,701)	(100)	(154)	(100)
Private label	13,296	(1,795)	(11.9)	(3,778)	(22.1)
Credit Card	10,814	(2,234)	(17.1)	8,677	100+
Other consumer	1,171	(288)	(19.7)	(653)	(35.8)
Total consumer loans	42,798	(6,387)	(13.0)	(888)	(2.0)
Total loans	73,069	(6,420)	(8.1)	(8,044)	(9.9)
Allowance for credit losses	2,170	(1,691)	(43.8)	(227)	(9.5)
Loans, net	$70,899	$(4,729)	(6.3)%	$(7,817)	(9.9)%

Commercial loans at December 31, 2010 reflect the implementation of new accounting guidance relating to the consolidation of variable interest entities ("VIEs") which resulted in an incremental $1.2 billion of large corporate commercial loans recognized on our balance sheet as of December 31, 2010. Excluding this impact, commercial loan balances decreased significantly as compared to 2009 and 2008 due to increased paydowns and managed reductions in certain exposures, including higher underwriting standards and lower overall demand from our core customer base.

Residential mortgage loans have decreased since December 31, 2009 and 2008. 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 majority of our new residential loan originations through the secondary markets and have allowed the existing loan portfolio to run off, resulting in reductions in loan balances. In addition to normal sales activity, we also sold $4.5 billion of prime adjustable and fixed rate mortgage loans to third parties in 2009. The decreases were partially offset by increases to the portfolio associated with originations targeted at our Premier customer relationships.

As previously discussed, real estate markets in a large portion of the United States have been and continue to be affected by stagnation or declines in property values. As such, the loan-to-value ("LTV") ratios for our mortgage loan portfolio have generally deteriorated since origination. Refreshed loan-to-value ratios for our mortgage loan portfolio, excluding subprime residential mortgage loans held for sale, are presented in the table below. The overall improvement in the average refreshed LTV ratio reflects the impact of new loan vintages which have lower LTV ratios.

	Refreshed LTVs(1)(2) at December 31, 2010		Refreshed LTVs(1)(2) at December 31, 2009
	First Lien	Second Lien	First Lien	Second Lien
LTV < 80%	75.1%	64.1%	71.5%	62.8%
80% ≤ LTV < 90%	11.9	13.5	14.3	14.9
90% ≤ LTV < 100%	6.8	9.8	7.7	9.5
LTV ≥ 100%	6.2	12.6	6.5	12.8
Average LTV for portfolio	67.1%	73.6%	68.1%	74.2%

____________

(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 Office of Federal Housing Enterprise Oversight's 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 which 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 HPI's available and applied on an individual loan basis, which results in an approximately 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 September 30, 2010 and 2009, respectively.

Credit card and private label receivable balances decreased from 2009 due to fewer active customer accounts, the continued impact from actions previously taken to mitigate risk including tighter underwriting criteria to lower the risk profile of the portfolio, an increased focus by customers to reduce outstanding credit card debt and, as it relates to the private label portfolio, the exit of certain merchant relationships. At December 31, 2010, private label receivables include $911 million associated with merchants for which we no longer finance new purchases. Credit card receivables increased as compared to 2008 largely due to the purchase of the GM and UP Portfolios, with an outstanding principal balance of $12.4 billion at the time of purchase in January 2009 from HSBC Finance while private label receivables decreased from 2008 for the reasons discussed above.

Auto finance loans decreased from both 2009 and 2008 as a result of the sale of the remainder of our auto finance loans to SC USA in August 2010.

Other consumer loans have decreased primarily due to the discontinuation of originations of student loans and run-off of our installment loan portfolio.

Loans Held for Sale Loans held for sale at December 31, 2010 and increases (decreases) over prior periods are summarized in the following table.

		Increase (Decrease) From
		December 31,		December 31,
	December 31,	2009		2008
	2010	Amount	%	Amount	%
	(dollars are in millions)
Total commercial loans	$1,356	$230	20.4%	$482	55.1%
Consumer loans:
Residential mortgages	954	(432)	(31.2)	(2,558)	(72.8)
Auto finance	-	(353)	(100)	-	-
Other consumer	80	37	86.0	35	77.8
Total consumer loans	1,034	(748)	(42.0)	(2,523)	(70.9)
Total loans held for sale	$2,390	$(518)	(17.8)%	$(2,041)	(46.1)%

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale. Commercial loans held for sale under this program were $1.0 billion, $1.1 billion and $874 million at December 31, 2010, 2009 and 2008, respectively, all of which are recorded at fair value as we have elected to designate these loans under fair value option. Commercial loan balances under this program decreased compared to 2009 primarily due to loan sales, partially offset by improved valuations and increased compared to 2008 due primarily to improved valuations, partially offset by loan sales. In addition during 2010, we provided foreign currency denominated loans to third parties which are classified as commercial loans held for sale and for which we also elected to apply fair value option. The fair value of commercial loans held for sale under this program was $273 million at December 31, 2010. See Note 17, "Fair Value Option," in the accompanying consolidated financial statements for further information.

Residential mortgage loans held for sale include subprime residential mortgage loans of $391 million, $757 million and $1.2 billion at December 31, 2010, 2009 and 2008, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties. Also included in residential mortgage loans held for sale are first mortgage loans originated and held for sale primarily to various government sponsored enterprises. In addition to normal sale activity, during 2009, we sold approximately $4.5 billion of prime adjustable and fixed rate residential mortgage loans. No such sales occurred in 2010. We retained the servicing rights in relation to the mortgages upon sale. Overall balances have declined in 2010 largely due to subprime residential mortgage loan sales.

Auto finance loans held for sale at December 31, 2009 were sold to HSBC Finance during the first quarter of 2010 to facilitate the completion of a loan sale to a third party.

Other consumer loans held for sale consist of student loans which we no longer originate. Higher balances at December 31, 2010 reflect the reclassification of approximately $50 million of student loans from held for investment to held for sale in 2010, partially offset by the sale of a portion of these loans in the first quarter of 2010.

Consumer loans held for sale are recorded at the lower of cost or market value. While the book value of loans held for sale continued to exceed fair value at December 31, 2010, we experienced a decrease in the valuation allowance during 2010 primarily due to lower balances driven by loan sales. The book value of loans held for sale exceeded fair value at December 31, 2009, although the adverse conditions in the U.S. residential mortgage markets in 2009 resulted in increases to the related valuation allowance during 2009.

Trading Assets and Liabilities Trading assets and liabilities balances at December 31, 2010, and increases (decreases) over prior periods, are summarized in the following table.

		Increase (Decrease) From
		December 31,		December 31,
	December 31,	2009		2008
	2010	Amount	%	Amount	%
	(dollars are in millions)
Trading assets:
Securities (1)	$9,665	$4,325	81.0%	$4,552	89.0%
Precious metals	16,725	4,471	36.5	11,820	100+
Derivatives	6,012	(2,197)	(26.8)	(15,259)	(71.7)
	$32,402	$6,599	25.6%	$1,113	3.6%
Trading liabilities:
Securities sold, not yet purchased	212	81	61.8	(194)	(47.8)
Payables for precious metals	5,326	2,868	100+	3,727	100+
Derivatives	4,990	(331)	(6.2)	(9,324)	(65.1)
	$10,528	$2,618	33.1%	$(5,791)	(35.5)%

____________

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

Securities balances as well as balances of securities sold, not yet purchased at December 31, 2010 increased from 2009 due to an increase in Treasury positions related to hedges for derivative positions in both the interest rate and emerging market trading portfolio. Securities balance increases from 2008 also reflect increased market values for asset backed securities from levels experienced in 2008 partially offset by the impact of sales of mortgage backed and asset backed securities held for trading purposes in 2009.

Precious metals trading assets at December 31, 2010 increased compared to 2009 and 2008 primarily due to higher prices on most metals and, compared to 2008, higher gold inventory. The higher payable for precious metals compared to both periods was primarily due to higher gold balances.

Derivative assets and liabilities balances as compared to 2009 were impacted by market volatility as valuations of credit derivatives decreased from small spread tightening and transaction unwinds, partially offset by increased value in foreign exchange and interest rate derivatives. Derivative assets and liabilities from December 31, 2008 were impacted by market volatilities as valuations of foreign exchange, interest rate and credit derivatives all reduced from significant spreads tightening in all sectors since 2008. In addition, credit derivatives had a large decrease as a number of transaction unwinds and commutations reduced the outstanding market value as management sought to actively reduce exposure.

Deposits Deposit balances by major depositor categories at December 31, 2010, and increases (decreases) over prior periods, are summarized in the following table.

		Increase (Decrease) From
		December 31,		December 31,
	December 31,	2009		2008
	2010	Amount	%	Amount	%
	(dollars are in millions)
Individuals, partnerships and corporations	$103,988	$5,581	5.7%	$5,355	5.4%
Domestic and foreign banks	11,912	(1,534)	(11.4)	(4,505)	(27.4)
U.S. government and states and political subdivisions	4,293	(121)	(2.7)	1,343	45.5
Foreign governments and official institutions	458	(1,509)	(76.7)	(521)	(53.2)
Total deposits	$120,651	$2,417	2.0%	$1,672	1.4%
Total core deposits (1)	$90,971	$7,744	9.3%	$22,191	32.3%

____________

(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 were a significant source of funding during 2010, 2009 and 2008. Deposits at December 31, 2010 have increased since December 31, 2009 and 2008 as higher deposits from affiliates, growth in branch-based deposit products driven primarily by our Premier and branch expansion strategies and continued stability in the online savings product was partially offset by our efforts to manage down low margin wholesale deposits in order to maximize profitability. Our relative liquidity strength has also allowed us to lower rates to be in line with our competition on several low margin deposit products. Core domestic deposits, which are a substantial source of our core liquidity, increased during 2010 from both 2009 and 2008 driven by continuing growth in our Premier balances and increases in institutional transaction account balances.

We maintain a growth strategy for our core retail banking business, which includes building deposits and wealth management across multiple markets, channels and segments. This strategy includes various initiatives, such as:

• HSBC Premier, HSBC's global banking service that offers internationally minded mass affluent customers unique international services seamlessly delivered through HSBC's global network coupled with a premium local service with a dedicated premier relationship manager. Total Premier deposits have grown to $29.5 billion at December 31, 2010 as compared to $23.6 billion at December 31, 2009;

• Retail branch expansion in existing and new geographic markets to largely support the needs of our internationally minded customers. During 2010, we opened five new branches in the states of California, Maryland and Virginia; and

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

Short-Term Borrowings Balances at December 31, 2010 compared to 2009 and 2008 reflect significantly increased levels of securities sold under agreements to repurchase, as well as higher commercial paper balances due to the consolidation of the Bryant Park commercial paper conduit as a result of adopting new VIE accounting guidance effective January 1, 2010, which increased short-term borrowings by $3.0 billion at December 31, 2010.

Long-Term Debt Long-term debt at December 31, 2010 decreased as compared to 2009 due to an increased mix of lower rate short-term funding, the impact of long-term debt retirements and continued focus on deposit gathering activities. These increases were partially offset by the issuance of $4.7 billion of term-debt funding in 2010, including the collective issuance of $2.0 billion in subordinated debt by HSBC Bank USA and HSBC USA Inc. Long-term debt at December 31, 2009 declined as compared to 2008 as our overall asset levels decreased and we continued to focus on deposit gathering activities.

Incremental issuances from the $40.0 billion HSBC Bank USA Global Bank Note Program totaled $1.9 billion during 2010 and $698 million during 2009. Total debt outstanding under this program was $4.9 billion and $3.5 billion at December 31, 2010 and 2009, respectively.

Incremental long-term debt issuances from our shelf registration statement with the Securities and Exchange Commission totaled $2.5 billion during 2010 compared to incremental issuances of $2.6 billion during 2009. Total long-term debt outstanding under this shelf was $6.5 billion and $5.5 billion at December 31, 2010 and 2009, respectively.

Borrowings from the Federal Home Loan Bank of New York ("FHLB") totaled $1.0 billion at December 31, 2010 and 2009. At December 31, 2010, we had the ability to access further borrowings of up to $2.7 billion based on the amount pledged as collateral with the FHLB.

In January 2009, as part of the purchase of the GM and UP Portfolio from HSBC Finance, we assumed $6.1 billion of securities backed by credit card receivables that were accounted for as secured financings. Borrowings under these facilities totaled $150 million and $2.4 billion at December 31, 2010 and 2009, respectively.

We have entered into a series of transactions with VIEs organized by HSBC affiliates and unrelated third parties. We are the primary beneficiary of certain of these VIEs under the applicable accounting literature and, accordingly, we have consolidated the assets and the debt of these VIEs. On January 1, 2010, we adopted new guidance issued by the Financial Accounting Standards Board which amends accounting rules relating to the consolidation of VIEs. Application of this new guidance has resulted in the consolidation of one additional VIE and, therefore, the consolidated debt of VIE's we now report is greater than that reported in previous periods. Debt obligations of VIEs totaling $3.0 billion and $205 million were included in short-term borrowings and long-term debt, respectively, at December 31, 2010. Debt obligations of VIEs totaling $3.0 billion were included in long-term debt at December 31, 2009. See Note 26, "Variable Interest Entities," in the accompanying consolidated financial statements for additional information regarding VIE arrangements.

Results of Operations

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

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."

The following table presents changes in the components of net interest income according to "volume" and "rate."

		2010 Compared to 2009 Increase (Decrease)			2009 Compared to 2008 Increase (Decrease)
Year Ended December 31	2010	Volume	Rate	2009	Volume	Rate	2008
	(in millions)
Interest income:
Interest bearing deposits with banks	$73	$30	$(1)	$44	$132	$(270)	$182
Federal funds sold and securities purchased under resale agreements	38	(13)	6	45	(52)	(132)	229
Trading assets	147	62	(134)	219	(226)	(90)	535
Securities	1,181	387	(203)	997	152	(422)	1,267
Loans:
Commercial	955	(110)	(95)	1,160	(189)	(566)	1,915
Consumer:
Residential mortgages	678	(142)	(64)	884	(470)	(56)	1,410
Home equity mortgages	129	(16)	(2)	147	(3)	(72)	222
Private label cards	1,313	(219)	(103)	1,635	(119)	41	1,713
Credit cards	974	(179)	(97)	1,250	1,070	23	157
Auto finance	169	(249)	(24)	442	348	81	13
Other consumer	98	(23)	(13)	134	(30)	(24)	188
Total consumer	3,361	(828)	(303)	4,492	796	(7)	3,703
Other interest	48	(12)	14	46	(16)	(157)	219
Total interest income	5,803	(484)	(716)	7,003	597	(1,644)	8,050
Interest expense:
Deposits in domestic offices:
Savings deposits	376	65	(272)	583	63	(484)	1,004
Other time deposits	163	(39)	(148)	350	(175)	(344)	869
Deposits in foreign offices:
Foreign banks deposits	20	(5)	12	13	(41)	(164)	218
Other time and savings	21	10	(32)	43	9	(294)	328
Short-term borrowings	81	49	(42)	74	(34)	(175)	283
Long-term debt	605	(199)	22	782	(31)	(172)	985
Total interest expense	1,266	(119)	(460)	1,845	(209)	(1,633)	3,687
Net interest income - taxable equivalent basis	4,537	$(365)	$(256)	5,158	$806	$(11)	4,363
Tax equivalent adjustment	18			22			30
Net interest income - non taxable equivalent basis	$4,519			$5,136			$4,333

The significant components of net interest margin are summarized in the following table.

Year Ended December 31	2010	2009	2008
Yield on total earning assets	3.58%	4.57%	5.39%
Rate paid on interest bearing liabilities	.94	1.46	2.71
Interest rate spread	2.64	3.11	2.68
Benefit from net non-interest or paying funds	.16	.25	.24
Net interest margin	2.80%	3.36%	2.92%

Significant trends affecting the comparability of 2010 and 2009 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.

	2010		2009		2008
Year Ended December 31	Amount	Interest Rate Spread	Amount	Interest Rate Spread	Amount	Interest Rate Spread
	(dollars are in millions)
Net interest income/interest rate spread from prior year	$5,158	3.11%	$4,363	2.68%	$3,432	1.90%
Increase (decrease) in net interest income associated with:
Trading related activities	(107)		(78)		300
Balance sheet management activities (1)	(26)		(219)		634
Private label receivable portfolio	(158)		237		260
Credit card portfolio	(234)		1,068		77
Commercial loans	(155)		143		317
Deposits	117		(216)		(627)
Residential mortgage banking	(28)		(6)		(5)
Other activity	(30)		(134)		(25)
Net interest income/interest rate spread for current year	$4,537	2.64%	$5,158	3.11%	$4,363	2.68%

____________

(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-K.

Trading related activities Net interest income for trading related activities decreased during 2010 and 2009 primarily due to lower balances on interest earning trading assets, such as trading bonds, which was partially offset by lower cost of funds. Net interest income for trading related activities increased during 2008 due primarily to decreased funding costs.

Balance sheet management activities Lower net interest income from balance sheet management activities during 2010 and 2009 was primarily due to the sale of securities and the re-investment into lower margin securities, partially offset by positions taken in expectation of decreasing short-term rates including in 2010, additional purchases of U.S. Treasuries and Government National Mortgage Association mortgage-backed securities. During 2008, higher net interest income from balance sheet management activities was due primarily to positions taken in expectation of decreasing short-term rates.

Private label credit card portfolio Net interest income on private label credit card receivables was lower during 2010 as a result of higher premiums, lower average balances outstanding and lower receivable levels at penalty pricing, partially offset by lower funding costs and repricing initiatives. Net interest income was higher during both 2009 and 2008 as a result of lower funding costs and lower amortization of premiums on the initial purchase as well as lower daily premiums.

Credit card portfolio Net interest income on credit card receivables decreased during 2010 primarily reflecting lower average balances outstanding, lower receivables levels at penalty pricing and higher premiums, partially offset by lower funding costs and repricing initiatives. Higher net interest income on credit card receivables during 2009 primarily reflects the impact of the purchase of the GM and UP Portfolios from HSBC Finance. Net interest income was higher in 2008 primarily due to the growing co-brand portfolio and lower funding costs.

Commercial loans Net interest income on commercial loans decreased during 2010 primarily due to lower average loan balances, partially offset by loan repricing, lower levels of nonperforming loans and lower funding costs. Net interest income on commercial loans was higher during 2009 due primarily to loan repricing and lower funding costs, partially offset by lower average balances. Net interest income was higher in 2008 due to higher levels of commercial loans, particularly to middle market customers.

Deposits Higher net interest income during 2010 reflects improved spreads in the Personal Financial Services ("PFS") and Commercial Banking business ("CMB") segments as deposit pricing has been optimized to reflect the on-going low interest rate environment. Both segments continue to be impacted, relative to historical trends, by the current rate environment and the growth in higher yielding deposit products such as on-line savings and Premier investor accounts.

Lower net interest income during 2009 and 2008 related to deposits is primarily due to spread compression on core banking activities in the PFS and CMB business segments. These segments were affected by falling interest rates, growth in higher yielding deposit products and an overall competitive retail market.

Residential mortgage banking Lower net interest income during 2010, 2009 and 2008 resulted from lower average residential loans outstanding partially offset by lower funding costs. Lower average residential loans outstanding resulted in part from the sale, in addition to normal sale activity, of approximately $4.5 billion and $7.0 billion of prime adjustable and fixed rate residential mortgages during 2009 and 2008, respectively.

Other activity Net interest income on other activity was lower in 2010, largely driven by lower net interest income on auto finance receivables, partially offset by lower interest expense related to long-term debt and higher net interest income related to interest bearing deposits with banks. Net interest income was lower in 2009 due to lower break funding charges charged back to specific loan portfolios, which was partially offset by higher net interest income related to a portfolio of auto finance loans purchased in January 2009 and lower funding costs on non-earning assets. Lower net interest income in 2008 was the result of lower interest income on consumer closed-end loans such as student loans and other consumer loans as balances declined from 2007, which was partially offset by lower funding costs on non-earning assets.

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

Year Ended December 31,	2010	2009	2008
	(in millions)
Commercial:
Construction and other real estate	$102	$179	$105
Business banking and middle market enterprises	18	135	187
Large corporate	(163)	214	86
Other commercial	(23)	137	50
Total commercial	$(66)	$665	$428
Consumer:
Residential mortgages, excluding home equity mortgages	(14)	364	286
Home equity mortgages	13	195	219
Private label card receivables	523	1,280	1,282
Credit card receivables	623	1,450	223
Auto finance	35	104	4
Other consumer	19	86	101
Total consumer	1,199	3,479	2,115
Total provision for credit losses	$1,133	$4,144	$2,543

During 2010, we decreased our credit loss reserves as the provision for credit losses was $1.7 billion lower than net charge-offs. During 2009, we increased our credit loss reserves as the provision for credit losses was $1.0 billion greater than net charge-offs. The decrease in 2010 reflects lower loss estimates in our commercial and consumer loan portfolios while loss estimates in these portfolios in 2009 were higher as discussed in more detail below. The provision as a percentage of average receivables was 1.52 percent in 2010, 4.79 percent in 2009 and 2.92 percent in 2008.

Commercial loan provision for credit losses decreased during 2010 as a result of lower loss estimates in all commercial portfolios due to lower outstanding balances including managed reductions in certain exposures and improvements in the financial circumstances of several customer relationships which led to credit upgrades on certain problem credits. Lower loss estimates in 2010 also reflect lower levels of nonperforming loans and criticized assets. The combination of all these factors has led to an overall net recovery in provision for commercial loans during 2010. These decreases were partially offset by a continuing high level of provision relating to certain commercial real estate lending relationships. Given the nature of the factors driving the reduction in commercial loan provision during the year, provision levels recognized in 2010 should not be considered indicative of provision levels in the future.

The increase in the commercial loan provision in 2009 was a result of higher loss estimates on our real estate, business banking and large corporate banking portfolios due to higher criticized loan levels reflecting customer downgrades in certain counterparties largely due to deteriorating economic conditions. Increased provision in our commercial real estate portfolio was largely due to condominium loans and land loans in the condominium construction market in South Florida and California, as well as in hotel and office construction in all markets, especially in the large metropolitan markets where construction projects were delayed. Our business banking portfolio experienced weakness particularly in small balance relationships. Although our large corporate banking portfolio deteriorated in most industry segments and geographies, consistent with the overall deterioration in the U.S. economy in 2009, customers in those areas of the economy that experienced above average weakness such as apparel, auto related suppliers and construction related businesses were particularly affected. Commercial loan provision also increased in 2009 as a result of a specific provision relating to a single private banking client relationship. These increases were partially offset by lower overall provisions in our middle market portfolio due to fewer downgrades in 2009.

The provision for credit losses on residential mortgages including home equity mortgages decreased $560 million during 2010 compared to an increase of $54 million during 2009. The decrease in 2010 was attributable to lower receivable levels and improvements in residential mortgage loan credit quality as dollars of delinquency and charge-off declined as compared to the prior year as outstanding balances continued to fall and housing market volatility declined. During 2009, the increase in provision for credit losses on residential mortgages was attributable to increased delinquencies within the prime residential first mortgage loan portfolio.

Provision expense associated with our private label card portfolio decreased $757 million in 2010 due to lower receivable levels, improved economic and credit conditions including lower delinquency levels and an improved outlook on future loss estimates as the impact of the economic environment including high unemployment levels on losses has not been as severe as previously anticipated. Provision expense associated with our private label card portfolio was relatively flat in 2009 as the impact of higher charge-off levels was largely offset by lower receivable levels, stable delinquency trends and an improved outlook on future loss estimates.

The provision for credit losses associated with credit card receivables decreased $827 million during 2010 compared to an increase of $1,227 million during 2009. The decrease in 2010 reflects lower receivable levels, improved economic and credit conditions, including lower dollars of delinquency, as well as an improved outlook on future loss estimates as the impact of the economic environment, including high unemployment rates, on losses has not been as severe as previously anticipated due in part to improved customer payment behavior, home price stability through much of 2010 and the impact of tighter underwriting initiated in prior periods. Lower receivable levels reflect fewer active customer accounts, the impact of actions previously taken to reduce risk as well as an increased focus by consumers to pay down credit card debt. The increase in the provision for credit losses associated with credit card receivables in 2009 reflects the impact of the purchase of the GM and UP Portfolios as previously discussed. Excluding these portfolios in 2009, provision remained higher primarily from higher delinquencies and charge offs within the co-brand credit card portfolios due to higher levels of personal bankruptcy filings, the impact from a weakened U.S. economy and lower recovery rates.

Provision expense associated with our auto finance portfolio decreased during 2010 as a result of the sale of the remaining auto loans purchased from HSBC Finance in August 2010 as previously discussed while prior to the sale, the portfolio continued to liquidate and used car prices continued to improve. Provision expense associated with our auto finance portfolio during 2009 increased due to the purchase of $3.0 billion in auto finance loans from HSBC Finance in January 2009.

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 the accompanying consolidated financial statements. See "Credit Quality" in this MD&A for additional discussion on the allowance for credit losses associated with our various loan portfolios.

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

Year Ended December 31,	2010	2009	2008
	(in millions)
Credit card fees	$910	$1,356	$879
Other fees and commissions	888	803	709
Trust income	102	125	150
Trading revenue	538	263	(2,662)
Net other-than-temporary impairment losses	(79)	(124)	(231)
Other securities gains, net	74	304	82
HSBC affiliate income:
Fees and commissions	97	129	108
Other affiliate income	59	11	20
Total HSBC affiliate income	156	140	128
Residential mortgage banking revenue(1)	(122)	172	(11)
Gain (loss) on instruments designated at fair value and related derivatives	294	(253)	286
Other income (loss):
Valuation of loans held for sale	47	(250)	(513)
Insurance	17	24	37
Earnings from equity investments	30	30	61
Miscellaneous income	92	(1)	164
Total other income (loss)	186	(197)	(251)
Total other revenues (losses)	$2,947	$2,589	$(921)

____________

(1)	Includes servicing fees received from HSBC Finance of $8 million, $12 million and $14 million during 2010, 2009 and 2008, respectively.

Credit card fees Lower credit card fees during 2010 was due primarily to lower receivable levels as a result of fewer active customer accounts, changes in customer behavior, the continuing impact of efforts to manage risk initiated in prior periods, improved delinquency levels and the implementation of certain provisions of the CARD Act. The CARD Act has resulted in significant decreases in overlimit fees as customers must now opt-in for such fees, restrictions on fees charged to process on-line and telephone payments and lower late fees due to limits on fees that can be assessed all of which are considered in determining the purchase price of the receivables purchased daily from HSBC Finance. Also contributing to the decrease were higher revenue share payments due to improved cash flows and renegotiation of certain merchant agreements as well as higher reversals of fee income stemming from reduced charge-off activity related to the acquisition of the GM and UP Portfolios in January 2009 due to purchase accounting. During 2009, higher credit card fees were due primarily to substantially higher outstanding credit card balances due to the purchase of the GM and UP Portfolios as previously discussed. Also contributing to the increase were higher late fees on private label cards due to increased average delinquency levels throughout 2009 partially offset by higher fee charge-offs due to increased loan defaults.

Other fees and commissions Other fee-based income increased during 2010 driven by higher commercial loan fee accruals and higher refund anticipation loan fees. Beginning in 2010, we began to keep a portion of originated refund anticipation loans on our balance sheet. As a result, we earn fee income on these loans. The loans we kept were transferred to HSBC Finance at par only if they reached a certain defined delinquency status. During 2009, other fee-based income increased due to higher customer referral fees, commercial loan commitment fees, loan syndication fees and fees generated by the Payments and Cash Management business.

Trust income Trust income declined in 2010 and 2009 primarily due to lower domestic custody fees from lower assets under management and margin pressures as money market assets have shifted from higher fee asset classes to lower fee institutional class funds.

Trading revenue (loss) is generated by participation in the foreign exchange, rates, credit and precious metals markets. The following table presents trading related revenue (loss) 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 (loss). Trading revenues related to the mortgage banking business are included in residential mortgage banking revenue.

Year Ended December 31,	2010	2009	2008
	(in millions)
Trading revenue (loss)	$538	$263	$(2,662)
Net interest income	32	165	193
Trading related revenue (loss)	$570	$428	$(2,469)
Business:
Derivatives	$243	$(362)	$(2,445)
Balance sheet management	87	103	(433)
Foreign exchange	174	245	392
Precious metals	60	67	96
Global banking	11	386	(99)
Other trading	(5)	(11)	20
Trading related revenue (loss)	$570	$428	$(2,469)

2010 Compared to 2009 Trading revenue increased during 2010 as the prior year reflects reductions to revenue associated with credit derivative products due to the adverse market conditions which existed at that time. Improved market conditions in 2010 and continued reductions in counterparty exposure have resulted in increases to trading revenues in 2010.

Trading revenue related to derivatives improved during 2010 largely due to the performance of structured credit products which reported total gains of $219 million during 2010 as compared to losses of $369 million during 2009. The performance of credit derivatives also improved during 2010 as credit spread volatility and the outlook for corporate defaults improved and exposures to several counterparties, including monoline insurers, were reduced as a result of the early termination of transactions. As a result, we recorded gains for monolines of $93 million during 2010 compared to losses of $152 million in 2009. Partly offsetting the improvement in credit derivatives revenue were reductions in other derivative products substantially due to lower deal activity as the demand in the marketplace for highly structured products declined.

Trading income related to balance sheet management activities declined in 2010 primarily due to lower net interest income as holdings of certain collateralized mortgage obligations were sold for risk management purposes.

Foreign exchange trading revenue declined in 2010 primarily due to narrower trading spreads as increased competition reduced trading margins.

Precious metals volumes increased in 2010 as a result of continued demand for metals as a perceived safe haven investment. Trading revenue declined compared to the prior year due to narrower trading spreads and higher funding costs associated with higher inventory levels required to support trading volumes.

Global banking trading revenue decreased significantly during 2010 due to the sale of high yield corporate debt securities sold in the early part of 2010 that appreciated during 2009.

2009 Compared to 2008 Trading revenue (loss) during 2009 continued to be affected by reduced liquidity and volatility in the credit markets although the magnitude of such impacts was not as severe when compared to the prior year. While liquidity improved in 2009, it continued to be lower than experienced before the financial crisis. Trading revenue (loss) for 2008 was significantly affected by reduced liquidity, widening spreads and higher volatility in the credit markets.

Trading revenue related to derivatives improved significantly during 2009 due to the performance of structured credit products which reported total losses of $369 million during 2009 as compared to total losses of $2.5 billion during 2008. The performance of credit derivatives improved in 2009 as credit spread volatility and the outlook for corporate defaults stabilized, and exposures to several counterparties, including monoline insurers, were reduced as a result of the early termination of transactions. As a result we recorded losses for monolines of $152 million during 2009 compared to losses of $1.0 billion in 2008.

Trading revenue related to balance sheet management activities improved in 2009 primarily due to more favorable trends in credit spreads on asset backed securities held for trading purposes and increased sales of mortgage backed and other asset backed securities held for trading purposes.

Foreign exchange revenue declined in 2009 primarily due to lower volumes and narrower trading spreads.

Precious metals continued to deliver strong results in 2009, however revenue declined from 2008 levels which benefitted from a higher demand for metals due to economic instability, which eased somewhat in 2009.

Global banking revenue increased during 2009 primarily due to increased values on corporate bonds as credit spreads narrowed on these securities compared to 2008.

Net other-than-temporary impairment (losses) recoveries During 2010 and 2009, 39 and 28 debt securities, respectively, were determined to have either initial other-than-temporary impairment or changes to previous other-than-temporary impairment estimates with only the credit component of such other-than-temporary impairment recognized in earnings. Prior to 2009, all other-than-temporary impairment losses were recorded in earnings. The following table presents other-than-temporary impairment recognized in earnings.

Year Ended December 31,	2010	2009	2008
	(in millions)
Other-than-temporary impairment losses recognized in consolidated statement of income (loss)	$(79)	$(124)	$(231)

Other securities gains, net We maintain various securities portfolios as part of our balance sheet diversification and risk management strategies. The following table summarizes the net other securities gains (losses) resulting from various strategies.

Year Ended December 31,	2010	2009	2008
	(in millions)
Sale of MasterCard or Visa Class B Shares	$-	$48	$83
Securities available-for-sale	74	256	-
Other	-	-	(1)
Total securities gains (losses), net	$74	$304	$82

Gross realized gains and losses from sales of securities are summarized in Note 6, "Securities," in the accompanying consolidated financial statements.

During 2010, we sold $14.1 billion of U.S. Treasury, municipal, 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 $177 million and losses of $103 million, which is included as a component of other security gains, net above. During 2009, we sold $17.4 billion of U.S. Treasury, municipal, mortgage-backed and other asset-backed securities for the reasons discussed above and recognized gains of $312 million and losses of $56 million during the year which is included as a component of other security gains, net above.

HSBC affiliate income Affiliate income was higher during 2010 due to higher fees and commissions earned from HSBC Finance affiliates as compared to the prior year driven by the transfer of certain real estate default servicing employees from HSBC Finance in July 2010, partially offset by lower fees and commissions earned from HSBC Markets USA ("HMUS") and other HSBC affiliates and lower fees on tax refund anticipation loans as in 2010, we transferred only a portion of these loans to HSBC Finance upon origination as discussed above. During 2009, affiliate income was higher due largely to higher fees and commissions earned from HMUS and HSBC Securities, USA. These increases in 2009 were partially offset by lower net sales credits received from affiliates for customer referrals and lower gains on tax refund anticipation loans due to lower origination volumes as there was an on-going relationship with only one third party provider during the 2009 tax season, as well as a shift in mix to lower revenue, lower risk products.

During the third quarter of 2010, the Internal Revenue Service ("IRS") announced it would stop providing information regarding certain unpaid obligations of a taxpayer (the "Debt Indicator"), which historically served as a significant part of our underwriting process for Taxpayer Financial Services ("TFS") tax refund products. It was determined that, without use of the Debt Indicator, we could no longer offer the product that has historically accounted for the substantial majority of our TFS loan production in a safe and sound manner and, therefore, we would no longer offer tax refund anticipation loans and other related products going forward in 2011.

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 (loss) and reflects actual interest earned, net of interest expense and corporate transfer pricing.

Year Ended December 31	2010	2009	2008
	(in millions)
Net interest income	$221	$249	$255
Servicing related income:
Servicing fee income	121	129	130
Changes in fair value of MSRs due to:
Changes in valuation, including inputs or assumptions	(12)	60	(213)
Realization of cash flows	(92)	(56)	(96)
Trading - Derivative instruments used to offset changes in value of MSRs	115	(31)	160
Total servicing related income	132	102	(19)
Originations and sales related income:
Gains (losses) on sales of residential mortgages	53	95	(17)
Provision for repurchase obligations	(341)	(65)	-
Trading and hedging activity	4	18	3
Total originations and sales related income	(284)	48	(14)
Other mortgage income	30	22	22
Total residential mortgage banking revenue included in other revenues (losses)	(122)	172	(11)
Total residential mortgage banking related revenue	$99	$421	$244

Lower net interest income during 2010 and 2009 reflects lower loan balances, partially offset by lower funding costs as well as reduced deferred cost amortization on lower average outstandings. Lower loan balances reflect, in addition to normal sale activity, the sale of approximately $4.5 billion and $7.0 billion in 2009 and 2008, respectively, of prime adjustable and fixed rate residential mortgages for which we retained the servicing rights. We continue to sell the majority of new loan originations to government sponsored enterprises and allow existing loans to runoff. Consistent with our Premier strategy, additions to the portfolio are comprised largely of Premier relationship products.

Total servicing related income increased in 2010 and 2009 due to improved net hedged MSR performance, partially offset during 2010 by increased realization of cash flows and lower servicing fee income as the average serviced loan portfolio declined as new originations sold were more than offset by prepayments. In 2009, servicing fee income was flat as payments owed to the GSEs increased significantly as prepayments increased which offset the impact of a higher average serviced portfolio.

Originations and sales related income decreased significantly in 2010 as higher gains from normal loan sales (excluding held mortgage asset sales) were more than offset by higher estimates of exposure on repurchase obligations associated with previously sold loans. In addition, we recorded gains of $70 million during 2009 related to held mortgage asset sales on sales of approximately $4.5 billion. There were no held mortgage asset sales during 2010. During 2010, we recorded expense of $341 million due to an increase in our estimated exposure associated with repurchase obligations on loans previously sold compared to expense of $65 million recorded in 2009 for such exposure. During 2009, originations and sales related income increased primarily due to gains from loan sales as discussed above, partially offset by an increase in our reserve for potential repurchase liability exposure. In 2008, we recorded gains of $17 million on sales of approximately $7.0 billion in 2008. In addition, 2008 reflects a write down on a pool of Alt A loans classified as held for sale due to the volatile market conditions which existed at that time.

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 has been elected. See Note 17, "Fair Value Option," in the accompanying consolidated financial statements for additional information including a breakout of these amounts by individual component.

Valuation of loans held for sale Valuation adjustments on loans held for sale improved during 2010 due to reduced volatility in the U.S. residential mortgage markets throughout much of 2010. 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 sub-prime residential mortgage loans with a fair value of $391 million and $757 million as of December 31, 2010 and 2009, respectively. Loans held for sale are recorded at the lower of their aggregate cost or market value, with adjustments to market value being recorded as a valuation allowance. Valuations on residential mortgage loans we originate are recorded as a component of residential mortgage banking revenue in the consolidated statement of income (loss). Valuations on loans held for sale in 2010 also reflects an $89 million settlement gain relating to certain whole loans previously purchased for re-sale from a third party. In 2009, valuation adjustments on loans held for sale were not as severe as experienced in 2008 as market conditions began to improve in the second half of 2009. During 2009, overall weakness and illiquidity in the U.S. residential mortgage market and continued delinquencies, particularly in the sub-prime market, resulted in valuation adjustments totaling $233 million being recorded on these loans. In addition, we recorded valuation adjustments on education loans held for sale of $17 million during 2009.

Other income (loss) Excluding the valuation of loans held for sale discussed above, other income (loss) increased during 2010 due largely to higher miscellaneous income due to improved performance related to credit derivatives used to economically hedge certain commercial loans, a $9 million gain on the sale of auto finance loans to SC USA and a $66 million gain relating to the sale of our equity investment in Wells Fargo HSBC Trade Bank partially offset by lower gains on a judgment as discussed below. Excluding the valuation of loans held for sale discussed above, during 2009 other income (loss) decreased due to lower valuations on credit default swaps used to economically hedge credit exposures, combined with lower equity investment income driven by the sale of our equity interest in HSBC Private Bank (Suisse) S.A. in the first quarter of 2009. These decreases were partially offset by an $85 million gain related to a judgment whose proceeds were used to redeem 100 preferred shares issued to CT Financial Services Inc. The obligation to redeem the preferred shares upon our receipt of the proceeds from the judgment represented a contractual arrangement established in connection with our purchase of a community bank from CT Financial Services Inc. in 1997 at which time this litigation remained outstanding. We received a final payment of $5 million in March 2010, relating to this judgment.

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

Year Ended December 31	2010	2009	2008
	(dollars are in millions)
Salaries and employee benefits:
Salaries	$595	$617	$713
Employee benefits	466	496	503
Total salary and employee benefits	1,061	1,113	1,216
Occupancy expense, net	267	280	277
Support services from HSBC affiliates:
Fees paid to HSBC Finance for loan servicing and other administrative support	715	725	473
Fees paid to HMUS	288	247	210
Fees paid to HTSU	780	471	255
Fees paid to other HSBC affiliates	117	144	210
Total support services from HSBC affiliates	1,900	1,587	1,148
Other expenses:
Equipment and software	48	40	42
Marketing	110	116	137
Outside services	132	98	118
Professional fees	74	89	81
Telecommunications	14	14	20
Postage, printing and office supplies	15	16	36
Off-balance sheet credit reserves	(29)	20	81
FDIC assessment fee	134	208	58
Goodwill impairment (1)	-	-	54
Insurance business	(2)	51	43
Miscellaneous	309	248	234
Total other expenses	805	900	904
Total operating expenses	$4,033	$3,880	$3,545
Personnel - average number	9,507	9,587	11,731
Efficiency ratio	54.02%	50.23%	103.90%

____________

(1)	Represents the entire amount of goodwill allocated to the residential mortgage banking reporting unit.

Salaries and employee benefits Salaries and employee benefits expense decreased in 2010 due to the transfer of additional support services employees to HTSU in 2010 as described below and continued cost management efforts partially offset by increased costs associated with the transfer of certain employees from HSBC Finance to the default mortgage loan servicing department of a subsidiary of HSBC Bank USA in July 2010. During 2009, salaries and employee benefits expense were lower due to the transfer of support services employees to an affiliate, as described below, as well as continued cost management efforts, including the impact of global resourcing initiatives undertaken by management, which resulted in lower headcount, partially offset by higher pension expense stemming from reduced plan asset values due to the volatile capital markets.

Occupancy expense, net Occupancy expense during 2010 included lease abandonment costs of $8 million associated with the closure of several non-strategic branches and in 2009, included a $20 million impairment of a data center building held for use. Excluding the impact of these items from both years, occupancy expense was flat in 2010 as higher costs associated with the expansion of the core banking network within the PFS segment were offset by the transfer of additional shared services employees and their related workspace expenses to an affiliate, as discussed below. During 2010, we opened five new branches resulting in higher rental expenses, depreciation of leasehold improvements, utilities and other occupancy expenses. Excluding the impact of the impairment described above, during 2009 occupancy expense declined due to the transfer of shared services employees and their related workspace expenses to an affiliate as discussed below, partially offset by higher occupancy expense due to the continued expansion of the core banking and commercial lending networks within the PFS and CMB business segments as we opened 18 branches in 2009.

Support services from HSBC affiliates includes technology and certain centralized support services, including human resources, corporate affairs and other shared services and beginning in January 2010, 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, collection and accounting functions as well as servicing fees paid to HSBC Finance for servicing nonconforming residential mortgage loans, private label card receivables, credit card receivables and auto finance receivables until the auto finance portfolio was sold in August 2010.

Higher support services from HSBC affiliates during 2010 reflects the increased level of services provided, including higher compliance costs and higher fees paid to HSBC Finance for servicing and assuming the credit risk associated with refund anticipation loans originated and held on our balance sheet as a result of the change in the management of the refund anticipation loan program between HSBC Bank USA and HSBC Finance in 2010. These increases in 2010 were partially offset by lower levels of receivables being serviced. During 2009, support services from HSBC affiliates increased as a result of a significant increase in fees paid to HSBC Finance for servicing largely as a result of the purchase of the GM and UP Portfolios and certain auto finance loans from HSBC Finance in early January 2009 as well as higher fees paid to HTSU due to increased services being provided as human resources, corporate affairs and other shared services were centralized beginning in January 2009. Support services from HSBC affiliates also increased in both periods as a result from higher utilization of other HSBC affiliates in support of global resourcing initiatives, which has resulted in a corresponding reduction in salary and employee benefit expense.

Marketing expenses Lower marketing and promotional expenses in 2010 and 2009 resulted from continued optimization of marketing spend as a result of general cost saving initiatives, partially offset by a continuing investment in HSBC brand activities and marketing support for branch expansion initiatives, primarily within the PFS business segment and during 2010 in the CMB business segment.

Other expenses Other expenses (excluding marketing expenses) decreased during 2010 due to lower FDIC assessment fees as the prior year included an $82 million special assessment recorded in the second quarter of 2009 as well as improved estimates of off-balance sheet exposure and lower insurance costs during 2010. The decreases were partially offset by higher miscellaneous expenses, including higher legal costs, higher collection agency costs and higher outside services costs. During 2009 other expenses increased due to the higher FDIC assessment fees discussed above and higher corporate insurance costs, partially offset by lower outside services fees, improved estimates of off balance sheet credit reserves and the impact of goodwill impairment charges recorded during 2008 with no similar charge being recorded in 2009.

Efficiency ratio Our efficiency ratio, which is the ratio of total operating expenses, reduced by minority interests, to the sum of net interest income and other revenues, was 54.02 percent in 2010 compared to 50.23 percent in 2009 and 103.90 percent in 2008. The deterioration in 2010 reflects higher operating expenses while the total of net interest income and other revenues declined. The improvement in the efficiency ratio in 2009 resulted primarily from an increase in other revenues (losses) and net interest income, partially offset by higher operating expenses.

Segment Results - IFRS Basis

We have five distinct segments that are utilized for management reporting and analysis purposes. The segments, which are based upon customer groupings as well as products and services offered, are described under Item 1, "Business" in this Form 10-K. There have been no changes in the basis of segmentation or measurement of segment profit (loss) as compared with the presentation in our 2009 Form 10-K. Our segment results are reported on a continuing operations basis.

We report to our parent, HSBC, in accordance with its reporting basis, 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 24, "Business Segments," in the accompanying consolidated financial statements and under the caption "Basis of Reporting" in the MD&A section of this Form 10-K.

We are currently in the process of re-evaluating the financial information used to manage our business including the scope and content of the financial data being reported to our management and Board of Directors. To the extent we make changes to this reporting in 2011, we will evaluate any impact such changes may have to our segment reporting.

As discussed in Note 3, "Discontinued Operations," our wholesale banknotes business ("Banknotes Business"), which was previously reported in our Global Banking and Markets segment, is now reported as discontinued operations and is no longer included in our segment presentation.

Personal Financial Services ("PFS") During 2010, we continue to direct resources towards the expansion of the core retail banking business and in particular the growth of wealth services and HSBC Premier, HSBC's global banking service that offers customers a seamless international service. In addition, expansion of the branch network continued during 2010 with the opening of five new branches in geographic markets with international connectivity as well as continued investment in the HSBC brand. We intend to open additional new branches in strategic geographies as the opportunity arises. Premier customers increased to approximately 490,000 at December 31, 2010, a 38 percent increase from December 31, 2009. We remain focused on providing differentiated premium services to the internationally minded mass affluent and upwardly mobile customers.

We continue to sell the majority of new residential mortgage loan originations to government sponsored enterprises. Consistent with our strategy, additions to our portfolio are primarily comprised of Premier relationship products. In addition to normal sales activity, we sold prime adjustable and fixed rate mortgage loan portfolios to third parties in prior years. In addition to normal sales volume, during 2009 and 2008, we sold approximately $4.5 billion and $7.0 billion, respectively, of prime adjustable and fixed rate residential mortgage loans to third parties. No such sales occurred during 2010. We retained the servicing rights in relation to the mortgages upon sale. As a result, average residential mortgage loans outstanding have continued to decline during 2010, decreasing approximately 18 percent in 2010 and 35 percent in 2009 as compared to average residential mortgage loans outstanding during 2009 and 2008, respectively.

The following table summarizes the IFRSs Basis results for our PFS segment:

Year Ended December 31	2010	2009	2008
	(in millions)
Net interest income	$976	$916	$849
Other operating income	164	262	327
Total operating income	1,140	1,178	1,176
Loan impairment charges	50	616	520
	1,090	562	656
Operating expenses	1,277	1,255	1,353
Loss before tax	$(187)	$(693)	$(697)

2010 loss before tax compared to 2009 Our PFS segment reported a loss before tax during 2010 which was lower than the loss before tax during the prior year. The improvement was driven by lower loan impairment charges as well as higher net interest income, which was partially offset by lower other operating income and higher operating expenses.

Net interest income increased in 2010, driven by a combination of customer deposit interest rate reductions and additional funding credits on deposits. The higher net interest income was partially offset by lower levels of mortgage loans outstanding in part due to mortgage loan sales as the portfolio continues to decline.

Other operating income decreased in 2010 reflecting the impact of increases in our estimate of exposure on repurchase obligations associated with previously sold loans which reduced other operating income in 2010 by $341 million as compared to $65 million in 2009. In addition, changes to the ability to charge overdraft fees implemented on July 1, 2010 reduced deposit fee income by $18 million. Other operating income in 2009 also reflects the impact of intersegment charges from the Global Banking and Markets segment of $170 million relating to costs associated with early termination of the funding associated with residential mortgage loan sales, partially offset by net gains on the sales of these residential mortgage loans of $73 million. There were no similar transactions during 2010.

Loan impairment charges declined in 2010, driven largely by improvements in residential mortgage loan credit quality as dollars of delinquency and loss severities in 2010 have moderated which, along with lower loan balances, has led to an improvement in our future loss estimates.

Operating expenses increased in 2010 driven by higher costs from shared services, including higher compliance and technology costs and from the expansion of our branch network. This was partially offset by lower FDIC assessment fees largely driven by the special assessment in the second quarter of 2009 as discussed above and the impact of a $48 million pension curtailment gain recorded in the first quarter of 2010 as a result of the decision in February 2010 to cease all future benefit accruals for legacy participants under the final average pay formula components of the HSBC North America defined benefit pension plan effective January 1, 2011. In addition, we recorded a recovery of $16 million in 2010 related to the Visa legal accrual previously established in 2007 as compared to a recovery of $9 million in 2009.

2009 loss before tax compared to 2008 Our PFS segment reported a decreased loss before tax in 2009 due to higher net interest income and lower operating expenses partially offset by lower other operating income and higher loan impairment charges.

Net interest income increased compared to prior year driven by a combination of customer rate cuts and additional funding credits on deposits as well as widening interest rate spreads on credit card balances due to reduced funding costs in the lower short term rate environment. This was partially offset by lower levels of mortgage loans outstanding driven by mortgage loan sales of approximately $4.5 billion during 2009.

Other operating income decreased during 2009 primarily due to lower personal service charges, ATM and other fees, and, beginning in 2009, a reclassification of loyalty program expenses for cards as a reduction to revenue. Additionally, 2008 benefited from an $83 million gain on the sale of Visa Class B shares. Also contributing to lower other operating income in 2009 was higher mortgage reinsurance costs and break funding charges from the Global Banking and Markets segment of $170 million relating to costs associated with early termination of the funding associated with residential mortgage loan sales compared with a similar charge of $142 million during 2008. These charges were partially offset by net gains on the sales of these same residential mortgage loans of $73 million and $22 million during 2009 and 2008, respectively, as well as better net hedged MSR performance following a very volatile mortgage market in 2008.

Deterioration in credit quality, particularly on prime residential mortgage loans and credit cards negatively impacted results in 2009. Higher loan impairment charges in 2009 were driven by an increase in delinquencies, which resulted in significantly increased charge offs within the home equity mortgage loan and residential first mortgage loan portfolios due to increased loss severities as real estate values continued to deteriorate in certain markets. Loan impairment charges on credit card receivables and other consumer loans also increased. The increase in charge offs within the prime residential mortgage loan portfolio was partially offset by a lower increase in overall reserve levels in 2009 compared to that experienced in 2008. Increased levels of personal bankruptcy filings and deterioration in the U.S. economy, including rising unemployment rates, resulted in the deterioration in credit quality across all products as compared to the prior year.

Operating expenses decreased in 2009 as a result of efficiency programs in the branch network and a reclassification of customer loyalty expenses for credit cards to revenue, which more than offset growth in costs from branch expansion initiatives and higher FDIC assessment fees, including the special assessment in the second quarter of 2009. Operating expenses in 2009 also benefited from a $9 million release related to the VISA litigation accrual set up in 2007. The prior year period was also impacted by a $54 million goodwill impairment charge taken relating to the residential mortgage reporting unit, partially offset by a benefit from a release of $36 million related to the Visa legal accrual set up in 2007. In addition, customer loyalty program expenses for credit cards of $19 million were included in operating expense in the year-ago periods but were reclassified as reduction to revenue beginning in the first quarter of 2009 as discussed above.

Consumer Finance ("CF") The CF segment includes the private label and co-brand credit cards, and other loans acquired from HSBC Finance or its correspondents, including the GM and UP Portfolios and certain auto finance loans which were sold to SC USA in August 2010 as well as portfolios of nonconforming residential mortgage loans (the "HMS Portfolio") purchased in 2003 and 2004. HSBC Finance services the receivables purchased for a fee.

The following table summarizes the IFRSs Basis results for our CF segment:

Year Ended December 31	2010	2009	2008
	(in millions)
Net interest income	$1,865	$2,101	$1,250
Other operating income	171	353	325
Total operating income	2,036	2,454	1,575
Loan impairment charges	972	2,073	1,650
	1,064	381	(75)
Operating expenses	162	88	46
Profit (loss) before tax	$902	$293	$(121)

2010 profit (loss) before tax compared to 2009 Our CF segment reported a higher profit before tax during 2010 largely due to lower loan impairment charges which was partially offset by lower net interest income, lower other operating income and higher operating expenses.

Net interest income was lower in 2010 driven by lower outstanding receivable levels including lower auto loan receivables as a result of the sale of the auto loan portfolio to SC USA, lower credit card and private label card yields due to lower receivable levels at penalty pricing primarily due to the impact of the CARD Act, higher premiums and higher charge-offs of credit card interest as the GM and UP portfolios recorded at fair value upon purchase in January 2009 continue to decline and be replaced by new volume. This was partially offset by repricing initiatives, a lower cost of funds due to a lower short term interest rate environment and a refinement to the assumptions used in allocating interest to the portion of the GM and UP portfolio previously recorded at fair value.

Other operating income decreased during 2010 due to lower fee income resulting from lower levels of credit card and private label card receivables outstanding including lower late fees on these portfolios driven by changes in customer behavior and the impact of the CARD Act, lower delinquency levels, higher charge-off of credit card fees on the GM and UP portfolios due to the runoff of purchase accounting as discussed above and higher revenue share payments. These decreases were partially offset by lower servicing fees on portfolios serviced by our affiliate, HSBC Finance (which is recorded as a reduction to other operating income) due to lower outstanding receivable levels including the transfer of the servicing of the auto finance loans in March 2010 to SC USA, which servicing costs were reflected in operating expense and a $49 million gain in August 2010 on the sale of the remaining auto finance loans to SC USA.

Loan impairment charges associated with credit card receivables, including private label credit card receivables, decreased during 2010 due to lower receivable levels driven by fewer active customer accounts, higher customer payment rates and previous risk mitigation efforts. Also contributing to the decrease were improved economic and credit conditions including lower dollars of delinquency as well as an improved outlook on future loss estimates as the impact of the current economic environment including high unemployment levels, has not been as severe as originally expected due in part to improved customer payment behavior. In addition, the GM and UP Portfolios experienced increased loan impairment charges in 2009 as these portfolios were recorded at fair value when they were purchased in January 2009 which resulted in no allowance for loan losses being established upon acquisition, creating the need to establish loan loss reserves as new volume was originated.

Operating expenses increased in 2010 due to higher collection costs on bad debt accounts which were previously reported in loan impairment charges, higher fraud expenses and prior to disposition, increased servicing costs associated with the transfer of the servicing associated with our auto finance portfolio from HSBC Finance to SC USA, partially offset by the impact of higher FDIC assessment fees in the prior year due to a special FDIC assessment during the second quarter of 2009.

As discussed in previous filings, on May 22, 2009, the CARD Act was signed into law. We have implemented all provisions of the CARD Act. The CARD Act has required us to make changes to our business practices, and will require us and our competitors to manage risk differently than has historically been the case. Pricing, underwriting and product changes in response to the new legislation have either been implemented or are under continuing analysis. The implementation of these new rules did not have a material adverse impact to us as the lower revenue associated with certain provisions of the CARD Act was considered in the purchase price to HSBC Finance on new sales volume.

2009 profit (loss) before tax compared to 2008 Our CF segment reported a higher profit before tax during 2009 due to higher net interest income and higher other operating income, partially offset by higher loan impairment charges and higher operating expenses. The higher profit was driven by the impact of the GM and UP credit card portfolios as well as auto finance receivables purchased from HSBC Finance in early 2009 which collectively contributed profit before tax of $284 million in 2009.

Net interest income increased during 2009 due to higher levels of receivables primarily due to the purchase of the GM and UP Portfolios and the auto finance receivables in January 2009, as well as lower amortization of premiums paid on the initial bulk and subsequent purchases of receivables associated with the private label portfolio, partially offset by higher charge offs of interest as a result of higher levels of credit card receivables outstanding and deterioration in credit quality. The original bulk purchase premium on the private label portfolio was fully amortized during 2008. Net interest income was also higher during 2009 due to higher yields as a result of repricing initiatives on the private label credit card portfolio and a lower cost of funds due to a declining interest rate environment.

Other operating income increased during 2009 primarily due to higher credit card fees associated with the purchase of the GM and UP credit card portfolios. This was partially offset by increased servicing fees on portfolios serviced by our affiliate, HSBC Finance (which are recorded as a reduction to other operating income), higher charge off of fees relating to private label cards due to deterioration in credit quality and credit cards due to higher levels of credit card receivables outstanding as well as lower late fees on co-brand credit card portfolios due to change in customer behavior.

Loan impairment charges associated with credit card receivables, including private label credit card receivables, increased substantially during 2009 due to higher receivable balances driven by our purchase of the GM and UP Portfolios from HSBC Finance as previously discussed, increased delinquencies and higher net charge-offs due to the impact of deterioration in the U.S. economy, including higher levels of personal bankruptcy filings and lower recovery rates on previously charged-off balances. Higher loan impairment charges were partially offset by an improved outlook on future loss estimates on private label credit card receivables as the impact of higher unemployment levels on losses has not been as severe as previously anticipated due to signs of home price stability in the second half of the year, tighter underwriting and as it relates to private label credit cards, the impact of lower receivable balances.

Operating expenses increased due to higher FDIC insurance premiums, including the special assessment recorded in the second quarter of 2009 and higher expenses related to the higher receivable levels and increased collection costs on late stage delinquent accounts.

Commercial Banking ("CMB") Our Commercial Banking segment serves three client groups, notably Middle Market Enterprises, Business Banking and Commercial Real Estate. CMB's business strategy is to be the leader in international banking in target markets. In the U.S., CMB strives to execute on that vision and strategy by proactively targeting the growing number of U.S. companies that are increasingly in need of international banking, financial products and services. The products and services provided to these client groups are offered through multiple delivery systems including the branch banking network. We continue to focus on building our core proposition to mid size international companies based on the west coast and in Texas and Florida.

During 2010, interest rate spreads, while improved from the prior year, continued to be pressured from a low interest rate environment while loan impairment charges improved. An increase in demand for loans towards the end of 2010 coupled with customer deleveraging in the fourth quarter of 2009 has resulted in a 6 percent increase in loans outstanding to middle-market customers at December 31 2010 as compared to December 31, 2009. The business banking loan portfolio has seen a 5 percent decrease in loans outstanding since December 31, 2009 resulting from an increase in paydowns and a decline in the demand for new credit facilities. The commercial real estate business continues to focus on deal quality and portfolio management rather than volume, which resulted in a 9 percent decline in outstanding receivables for this portfolio since December 31, 2009. Average customer deposit balances across all CMB business lines during 2010 increased 5 percent as compared to December 31, 2009 and average loans decreased 11 percent as compared to December 31, 2009. In February 2010, we completed the sale of our interest in Wells Fargo HSBC Trade Bank ("WHTB") to Wells Fargo and recorded a gain of $66 million which is included in other operating income.

The following table summarizes the IFRSs Basis results for our CMB segment:

Year Ended December 31	2010	2009	2008
	(in millions)
Net interest income	$704	$725	$753
Other operating income	455	353	322
Total operating income	1,159	1,078	1,075
Loan impairment charges	115	309	288
	1,044	769	787
Operating expenses	681	634	594
Profit before tax	$363	$135	$193

2010 profit before tax compared to 2009 Our CMB segment reported a higher profit before tax during 2010 as higher other operating income and lower loan impairment charges were partially offset by lower net interest income and higher operating expenses.

Net interest income decreased in 2010 as lower loan balances offset growth in deposit balances and improved loan spreads from re-pricing activities in late 2009.

Other operating income increased during 2010 reflecting higher income from Agency sales, syndications, higher commercial loan fee accruals and gains on the sale of certain commercial real estate loans. The increase in 2010 also reflects a $66 million gain on the sale of our equity investment in WHTB.

Loan impairment charges decreased in 2010 as economic conditions improved and credit quality began to stabilize resulting in improvements in the financial circumstances of several customer relationships which led to credit upgrades on certain problem credits and fewer customer downgrades across all business lines. These improvements were partially offset by a specific provision on a single commercial real estate lending relationship.

Operating expenses increased during 2010 due to higher expenses relating to infrastructure costs such as compliance, higher retail network expenses and higher performance related compensation costs, which were partially offset by a $16 million pension curtailment gain recorded in the first quarter of 2010 as well as lower FDIC assessment fees due to a special FDIC assessment recorded during the second quarter of 2009.

2009 profit before tax compared to 2008 Our CMB segment reported a lower profit before tax during 2009 due to lower net interest income, higher loan impairment charges and higher operating expenses, partially offset by higher other operating income.

Net interest income decreased in 2009 due primarily to narrower spreads on deposits and lower loan balances, partially offset by growth in deposit balances and improved loan spreads from repricing. Loan impairment charges increased in 2009 as worsening economic conditions resulted in higher levels of criticized assets due to downward credit migration and specific credit reserves on impaired loans. Net charge-offs, although relatively low, were higher across all commercial business lines. Operating expenses increased due to higher FDIC insurance premiums, including the special assessment recorded in the second quarter of 2009, partially offset by reduced staff costs and efficiency savings, including lower marketing spend. Other operating income increased in 2009 largely due to higher fee income, partially offset by fewer syndications which resulted in lower fees and lower gains on sale of real estate loans.

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.

There are four major lines of business within Global Banking and Markets: Global Banking, Global Markets, Transaction Banking and Asset Management. The Global Banking business line includes corporate lending and investment banking activities, and this unit also coordinates client relationships across all Global Markets and Banking products. The Global Markets business services the requirements of the world's central banks, corporations, institutional investors and financial institutions through our global trading platforms and distribution capabilities. Transaction Banking provides payments and cash management, trade finance, supply chain and security services primarily to corporations and financial institutions. Asset Management provides investment solutions to institutions, financial intermediaries and individual investors. In 2010, we decided to exit our wholesale banknotes business.

The Global Banking and Markets segment results in 2010 benefited from improved credit market conditions, which when combined with our risk management efforts, led to an increase in the credit quality of our corporate lending relationships, lower securities impairment charges, and reduced losses and gains in certain legacy positions as compared to the year ago periods. The improved credit quality of the portfolio and improved market conditions resulted in a tightening of the net interest margin in the Global Banking and Markets portfolio. As credit markets improved during the first half of the year and then stabilized, results from legacy positions including credit derivatives and subprime mortgage loans contributed to higher other operating income. Substantial counterparty credit reserves for monoline exposure and significant valuation losses were taken in both the trading and available-for-sale securities portfolios throughout 2008 and into 2009 due to market volatility.

Under the provisions of the IAS 39 amendment issued in October 2008, we elected to re-classify $1.8 billion in leveraged loans and high yield notes and $892 million in securities held for balance sheet management purposes from trading assets to loans and available-for-sale investment securities, effective July 1, 2008. In November 2008, $967 million in additional securities were also transferred from trading assets to available-for-sale investment securities. If these IFRS reclassifications had not been made, our profit before tax for 2010 and 2009 would have been higher by $153 million and $617 million, respectively, and our loss before tax for 2008 would have been greater by $893 million.

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

Year Ended December 31	2010	2009	2008
	(in millions)
Net interest income	$638	$812	$1,005
Other operating income	1,048	543	(2,011)
Total operating income	1,686	1,355	(1,006)
Loan impairment charges	(180)	591	165
	1,866	764	(1,171)
Operating expenses	760	761	733
Profit (loss) before tax	$1,106	$3	$(1,904)

2010 profit (loss) before tax compared to 2009 Our Global Banking and Markets segment performance improved significantly during 2010 due primarily to higher other operating income and lower loan impairment charges, partially offset by lower net interest income.

Net interest income decreased during 2010 as a result of sales of higher yielding assets in our available-for-sale securities portfolio since March 2009 which were made for risk management purposes and lower margins on deposit balances.

Other operating income increased in 2010 due to improved performance of credit derivatives, sub-prime mortgage loans held for sale and precious metals. Partially offsetting these improvements were reductions in foreign exchange trading and lower intersegment income.

Other operating income increased in 2010 reflecting gains on structured credit products of $130 million during 2010 as compared to losses of $395 million during the prior year as the credit markets stabilized beginning in the second half of 2009 resulting in fewer losses from hedging activity and counterparty exposures. Also contributing to the increase in other operating income were lower valuation losses on sub-prime residential mortgage loans held for sale as compared to the prior year and improved precious metals revenue as higher vault storage fees more than offset lower trading revenue, partially offset by a decline in foreign exchange trading revenue due to narrower spreads as increased competition reduced trading margins. Other operating income in 2010 also includes a gain of $89 million associated with a settlement relating to certain loans previously purchased for resale from a third party. During 2009, other operating income includes intersegment income of $170 million from PFS relating to the fee charged for the early termination of funding associated with the sale of residential mortgage loans. There was no similar transaction during 2010.

Exposure to insurance monolines continued to impact revenues but deterioration abated in 2010, resulting in gains of $93 million during 2010 compared to losses of $152 million during the prior year. Valuation losses of $59 million were recorded during 2010 against the fair values of sub-prime residential mortgage loans held for sale as compared to valuation losses of $233 million during the prior year.

Loan impairment charges decreased in 2010 due to an improved credit environment combined with active risk mitigation efforts. This resulted in a decrease in higher risk rated loan balances and stabilization of credit downgrades which led to an overall release in loss reserves. In addition, 2009 impairments included a charge of $208 million on securities determined to be other-than-temporarily impaired compared to no similar impairments in the current year.

Operating expenses remained flat in 2010 compared to 2009 as an increase in compensation costs and higher compliance costs was offset by a decrease in legal and professional costs due to the curtailment of the sub-prime residential mortgage securitization and structured credit product activities and lower FDIC assessment fees as the year-ago year-to-date period included a special FDIC assessment recorded in the second quarter of 2009.

2009 profit (loss) before tax compared to 2008 Our Global Banking and Markets segment performance improved considerably in 2009 due primarily to significantly higher other operating income, partially offset by lower net interest income, higher loan impairment charges and a slightly higher increase in operating expenses as a result of the business environment discussed above.

Net interest income declined during 2009 as a result of sales of higher yielding assets in our available-for-sale securities portfolio which were made for risk management purposes, and lower margins on deposit balances. Partially offsetting these declines was higher margin due to loan repricing in our commercial loan portfolio driven by wider credit spreads.

Other operating income improved $2.5 billion during 2009 due to lower valuation losses on credit derivatives and sub-prime mortgage loans held for sale, lower other-than-temporary impairments and valuation losses in the securities portfolio, gains on sales of available-for-sale securities, higher break funding fees from PFS as discussed more fully below and higher transaction fees in Corporate Banking and Transaction Banking. Other operating income overall continued to be affected by adverse market conditions but to a lesser extent than in the prior year period. Other operating income in 2009 would have been higher in 2009 had we not reclassified assets from trading to available-for-sale assets and to loans and receivables under the IAS 39 amendment as previously discussed.

Other operating income reflects losses on structured credit products of $395 million during 2009 compared to total net losses of $2.5 billion during 2008, as the credit markets began to stabilize resulting in lower losses from hedging activity and counterparty exposures. Exposure to insurance monoline continued to adversely impact revenues as deterioration in creditworthiness persisted, although the pace of such deterioration slowed significantly, resulting in losses of $152 million during 2009 compared to losses of $1 billion during 2008.

Valuation losses of $233 million during 2009 were recorded against the fair values of sub-prime residential mortgage loans held for sale as compared to valuation losses of $505 million during 2008. Fair value adjustments on our leveraged loan portfolio of $2 million in 2009 reflects the classification of substantially all leveraged loans and notes as loans and receivables compared to losses of $102 million during 2008 when these assets were subject to fair value accounting. Other operating income also benefited from gains of $254 million on sales of securities, primarily during the second quarter of 2009 and from intersegment income of $170 million from PFS in 2009 relating to the break funding fee charged for the early termination of funding associated with the sale of the residential mortgage loans compared to a similar benefit of $142 million during 2008.

Other operating losses in 2008 included a reduction of $203 million related to the other-than-temporary impairment of FNMA equity securities. There were no similar charges in 2009.

Loan impairment charges increased during 2009 due to a number of credit downgrades in Global Banking on our exposure to the financial services industry and other downgrades on specific accruing loans. In addition, impairments included a charge of $208 million on securities determined to be other-than-temporarily impaired compared to $28 million in the prior year.

Operating expenses increased modestly during 2009 as higher FDIC assessment charges, including the special assessment recorded during the second quarter of 2009 and higher performance related compensation costs due to improved results were offset by lower salary and other staff costs resulting from a decreased overall number of employees.

Private Banking ("PB") As part of HSBC's global network, the PB segment offers integrated domestic and international services to high net worth individuals, their families and their businesses. These services address both resident and non-resident financial needs. During 2010, 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, banking and cash management, residential mortgages, as well as wealth planning for trusts and estates.

Average client deposit levels increased 2 percent as compared to December 31, 2009 as growth in deposits from core clients was partially offset by withdrawals from domestic institutional clients during early 2010. Total average loans decreased 3 percent compared to December 31, 2009 from runoff and reductions of commercial loan borrowings partially offset by growth in the tailored mortgage product. Overall client assets decreased to $33.0 billion at December 31, 2010, or 11 percent since December 31, 2009, driven primarily by withdrawals by institutional clients who had added assets temporarily during the financial crisis.

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

Year Ended December 31	2010	2009	2008
	(in millions)
Net interest income	$184	$172	$192
Other operating income	132	106	156
Total operating income	316	278	348
Loan impairment charges	(38)	98	17
	354	180	331
Operating expenses	242	232	268
Profit (loss) before tax	$112	$(52)	$63

2010 profit (loss) before tax compared to 2009 Our PB segment reported a higher profit before tax during 2010 due to lower loan impairment charges, higher net interest income and higher other operating income, partially offset by higher operating expenses.

Net interest income increased in 2010 primarily due to improved interest spreads on loans and deposits.

Other operating income increased in 2010 primarily due to higher fees on managed products, structured products and recurring fund fees.

Loan impairment charges were lower in 2010 due to lower reserves required relating to certain exposures due to improved credit conditions and improvements in client credit ratings as well as a partial recovery related to a single client relationship which led to an overall release in loss reserves. During 2009 we recorded a large specific provision relating to this client relationship.

Operating expenses increased in 2010 as higher technology costs and higher performance related pay was partially offset by lower FDIC assessment fees due to a special FDIC assessment recorded during the second quarter of 2009 and a $5 million pension curtailment gain recorded in 2010 as discussed above.

2009 Profit (loss) before tax compared to 2008 Our PB segment reported a loss before tax during 2009 due largely to lower net interest income, higher loan impairment charges and lower other operating income, partially offset by lower operating expenses.

Net interest income was lower during 2009 primarily as a result of narrowing interest rate spreads due to declining market rates and lower outstanding loan and deposit balances.

Other operating income was lower primarily due to lower performance fees from equity investments, and lower fee income from credit derivatives, managed products, structured products and recurring fund fees and insurance commissions.

Loan impairment charges increased during 2009 largely to a specific provision relating to a single client relationship recorded in the third quarter of 2009 and higher reserve levels associated with the downgrade of a separate specific domestic client relationship.

Operating expenses decreased as a result of lower staff costs due to lower headcount resulting from efficiency initiatives. Travel and entertainment, marketing and communications costs were also lower, partially offset by higher FDIC assessment fees, including the special assessment recorded during the second quarter of 2009.

Other The other segment primarily includes adjustments made at the corporate level for fair value option accounting related to certain debt issued, the offset to funding credits provided to CMB for holding certain investments, income and expense associated with certain affiliate transactions, adjustments to the fair value on HSBC shares held for stock plans, gains on the sale of various owned properties, the impact of the resolution of a lawsuit as discussed below and for 2009 include the earnings on an equity investment in HSBC Private Bank (Suisse) S.A which was sold in March 2009 for a gain.

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

Year Ended December 31	2010	2009	2008
	(in millions)
Net interest income	$(11)	$17	$(5)
Gain (loss) on own debt designated at fair value and related derivatives	162	(565)	636
Other operating income	31	50	(89)
Total operating income	182	(498)	542
Loan impairment charges	-	-	-
	182	(498)	542
Operating expenses	70	87	-
Profit (loss) before tax	$112	$(585)	$542

2010 profit (loss) before tax compared to 2009 Profit (loss) before tax in 2010 was impacted by credit and interest rate related changes in the fair value of certain own debt instruments to which fair value option was elected. Along with the related fair value option derivatives, we recorded total gains relating to these instruments of $162 million during 2010 compared to losses of $565 million in the prior year.

Other operating income declined in 2010, as lower income from support services from affiliates due to the transfer of additional support functions to HTSU, lower net gains related to the resolution of a lawsuit whose proceeds in 2009 were used to redeem preferred stock issued to CT Financial Services Inc. and lower equity income due to the sale of our investment in Private Bank (Suisse S.A. in March 2009 (which also resulted in a $43 million gain), was partially offset by a $56 million gain on sale of our 452 Fifth Avenue property in New York City (including the 1 W. 39th Street building) and a $4 million gain on the sale of a branch located in Brooklyn, New York in 2010.

Operating expenses declined in 2010 largely reflecting lower closure costs as 2009 includes higher expenses relating to the closure of a data center.

2009 profit (loss) before tax compared to 2008 We reported lower profit before tax during 2009 largely due to a loss on own debt designated at fair value and related derivatives in 2009 and higher operating expenses, partially offset by higher other operating income. Results were negatively impacted in 2009 by an increase in the fair value of certain of our own debt instruments outstanding to which fair value option accounting is applied for which we recorded a loss in 2009 of $565 million due to narrowing credit spreads.

Other operating income improved in 2009 due to higher income from support services provided to affiliates, a net gain of $30 million relating to the resolution of a lawsuit and a gain associated with the sale of an equity investment in HSBC Private Bank (Suisse) S.A. referred to above, partially offset by lower equity earnings on this investment, higher losses associated with funding credits provided to CMB and an impairment charge relating to a building held for use. Additionally, other operating income in 2008 reflects adjustments to the fair value on HSBC shares held for stock plans which reduced other operating income by $97 million.

Operating expenses in 2009 largely reflect higher costs relating to affiliate transactions as well as $16 million of expense associated with the closure of a data center.

Reconciliation of Segment Results As previously discussed, segment results are reported on an IFRS Basis. See Note 24, "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. We generally account for transactions between segments as if they were with third parties. Also see Note 24, "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 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 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 S&P 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 $250,000, an appraisal is generally ordered when the loan is classified as Substandard as defined by the Office of the Comptroller of the Currency. On average, it is 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 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 into 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.

Probable losses for pools of homogeneous consumer loans are generally 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. This analysis considers delinquency status, loss experience and severity and takes into account whether loans are in bankruptcy, have been re-aged or are subject to forbearance, 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.

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 including credit card 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" in this MD&A and in Note 2, "Summary of Significant Accounting Policies and New Accounting Pronouncements," in the accompanying consolidated financial statements. Our approach toward credit risk management is summarized under the caption "Risk Management" in this MD&A.

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

At December 31,	2010	2009	2008	2007	2006
	(dollars are in millions)
Allowance for credit losses	$2,170	$3,861	$2,397	$1,414	$897
Ratio of Allowance for credit losses to:
Loans: (1)
Commercial	1.77%	3.10%	1.53%	.81%	.73%
Consumer:
Residential mortgages, excluding home equity mortgages	1.22	2.53	1.15	.19	.08
Home equity mortgages	2.02	4.44	3.67	.80	.16
Private label card receivables	5.66	7.85	6.86	4.84	3.21
Credit card receivables	5.60	8.48	9.73	6.55	4.12
Auto finance	-	2.12	3.25	2.47	1.72
Other consumer loans	2.73	4.46	3.68	3.31	2.57
Total consumer loans	3.82	5.94	4.18	2.07	1.22
Total	2.97%	4.86%	2.96%	1.56%	1.05%
Net charge-offs (1):
Commercial	158.58%	313.71%	366.67%	252.10%	218.37%
Consumer	66.34	104.06	129.99	125.73	102.55
Total	77.47%	124.23%	153.65%	140.70%	117.41%
Nonperforming loans (1):
Commercial	53.92%	65.44%	146.29%	201.43%	153.20%
Consumer	103.75	155.00	165.91	142.41	108.47
Total	84.47%	116.33%	160.76%	151.85%	116.59%

____________

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

Changes in the allowance for credit losses by general loan categories for the years ended December 31, 2010, 2009 and 2008 are summarized in the following table:

	Commercial				Consumer
					Residential
		Business			Mortgage,
	Construction	Banking and			Excl Home	Home	Private
	and Other	Middle Market	Large	Other	Equity	Equity	Label	Credit	Auto	Other
	Real Estate	Enterprises	Corporate	Comm'l	Mortgages	Mortgages	Card	Card	Finance	Consumer	Total
	(in millions)
Year ended December 31, 2010:
Allowance for credit losses - beginning of period	$303	$184	$301	$150	$347	$185	$1,184	$1,106	$36	$65	$3,861
Provision charged to income	102	18	(163)	(23)	(14)	13	523	623	35	19	1,133
Charge offs	(171)	(90)	(24)	(92)	(170)	(121)	(1,129)	(1,239)	(37)	(67)	(3,140)
Recoveries	9	20	2	8	4	-	174	108	(1)	15	339
Net charge offs	(162)	(70)	(22)	(84)	(166)	(121)	(955)	(1,131)	(38)	(52)	(2,801)
Allowance on loans transferred to held for sale	-	-	-	-	-	-	-	-	(33)	-	(33)
Other	-	-	-	2	-	-	-	8	-	-	10
Allowance for credit losses - end of period	$243	$132	$116	$45	$167	$77	$752	$606	$-	$32	$2,170
Year ended December 31, 2009:
Balances at beginning of period	$186	$189	$131	$66	$207	$167	$1,171	$208	$5	$67	$2,397
Provision charged to income	179	135	214	137	364	195	1,280	1,450	104	86	4,144
Charge offs	(63)	(159)	(45)	(60)	(235)	(189)	(1,431)	(1,033)	(92)	(107)	(3,414)
Recoveries	1	19	1	7	11	12	164	54	18	19	306
Net charge offs	(62)	(140)	(44)	(53)	(224)	(177)	(1,267)	(979)	(74)	(88)	(3,108)
Allowance on loans transferred to held for sale	-	-	-	-	-	-	-	-	(12)	-	(12)
Allowance related to bulk loan purchases from HSBC Finance	-	-	-	-	-	-	-	424	13	-	437
Other	-	-	-	-	-	-	-	3	-	-	3
Balance at end of period	$303	$184	$301	$150	$347	$185	$1,184	$1,106	$36	$65	$3,861
Year ended December 31, 2008:
Balance at beginning of period	$81	$100	$52	$67	$53	$35	$844	$119	$8	$55	$1,414
Provision charged to income	105	187	86	50	286	219	1,282	223	4	101	2,543
Charge offs	-	(119)	(10)	(61)	(133)	(87)	(1,148)	(154)	(9)	(116)	(1,837)
Recoveries	-	21	3	10	1	-	193	20	2	27	277
Net charge offs	-	(98)	(7)	(51)	(132)	(87)	(955)	(134)	(7)	(89)	(1,560)
Balance at end of period	$186	$189	$131	$66	$207	$167	$1,171	$208	$5	$67	$2,397

The allowance for credit losses at December 31, 2010 decreased $1,691 million, or 43.8 percent, as compared to December 31, 2009 reflecting lower loss estimates in all of our consumer and commercial loan portfolios. The lower allowance on our private label credit card and credit card portfolio was due to lower receivable levels as a result of actions previously taken to reduce risk which has led to improved credit quality including lower delinquency levels as well as an increased focus by consumers to reduce outstanding credit card debt. The lower delinquency levels also resulted from continued improvement in delinquency including early stage delinquency roll rates as economic conditions improved. The decrease in the allowance for our residential mortgage loan portfolio and home equity line of credit ("HELOC") and home equity loan portfolios reflects lower receivable levels and dollars of delinquency, moderation in loss severities and an improved outlook for incurred future losses. The decline in the allowance for credit losses relating to auto finance loans reflects the sale of all remaining auto loans previously purchased from HSBC Finance to SC USA in August 2010. Reserve levels for all consumer loan categories however remain elevated due to ongoing weakness in the U.S. economy, including elevated unemployment rates. Reserve requirements in our commercial loan portfolio have also declined due to run-off, including managed reductions in certain exposures and improvements in the financial circumstances of several customer relationships which led to credit upgrades on certain problem credits and lower levels of nonperforming loans and criticized assets.

The allowance for credit losses at December 31, 2009 increased $1,464 million, or 61.1 percent as compared to December 31, 2008 reflecting higher loss estimates on our residential mortgage portfolio driven largely by increased charge-off and delinquency in our prime residential mortgage loan portfolio due to deterioration in the housing markets, higher reserve requirements in our commercial loan portfolio as well as a significantly higher allowance on our credit card receivable portfolio due to the purchase of the GM and UP Portfolios in January 2009. Reserve levels for all loan categories were impacted by continued weakness in the U.S. economy, including rising unemployment rates, and for consumer loans, higher levels of personal bankruptcy filings.

The allowance for credit losses as a percentage of total loans at December 31, 2010 decreased as compared to December 31, 2009 for the reasons discussed above. The allowance for credit losses as a percentage of total loans at December 31, 2009 increased as compared to December 31, 2008 reflecting a higher allowance percentage on our residential mortgage loan and commercial loan portfolios and lower outstanding balances in these portfolios as discussed above, partially offset by a lower credit card ratio reflecting the impact of our prime GM and UP Portfolios on credit card mix. The allowance for credit losses as a percentage of total loans at December 31, 2009 for our private label receivable portfolio also increased as compared to December 31, 2008 due in part to higher charge-off levels as a result of portfolio seasoning, continued deterioration in the U.S. economy including rising unemployment levels and lower receivable levels, including the actions previously taken to tighten underwriting and reduce the risk profile of the portfolio and lower customer spending.

The allowance for credit losses as a percentage of net charge-offs decreased in 2010 as the decline in reserve levels discussed above outpaced the decline in dollars of net charge-off as charge-off is a lagging indicator and does not reflect improved credit performance. While net charge-off levels continued to decline in 2010 due to improved economic conditions and lower outstanding receivable balances, delinquency levels, including early stage delinquency roll rates and future loss estimates also continued to improve. The allowance for credit losses as a percentage of net charge-offs decreased in 2009 as compared to 2008 as the increase in the net charge-offs outpaced the increase in the allowance for credit losses due largely to credit card receivables, private label card receivables and commercial loans.

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

At December 31,	Amount	% of Loans to Total Loans(1)	Amount	% of Loans to Total Loans(1)	Amount	% of Loans to Total Loans(1)
		2010		2009		2008
	(dollars are in millions)
Commercial (2)	$536	41.43%	$938	38.12%	$572	46.14%
Consumer:
Residential mortgages, excluding home equity mortgages	167	18.75	347	17.26	207	22.13
Home equity mortgages	77	5.23	185	5.24	167	5.61
Private label card receivables	752	18.20	1,184	18.99	1,171	21.05
Credit card receivables	606	14.80	1,106	16.41	208	2.63
Auto finance	-	-	36	2.14	5	.19
Other consumer	32	1.59	65	1.84	67	2.25
Total consumer	1,634	58.57	2,923	61.88	1,825	53.86
Total	$2,170	100.00%	$3,861	100.00%	$2,397	100.00%

____________

(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:

At December 31,	2010	2009	2008
	(in millions)
On-balance sheet allowance:
Specific	$178	$326	$43
Collective	335	549	476
Transfer risk	-	-	5
Unallocated	23	63	48
Total on-balance sheet allowance	536	938	572
Off-balance sheet allowance	94	188	168
Total commercial allowances	$630	$1,126	$740

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.

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"):

	2010				2009
	Dec. 31	Sept. 30	June 30	Mar. 31	Dec. 31	Sept. 30	June 30	Mar. 31
	(dollars are in millions)
Dollars of delinquency:
Commercial	$765	$959	$656	$723	$954	$938	$709	$360
Consumer:
Residential mortgages, excluding home equity mortgages(2)	1,248	1,243	1,286	1,551	1,595	1,445	1,335	1,259
Home equity mortgages	182	170	174	184	173	185	194	185
Total residential mortgages(1)	1,430	1,413	1,460	1,735	1,768	1,630	1,529	1,444
Private label card receivables	403	445	478	510	622	639	634	657
Credit card receivables	339	383	449	515	587	591	583	488
Auto finance	-	-	27	33	48	47	37	24
Other consumer	36	38	39	44	45	45	41	42
Total consumer	2,208	2,279	2,453	2,837	3,070	2,952	2,824	2,655
Total	$2,973	$3,238	$3,109	$3,560	$4,024	$3,890	$3,533	$3,015
Delinquency ratio:
Commercial	2.42%	3.03%	2.11%	2.33%	3.04%	2.80%	2.03%	1.02%
Consumer:
Residential mortgages, excluding home equity mortgages	8.52	8.56	8.84	10.59	10.56	9.20	8.14	6.57
Home equity mortgages	4.76	4.37	4.38	4.55	4.15	4.24	4.35	4.07
Total residential mortgages(1)	7.74	7.68	7.88	9.28	9.17	8.12	7.33	8.10
Private label card receivables	3.03	3.57	3.75	3.79	4.12	4.37	4.21	4.21
Credit card receivables	3.13	3.54	3.98	4.36	4.50	4.43	4.23	3.48
Auto finance	-	-	2.11	2.27	2.34	2.06	1.48	.88
Other consumer	2.88	2.90	2.89	3.15	3.00	2.86	2.47	2.40
Total consumer	5.04	5.30	5.43	6.06	6.02	5.69	5.24	4.59
Total	3.93%	4.34%	4.08%	4.57%	4.88%	4.56%	3.98%	3.23%

____________

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

	2010				2009
	Dec. 31	Sept. 30	June 30	Mar. 31	Dec. 31	Sept. 30	June 30	Mar. 31
	(dollars are in millions)
Dollars of delinquency:
Interest-only loans	$150	$153	$164	$214	$236	$ 269	$ 277	$ 281
ARM loans	454	486	535	634	802	781	733	690
Delinquency ratio:
Interest-only loans	4.82%	5.48%	5.79%	7.26%	6.94%	6.78%	6.44%	5.58%
ARM loans	5.70	6.06	6.71	7.94	9.58	8.99	8.22	6.32

(2)	At December 31, 2010 and 2009, residential mortgage loan delinquency includes $852 million and $362 million, respectively, of loans that are carried at the lower of cost or net realizable value.

Our total two-months-and-over contractual delinquency ratio decreased 41 basis points as compared to September 30, 2010. Our two-months-and-over contractual delinquency ratio for consumer loans decreased to 5.04 percent at December 31, 2010 as compared to 5.30 percent at September 30, 2010, driven by declines in both private label card and credit card delinquency. Dollars of delinquency fell in all consumer portfolios except residential mortgages and home equity mortgages. The decrease in dollars of delinquency in our private label card and credit card receivable portfolios reflect improving credit quality due to improved delinquency roll rates including early stage delinquency roll rates and the continued increased focus by consumers to make payments as well as the continued impact of actions previously taken to tighten underwriting and reduce risk in these portfolios. The slight increase in our residential mortgage loan delinquency since September 30, 2010 reflects seasonal trends in delinquency. Overall delinquency levels however, continue to be impacted by elevated unemployment levels. Our two-months-and-over contractual delinquency ratio at December 31, 2010 also benefitted from growth in private label card receivables of approximately $836 million during the fourth quarter due to seasonal volume.

Our commercial two-months-and-over contractual delinquency ratio decreased 61 basis points since September 30, 2010 driven by lower dollars of commercial real estate delinquency levels while average loans outstanding remained relatively flat.

Compared to December 31, 2009, our delinquency ratio decreased 95 basis points at December 31, 2010, due to lower dollars of delinquency resulting from improved economic conditions and lower outstanding loan balances as discussed above as well as the sale of $276 million of delinquent subprime mortgage whole loans during 2010.

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

	2010					2009
		Quarter Ended					Quarter Ended				2008
	Full					Full					Full
	Year	Dec. 31	Sept. 30	June 30	Mar. 31	Year	Dec. 31	Sept. 30	June 30	Mar. 31	Year
	(dollars are in millions)
Net Charge-off Dollars:
Commercial
Construction and other real estate	$162	$77	$29	$43	$13	$62	$36	$8	$18	$-	$-
Business banking and middle market enterprises	70	13	19	17	21	140	33	36	37	34	98
Large corporate	22	(1)	7	12	4	44	33	1	8	2	7
Other commercial	84	7	9	7	61	53	10	15	13	15	51
Total commercial	338	96	64	79	99	299	112	60	76	51	156
Consumer:
Residential mortgages, excluding home equity mortgages	166	27	45	46	48	224	60	55	50	59	132
Home equity mortgages	121	23	32	30	36	177	38	61	50	28	87
Total residential mortgages	287	50	77	76	84	401	98	116	100	87	219
Private label card receivables	955	189	226	251	289	1,267	312	313	328	314	955
Credit card receivables	1,131	221	270	301	339	979	337	343	238	61	134
Auto finance	38	-	-	14	24	74	26	24	20	4	7
Other consumer	52	9	13	13	17	88	20	20	22	26	89
Total consumer	2,463	469	586	655	753	2,809	793	816	708	492	1,404
Total	$2,801	$565	$650	$734	$852	$3,108	$905	$876	$784	$543	$1,560
Net Charge-off Ratio:
Commercial:
Construction and other real estate	1.88%	3.63%	1.35%	1.97%	.60%	.70%	1.62%	.37%	.82%	-%	-%
Business banking and middle market enterprises	.95	.66	1.01	.97	1.17	1.56	1.63	1.67	1.60	1.37	1.00
Large corporate	.20	(.04)	.27	.44	.14	.35	1.21	.03	.24	.06	.05
Other commercial	2.62	.93	1.21	.92	6.49	1.46	1.11	1.73	1.42	1.63	1.16
Total commercial	1.12	1.27	.86	1.08	1.28	.88	1.42	.72	.87	.56	.42
Consumer:
Residential mortgages, excluding home equity mortgages	1.22	.78	1.32	1.36	1.43	1.46	1.70	1.49	1.34	1.36	.54
Home equity mortgages	3.05	2.37	3.23	2.99	3.56	3.98	3.52	5.44	4.44	2.50	1.92
Total residential mortgages	1.63	1.13	1.74	1.74	1.92	2.03	2.12	2.41	2.06	1.59	.76
Private label card receivables	7.25	5.92	7.11	7.68	8.19	8.27	8.44	8.38	8.54	7.77	5.81
Credit card receivables	9.85	8.18	9.63	10.38	11.03	7.24	10.18	9.98	6.84	1.85	6.99
Auto finance	4.12	-	-	4.10	6.11	3.25	5.68	4.53	3.05	.62	3.02
Other consumer	3.90	2.85	3.98	3.84	4.89	5.41	5.32	4.94	5.31	5.92	4.54
Total consumer	5.54	4.41	5.36	5.83	6.43	5.35	6.37	6.32	5.34	3.55	2.83
Total	3.76%	3.11%	3.54%	3.94%	4.40%	3.59%	4.45%	4.13%	3.56%	2.37%	1.79%

Our net charge-off ratio as a percentage of average loans increased 17 basis points for the full year of 2010 as compared to the full year of 2009, driven by higher credit card charge-offs as charge-off levels in 2009 were positively impacted by the purchase of the GM and UP portfolios, a portion of which was recorded at fair value net of future anticipated losses at the time of acquisition, while average receivable levels declined. Also contributing to the increase was higher commercial loan charge-offs driven largely by commercial real estate loans as the higher levels of nonperforming loans reported in the prior year migrated to charge-off. These increases were largely offset by lower residential mortgage and private label card charge-offs due to lower receivable levels and improved credit quality. The trends also reflect the impact from continued high unemployment levels.

Charge-off dollars and ratios in the residential mortgage loan portfolio decreased during 2010 reflecting lower outstanding loan balances and continued moderation in real estate loss severities. Charge-off dollars and ratios for private label card receivables declined compared to the prior year due to lower receivable balances, including increased focus by customers to paydown debt as well as improving credit quality resulting from actions previously taken to reduce risk in the portfolio. Charge-off dollars and ratios in the auto finance portfolio reflect the transfer of these loans to held for sale in July 2010 and subsequent sale of these loans which was completed in August 2010.

Commercial charge-off dollars and ratios increased compared to 2009 largely due to higher commercial real estate loan charge-offs and a charge-off associated with a single private banking relationship which was partially offset by lower charge-off levels in business banking as well as in middle market and large corporate clients due to improving trends in credit quality.

Our net charge-off ratio as a percentage of average loans increased 180 basis points for the full year of 2009 as compared to the full year of 2008 primarily due to higher residential mortgage, private label card, credit card and auto finance charge-offs. Higher net charge-off levels are a result of higher delinquency levels due to the weakness in the U.S. economy and housing markets in 2009, high unemployment rates, portfolio seasoning, and higher loss severities for secured loans as compared to 2008 loss severities.

Nonperforming Assets Nonperforming assets are summarized in the following table.

At December 31,	2010	2009	2008
	(dollars are in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans	$70	$154	$36
Other real estate	529	490	38
Business banking and middle market enterprises	113	120	118
Large corporate	74	344	39
Other commercial	12	159	10
Total commercial	798	1,267	241
Consumer:
Residential mortgages, excluding home equity mortgages	900	818	402
Home equity mortgages	93	107	122
Total residential mortgages (2)	993	925	524
Credit card receivables	3	3	2
Auto finance	-	40	3
Others	9	9	-
Total consumer loans	1,005	977	529
Nonaccrual loans held for sale	186	446	441
Total nonaccruing loans	1,989	2,690	1,211
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans	$-	$-	$-
Other real estate	137	51	94
Business banking and middle market enterprises	47	95	34
Large corporate	-	-	-
Other commercial	12	20	22
Total commercial	196	166	150
Consumer:
Private label card receivables	295	449	462
Credit card receivables	250	429	82
Other consumer	25	31	27
Total consumer loans	570	909	571
Total accruing loans contractually past due 90 days or more	766	1,075	721
Total nonperforming loans	2,755	3,765	1,932
Other real estate owned	159	72	80
Total nonperforming assets	$2,914	$3,837	$2,012
Allowance for credit losses as a percent of nonperforming loans (1):
Commercial	53.92%	65.44%	146.29%
Consumer	103.75	155.00	165.91

____________

(1)	Ratio excludes nonperforming loans associated with loan portfolios which are considered held for sale as these loans are carried at the lower of cost or market.

(2)	At December 31, 2010 and 2009, residential mortgage loan nonaccrual balances include $826 million and $354 million, respectively, of loans that are carried at the lower of cost or net realizable value.

Nonperforming loans at December 31, 2010 decreased significantly as compared to December 31, 2009 reflecting lower levels of commercial nonaccrual loans due to reductions in certain exposures and improved of credit quality in certain components of the book. Decreases in accruing loans past due 90 days or more since December 31, 2009 were driven by credit card and private label card receivables reflecting lower outstanding balances and improvements in credit quality including lower dollars of delinquency in 2010. These decreases were partially offset by modest increases in commercial real estate loans accruing past due 90 days or more. During 2010, we also experienced a significant decline in nonaccrual loans held for sale largely due to the sale of $276 million of non-accrual subprime mortgage loans during the second and third quarters of 2010.

Increases in nonperforming loans at December 31, 2009 as compared to December 31, 2008 are related primarily to commercial loans, residential mortgages, and credit card receivables 90 days or more past due and still accruing.

Deterioration in the U.S. economy, including rising unemployment rates, contributed to the overall increase in nonperforming loans in 2009.

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 the accompanying consolidated financial statements.

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:

At December 31,	2010	2009	2008
	(in millions)
Impaired commercial loans:
Balance at end of period	$1,127	$1,533	$241
Amount with impairment reserve	620	1,127	150
Impairment reserve	188	336	43

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.

At December 31,	2010	2009	2008
	(in millions)
Special mention:
Commercial loans	$2,284	$3,009	$4,066
Substandard:
Commercial loans	2,260	3,523	1,874
Consumer loans	1,774	2,109	1,231
Total substandard	4,034	5,632	3,105
Doubtful:
Commercial loans	202	504	60
Total	$6,520	$9,145	$7,231

The overall decreases in criticized commercial loans in 2010 resulted primarily from changes in the financial condition of certain customers, some of which were upgraded during the year as well as paydowns and charge-off related to certain exposures.

The increase in criticized commercial loans in 2009 resulted primarily from customer credit downgrades in financial institution counterparties and real estate customers. Although our large corporate banking portfolio deteriorated in most industry segments and geographies in 2009, consistent with the overall deterioration in the U.S. economy, customers in those areas of the economy that have experienced above average weakness such as apparel, auto related suppliers and construction related businesses were particularly affected. Higher substandard consumer loans since December 31, 2008 were largely driven by our purchase of the GM and UP Portfolios in January 2009 and to a lesser extent, residential mortgage loans.

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 $94 million and $188 million at December 31, 2010 and 2009, respectively. The related provision is recorded as a miscellaneous expense and is a component of operating expenses. The decrease in off-balance sheet reserves at December 31, 2010 as compared to December 31, 2009 reflects improved credit conditions and lower outstanding exposure as well as the consolidation of a previously unconsolidated commercial paper VIE as of January 1, 2010 which resulted in the reclassification of this reserve on our balance sheet. Off-balance sheet exposures are summarized under the caption "Off-Balance Sheet Arrangements and Contractual Obligations" in this MD&A.

Our commercial credit exposure is diversified across a broad range of industries. Commercial loans outstanding and unused commercial commitments by industry are presented in the table below.

	Commercial Utilized		Unused Commercial Commitments
At December 31,	2010	2009	2010	2009
	(in millions)
Real estate and related	$7,208	$8,076	$1,480	$1,772
Non bank holding companies	1,992	2,884	1,838	1,477
Electronic and electrical equipment	1,794	660	5,000	3,497
Chemicals, plastics and rubber	1,708	1,224	2,424	1,495
Banks and depository institutions	1,560	1,402	784	1,217
Recreational industry	1,489	1,561	1,439	1,287
Ferrous and non ferrous mining	1,444	1,016	1,985	1,745
Security brokers and dealers	1,439	1,283	1,277	2,706
Health, child care and education	1,130	1,036	4,029	3,024
Petro/gas and related	951	705	2,724	1,527
Business and professional services	883	914	2,269	1,853
Textile, apparel and leather goods	871	621	677	841
Food and kindred products	859	758	2,975	4,745
Insurance business	492	671	2,215	2,562
Natural resources, precious metals and jewelry	455	421	78	107
Total commercial credit exposure in top 15 industries based on utilization	24,275	23,232	31,194	29,855
All other industries	5,996	7,072	14,417	19,136
Total commercial credit exposure by industry	$30,271	$30,304	$45,611	$48,991

Cross-Border Net Outstandings Cross-border net outstandings are amounts payable by residents of foreign countries regardless of the currency of claim and local country claims in excess of local country obligations. Cross- border net outstandings, as calculated in accordance with Federal Financial Institutions Examination Council ("FFIEC") guidelines, include deposits placed with other banks, loans, acceptances, securities available-for-sale, trading securities, revaluation gains on foreign exchange and derivative contracts and accrued interest receivable. Excluded from cross-border net outstandings are, among other things, the following: local country claims funded by non-local country obligations (U.S. dollar or other non-local currencies), principally certificates of deposit issued by a foreign branch, where the providers of funds agree that, in the event of the occurrence of a sovereign default or the imposition of currency exchange restrictions in a given country, they will not be paid until such default is cured or currency restrictions lifted or, in certain circumstances, they may accept payment in local currency or assets denominated in local currency (hereinafter referred to as constraint certificates of deposit); and cross-border claims that are guaranteed by cash or other external liquid collateral. Cross-border net outstandings that exceed .75 percent of total assets at year-end are summarized in the following table.

	Banks and Other Financial Institutions	Commercial and Industrial	Total
	(in millions)
December 31, 2010:
France	$1,274	$1,503	$2,777
Canada	926	1,448	2,374
Mexico	533	2,153	2,686
United Kingdom	2,240	832	3,072
Brazil	723	1,209	1,932
Total	$5,696	$7,145	$12,841
December 31, 2009:
France	$303	$1,189	$1,492
Canada	892	494	1,386
United Kingdom	2,874	803	3,677
Brazil	1,275	12	1,287
Total	$5,344	$2,498	$7,842
December 31, 2008:
France	$1,617	$104	$1,721
Canada	2,287	1,619	3,906
United Kingdom	3,387	651	4,038
Cayman Islands	21	2,068	2,089
Venezuela	-	2,426	2,426
Brazil	1,425	682	2,107
Total	$8,737	$7,550	$16,287

Cross-border net outstandings related to Portugal, Ireland, Italy, Greece and Spain totaled 0.50 percent of total assets and did not individually exceed 0.20 percent of total assets.

Credit and Market 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 ignore collateral that may have been received from counterparties to secure exposures and 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.

At December 31,	2010	2009
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure	$39,652	$39,856
Less: collateral held against exposure	4,577	3,890
Net credit risk exposure	$35,075	$35,966

The table below summarizes the risk profile of the counterparties of off-balance sheet exposure to derivative contracts, net of cash and other highly liquid collateral. The ratings presented in the table below are equivalent ratings based on our internal credit rating system.

	Percent of Current Credit Risk Exposure, Net of Collateral
Rating equivalent at December 31	2010	2009
AAA to AA-	39%	37%
A+ to A-	32	35
BBB+ to BBB-	19	17
BB+ to B-	9	8
CCC+ and below	1	2
Unrated	-	1
Total	100%	100%

Our principal exposure to monoline insurance companies is through a number of OTC derivative transactions, primarily credit default swaps ("CDS"). We have entered into CDS to purchase credit protection against securities held within the available for sale and trading portfolios. Due to downgrades in the internal credit ratings of monoline insurers, fair value adjustments have been recorded due to counterparty credit exposures. The table below sets out the mark-to-market value of the derivative contracts at December 31, 2010 and 2009. The "Credit Risk Adjustment" column indicates the valuation adjustment taken against the mark-to-market exposures and reflects the deterioration in creditworthiness of the monoline insurers. The exposure relating to monoline insurance companies that are rated CCC+ and below were fully written down as of December 31, 2010 and 2009. These adjustments have been charged to the consolidated statement of income (loss).

	Net Exposure before Credit Risk Adjustment(1)	Credit Risk Adjustment(2)	Net Exposure After Credit Risk Adjustment
	(in millions)
December 31, 2010
Derivative contracts with monoline counterparties:
Monoline - investment grade	$628	$(63)	$565
Monoline - below investment grade	514	(298)	216
Total	$1,142	$(361)	$781
December 31, 2009:
Derivative contracts with monoline counterparties:
Monoline - investment grade	$721	$(72)	$649
Monoline - below investment grade	1,031	(641)	390
Total	$1,752	$(713)	$1,039

____________

(1)	Net exposure after legal netting and any other relevant credit mitigation prior to deduction of credit risk adjustment.

(2)	Fair value adjustment recorded against the over-the-counter derivative counterparty exposures to reflect the credit worthiness of the counterparty.

Market risk is the adverse effect that a change in market liquidity, interest rates, currency or implied volatility rates has on the value of a financial instrument. We manage the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. We also manage the market risk associated with trading derivatives through hedging strategies that correlate the rates, price and spread movements. This risk is measured daily by using Value at Risk and other methodologies. See the caption "Risk Management" in this MD&A for additional information regarding the use of Value at Risk analysis to monitor and manage interest rate and other market risks.

Liquidity and Capital Resources

Effective liquidity management is defined as making sure 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 2010, liquidity returned to the financial markets for most sources of funding except for mortgage securitization and companies are generally able to issue debt with credit spreads approaching levels historically seen prior to the financial crisis, despite the expiration of some of the U.S. government's support programs. European sovereign debt fears triggered by Greece in May 2010 and again by Ireland in November continue to pressure borrowing costs in the U.S. and the prolonged period of low Federal funds rates continues to put pressure on spreads earned on our deposit base.

Interest Bearing Deposits with Banks totaled $8.2 billion and $20.1 billion at December 31, 2010 and 2009, respectively. 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 $8.2 billion and $1.0 billion at December 31, 2010 and 2009, respectively. The balances increased during 2010 as we redeployed surplus liquidity using repurchase agreements.

Short-Term Borrowings totaled $15.2 billion and $6.5 billion at December 31, 2010 and 2009, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on short-term borrowing trends.

Deposits totaled $120.7 billion and $118.2 billion at December 31, 2010 and 2009, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on deposit trends.

Long-Term Debt decreased to $17.2 billion at December 31, 2010 from $18.0 billion at December 31, 2009. The following table summarizes issuances and retirements of long-term debt during 2010 and 2009:

Year Ended December 31,	2010	2009
	(in millions)
Long-term debt issued	$4,721(1)	$4,318(2)
Long-term debt retired (3)	(5,441)	(13,955)
Net long-term debt retired	$(720)	$(9,637)

____________

(1)	Includes $309 million of long-term debt issued as part of the sale-leaseback of the 452 Fifth Avenue property.

(2)	Excludes $6.1 billion of indebtedness assumed in connection with the purchase of the GM and UP Portfolios in January, 2009.

(3)	Includes the retirement in 2010 and 2009 of $2.4 billion and $3.6 billion, respectively, of indebtedness assumed in connection with the purchase of the GM and UP Portfolios in January 2009. At December 31, 2010 and 2009, $120 million and $2.5 billion, respectively, of the assumed indebtedness remained outstanding

Issuances of long-term debt during 2010 include:

• $2.0 billion of ten-year subordinated debt, of which $1.3 billion was issued by HSBC Bank USA;

• $2.3 billion of medium term notes, of which $612 million was issued by HSBC Bank USA; and

• $90 million of secured financings backed by private label cards 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 ability to issue debt is limited by the issuance authority granted by the Board of Directors. At December 31, 2010, we were authorized to issue up to $15.0 billion, of which $3.0 billion was available. HSBC Bank USA also has a $40.0 billion Global Bank Note Program of which $17.9 billion was available at December 31, 2010 on a cumulative basis.

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 December 31, 2010 and 2009, long-term debt included $1.0 billion, under this facility. The facility also allows access to further borrowings of up to $2.7 billion based upon the amount pledged as collateral with the FHLB.

At December 31, 2010, we had a $2.5 billion unused line of credit with HSBC Bank plc, a U.K. based HSBC subsidiary to support issuances of commercial paper.

At December 31, 2010, we had conduit credit facilities with commercial and investment banks under which our operations may issue securities up to $500 million backed with private label card and credit card receivables. The facilities are annually renewable at the providers' option. At December 31, 2010, credit card and private label card receivables of $233 million were used to collateralize $150 million of funding transactions structured as secured financings under these funding programs. At December 31, 2009, private label card receivables and credit card receivables of $1.7 billion were used to collateralize $1.2 billion of funding transactions structured as secured financings under these funding programs. For the conduit credit facilities that have renewed during 2010, pricing has declined compared to 2009 but is still elevated by historical standards. Available-for-sale investments included $1.1 billion at December 31, 2009, which were restricted for the sole purpose of paying down certain secured financings at the established payment date. At December 31, 2010, there was no outstanding public debt secured by consumer receivables. At December 31, 2009, private label card receivables, credit card receivables and restricted available-for-sale investments totaling $3.9 billion secured $3.0 billion of outstanding public debt and conduit facilities. Public debt associated with these transactions totaled $1.8 billion at December 31, 2009.

The securities issued in connection with collateralized funding transactions may pay off sooner than originally scheduled if certain events occur. Early payoff of securities may occur if established delinquency or loss levels are exceeded or if certain other events occur. For all other transactions, early payoff of the securities begins if the annualized portfolio yield drops below a base rate or if certain other events occur. Presently we do not anticipate that any early payoff will take place. If early payoff were to occur, our 2011 funding requirements would not increase significantly.

Preferred Equity See Note 19, "Preferred Stock," in the accompanying consolidated financial statements for information regarding all outstanding preferred share issues.

Common Equity During 2010, we did not receive any capital contributions from HNAI. During 2010, we contributed $60 million of capital 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, Total capital to risk weighted assets and Tier 1 capital to average assets. Our targets may change from time to time to accommodate changes in the operating environment or other considerations such as those listed above. Selected capital ratios are summarized in the following table:

At December 31,	2010	2009
Tier 1 capital to risk weighted assets	11.80 (1)	9.61%
Total capital to risk weighted assets	18.14 (1)	14.19
Tier 1 capital to average assets	7.87	7.59
Total equity to total assets	9.10	8.87

____________

(1)

Effective January 1, 2010, we began consolidating a commercial paper conduit managed by HSBC Bank USA as a result of adopting new guidance related to the consolidation of variable interest entities. See Note 26, "Variable Interest Entities," in the accompanying consolidated financial statements for further discussion of the consolidation of this entity and related impacts.

HSBC USA manages capital in accordance with the HSBC Group policy. HSBC North America and HSBC Bank USA have each approved an Internal Capital Adequacy Assessment Process ("ICAAP") that works in conjunction with the HSBC Group's ICAAP. The ICAAP evaluates regulatory capital adequacy, economic capital adequacy, rating agency requirements 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.

Subject to regulatory approval, HSBC North America will be required to implement Basel II provisions no later than April 1, 2011 in accordance with current regulatory timelines. HSBC USA Inc. will not report separately under the new rules, but HSBC Bank USA will report under the new rules on a stand-alone basis. Further increases in regulatory capital may be required prior to the Basel II adoption date; however the exact amount will depend upon our prevailing risk profile and that of our North America affiliates under various stress scenarios. Adoption must be preceded by a parallel run period of at least four quarters, and requires the approval of U.S. regulators. This parallel run, which was initiated in January 2010, encompasses enhancements to a number of risk policies, processes and systems to align HSBC Bank USA with the Basel II final rule requirements. HSBC Bank USA will seek regulatory approval for adoption when the program enhancements have been completed which may extend beyond April 1, 2011.

HSBC Bank USA is subject to restrictions that limit the transfer of funds to its affiliates, including HSBC USA, and its nonbank subsidiaries in so-called "covered transactions." In general, covered transactions include loans and other extensions of credit, investments and asset purchases, as well as certain other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. Unless an exemption applies, covered transactions by a subsidiary bank with a single affiliate are limited to 10 percent of the subsidiary bank's capital and surplus and, with respect to all covered transactions with affiliates in the aggregate, to 20 percent of the subsidiary bank's capital and surplus. Also, loans and extensions of credit to affiliates generally are required to be secured in specified amounts. Where cash collateral is provided for an extension of credit to an affiliate, that loan is excluded from the 10 and 20 percent limitations. A bank's transactions with its nonbank affiliates are also required to be on arm's length terms.

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 25, "Retained Earnings and Regulatory Capital," in the accompanying consolidated financial statements.

HSBC USA Inc. We are an indirect wholly owned subsidiary of HSBC Holdings plc and the parent company of HSBC Bank USA and other subsidiaries through which we offer personal and commercial banking products and related financial services including derivatives, payments and cash management, trade finance and investment solutions. Our main source of funds is cash received from operations and subsidiaries in the form of dividends. In addition, we receive cash from third parties and affiliates by issuing preferred stock and debt and from our parent by receiving capital contributions when necessary.

We received cash dividends from our subsidiaries of $7 million and $9 million in 2010 and 2009, respectively.

We have a number of obligations to meet with our available cash. We must be able to service our debt and meet the capital needs of our subsidiaries. We also must pay dividends on our preferred stock and may pay dividends on our common stock. Dividends paid on preferred stock totaled $74 million in 2010 and $73 million in 2009. No dividends were paid to HNAI, our immediate parent company, on our common stock during either 2010 or 2009. We may pay dividends to HNAI in the future, but will maintain our capital at levels that we perceive to be consistent with our current ratings either by limiting the dividends to, or through capital contributions from, our parent.

At various times, we will make capital contributions to our subsidiaries to comply with regulatory guidance, support receivable growth, maintain acceptable investment grade ratings at the subsidiary level, or provide funding for long-term facilities and technology improvements. We made capital contributions to certain subsidiaries of $60 million in 2010 and $2.7 billion in 2009.

Subsidiaries At December 31, 2010, we had one major subsidiary, HSBC Bank USA. Prior to December 9, 2008, we had two primary subsidiaries: HSBC Bank USA and HSBC National Bank USA. On December 9, 2008, HSBC National Bank USA was merged into HSBC Bank USA.

We manage substantially all of our operations through HSBC Bank USA, which funds our businesses primarily through receiving deposits from customers; the collection of receivable balances; issuing short-term, medium-term and long-term debt; borrowing under secured financing facilities and selling residential mortgage receivables. The vast majority of our domestic medium-term notes and long-term debt is marketed through subsidiaries of HSBC. Intermediate and long-term debt may also be marketed through unaffiliated investment banks.

As part of the regulatory approvals with respect to the receivable purchases completed in January 2009 described above, we and our ultimate parent, HSBC, committed that HSBC Bank USA will maintain a Tier 1 risk-based capital ratio of at least 7.62 percent, a total capital ratio of at least 11.55 percent and a Tier 1 leverage ratio of at least 6.45 percent for one year following the date of transfer. In addition, we and HSBC made certain additional capital commitments to ensure that HSBC Bank USA holds sufficient capital with respect to the purchased receivables that are or become "low-quality assets," as defined by the Federal Reserve Act. Capital ratios and amounts reported above at December 31, 2010 and 2009 reflect this revised regulatory reporting.

During 2010, HSBC Bank USA sold low-quality auto finance loans with a net book value of approximately $178 million to a non-bank subsidiary of HSBC USA Inc. to reduce the capital requirement associated with these assets. These loans were subsequently sold to SC USA in August 2010. At December 31, 2010, the remaining purchased receivables subject to this requirement total $3.2 billion, of which $651 million were considered low-quality assets. As discussed above, we have established an Internal Capital Adequacy Assessment Process. Under ICAAP, capital adequacy is evaluated through the examination of regulatory capital ratios (measured under current and Basel II rules), economic capital and stress testing. The results of the ICAAP are forwarded to HSBC and, to the extent that this evaluation identifies potential capital needs, incorporated into the HSBC capital management process. HSBC has provided capital support in the past and has indicated its commitment and capacity to fund the needs of the business in the future.

2011 Funding Strategy Our current estimate for funding needs and sources for 2011 are summarized in the following table.

(in billions)
Funding needs:
Net loan growth (attrition), excluding asset transfers	$4
Long-term debt maturities	5
Total funding needs	$9
Funding sources:
Core deposit growth	$3
Other deposit growth	1
Long-term debt issuance	7
Short-term funding/investments	(3)
Other, including capital infusions	1
Total funding sources	$9

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 are 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. Deposits are expected to grow as we continue to expand our core domestic banking network. 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 majority of new mortgage loan originations to government sponsored enterprises and private investors.

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

Capital Expenditures We made capital expenditures of $96 million and $42 million during 2010 and 2009, respectively. In addition to these amounts, during 2010 and 2009, we capitalized $72 million and $49 million, respectively, relating to the building of several new retail banking platforms as part of an initiative to build common platforms across HSBC. We began to roll out certain of these platforms in 2010 and will continue to roll out other platforms in 2011. We currently expect to capitalize approximately $40 million to $50 million of additional costs on these retail banking platforms during 2011. Excluding the costs related to the new retail banking platforms, capital expenditures in 2011 are not expected to be significant.

Commitments See "Off-Balance Sheet Arrangements" below for further information on our various commitments.

Contractual Cash Obligations The following table summarizes our long-term contractual cash obligations at December 31, 2010 by period due.

	2011	2012	2013	2014	2015	Thereafter	Total
	(in millions)
Subordinated long-term debt and perpetual capital notes (1)	$101	$125	$-	$1,170	$-	$6,246	$7,642
Other long-term debt, including capital lease obligations (1)	5,307	1,038	298	1,141	116	1,688	9,588
Other postretirement benefit obligations (2)	7	7	7	7	7	31	66
Obligation to the HSBC North America Pension Plan (3)	121	22	33	30	16	-	222
Minimum future rental commitments on operating leases (4)	157	144	139	132	116	392	1,080
Purchase obligations (5)	92	12	12	12	7	-	135
Total	$5,785	$1,348	$489	$2,492	$262	$8,357	$18,733

____________

(1)	Represents future principal payments related to debt instruments included in Note 15, "Long-Term Debt," of the accompanying consolidated financial statements.

(2)	Represents estimated future employee benefits expected to be paid over the next ten years based on assumptions used to measure our benefit obligation at December 31, 2010. See Note 22, "Pension and Other Postretirement Benefits," in the accompanying consolidated financial statements.

(3)	Our contractual cash obligation to the HSBC North America Pension Plan included in the table above is based on the Pension Funding Policy which was revised during the fourth quarter of 2010 and establishes required annual contributions by HSBC North America through 2015. The amounts included in the table above, reflect an estimate of our portion of those annual contributions based on plan participants at December 31, 2010. See Note 22, "Pension and Other Postretirement Benefits," in the accompanying consolidated financial statements for further information about the HSBC North America Pension Plan.

(4)	Represents expected minimum lease payments, net of minimum sublease income under noncancellable operating leases for premises and equipment included in Note 29, "Collateral, Commitments and Contingent Liabilities," in the accompanying consolidated financial statements.

(5)	Represents binding agreements for facilities management and maintenance contracts, custodial account processing services, internet banking services, consulting services, real estate services and other services.

These cash obligations could be funded primarily through cash collections on receivables and from the issuance of new unsecured debt or receipt of deposits.

Our purchase obligations for goods and services at December 31, 2010 were not significant.

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 that meet the definition 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 December 31,
	2011	2012	2013	2014	2015	Thereafter	2010	2009
	(in billions)
Standby letters of credit, net of participations (1)	$4.7	$1.3	$.5	$.4	$.1	$.2	$7.2	$7.6
Commercial letters of credit	.8	-	-	-	-	-	.8	.7
Credit derivatives (2)	44.0	94.7	75.4	57.1	38.2	45.4	354.8	387.2
Other commitments to extend credit:
Commercial	15.6	12.1	9.9	3.0	3.2	1.8	45.6	49.0
Consumer	7.2	-	-	-	-	-	7.2	6.9
Total	$72.3	$108.1	$85.8	$60.5	$41.5	$47.4	$415.6	$451.4

____________

(1)	Includes $486 million and $774 million issued for the benefit of HSBC affiliates at December 31, 2010 and 2009, respectively.

(2)	Includes $49.4 billion and $57.3 billion issued for the benefit of HSBC affiliates at December 31, 2010 and 2009, respectively.

Letters of Credit A letter of credit may be issued for the benefit of a customer, authorizing a third party to draw on the letter for specified amounts under certain terms and conditions. The issuance of a letter of credit is subject to our credit approval process and collateral requirements. We issue commercial and standby letters of credit.

• A commercial letter of credit is drawn down on the occurrence of an expected underlying transaction, such as the delivery of goods. Upon the occurrence of the transaction, the amount drawn under the commercial letter of credit is recorded as a receivable from the customer in other assets and as a liability to the vendor in other liabilities until settled.

• A standby letter of credit is issued to third parties for the benefit of a customer and is essentially a guarantee that the customer will perform, or satisfy some obligation, under a contract. It irrevocably obligates us to pay a third party beneficiary when a customer either: (1) in the case of a performance standby letter of credit, fails to perform some contractual non-financial obligation, or (2) in the case of a financial standby letter of credit, fails to repay an outstanding loan or debt instrument.

Fees are charged for issuing letters of credit commensurate with the customer's credit evaluation and the nature of any collateral. Included in other liabilities are deferred fees on standby letters of credit, representing the fair value of our "stand ready obligation to perform" under these arrangements, amounting to $47 million and $48 million at December 31, 2010 and 2009, respectively. Fees are recognized ratably over the term of the standby letter of credit. Also included in other liabilities is a credit loss reserve on unfunded standby letters of credit of $26 million and $27 million at December 31, 2010 and 2009, respectively. See Note 27, "Guarantee Arrangements," in the accompanying consolidated financial statements for further discussion on off-balance sheet guarantee arrangements.

Credit Derivatives Credit derivative contracts are entered into both for our own benefit and to satisfy the needs of our customers. Credit derivatives are arrangements that provide for one party (the "beneficiary") to transfer the credit risk of a "reference asset" to another party (the "guarantor"). Under this arrangement the guarantor assumes the credit risk associated with the reference asset without directly purchasing it. The beneficiary agrees to pay to the guarantor a specified fee. In return, the guarantor agrees to pay the beneficiary an agreed upon amount if there is a default during the term of the contract.

In accordance with our policy, we offset most of the market risk we assume in selling credit guarantees through a credit derivative contract with another counterparty. Credit derivatives, although having characteristics of a guarantee, are accounted for as derivative instruments and are carried at fair value. The commitment amount included in the table above is the maximum amount that we could be required to pay, without consideration of the approximately equal amount receivable from third parties and any associated collateral. See Note 27, "Guarantee Arrangements," in the accompanying consolidated financial statements for further discussion on off-balance sheet guarantee arrangements.

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 comprise 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 26, "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 because of a commercial paper market disruption or the supported transaction has breached certain triggers. 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 because of a commercial paper market disruption or the supported transaction has breached certain triggers. 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 December 31, 2010. 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 Type	Maximum Exposure to Loss	Conduit Assets (1) Total Assets	Weighted Average Life (Months)	Conduit Funding(1) Commercial Paper	Weighted Average Life (Days)
	(dollars are in millions)
HSBC affiliate sponsored (multi-seller)	$1,302	$707	38	$690	15
Third-party sponsored:
Single-seller	554	6,964	40	6,643	90
Total	$1,856	$7,671		$7,333

____________

(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	Average Credit Quality (1)
	Asset
Asset Class	Mix	AAA	AA+/AA	A	A-	BB/BB-
Multi-seller conduits
Debt securities backed by:
Auto loans and leases	15%	-%	-%	100%	-%	-%
Trade receivables	14	100	-	-	-	-
Credit card receivables	71	30	-	70	-	-
Total	100%	35%	-%	65%	-%	%
Single-seller conduits
Debt securities backed by:
Auto loans and leases	100%	99%	1%	-%	-%	-%

____________

(1)

Credit quality is based on Standard and Poor's ratings at December 31, 2010 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 2010, U.S. asset-backed commercial paper volumes stabilized as most major bank conduit sponsors are extending new financing to clients but at a slower pace. Credit spreads in the multi-seller conduit market have generally trended lower following a pattern that is prevalent across the U.S. credit markets. In the ABCP market, the success of the Federal Reserve's Term Asset-Backed Securities Loan Facility program revived the term ABS market. The lower supply of ABCP has led to greater 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 a result of specific difficulties in the Canadian asset backed commercial paper markets, we entered into various agreements during 2007 modifying obligations with respect to these facilities.

Under one of these agreements, known as the Montreal Accord, a restructuring proposal to convert outstanding commercial paper into longer term securities was approved by ABCP noteholders and endorsed by the Canadian justice system in 2008. The restructuring plan was formally executed during the first quarter of 2009. As part of the enhanced collateral pool established for the restructuring, we have provided a $399 million Margin Funding Facility to new Master Conduit Vehicles, which is currently undrawn. HSBC Bank USA derivatives transactions with the previous conduit vehicles have been assigned to the new Master Conduit Vehicles. Under the restructuring, collateral provided to us to mitigate the derivatives exposures is significantly higher than it was prior to the restructuring.

Also in Canada but separately from the Montreal Accord, as part of an ABCP conduit restructuring executed in 2008, we agreed to hold long-term securities of $300 million (denominated in Canadian dollars) and provide a $100 million credit facility. As of December 31, 2010 this credit facility was undrawn and approximately $301 million (U.S. dollars) of long-term securities were held. At December 31, 2009, approximately $1 million of the credit facility was drawn and $285 million (U.S. dollars) of long term securities were held. The change in value of securities held from December 31, 2009 was due to exchange rate fluctuations between the U.S. dollar and the Canadian dollar.

As of December 31, 2010 and 2009, other than the facilities referred to above, we no longer have outstanding liquidity facilities to Canadian ABCP conduits subject to the Montreal Accord or other agreements. However, we hold $10 million of long-term securities that were converted from a liquidity drawing which fell under the Montreal Accord restructuring agreement.

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 as they are not VIEs and we do not hold a majority voting interest.

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 decrease of $103 million in the fair value of financial liabilities during 2010, compared to an increase of $310 million during 2009.

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 loss on debt designated at fair value and related derivatives during 2010 should not be considered indicative of the results for any future period.

Control Over Valuation Process and Procedures A control framework has been established which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. To that end, the ultimate responsibility for the determination of fair values rests with Finance. Finance establishes policies and procedures to ensure appropriate valuations. For fair values determined by reference to external quotations on the identical or similar assets or liabilities, an independent price validation process is utilized. For price validation purposes, quotations from at least two independent pricing sources are obtained for each financial instrument, where possible. We consider the following factors in determining fair values:

• similarities between the asset or the liability under consideration and the asset or liability for which quotation is received;

• consistency among different pricing sources;

• the valuation approach and the methodologies used by the independent pricing sources in determining fair value;

• the elapsed time between the date to which the market data relates and the measurement date; and

• the source of the fair value information.

Greater weight is given to quotations of instruments with recent market transactions, pricing quotes from dealers who stand ready to transact, quotations provided by market-makers who originally structured such instruments, and market consensus pricing based on inputs from a large number of participants. Any significant discrepancies among the external quotations are reviewed by management and adjustments to fair values are recorded where appropriate.

For fair values determined by using internal valuation techniques, valuation models and inputs are developed by the business and are reviewed, validated and approved by the Quantitative Risk and Valuation Group ("QRVG") or other independent valuation control teams within Finance. Any subsequent material changes are reviewed and approved by the Valuation Committee which is comprised of representatives from the business and various control groups. Where available, we also participate in pricing surveys administered by external pricing services to validate our valuation models and the model inputs. The fair values of the majority of financial assets and liabilities are determined using well developed valuation models based on observable market inputs. The fair value measurements of these assets and liabilities require less judgment. However, certain assets and liabilities are valued based on proprietary valuation models that use one or more significant unobservable inputs and judgment is required to determine the appropriate level of adjustments to the fair value to address, among other things, model and input uncertainty. Any material adjustments to the fair values are reported to management.

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 Vale 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 inputs 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. 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 December 31, 2010 and December 31, 2009, 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 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.

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

Material Transfers Between Level 1 and Level 2 Measurements During 2010 and 2009, there were no material 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 December 31, 2010 and 2009.

At December 31,	2010	2009
	(dollars are in millions)
Level 3 assets (1)(2)	$5,776	$9,179
Total assets measured at fair value (3)	139,139	111,219
Level 3 liabilities	5,197	3,843
Total liabilities measured at fair value (1)	83,444	74,021
Level 3 assets as a percent of total assets measured at fair value	4.2%	8.3%
Level 3 liabilities as a percent of total liabilities measured at fair value	6.2%	5.2%

____________

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

(2)	Includes $4.8 billion of recurring Level 3 assets and $992 million of non-recurring Level 3 assets at December 31, 2010 and $7.4 billion of recurring Level 3 assets and $1.8 billion of non-recurring Level 3 assets at December 31, 2009.

(3)	Includes $137.6 billion of assets measured on a recurring basis and $1.5 billion of assets measured on a non-recurring basis at December 31, 2010. Includes $108.6 billion of assets measured on a recurring basis and $2.7 billion of assets measured on a non-recurring basis at December 31, 2009.

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. Beginning in 2007 and continuing into 2009, the creditworthiness of the monoline insurers had deteriorated significantly. However, beginning in the second half of 2009 and continuing into 2010, the credit condition of some insurers began to improve. As a result, we made a $93 million positive credit risk adjustment and a $152 million negative credit risk adjustment to the fair value of our credit default swap contracts during 2010 and 2009, respectively, which is reflected in trading revenue (loss). We have recorded a cumulative credit adjustment reserve of $361 million against our monoline exposure at December 31, 2010 compared to a $713 million credit adjustment reserve at December 31, 2009. The decreases in 2010 reflect both reductions in our outstanding positions and improvements in exposure estimates.

Loans As of December 31, 2010 and 2009, we have classified $413 million and $793 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 cost or fair value basis. Based on our assessment, we recorded a gain of $50 million for such mortgage loans during 2010 compared to losses of $233 million during 2009. The changes in fair value are recorded as other revenues in the consolidated statement of income (loss). The decrease in losses in 2010 reflect reduced volatility in the U.S. residential mortgage markets.

Material Additions to and Transfers Into (Out of) Level 3 Measurements During 2010, we transferred $238 million of mortgage and other asset-backed securities from Level 2 to Level 3 as the availability of observable inputs declined and the discrepancy in valuation per independent pricing services increased. In addition, we transferred $157 million of credit derivatives from Level 2 to Level 3 as a result of a qualitative analysis of the foreign exchange and credit correlation attributes of our model used for certain credit default swaps.

During 2010, we transferred $666 million of mortgage and other asset-backed securities and $184 million of corporate bonds from Level 3 to Level 2 due to the availability of observable inputs in the market including broker and independent pricing service valuations. In addition, we transferred $366 million of long-term debt from Level 3 to Level 2. The long-term debt relates to medium term debt issuances where the embedded equity derivative is no longer unobservable as the derivative option is closer to maturity and there is more observability in short term volatility.

During 2009, we transferred $634 million of mortgage and other asset-backed securities and $345 million of corporate bonds from Level 2 to Level 3 as the availability of observable inputs continued to decline. In addition, we transferred $69 million of credit derivatives from Level 2 to Level 3.

See Note 28, "Fair Value Measurements," in the accompanying consolidated financial statements for information on additions to and transfers into (out of) Level 3 measurements during 2010 and 2009 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 December 31, 2010:

Asset-backed securities backed by consumer finance collateral:

Credit Quality of Collateral:

			Commercial Mortgages		Prime		Alt-A		Sub-prime
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:	Collateral type:
AAA	Home equity loans	$161	$-	$-	$-	$-	$3	$156	$2	$-
	Student loans	32	-	-	-	-	32	-	-	-
	Residential mortgages	470	-	-	-	-	279	-	191	-
	Commercial mortgages	552	53	499	-	-	-	-	-	-
	Other	104	-	-	-	-	104	-	-	-
	Total AAA	1,319	53	499	-	-	418	156	193	-
AA	Home equity loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	-	-	-	-	-	-	-	-	-
	Student loans	-	-	-	-	-	-	-	-	-
	Other	-	-	-	-	-	-	-	-	-
	Total AA	-	-	-	-	-	-	-	-	-
A	Home equity loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	63	-	-	-	-	-	-	63	-
	Commercial mortgages	-	-	-	-	-	-	-	-	-
	Other	-	-	-	-	-	-	-	-	-
	Total A	63	-	-	-	-	-	-	63	-
BBB	Home equity loans	106	-	-	-	-	1	104	1	-
	Residential mortgages	-	-	-	-	-	-	-	-	-
	Other	-	-	-	-	-	-	-	-	-
	Total BBB	106	-	-	-	-	1	104	1	-
BB	Home equity	-	-	-	-	-	-	-	-	-
	Residential mortgages	-	-	-	-	-	-	-	-	-
	Total BB	-	-	-	-	-	-	-	-	-
B	Auto loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	-	-	-	-	-	-	-	-	-
	Total B	-	-	-	-	-	-	-	-	-
CCC	Home equity loans	90	-	-	-	-	-	90	-	-
	Residential mortgages	11	-	-	-	-	4	4	-	3
	Total CCC	101	-	-	-	-	4	94	-	3
CC	Residential mortgages	-	-	-	-	-	-	-	-	-
D	Home equity loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	-	-	-	-	-	-	-	-	-
	Total D	-	-	-	-	-	-	-	-	-
Unrated	Home equity loans	-	-	-	-	-	-	-	-	-
	Residential mortgages	9	-	-	-	-	9	-	-	-
	Other	-	-	-	-	-	-	-	-	-
	Total Unrated	9	-	-	-	-	9	-	-	-
		$1,598	$53	$499	$-	$-	$432	$354	$257	$3

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:	Collateral type:
	Corporate loans	$322	$-	$-	$322	$-	$-
	Residential mortgages	6	-	-	-	-	6
	Commercial mortgages	245	-	-	182	63	-
	Trust preferred	157	-	157	-	-	-
	Aircraft leasing	63	-	-	-	-	63
	Others	-	-	-	-	-	-
		793	$-	$157	$504	$63	$69
	Total asset-backed securities	$2,390

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 $234 million or a decrease of the overall fair value measurement of approximately $206 million as of December 31, 2010. The effect of changes in significant unobservable input parameters are primarily driven by mortgage whole loans held for sale or securitization, 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. For the principal activities undertaken, the following are considered to be the most important types of risks:

• 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.

• 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 potential for losses in daily mark-to-market positions (mostly trading) due to adverse movements in money, foreign exchange, equity or other markets and includes both interest rate risk and trading risk.

• 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 arising from failure to comply with relevant laws, regulations and regulatory requirements governing the conduct of specific businesses.

• Fiduciary risk is the risk associated with offering services honestly and properly to clients in a fiduciary capacity in accordance with Regulation 12 CFR 9, Fiduciary Activity of National Banks.

• Reputational risk involves the safeguarding of our reputation and can arise from social, ethical or environmental issues, or as a consequence of operational and other risk events.

• Strategic risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions.

The objective of our risk management system is to identify, measure, monitor and manage risks so that:

• potential costs can be weighed against the expected rewards from taking the risks;

• appropriate disclosures can be made to all concerned parties;

• adequate protections, capital and other resources can be put in place to weather all significant risks; and

• compliance with all relevant laws, regulations and regulatory requirements is ensured through staff education, adequate processes and controls, and ongoing monitoring efforts.

Our risk management policies are designed to identify and analyze these risks, to set appropriate limits and controls, and to monitor the risks and limits continually by means of reliable and up-to-date administrative and information systems. We continually modify and enhance our risk management policies and systems to reflect changes in markets and products and to better align overall risk management processes. Training, individual responsibility and accountability, together with a disciplined, conservative and constructive culture of control, lie at the heart of our management of risk.

Senior managers within an independent, central risk organization under the leadership of the HSBC North America Chief Risk Officer ensure risks are appropriately identified, measured, reported and managed. For all risk types, there are independent risk specialists that set standards, develop new risk methodologies, maintain central risk databases and conduct reviews and analysis. For instance, the Chief Risk Officer and the Regional Compliance Officer provide day-to-day oversight of these types of risk management activities within their respective areas and work closely with internal audit and other senior risk specialists at HSBC North America and HSBC. Market risk is managed by the HSBC North America Head of Market Risk. Operational risk is decentralized and is the responsibility of each business and support unit under the direction of the HSBC North America Head of Operational Risk. Compliance risk is managed both on a decentralized basis, with staff who are aligned with and advise each business segment, as well as with an increasing level of centralized compliance services. Beginning in 2010, the compliance function reports to the CEO of HSBC North America as well as functionally to the HSBC Head of Group Compliance. Previously, this formal independent compliance function was under the direction of the HSBC North America Head of Legal and Compliance.

Historically, our approach toward risk management has emphasized a culture of business line responsibility combined with central requirements for diversification of customers and businesses. Our risk management policies are primarily carried out in accordance with practice and limits set by the HSBC Group Management Board, which consists of senior executives throughout the HSBC organization. As such, extensive centrally determined requirements for controls, limits, reporting and the escalation of issues have been detailed in our policies and procedures.

In the course of our regular risk management activities, we use simulation models to help quantify the risk we are taking. The output from some of these models is included in this section of our filing. By their nature, models are based on various assumptions and relationships. We believe that the assumptions used in these models are reasonable, but events may unfold differently than what is assumed in the models. In actual stressed market conditions, these assumptions and relationships may no longer hold, causing actual experience to differ significantly from the results predicted in the model. Consequently, model results may be considered reasonable estimates, with the understanding that actual results may vary significantly from model projections.

Risk management oversight begins with our Board of Directors and its various committees, principally the Audit and Risk Committee. Management oversight is provided by corporate and business unit risk management committees with the participation of the Chief Executive Officer or her staff. An HSBC USA Risk Management Committee, chaired by the Chief Executive Officer, focuses on governance, emerging issues and risk management strategies.

The HSBC North America Chief Risk Officer also serves as the HUSI Chief Risk Officer and leads a distinct, cross-disciplinary risk organization and integrated risk function. Additionally, an HSBC North America Anti-Money Laundering ("AML") Director serves as the designated Anti-Money Laundering Director and Bank Secrecy Act Compliance Officer for HUSI. Specific oversight of various risk management processes is provided by the Risk Management Committee, with the assistance of the following principal HSBC USA subcommittees:

• the Asset and Liability Policy Committee ("ALCO");

• the Fiduciary Risk Committee; and

• the Operational Risk and Internal Control Committee.

Risk oversight and governance is also provided within a number of specialized cross-functional North America risk management subcommittees, including the HSBC North America Operational Risk and Internal Control Committee, Credit Risk Analytics Oversight Committee, Capital Management Review Meeting, and Stress Testing and Scenario Oversight Committee.

While the charters of the Risk Management Committee and each sub-committee are tailored to reflect the roles and responsibilities of each committee, they all have the following common themes:

• defining risk appetites, policies and limits;

• monitoring and assessing exposures, trends and the effectiveness of risk management;

• reporting to the Board of Directors; and

• promulgating a suitable risk taking, risk management and compliance culture.

Oversight of all liquidity, interest rate and market risk is provided by ALCO which is chaired by the Chief Financial Officer. Subject to the approval of our Board of Directors and HSBC, ALCO sets the limits of acceptable risk, monitors the adequacy of the tools used to measure risk and assesses the adequacy of reporting. In managing these risks, we seek to protect both our income stream and the value of our assets. ALCO also conducts contingency planning with regard to liquidity.

Economic Capital ("EC") is defined as the amount of capital required to sustain a business through a complete business cycle, enabling the business to absorb unexpected losses and thereby limit the probability of insolvency. As part of its ICAAP, HNAH and HBUS have developed an inventory of risks that we are subject to, and have established processes for quantifying those risks were possible. The quantified risks comprise Economic Capital, and include credit risk, operational risk, market risk, interest rate risk, pension risk, refinance risk, insurance risk and model risk. Economic Capital is calibrated to calculate losses over a one year time horizon at a confidence level of 99.95 percent. The confidence level is consistent with HSBC USA's target rating of "AA," as "AA" rated credits have historically defaulted at a rate of about .05% per year. The one-year time horizon is consistent with traditional planning and budgeting time horizons.

Regulatory capital requirements are based on the amount of capital held, as defined by regulations, and the amount of risk weighted assets, also calculated based on regulatory definitions. Economic capital is a proprietary measure of risk, calculated on a basis tailored to the risks incurred. Quarterly, Economic Capital is compared to a calculation of available capital resources to assess capital adequacy as part of the ICAAP. In addition, Risk Adjusted Return On Economic Capital (RAROC) is computed for HUSI businesses on a quarterly basis to allow for a comparison of return on risk.

In December 2007, U.S. regulators published a final rule regarding Risk-Based Capital Standards. This final rule represents the U.S. adoption of the Basel II Capital Accord. The final rule became effective April 1, 2008 and requires us to adopt its provisions no later than April 1, 2011, in accordance with current regulatory timelines. Final adoption must be preceded by a parallel run period of at least four quarters. We began a formal parallel run in January 2010. This parallel run, which was initiated in January 2010, encompasses enhancements to a number of risk policies, processes and systems to align HSBC Bank USA with the Basel II final rule requirements. HSBC Bank USA will seek regulatory approval for adoption when the program enhancements have been completed which may extend beyond April 1, 2011.

In December 2010, U.S. regulators published their updated Market Risk Amendment Notice of Proposed Rulemaking aligned closely with the Basel publications (known in the industry as Basel 2.5). The rule includes changes to the existing regulatory capital approaches which may become official after the comment period and normal regulatory review. If the rule is published as presently written, we will experience a significant increase to capital requirements with no additional risk acceptance.

In addition, we continue to support the HSBC Group Basel II framework, as adopted by the Financial Services Authority ("FSA"). Data regarding credit risk, operational risk, and market risk is supplied to support the Group's regulatory capital and risk weighted asset calculations.

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 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, the HSBC North America Chief Retail Credit Officer and the Head of Market Risk, 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.

Our credit risk management procedures are designed for all stages of economic and financial cycles, including the current protracted and challenging period of market volatility and economic uncertainty. The credit risk function continues to refine "early warning" indicators and reporting, including stress testing scenarios on the basis of current experience. These risk management tools are embedded within our business planning process. Action has been taken, where necessary, to improve our resilience to risks associated with the current market conditions by selectively discontinuing business lines or products, tightening underwriting criteria and investing in improved fraud prevention technologies.

The responsibilities of the credit risk function include:

• Formulating credit risk policies - Our policies are designed to ensure that various retail and commercial business units operate within clear standards of acceptable credit risk. Our policies ensure that the HSBC standards are consistently implemented across all businesses and that all regulatory requirements are also considered. Credit policies are reviewed and approved annually by the Audit and Risk Committee.

• Approving new credit exposures and independently assessing large exposures annually - The Chief Credit Officer delegates credit authority to our various lending units. However, most large credits are reviewed and approved centrally through a dedicated Credit Approval Unit that reports directly to the Chief Credit Officer. In addition, the Chief Credit Officer coordinates the approval of material credits with HSBC Group Credit Risk which, subject to certain agreed-upon limits, will review and concur on material new and renewal transactions.

• Overseeing retail credit risk - The HSBC North America Chief Retail Credit Officer manages the credit risk associated with retail portfolios and is supported by expertise from a dedicated advanced risk analytics unit.

• Maintaining and developing the governance and operation of the commercial risk rating system - A two-dimensional credit risk rating system is utilized in order to categorize exposures meaningfully and enable focused management of the risks involved. This ratings system is comprised of a 23 category Customer Risk Rating, which considers the probability of default of an obligor and a separate assessment of a transaction's potential loss given default. Each credit grade has a probability of default estimate. Rating methodologies are based upon a wide range of analytics and market data-based tools, which are core inputs to the assessment of counterparty risk. Although automated risk rating processes are increasingly used, for larger facilities the ultimate responsibility for setting risk grades rests in each case with the final approving executive. Risk grades are reviewed frequently and amendments, where necessary, are implemented promptly.

• Measuring portfolio credit risk - Over the past few years, the advanced credit ratings system has been used to implement a credit economic capital risk measurement system to measure the risk in our credit portfolios, using the measure in certain internal and Board of Directors reporting. Simulation models are used to determine the amount of unexpected losses, beyond expected losses, that we must be prepared to support with capital given our targeted debt rating. Quarterly credit economic capital reports are generated and reviewed with management and the business units. Efforts continue to refine both the inputs and assumptions used in the credit economic capital model to increase its usefulness in pricing and the evaluation of large and small commercial and retail customer portfolio products and business unit return on risk.

• Monitoring portfolio performance - A credit data warehouse has been implemented to centralize the reporting of credit risk, support the analysis of risk using tools such as Economic Capital, and to calculate credit loss reserves. This data warehouse also supports HSBC's wider effort to meet the requirements of Basel II and to generate credit reports for management and the Board of Directors.

• Establishing counterparty and portfolio limits - We monitor and limit our exposure to individual counterparties and to the combined exposure of related counterparties. In addition, selected industry portfolios, such as real estate, are subject to caps that are established by the Chief Credit Officer and reviewed where appropriate by management committees and the Board of Directors. Counterparty credit exposure related to derivative activities is also managed under approved limits. Since the exposure related to derivatives is variable and uncertain, internal risk management methodologies are used to calculate the 95% worst-case potential future exposure for each customer. These methodologies take into consideration, among other factors, cross-product close-out netting, collateral received from customers under Collateral Support Annexes (CSAs), termination clauses, and off-setting positions within the portfolio.

• Managing problem commercial loans - Special attention is paid to problem loans. When appropriate, our commercial Special Credits Unit and retail Default Services teams provide customers with intensive management and control support in order to help them avoid default wherever possible and maximize recoveries.

• Establishing allowances for credit losses - The Chief Credit Officer and the HSBC North America Chief Retail Credit Officer share responsibility with the Chief Financial Officer for establishing appropriate levels of allowances for credit losses inherent in various loan portfolios.

A Credit Review and Risk Identification ("CRRI") function is also in place in HSBC North America to identify and assess credit risk. The CRRI function consists of a Wholesale and Retail Credit Review function as well as functions responsible for the independent assessment of Wholesale and Retail models. The CRRI function provides an ongoing independent assessment of credit risk, the quality of credit risk management and, in the case of wholesale credit risk, the accuracy of individual credit risk ratings. The functions independently and holistically assess the business units and risk management functions to ensure the business is operating in a manner that is consistent with HSBC Group strategy and appropriate local and HSBC Group credit policies, procedures and applicable regulatory guidelines. The Credit Risk Review functions examine asset quality, credit processes and procedures, as well as the risk management infra-structures in each commercial and retail lending unit. Selective capital markets based functions are included within this scope. CRRI also independently assesses the retail and wholesale credit risk models, operational risk models, and Economic Capital models to determine if they are fit for purpose and consistent with regulatory requirements and HSBC Group Policy.

Liquidity Risk Management Liquidity risk is the risk that an institution will be unable to meet its obligations as they become due or fund its customers because of an inability to liquidate assets or obtain adequate funding. We continuously monitor the impact of market events on our liquidity positions. In general terms, the strains due to the 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 the recent conditions. Core deposits comprise 75 percent of our total deposit base, providing more stable balances, less sensitivity to market events or changes in interest rates. Our limited dependence upon the wholesale markets for funding has been a significant competitive advantage through the recent period of financial market turmoil. We will continue to adapt the liquidity framework described below as we assimilate further knowledge from the recent disruptions in the marketplace.

Liquidity is managed to provide the ability to generate cash to meet lending, deposit withdrawal and other commitments at a reasonable cost in a reasonable amount of time while maintaining routine operations and market confidence. Market funding is planned in conjunction with HSBC, as the markets increasingly view debt issuances from the separate companies within the context of their common parent company. Liquidity management is performed at both HSBC USA and HSBC Bank USA. Each entity is required to have sufficient liquidity for a crisis situation. ALCO is responsible for the development and implementation of related policies and procedures to ensure that the minimum liquidity ratios and a strong overall liquidity position are maintained.

In carrying out this responsibility, ALCO projects cash flow requirements and determines the level of liquid assets and available funding sources to have at our disposal, with consideration given to anticipated deposit and balance sheet growth, contingent liabilities, and the ability to access wholesale funding markets. In addition to base case projections, multiple stress scenarios are generated to simulate crisis conditions, including:

• run-off of non-core deposits;

• inability to renew maturing interbank fundings;

• draw downs of committed loan facilities;

• four-notch rating downgrade of HSBC Bank USA; and

• increased discount on security values for repos or disposals.

ALCO monitors the overall mix of deposit and funding concentrations to avoid undue reliance on individual funding sources and large deposit relationships. In addition, ALCO analyzes changes in the uses of liquidity, establishes policy on balance sheet usage, and sets limits on and monitors the ratio of Advances to Core Funding ("ACF"). This ratio measures what percentage of our stable sources of long-term funding (generally customer deposits deemed to be "core" in accordance with HSBC policy and debt with at least 12 months until maturity), are utilized in providing loans to customers. Currently our ACF ratio stands at 88 percent. ALCO must also maintain a liquidity management and contingency funding plan, which identifies certain potential early indicators of liquidity problems, and actions that can be taken both initially and in the event of a liquidity crisis, to minimize the long-term impact on our businesses and customer relationships. We recognize a liquidity crisis can either be specific to us, relating to our ability to meet our obligations in a timely manner, or market-wide, caused by a macro risk event in the broader financial system. A range of indicators are monitored to attain an early warning of any liquidity issues. These include widening of key spreads or indices used to track market volatility, material reductions or extreme volatility in customer deposit balances, increased utilization of credit lines, widening of our credit spreads and higher borrowing costs. In the event of a cash flow crisis, our objective is to fund cash requirements without access to the wholesale unsecured funding market for at least one year. Contingency funding needs will be satisfied primarily through the sale of the investment portfolio and liquidation of the residential mortgage portfolio. Securities may be sold or used as collateral in a repurchase agreement depending on the scenario. Portions of the mortgage portfolio may be sold, securitized, or used for collateral at the FHLB to increase borrowings. We maintain a Liquid Asset Buffer consisting of cash, short-term liquid assets and unencumbered government and other highly rated investment securities as a source of funding. Further, collateral is maintained at the Federal Reserve Bank discount window and the FHLB, providing additional secured borrowing capacity in a liquidity crisis.

Given our overall liquidity position, during 2010, we have continued to manage down low-margin commercial and institutional deposits in order to maximize profitability.

We continue to evaluate the Basel III framework for liquidity risk management. The Basel Committee has issued some preliminary guidance, but we are still awaiting formal instructions as to how the ratios are calculated. The proposals include both a Liquidity Coverage Ratio ("LCR") designed to insure banks have sufficient high-quality liquid assets to survive a significant stress scenario lasting 30 days and a Net Stable Funding Ratio ("NSFR") with a time horizon of one year to ensure a sustainable maturity structure of assets and liabilities. For both ratios, banks are expected to achieve a ratio of 100%. The observation period for the ratios begins in 2012 with LCR introduced by 2015 and NSFR by 2018. We anticipate meeting these requirements well in advance of their formal introduction.

Our ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit ratings agencies. At December 31, 2010, 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
Long-term debt	A1	AA-	AA	AA
HSBC Bank USA:
Short-term borrowings	P-1	A-1+	F1+	R-1
Long-term debt	Aa3	AA	AA	AA

____________

(1)	Dominion Bond Rating Service.

In August 2010, Standard and Poor's changed their outlook on the long and short term debt ratings of both HSBC USA Inc. and HSBC Bank USA from "negative" to "stable" and in October 2010, re-affirmed the long and short term debt ratings of each entity. As of December 31, 2010, there were no pending actions in terms of changes to ratings on the debt of HSBC USA Inc. or HSBC Bank USA from any of the rating agencies. In January 2011, DBRS changed its outlook for both HSBC USA Inc. and HSBC Bank USA from "negative" to "stable."

Numerous factors, internal and external, may impact access to and costs associated with issuing debt in the global capital markets. These factors include our debt ratings, overall economic conditions, overall capital markets volatility and the effectiveness of the management of credit risks inherent in our customer base.

Cash resources, short-term investments and a trading asset portfolio are available to provide highly liquid funding for us. Additional liquidity is provided by available for sale debt securities. Approximately $453 million of debt securities in this portfolio at December 31, 2010 are expected to mature in 2011. The remaining $44.9 billion of debt securities not expected to mature in 2011 are available to provide liquidity by serving as collateral for secured borrowings, or if needed, by being sold. Further liquidity is available through our ability to sell or securitize loans in secondary markets through loan sales and securitizations. In 2010, we did not sell any residential mortgage loans other than normal loan sales to government sponsored enterprises.

It is the policy of HSBC Bank USA to maintain both primary and secondary collateral in order to ensure precautionary borrowing availability from the Federal Reserve. Primary collateral is collateral that is physically maintained at the Federal Reserve, and serves as a safety net against any unexpected funding shortfalls that may occur. Secondary collateral is collateral that is acceptable to the Federal Reserve, but is not maintained there. If unutilized borrowing capacity were to be low, secondary collateral would be identified and maintained as necessary. Further liquidity is available from the Federal Home Loan Bank of New York. As of December 31, 2010, we had outstanding advances of $1.0 billion. We have access to further borrowings based on the amount of mortgages and securities pledged as collateral to the FHLB.

As of December 31, 2010, any significant dividend from HSBC Bank USA to us would require the approval of the OCC, in accordance with 12 USC 60. See Note 25, "Retained Earnings and Regulatory Capital Requirements," of the consolidated financial statements for further details. In determining the extent of dividends to pay, HSBC Bank USA must also consider the effect of dividend payments on applicable risk-based capital and leverage ratio requirements, as well as policy statements of federal regulatory agencies that indicate that banking organizations should generally pay dividends out of current operating earnings.

Under a shelf registration statement filed with the Securities and Exchange Commission, we may issue debt securities or preferred stock, either separately or represented by depositary shares, warrants, purchase contracts and units. We satisfy the eligibility requirements for designation as a "well-known seasoned issuer," which allows us to file a registration statement that does not have a limit on issuance capacity. The ability to issue debt under the registration statement is limited by the debt issuance authority granted by the Board. We are currently authorized to issue up to $15.0 billion, of which $3.0 billion is available. During 2010, we issued $2.5 billion of senior debt from this shelf.

HSBC Bank USA has a $40.0 billion Global Bank Note Program, which provides for issuance of subordinated and senior notes. Borrowings from the Global Bank Note Program totaled $1.9 billion in 2010. There is approximately $17.9 billion of availability remaining on a cumulative basis.

At December 31, 2010, we also had a $2.5 billion back-up credit facility with HSBC Bank plc for issuances of commercial paper.

Interest Rate Risk Management Interest rate risk is the potential impairment of net interest income due to mismatched pricing between assets and liabilities. We are subject to interest rate risk associated with the repricing characteristics of our balance sheet assets and liabilities. Specifically, as interest rates change, amounts of interest earning assets and liabilities fluctuate, and interest earning assets reprice at intervals that do not correspond to the maturities or repricing patterns of interest bearing liabilities. This mismatch between assets and liabilities in repricing sensitivity results in shifts in net interest income as interest rates move. To help manage the risks associated with changes in interest rates, and to manage net interest income within ranges of interest rate risk that management considers acceptable, we use derivative instruments such as interest rate swaps, options, futures and forwards as hedges to modify the repricing characteristics of specific assets, liabilities, forecasted transactions or firm commitments. Day-to-day management of interest rate is centralized principally under the Treasurer.

We have substantial, but historically well controlled, interest rate risk in large part as a result of our portfolio of residential mortgages and mortgage backed securities, which consumers can prepay without penalty, and our large base of demand and savings deposits. These deposits can be withdrawn by consumers at will, but historically they have been a stable source of relatively low cost funds. Market risk exists principally in treasury businesses and to a lesser extent in the residential mortgage business where mortgage servicing rights and the pipeline of forward mortgage sales are hedged. We have little foreign currency exposure from investments in overseas operations, which are limited in scope. Total equity investments, excluding stock owned in the Federal Reserve and New York Federal Home Loan Bank, represent less than one percent of total available-for-sale securities.

The following table shows the repricing structure of assets and liabilities as of December 31, 2010. For assets and liabilities whose cash flows are subject to change due to movements in interest rates, such as the sensitivity of mortgage loans to prepayments, data is reported based on the earlier of expected repricing or maturity and reflects anticipated prepayments based on the current rate environment. The resulting "gaps" are reviewed to assess the potential sensitivity to earnings with respect to the direction, magnitude and timing of changes in market interest rates. Data shown is as of year end, and one-day figures can be distorted by temporary swings in assets or liabilities.

December 31, 2010	Within One Year	After One But Within Five Years	After Five But Within Ten Years	After Ten Years	Total
	(in millions)
Commercial loans	$29,469	$1,632	$474	$52	$31,627
Residential mortgages	11,892	3,816	1,632	1,131	18,471
Private label	11,988	1,308	-	-	13,296
Credit card receivables	9,289	1,525	-	-	10,814
Other consumer loans	1,035	215	1	-	1,251
Total loans (1)	63,673	8,496	2,107	1,183	75,459
Securities available-for-sale and securities held-to-maturity	1,594	15,446	17,200	14,473	48,713
Other assets	51,375	7,416	850	-	59,641
Total assets	116,642	31,358	20,157	15,656	183,813
Domestic deposits (2):
Savings and demand	59,158	17,982	10,665	-	87,805
Certificates of deposit	7,361	691	29	-	8,081
Long-term debt	10,072	1,610	2,648	2,900	17,230
Other liabilities/equity	59,576	10,594	2	525	70,697
Total liabilities and equity	136,167	30,877	13,344	3,425	183,813
Total balance sheet gap	(19,525)	481	6,813	12,231	-
Effect of derivative contracts	11,529	(7,520)	(2,497)	(1,512)	-
Total gap position	$(7,996)	$(7,039)	$4,316	$10,719	$-

____________

(1)	Includes loans held for sale.

(2)	Does not include purchased or wholesale deposits. For purposes of this table purchased and wholesale deposits are reflected in "Other liabilities/equity".

Various techniques are utilized to quantify and monitor risks associated with the repricing characteristics of our assets, liabilities and derivative contracts.

In the course of managing interest rate risk, a present value of a basis point ("PVBP") analysis is utilized in conjunction with a combination of other risk assessment techniques, including economic value of equity, dynamic simulation modeling, capital risk and Value at Risk ("VAR") analyses. The combination of these tools enables management to identify and assess the potential impact of interest rate movements and take appropriate action. This combination of techniques, with some focusing on the impact of interest rate movements on the value of the balance sheet (PVBP, economic value of equity, VAR) and others focusing on the impact of interest rate movements on earnings (dynamic simulation modeling) allows for comprehensive analyses from different perspectives. Discussion of the use of VAR analyses to monitor and manage interest rate and other market risks is included in the discussion of market risk management below.

A key element of managing interest rate risk is the management of the convexity of the balance sheet, largely resulting from the mortgage related products on the balance sheet. Convexity risk arises as mortgage loan consumers change their behavior significantly in response to large movements in market rates, but do not change behavior appreciably for smaller changes in market rates. Certain of the interest rate management tools described below, such as dynamic simulation modeling and economic value of equity, better capture the embedded convexity in the balance sheet, while measures such as PVBP are designed to capture the risk of smaller changes in rates.

Refer to "Market Risk Management" for discussion regarding the use of VAR analyses to monitor and manage interest rate risk.

The assessment techniques discussed below act as a guide for managing interest rate risk associated with balance sheet composition and off-balance sheet hedging strategy (the risk position). Calculated values within limit ranges reflect an acceptable risk position, although possible future unfavorable trends may prompt adjustments to on or off-balance sheet exposure. Calculated values outside of limit ranges will result in consideration of adjustment of the risk position, or consideration of temporary dispensation from making adjustments.

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 December 31, 2010 and 2009.

At December 31,	2010	2009
	(in millions)
Institutional PVBP movement limit	$8.0	$6.5
PVBP position at period end	3.9	.5

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 December 31, 2010 and 2009.

At December 31,	2010	2009
	(values as a percentage)
Institutional economic value of equity limit	+/-15	+/-20
Projected change in value (reflects projected rate movements on January 1, 2010):
Change resulting from an immediate 200 basis point increase in interest rates	(7)	(4)
Change resulting from an immediate 200 basis point decrease in interest rates	(4)	(3)

The 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.

At December 31, 2010	Amount	%
	(dollars are in millions)
Projected change in net interest income (reflects projected rate movements on January 1, 2011):
Institutional base earnings movement limit		(10)
Change resulting from a gradual 100 basis point increase in the yield curve	$43	1
Change resulting from a gradual 100 basis point decrease in the yield curve	(205)	(4)
Change resulting from a gradual 200 basis point increase in the yield curve	20	-
Change resulting from a gradual 200 basis point decrease in the yield curve	(374)	(8)
Other significant scenarios monitored (reflects projected rate movements on January 1, 2011):
Change resulting from an immediate 100 basis point increase in the yield curve	43	1
Change resulting from an immediate 100 basis point decrease in the yield curve	(335)	(7)
Change resulting from an immediate 200 basis point increase in the yield curve	(20)	-
Change resulting from an immediate 200 basis point decrease in the yield curve	(531)	(11)

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 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. As of December 31, 2010, we had an available-for-sale securities portfolio of approximately $45.5 billion with a positive mark-to-market of $187 million included in tangible common equity of $12.5 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $328 million to a net loss of $141 million with the following results on our tangible capital ratios.

At December 31, 2010	Actual	Proforma(1)
Tangible common equity to tangible assets	6.91%	6.80%
Tangible common equity to risk weighted assets	10.29	10.10

____________

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

Market Risk Management 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. We separate exposures to market risk into trading and non-trading portfolios. Trading portfolios include those positions arising from market-making and other mark-to-market positions so designated. Non-trading portfolios primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments classified as available-for-sale and held-to-maturity. We use a range of tools to monitor and manage market risk exposures. These include sensitivity analysis, VAR and stress testing.

Sensitivity analysis Sensitivity measures are used to monitor the market risk positions within each risk type, for example, PVBP movement in interest rates for interest rate risk. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being one of the principal factors in determining the level of limits set.

Value at Risk - Overview VAR analysis is used to estimate the maximum potential loss 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 interest rate risk inherent in non-trading activities. VAR is calculated daily for a one-day holding period to a 99 percent confidence level.

The VAR models are based predominantly on historical simulation. These models derive plausible future scenarios from past series of recorded market rate and price changes, and applies these to their current rates and prices. The model also incorporates the effect of option features on the underlying exposures. The historical simulation models used by us incorporate the following features:

• market movement scenarios are derived with reference to data from the past two years;

• scenario profit and losses are calculated with the derived market scenarios for foreign exchange rates and commodity prices, interest rates, credit spreads equity prices, volatilities; and

• VAR is calculated to a 99 percent confidence level for a one-day holding period.

We routinely validate the accuracy of our VAR models by back-testing the actual daily profit and loss results, adjusted to remove non-modeled items such as fees and commissions and intraday trading, against the corresponding VAR numbers. Statistically, we would expect to see losses in excess of VAR only one percent of the time. The number of backtesting breaches in a period is used to assess how well the model is performing and, occasionally, new parameters are evaluated and introduced to improve the models' fit. Although a valuable guide to risk, VAR must always be viewed in the context of its limitations, that is:

• the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;

• the use of a one-day holding period assumes that all positions can be liquidated or the risks offset in one day. This may not fully reflect the market risk arising at times of severe illiquidity, when a one-day holding period may be insufficient to liquidate or fully hedge all positions;

• the use of a 99 percent confidence level, by definition, does not take into account losses that might occur beyond this level of confidence;

• VAR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intraday exposures; and

• VAR is unlikely to reflect loss potential on exposures that only arise under significant market moves.

In recognition of the limitations of VAR, we complement VAR with stress testing to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. Stress testing is performed at a portfolio level, as well as on the consolidated positions of the Group, and covers the following scenarios:

• Sensitivity scenarios, which consider the impact of market moves to any single risk factor or a set of factors. For example the impact resulting from a break of a currency peg that will not be captured within the VAR models;

• Technical scenarios, which consider the largest move in each risk factor, without consideration of any underlying market correlation;

• Hypothetical scenarios, which consider potential macro economic events; and

• Historical scenarios, which incorporate historical observations of market moves during previous periods of stress which would not be captured within VAR.

Stress testing is governed by the Stress Testing Review Group forum that coordinates Group stress testing scenarios in conjunction with the regional risk managers. Consideration is given to the actual market risk exposures, along with market events in determining the stress scenarios.

Stress testing results are reported to senior management and provide them with an assessment of the financial impact such events would have on our profits.

The years preceding the market turmoil experienced in recent years were characterized by historically low levels of volatility, with ample market liquidity. This period was associated with falling levels of VAR as the level of observed market volatility is a key determinant in the VAR calculation. The increase in market volatility throughout 2008 and into 2009 was most noticeable in the credit spreads of financial institutions and asset backed securities ("ABSs") and mortgage backed securities ("MBSs"). The increase in the volatility of credit spreads reflected the market's continued uncertainty with respect to the exposure of financial institutions to the U.S. subprime market, either directly or through structured products, and spread to more concerns about the wider economy. The tightening of both credit and liquidity within the wholesale markets prompted remedial action from the central banks, which included injecting liquidity into the wholesale markets, taking equity stakes and cutting rates. Macro economic uncertainty also has led to increases in volatility in other risk types such as interest rates and foreign exchange prices.

The major contributor to the trading and non-trading VAR for us was our Global Banking and Markets operations.

VAR - 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 PFS 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 2010:

	December 31,	Full Year 2010					December 31,
	2010	Minimum		Maximum	Average		2009
	(in millions)
Total trading	$21	$20	$60			$33	$38
Equities	-	-	2			-	-
Foreign exchange	1	1	9			4	2
Interest rate directional and credit spread	18	18	53			28	33

The following table summarizes the frequency distribution of daily market risk-related revenues for trading activities during calendar year 2010. 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 2010 shows that the largest daily gain was $18 million and the largest daily loss was $10 million.

Below

$(5)

to $0

$0 to

$5 to

$10

Over

$10

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

(dollars are in millions)

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

111

The risk associated with movements in credit spreads is primarily managed through sensitivity limits, stress testing and VAR on those portfolios where it is calculated. Beginning in 2009, HSBC introduced credit spread as a separate risk type within its VAR models and credit spread VAR is calculated for credit derivatives portfolios. The total VAR for trading activities, including credit spread VAR for the above portfolios, was $21 million and $38 million for December 31, 2010 and 2009, respectively.

The sensitivity of trading income to the effect of movements in credit spreads on the total trading activities was less than one million and $1 million for December 31, 2010 and 2009, respectively. This sensitivity was calculated using simplified assumptions based on one-day movements in market credit spreads over a two-year period at a confidence level of 99 percent.

Certain transactions are structured such that the risk is negligible under a wide range of market conditions or events, but in which there exists a remote possibility that a significant gap event could lead to loss. A gap event could be seen as a change in market price from one level to another with no trading opportunity in between, and where the price change breaches the threshold beyond which the risk profile changes from having no open risk to having full exposure to the underlying structure. Such movements may occur, for example, when there are adverse news announcements and the market for a specific investment becomes illiquid, making hedging impossible. Given the characteristics of these transactions, they will make little or no contribution to VAR or to traditional market risk sensitivity measures. We capture the risks for such transactions within our stress testing scenarios. Gap risk arising is monitored on an ongoing basis, and we incurred no gap losses on such transactions in 2010.

The ABS/MBS exposures within the trading portfolios are managed within sensitivity and VAR limits and are included within the stress testing scenarios described above.

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.

The following table summarizes non-trading VAR for 2010, assuming a 99 percent confidence level for a two-year observation period and a one-day "holding period."

	December 31,	Full Year 2010			December 31,
	2010	Minimum	Maximum	Average	2009
	(in millions)
Interest rate	$138	$114	$170	$139	$114

The sensitivity of equity to the effect of movements in credit spreads on our available-for-sale debt securities was $3 million and $8 million at December 31, 2010 and 2009, respectively. The sensitivity was calculated on the same basis as that applied to the trading portfolio.

Market risk also arises on fixed-rate securities we issue. These securities are issued to support long-term capital investments in subsidiaries and include non-cumulative preferred shares, noncumulative perpetual preferred securities and fixed rate subordinated debt.

Market risk arises on debt securities held as available-for-sale. The fair value of these securities was $45.5 billion and $27.8 billion at December 31, 2010 and 2009, respectively.

A principal part of our management of market risk in non-trading portfolios is to monitor the sensitivity of projected net interest income under varying interest rate scenarios (simulation modeling). We aim, through our management of market risk in non-trading portfolios, to mitigate the effect of prospective interest rate movements which could reduce future net interest income, while balancing the cost of such hedging activities on the current net revenue stream. See "Interest Rate Risk Management" above for further discussion.

Trading Activities - HSBC Mortgage Corporation (USA) ("HSBC Mortgage Corp") HSBC Mortgage Corp is a mortgage banking subsidiary of HSBC Bank USA. Trading occurs in mortgage banking operations as a result of an economic hedging program intended to offset changes in 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.

At December 31, 2010	Value
	(in millions)
Projected change in net market value of hedged MSRs portfolio (reflects projected rate movements on January 1, 2011):
Value of hedged MSRs portfolio	$394
Change resulting from an immediate 50 basis point decrease in the yield curve:
Change limit (no worse than)	(10)
Calculated change in net market value	(2)
Change resulting from an immediate 50 basis point increase in the yield curve:
Change limit (no worse than)	(8)
Calculated change in net market value	5
Change resulting from an immediate 100 basis point increase in the yield curve:
Change limit (no worse than)	(12)
Calculated change in net market value	12

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 2010. 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 2010.

Below

$(2)

$(2) to

$0 to

$2 to

Over

Ranges of mortgage economic value from market risk-related activities

(dollars are in millions)

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

Operational Risk Operational risk results from inadequate or failed internal processes, people and systems or from external events, including legal risk, but excluding strategic and reputation risk. Operational risk is inherent in all of our business activities and, as with other types of risk, is managed through our overall framework designed to balance strong corporate oversight with well defined independent risk management.

We have established an independent Operational Risk Management discipline in North America, which reports to the HSBC North America Chief Risk Officer. The Operational Risk and Internal Control Committee, chaired by the HSBC North America Head of Operational Risk and Internal Control, is responsible for oversight of operational risk management, including internal controls to mitigate risk exposure and comprehensive reporting. Results from this committee are communicated to the Risk Management Committee and subsequently to the Audit Committee of the Board of Directors. Business unit line management is responsible for managing and controlling all risks and for communicating and implementing all control standards. A central Operational Risk and Internal Control function provides functional oversight by coordinating the following activities:

• developing Operational Risk Management policies and procedures;

• developing and managing operational risk identification, scoring and assessment tools and databases;

• providing firm-wide operational risk and control reporting and facilitating resulting action plan development;

• assessing emerging risk areas and monitoring operational risk internal controls to reduce loss exposure;

• perform root-cause analysis on large operational risk losses;

• providing general and/or specific operational risk training and awareness programs for employees throughout the firm;

• maintaining a network of business line operational risk coordinators;

• independently reviewing and reporting the assessments of operational risks; and

• modeling operational risk losses and scenarios for capital management purposes.

Management of operational risk includes identification, assessment, monitoring, management and mitigation, rectification and reporting of the results of risk events, including losses and compliance with local regulatory requirements. These key components of the Operational Risk Management process have been communicated by issuance of a high level standard. Key features within the standard that have been addressed in our Operational Risk Management and Internal Control process have been communicated by issuance of a HSBC North America regional policy. Key features within the policy and our Operational Risk and Internal Control framework include:

• each business and support department is responsible for the assessment, identification and management of their operational risks;

• each risk is evaluated and scored by its likelihood to occur, its potential impact on shareholder value and by exposure based on the effectiveness of current controls to prevent or mitigate losses. An operational risk automated database is used to record risk assessments and track risk mitigation action plans. The risk assessments are reviewed at least annually, or as business conditions change;

• key risk indicators are established where appropriate, and monitored/tracked; and

• the database is also used to track operational losses for analysis of root causes, comparison with risk assessments, lessons learned and capital modeling.

Management practices include standard monthly reporting to business line managers, senior management and the Operational Risk and Internal Control Committee of high risks, control deficiencies, risk mitigation action plans, losses and key risk indicators. We also monitor external operational risk events which take place to ensure that the firm remains in line with best practice and takes into account lessons learned from publicized operational failures within the financial services industry. Operational Risk Management is an integral part of the product development process and the employee performance measurement process. An online certification process, attesting to the completeness and accuracy of operational risk, is completed by senior business management on an annual basis.

Internal audits provide an important independent check on controls and test institutional compliance with the operational risk management framework. Internal audit utilizes a risk-based approach to determine its audit coverage in order to provide an independent assessment of the design and effectiveness of key controls over our operations, regulatory compliance and reporting. This includes reviews of the operational risk framework, the effectiveness and accuracy of the risk assessment process and the loss data collection and reporting activities.

Compliance Risk Compliance risk is the risk arising from failure to comply with relevant laws, regulations and regulatory requirements governing the conduct of specific businesses. It is a composite risk that can result in regulatory sanctions, financial penalties, litigation exposure and loss of reputation. Compliance risk is inherent throughout our organization.

Prior to the second quarter of 2010, compliance risk reported to the HSBC North America Head of Legal and Compliance. Beginning in the second quarter of 2010, the Compliance and Legal functions were separated and the Compliance function now reports to the CEO of HSBC North America as well as functionally to the HSBC Head of Group Compliance. Until a permanent Head of HSBC Compliance, North America was appointed in January 2011, the HSBC Head of Group Compliance was appointed as the Acting Head of Compliance, North America. Additional steps were taken in 2010 to further strengthen our compliance risk management approach, including increased investment in people, systems and advisory services; strategic actions to streamline our business; and the strengthening of the Anti-Money Laundering ("AML") Office with responsibility for the guidance and oversight of AML risk management activities within HSBC North America and its subsidiaries, including HSBC USA. Efforts to strengthen the Compliance function will continue.

Consistent with HSBC's commitment to ensure adherence with applicable regulatory requirements for all of its world-wide affiliates, we have implemented a multi-faceted Compliance Risk Management program. This program addresses a number of regulatory priorities, including the following:

• AML regulations;

• economic sanctions requirements;

• consumer protection regulations;

• community reinvestment requirements;

• privacy; and

• dealings with affiliates.

Oversight of the Compliance Risk Management program is provided by the Audit and Risk Committee of the Board of Directors through the Risk Management Committee, which is advised of significant potential compliance issues, strategic policy-making decisions and reputational risk matters. Internal audit, through continuous monitoring and periodic audits, tests the effectiveness of the overall Compliance Risk Management program.

The Compliance Risk Management program elements include identification and assessment of compliance risk (using operational risk methodology), as well as monitoring, control and mitigation of such risk and timely resolution of the results of risk events. The execution of the program is generally performed by line management, with oversight provided by Compliance. Controls for mitigating compliance risk are incorporated into business operating policies and procedures. Processes are in place to ensure controls are appropriately updated to reflect changes in regulatory requirements as well as changes in business practices, including new or revised products, services and marketing programs. A wide range of compliance training is provided to relevant staff, including mandated programs for such areas as anti-money laundering, fair and responsible lending and privacy.

The independent Compliance function is comprised of compliance teams supporting the specific business units, as well as centralized teams providing subject matter and operational compliance expertise in specific areas, notably AML compliance. In 2010, we reorganized the HSBC North America AML Compliance function to centralize AML governance and decision-making and establish a more robust oversight of the AML Compliance function. Beginning in October 2010, the HSBC North America Holdings Anti-Money Laundering Director ("AML Director"), who also serves as the designated Anti-Money Laundering Director and Bank Secrecy Act Compliance Officer for HUSI, reports directly to the Regional Compliance Officer of HSBC North America. Additionally, beginning in 2010, the local compliance officers in each line of business have a functional reporting line to the AML Director as it relates to the AML Compliance function. As a result of the reorganization in 2010, AML Compliance now operates as a separate and centralized group within the overall Compliance function.

The Compliance function is responsible for the following activities:

• advising management on compliance matters;

• developing compliance risk management policies and procedures, inclusive of a compliance risk assessment program;

• providing independent assessment, monitoring and review; and

• reporting compliance issues to senior management and Board of Directors, as well as to HSBC Group Compliance.

The Compliance function has established a rigorous independent review program which includes assessing the effectiveness of controls and testing for adherence to compliance policies and procedures. The review program is executed by a centralized compliance review unit, with the assistance of business compliance officers, as necessary.

Fiduciary Risk Fiduciary risk is the risk associated with offering services honestly and properly to clients in a fiduciary capacity in accordance with Regulation 12 CFR 9, Fiduciary Activity of National Banks. Fiduciary capacity is defined in the regulation as:

• serving traditional fiduciary duties such as trustee, executor, administrator, registrar of stocks and bonds, guardian, receiver or assignee;

• providing investment advice for a fee; or

• processing investment discretion on behalf of another.

Fiduciary risks, as defined above, reside in Private Banking businesses (including Investment Management, Personal Trust, Custody, Middle Office Operations) and other business lines outside of Private Banking (including Corporate Trust). However, our Fiduciary Risk Management infrastructure is also responsible for fiduciary risks associated with certain SEC regulated Registered Investment Advisors ("RIA"), which lie outside of the traditional regulatory fiduciary risk definition for banks. The fiduciary risks present in both banking and RIA business lines almost always occur where we are entrusted to handle and execute client business affairs and transactions in a fiduciary capacity. Our policies and procedures for addressing fiduciary risks generally address various risk categories including suitability, conflicts, fairness, disclosure, fees, AML, operational, safekeeping, efficiencies, etc.

Oversight for the Fiduciary Risk Management function falls to the Fiduciary Risk Management Committee, a subcommittee of the Risk Management Committee. This committee is chaired by the Managing Director - Private Banking. The Senior Vice President - Fiduciary Risk is responsible for an independent Fiduciary Risk Management Unit that is responsible for day to day oversight of the Fiduciary Risk Management function. The main goals and objectives of this unit include:

• development and implementation of control self assessments, which have been completed for all fiduciary businesses;

• developing, tracking and collecting rudimentary key risk indicators ("KRIs"), and collecting data regarding errors associated with these risks. KRIs for each fiduciary business are in the process of being expanded;

• designing, developing and implementing risk monitoring tools, approaches and programs for the relevant business lines and senior management that will facilitate the identification, evaluation, monitoring, measurement, management and reporting of fiduciary risks. In this regard, a common database is used for compliance, operational and fiduciary risks; and

• ongoing development and implementation of more robust and enhanced key risk indicator/key performance indicator process with improved risk focused reporting.

Reputational Risk The safeguarding of our reputation is of paramount importance to our continued prosperity and is the responsibility of every member of our staff. Reputational risk can arise from social, ethical or environmental issues, or as a consequence of operational and other risk events. Our good reputation depends upon the way in which we conduct our business, but can also be affected by the way in which customers to whom we provide financial services conduct themselves.

Reputational risk is considered and assessed by the HSBC Group Management Board, our Board of Directors and senior management during the establishment of standards for all major aspects of business and the formulation of policy and products. These policies, which are an integral part of the internal control systems, are communicated through manuals and statements of policy, internal communication and training. The policies set out operational procedures in all areas of reputational risk, including money laundering deterrence, economic sanctions, environmental impact, anti-corruption measures and employee relations.

We have established a strong internal control structure to minimize the risk of operational and financial failure and to ensure that a full appraisal of reputational risk is made before strategic decisions are taken. The HSBC Internal Audit function monitors compliance with our policies and standards.

Strategic Risk This risk is a function of the compatibility of our strategic goals, the business strategies developed to achieve those goals, the resources deployed against those goals and the quality of implementation. The resources needed to carry out business strategies are both tangible and intangible. They include communication channels, operating systems, delivery networks and managerial capacities and capabilities.

Strategic risk focuses on more than an analysis of the written strategic plan. It focuses on how plans, systems and implementation affect our value. It also incorporates how we analyze external factors that impact our strategic direction.

We have established a strong internal control structure to minimize the impact of strategic risk to our earnings and capital. All changes in strategy as well as the process in which new strategies are implemented are subject to detailed reviews and approvals at business line, functional, regional, board and HSBC Group levels. This process is monitored by the Strategic Initiatives Group to ensure compliance with our policies and standards.

Business Continuity Planning We are committed to the protection of employees, customers and shareholders by a quick response to all threats to the organization, whether they are of a physical or financial nature. We are governed by the HSBC North America Crisis Management Framework, which provides an enterprise-wide response and communication approach for managing major business continuity events or incidents. It is designed to be flexible and is scaled to the scope and magnitude of the event or incident.

The Crisis Management Framework works in tandem with the HSBC North America Corporate Contingency Planning Policy, business continuity plans and key business continuity committees to manage events. The North American Crisis Management Committee, a 24/7 standing committee, is activated to manage the Crisis Management process in concert with our senior management. This committee provides critical strategic management of business continuity crisis issues, risk management, communication, coordination and recovery management. In particular, the HSBC North America Crisis Management Committee has implemented an enterprise-wide plan, response and communication approach for pandemic preparedness. Tactical management of business continuity issues is handled by the Corporate and Local Incident Response Teams in place at each major site. We have also designated an Institutional Manager for Business Continuity who plays a key role on the Crisis Management Committee. All major business and support functions have a senior representative assigned to our Business Continuity Planning Committee, which is chaired by the Institutional Manager.

We test business continuity and disaster recovery resiliency and capability through routine contingency tests and actual events. Business continuity and disaster recovery programs have been strengthened in numerous areas as a result of these tests or actual events. There is a continuing effort to enhance the program well beyond the traditional business resumption and disaster recovery model.

New Accounting Pronouncements to be Adopted in Future Periods

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts In October 2010, the FASB issued guidance which amends the accounting rules that define which costs associated with acquiring or renewing insurance contracts qualify as deferrable acquisition costs by insurance entities. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Early adoption is permitted, but must be applied as of the beginning of an entity's annual reporting period. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

GLOSSARY OF TERMS

Balance Sheet Management - Represents our activities to manage interest rate risk associated with the repricing characteristics of balance sheet assets and liabilities.

Basis point - A unit that is commonly used to calculate changes in interest rates. The relationship between percentage changes and basis points can be summarized as a 1 percent change equals a 100 basis point change or .01 percent change equals 1 basis point.

Collateralized Funding Transaction - A transaction in which we use a pool of our consumer receivables as a source of funding and liquidity through either a Secured Financing or Securitization. Collateralized funding transactions allow us to limit our reliance on unsecured debt markets and can be a more cost-effective source of funding.

Contractual Delinquency - A method of determining aging of past due accounts based on the past due status of payments under the loan. Delinquency status may be affected by customer account management policies and practices such as the restructure of accounts, forbearance agreements, extended payment plans, modification arrangements, external debt management plans, loan rewrites and deferments.

Delinquency Ratio - Two-months-and-over contractual delinquency expressed as a percentage of loans and loans held for sale at a given date.

Efficiency Ratio - Total operating expenses, reduced by minority interests, expressed as a percentage of the sum of net interest income and other revenues (losses).

Federal Reserve - The Federal Reserve Board; our principal regulator.

Futures Contract - An exchange-traded contract to buy or sell a stated amount of a financial instrument or index at a specified future date and price.

Global Bank Note Program - A $40 billion note program, under which HSBC Bank USA issues senior and subordinated debt.

GM Portfolio - A portfolio of General Motors MasterCard receivables we purchased from HSBC Finance in January 2009. New loan originations subsequent to the initial purchase are purchased daily by HSBC Bank USA.

Goodwill - The excess of purchase price over the fair value of identifiable net assets acquired, reduced by liabilities assumed in a business combination.

HELOC - A revolving line of credit with an adjustable interest rate secured by a lien on the borrower's home which reduces the borrower's equity in the home. HELOCs are classified as home equity mortgages, which are reported within Residential Mortgage Loans.

HMUS - HSBC Markets (USA) Inc.; an indirect wholly-owned subsidiary of HSBC North America, and a holding company for investment banking and markets subsidiaries in the U.S.

HNAI - HSBC North America Inc.; an indirect wholly-owned subsidiary of HSBC North America.

HSBC or HSBC Group - HSBC Holdings plc.; HSBC North America's U.K. parent company.

HSBC Affiliate - Any direct or indirect subsidiary of HSBC outside of our consolidated group of entities.

HSBC Bank USA - HSBC Bank, USA, National Association; our principal wholly-owned U.S. banking subsidiary.

HSBC Finance - HSBC Finance Corporation; an indirect wholly-owned consumer finance subsidiary of HSBC North America.

HSBC North America - HSBC North America Holdings Inc.; a wholly-owned subsidiary of HSBC and HSBC's top-tier bank holding company in North America.

Home Equity Mortgage - A closed- or open- ended loan in which the borrower uses the equity in their home as collateral. Home equity mortgages are secured by a lien against the borrower's home which reduces the borrower's equity in the home. Home equity mortgages may be either fixed rate or adjustable rate loans. Home equity mortgages are reported within Residential Mortgage Loans.

HTCD - HSBC Trust Company (Delaware); one of our wholly-owned U.S. banking subsidiaries.

HTSU - HSBC Technology & Services (USA) Inc., an indirect wholly-owned subsidiary of HSBC North America which provides information technology and centralized operational services, such as human resources, tax, finance, compliance, legal, corporate affairs and other services shared among HSBC Affiliates, primarily in North America.

Intangible Assets - Assets, excluding financial assets, that lack physical substance. Our intangible assets include mortgage servicing rights and favorable lease arrangements.

Interest Rate Swap - Contract between two parties to exchange interest payments on a stated principal amount (notional principal) for a specified period. Typically, one party makes fixed rate payments, while the other party makes payments using a variable rate.

LIBOR - London Interbank Offered Rate; A widely quoted market rate which is frequently the index used to determine the rate at which we borrow funds.

Liquidity - A measure of how quickly we can convert assets to cash or raise additional cash by issuing debt.

Loan-to-Value ("LTV") Ratio - The loan balance at time of origination expressed as a percentage of the appraised property value at the time of origination.

Mortgage Servicing Rights ("MSRs") - An intangible asset which represents the right to service mortgage loans. These rights are recognized at the time the related loans are sold or the rights are acquired.

Net Charge-off Ratio - Net charge-offs of loans expressed as a percentage of average loans outstanding for a given period.

Net Interest Income - Interest income earned on interest-bearing assets less interest expense on deposits and borrowed funds.

Net Interest Margin - Net interest income expressed as a percentage of average interest earning assets for a given period.

Net Interest Income to Total Assets - Net interest income expressed as a percentage of average total assets for a given period.

Nonaccruing Loans - Loans on which we no longer accrue interest because ultimate collection is unlikely.

OCC - The Office of the Comptroller of the Currency; the principal regulator for HSBC Bank USA.

Options - A contract giving the owner the right, but not the obligation, to buy or sell a specified item at a fixed price for a specified period.

Portfolio Seasoning - Relates to the aging of origination vintages. Loss patterns emerge slowly over time as new accounts are booked.

Private Label Credit Card - A line of credit made available to customers of retail merchants evidenced by a credit card bearing the merchant's name.

Private Label Card Receivable Portfolio - Loan and credit card receivable portfolio acquired from HSBC Finance on December 29, 2004.

Rate of Return on Common Shareholder's Equity - Net income, reduced by preferred dividends, divided by average common shareholder's equity for a given period.

Rate of Return on Total Assets - Net income after taxes divided by average total assets for a given period.

Refreshed Loan-to-Value - For first liens, the current loan balance expressed as a percentage of the current property value. For second liens, the current loan balance plus the senior lien amount at origination expressed as a percentage of the current property value. Current property values are derived from the property's appraised value at the time of loan origination updated by the change in the Office of Federal Housing Enterprise Oversight's house pricing index ("HPI") at either a Core Based Statistical Area or state level. The estimated current value of the home 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.

Residential Mortgage Loan - Closed-end loans and revolving lines of credit secured by first or second liens on residential real estate. Depending on the type of residential mortgage, interest can either be fixed or adjustable.

SEC - The Securities and Exchange Commission.

Secured Financing - A Collateralized Funding Transaction in which the interests in a dedicated pool of consumer receivables, typically credit card, auto or personal non-credit card receivables, are sold to investors. Generally, the pool of consumer receivables is sold to a special purpose entity which then issues securities that are sold to investors. Secured Financings do not receive sale treatment and, as a result, the receivables and related debt remain on our balance sheet.

Tangible Common Shareholder's Equity to Total Tangible Assets - Common shareholder's equity less goodwill, other intangibles, unrealized gains and losses on cash flow hedging instruments, postretirement benefit plan adjustments, and unrealized gains and losses on available-for-sale securities expressed as a percentage of total assets less goodwill and other intangibles.

Total Average Shareholders' Equity to Total Assets - Average total shareholders' equity expressed as a percentage of average total assets for a given period.

Total Period End Shareholders' Equity to Total Assets - Total shareholders' equity expressed as a percentage of total assets as of a given date.

UP Portfolio - A portfolio of AFL-CIO Union Plus MasterCard/Visa receivables that we purchased from HSBC Finance in January 2009. New loan originations subsequent to the initial purchase are purchased daily by HSBC Bank USA.

CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES - CONTINUING OPERATIONS

The following table shows the year-to-date average balances of the principal components of assets, liabilities and shareholders' equity together with their respective interest amounts and rates earned or paid for 2010, 2009, and 2008, presented on a taxable equivalent basis.

	2010				2009				2008
	Balance	Interest	Rate(1)		Balance		Interest	Rate(1)	Balance	Interest	Rate(1)
	(dollars are in millions)
Assets
Interest bearing deposits with banks	$26,696	$73		.27%		$15,613	$44	.28%	$5,359	$182	3.40%
Federal funds sold and securities purchased under resale agreements	5,100	38		.75		6,860	45	.66	9,560	229	2.39
Trading assets	6,510	147		2.26		4,797	219	4.56	9,425	535	5.68
Securities	40,148	1,181		2.94		27,778	997	3.59	24,538	1,267	5.16
Loans:
Commercial	31,515	955		3.03		35,011	1,160	3.33	39,210	1,915	4.88
Consumer:
Residential mortgages	14,640	678		4.63		17,641	884	5.01	26,972	1,410	5.23
HELOCs and home equity mortgages	3,973	129		3.24		4,452	147	3.29	4,521	222	4.91
Private label card receivables	13,176	1,313		9.96		15,317	1,635	10.67	16,436	1,713	10.42
Credit cards	11,471	974		8.49		13,519	1,250	9.28	1,917	157	8.19
Auto finance	992	169		17.03		2,444	442	18.09	232	13	5.85
Other consumer	1,364	98		7.22		1,668	134	8.09	2,012	188	9.37
Total consumer	45,616	3,361		7.37		55,041	4,492	8.16	52,090	3,703	7.11
Total loans	77,131	4,316		5.60		90,052	5,652	6.28	91,300	5,618	6.15
Other	6,447	48		.74		8,309	46	.55	9,041	219	2.43
Total earning assets	162,032	$5,803		3.58%		153,409	$7,003	4.57%	149,223	$8,050	5.39%
Allowance for credit losses	(3,063)					(3,645)			(1,837)
Cash and due from banks	1,496					1,787			5,307
Other assets	25,656					24,687			30,751
Total assets	$186,121					$176,238			$183,444
Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits	$54,048	$376		.70%		$48,129	$583	1.21%	$45,143	$1,004	2.22%
Other time deposits	16,952	163		.97		19,375	350	1.81	25,450	869	3.42
Deposits in foreign offices:
Foreign banks deposits	7,876	20		.25		11,033	13	.12	14,336	218	1.52
Other interest bearing deposits	19,474	21		.11		15,026	43	.28	14,621	328	2.25
Total interest bearing deposits	98,350	580		.59		93,563	989	1.06	99,550	2,419	2.43
Short-term borrowings	18,499	81		.44		9,600	74	.77	12,182	283	2.32
Long-term debt	17,539	605		3.44		23,320	782	3.35	24,100	985	4.09
Total interest bearing liabilities	134,388	1,266		.94		126,483	1,845	1.46	135,832	3,687	2.71
Net interest income/Interest rate spread		$4,537		2.64%			$5,158	3.11%		$4,363	2.68%
Noninterest bearing deposits	21,974					20,170			15,250
Other liabilities	13,440					15,201			20,736
Total shareholders' equity	16,319					14,384			11,626
Total liabilities and shareholders' equity	$186,121					$176,238			$183,444
Net interest margin				2.80%				3.36%			2.92%
Net interest income to average total assets				2.44%				2.93%			2.38%

____________

(1)	Rates are calculated on unrounded numbers.

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 years ended December 31, 2010, 2009 and 2008 included fees of $64 million, $85 million and $37 million, respectively.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Information required by this Item is included within Item 7. 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."

Item 8. Financial Statements and Supplementary Data

Our 2010 Financial Statements meet the requirements of Regulation S-X. The 2010 Financial Statements and supplementary financial information specified by Item 302 of Regulation S-K are set forth below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

HSBC USA Inc.:

We have audited the accompanying consolidated balance sheets of HSBC USA Inc. and subsidiaries (the Company), an indirect wholly-owned subsidiary of HSBC Holdings plc, as of December 31, 2010 and 2009, and the related consolidated statements of income (loss), changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2010, and the accompanying consolidated balance sheets of HSBC Bank USA, National Association and subsidiaries (the Bank) as of December 31, 2010 and 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, and the financial position of the Bank as of December 31, 2010 and 2009, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for other-than-temporary impairments of debt securities in 2009.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2011 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

New York, New York

February 28, 2011

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

HSBC USA Inc.:

We have audited HSBC USA Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2010 and 2009, and the related consolidated statements of income (loss), changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2010, and the consolidated balance sheets of HSBC Bank USA, National Association and subsidiaries as of December 31, 2010 and 2009, and our report dated February 28, 2011 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

New York, New York

February 28, 2011

CONSOLIDATED STATEMENT OF INCOME (LOSS)

Year Ended December 31,	2010	2009	2008
	(in millions)
Interest income:
Loans	$4,316	$5,652	$5,618
Securities	1,163	975	1,237
Trading assets	147	219	535
Short-term investments	111	89	411
Other	48	46	219
Total interest income	5,785	6,981	8,020
Interest expense:
Deposits	580	989	2,419
Short-term borrowings	81	74	283
Long-term debt	605	782	985
Total interest expense	1,266	1,845	3,687
Net interest income	4,519	5,136	4,333
Provision for credit losses	1,133	4,144	2,543
Net interest income after provision for credit losses	3,386	992	1,790
Other revenues (losses):
Credit card fees	910	1,356	879
Other fees and commissions	888	803	709
Trust income	102	125	150
Trading revenue (loss)	538	263	(2,662)
Net other-than-temporary impairment losses(1)	(79)	(124)	(231)
Other securities gains, net	74	304	82
Servicing and other fees from HSBC affiliates	156	140	128
Residential mortgage banking revenue (loss)	(122)	172	(11)
Gain (loss) on instruments designated at fair value and related derivatives	294	(253)	286
Other income (expense)	186	(197)	(251)
Total other revenues (losses)	2,947	2,589	(921)
Operating expenses:
Salaries and employee benefits	1,061	1,113	1,216
Support services from HSBC affiliates	1,900	1,587	1,148
Occupancy expense, net	267	280	277
Other expenses	805	900	904
Total operating expenses	4,033	3,880	3,545
Income (loss) from continuing operations before income tax expense (benefit)	2,300	(299)	(2,676)
Income tax expense (benefit)	742	(110)	(943)
Income (loss) from continuing operations	1,558	(189)	(1,733)
Discontinued Operations (Note 3):
Income from discontinued operations before income tax expense	23	73	68
Income tax expense	17	26	24
Income from discontinued operations	6	47	44
Net income (loss)	$1,564	$(142)	$(1,689)

____________

(1)

During 2010, other-than-temporary impairment ("OTTI") losses on securities available-for-sale and held-to-maturity totaling $79 million were recognized in other revenues. There were no significant losses in the non-credit component of such impaired securities reflected in accumulated other comprehensive income (loss) ("AOCI"), net of tax. During 2009, $208 million of OTTI losses on securities available-for-sale were recognized, of which $84 million was recognized in AOCI, net of tax.

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED BALANCE SHEET

December 31,	2010	2009
	(in millions)
Assets
Cash and due from banks	$1,576	$2,099
Interest bearing deposits with banks	8,202	20,109
Securities purchased under agreements to resell	8,236	1,046
Trading assets	32,402	25,803
Securities available-for-sale (includes $1.1 billion at December 31 2009, collateralizing long-term debt) (1)	45,523	27,806
Securities held-to-maturity (fair value of $3.4 billion and $2.9 billion at December 31, 2010 and 2009, respectively, and includes $881 million at December 31, 2010 collateralizing short-term borrowings)(1)	3,190	2,762
Loans (includes $1.5 billion and $2.7 billion at December 31, 2010 and 2009 collateralizing debt)	73,069	79,489
Less - allowance for credit losses	2,170	3,861
Loans, net (1)	70,899	75,628
Loans held for sale (includes $1.3 billion and $1.1 billion designated under fair value option at December 31, 2010 and 2009, respectively)	2,390	2,908
Properties and equipment, net	549	532
Intangible assets, net	424	484
Goodwill	2,626	2,626
Other assets (1)	7,677	8,156
Assets of discontinued operations	119	1,120
Total assets (1)	$183,813	$171,079
Liabilities
Debt:
Deposits in domestic offices:
Noninterest bearing	$23,078	$20,813
Interest bearing (includes $7.4 billion and $4.2 billion designated under fair value option at December 31, 2010 and 2009, respectively)	72,808	69,894
Deposits in foreign offices:
Noninterest bearing	1,263	1,090
Interest bearing	23,502	26,437
Total deposits	120,651	118,234
Short-term borrowings (1)	15,187	6,512
Long-term debt (includes $5.4 billion and $4.6 billion designated under fair value option at December 31, 2010 and 2009, respectively, and $150 million and $3.0 billion at December 31, 2010 and 2009, respectively, collateralized by loans and available-for-sale securities)(1)	17,230	18,008
Total debt	153,068	142,754
Trading liabilities	10,528	7,910
Interest, taxes and other liabilities (1)	3,470	4,652
Liabilities of discontinued operations	14	586
Total liabilities (1)	167,080	155,902
Shareholders' equity
Preferred stock	1,565	1,565
Common shareholder's equity:
Common stock ($5 par; 150,000,000 shares authorized; 712 shares issued and outstanding at December 31, 2010 and 2009)	-	-
Additional paid-in capital	13,785	13,795
Retained earnings	1,536	45
Accumulated other comprehensive loss	(153)	(228)
Total common shareholder's equity	15,168	13,612
Total shareholders' equity	16,733	15,177
Total liabilities and shareholders' equity	$183,813	$171,079

____________

(1)	The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") as of December 31, 2010 and 2009 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation.

December 31,	2010	2009
	(in millions)
Assets
Interest bearing deposits with banks	$759	$72
Securities available-for-sale	-	1,138
Securities held-to-maturity	881	-
Loans, net	14,183	15,953
Other assets	(543)	(330)
Total assets	$15,280	$16,833
Liabilities
Deposits	$20	$20
Short-term borrowings	3,022	-
Long-term debt	205	3,020
Interest, taxes and other liabilities	373	335
Total liabilities	$3,620	$3,375

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

	2010	2009	2008
	(dollars are in millions)
Preferred stock
Balance at beginning and end of period	$1,565	$1,565	$1,565
Common stock
Balance at beginning and end of period	-	-	-
Additional paid-in capital
Balance at beginning of period	13,795	11,694	8,123
Capital contributions from parent	-	2,167	3,563
Return of capital on preferred shares issued to CT Financial Services, Inc.	(3)	(55)	-
Employee benefit plans and other	(7)	(11)	8
Balance at end of period	13,785	13,795	11,694
Retained earnings
Balance at beginning of period	45	245	1,901
Adjustment to initially apply new guidance for consolidation of VIEs, net of tax	1	-	-
Adjustment to initially apply fair value measurement and fair value option accounting, net of tax	-	-	113
Adjustment to initially apply new guidance for other-than-temporary impairment on debt securities, net of tax	-	15	-
Balance at beginning of period, as adjusted	46	260	2,014
Net income (loss)	1,564	(142)	(1,689)
Cash dividends declared on preferred stock	(74)	(73)	(80)
Balance at end of period	1,536	45	245
Accumulated other comprehensive loss
Balance at beginning of period	(228)	(787)	(352)
Adjustment to initially apply new guidance for consolidation of VIEs, net of tax	(246)	-	-
Adjustment to initially apply new guidance for other-than-temporary impairment on debt securities, net of tax	-	(15)	-
Balance at beginning of period, as adjusted	(474)	(802)	(352)
Net change in unrealized gains (losses), net of tax as applicable on:
Securities available-for-sale, not other-than-temporarily impaired	165	444	(324)
Other-than-temporarily impaired debt securities available-for-sale (1)	55	(41)	-
Other-than-temporarily impaired debt securities held- to-maturity (1)	93	-	-
Derivatives classified as cash flow hedges	13	171	(98)
Unrecognized actuarial gains, transition obligation and prior service costs relating to pension and postretirement benefits, net of tax	(5)	-	2
Foreign currency translation adjustments, net of tax	-	-	(15)
Other comprehensive income (loss), net of tax	321	574	(435)
Balance at end of period	(153)	(228)	(787)
Total shareholders' equity	$16,733	$15,177	$12,717
Comprehensive income (loss)
Net income (loss)	$1,564	$(142)	$(1,689)
Other comprehensive income (loss), net of tax	321	574	(435)
Comprehensive income (loss)	$1,885	$432	$(2,124)
Preferred stock
Number of shares at beginning of period	25,947,500	25,947,600	25,947,600
Shares redeemed	-	(100)	-
Number of shares at end of period	25,947,500	25,947,500	25,947,600
Common stock
Issued
Number of shares at beginning of period	712	709	706
Number of shares of common stock issued to parent	-	3	3
Number of shares at end of period	712	712	709

____________

(1)

During 2010, OTTI losses on securities available-for-sale and held-to-maturity totaling $79 million were recognized in other revenues. There were no significant losses in the non-credit component of such impaired securities reflected in AOCI. During 2009, $208 million of OTTI losses on securities available-for-sale were recognized, of which $124 million was recognized in other revenues.

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

Year Ended December 31,	2010	2009	2008
	(in millions)
Cash flows from operating activities
Net income (loss)	$1,564	$(142)	$(1,689)
Income from discontinued operations	6	47	44
Income (loss) from continuing operations	1,558	(189)	(1,733)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	724	357	202
Provision for credit losses	1,133	4,144	2,543
Deferred income tax provision (benefit)	485	(612)	(592)
Other-than-temporarily impaired available-for-sale and held-to-maturity securities	79	124	231
Realized gains on securities available for sale	(74)	(304)	(82)
Net change in other assets and liabilities	101	1,880	(818)
Net change in loans held for sale:
Originations of loans	(4,019)	(6,485)	(8,808)
Sales and collection of loans held for sale	4,079	6,663	9,067
Tax refund anticipation loans:
Originations of loans	(3,082)	(9,020)	(12,628)
Transfers of loans to HSBC Finance, including premium	3,086	9,031	12,641
Net change in trading assets and liabilities	(4,762)	(2,535)	6,079
LOCOM on loans held for sale	(51)	215	567
Mark-to-market on financial instruments designated at fair value and related derivatives	(294)	253	(286)
Net change in fair value of derivatives and hedged items	(95)	59	93
Cash provided by (used in) operating activities - continuing operations	(1,132)	3,581	6,476
Cash provided by (used in) operating activities - discontinued operations	(405)	33	15
Net cash provided by (used in) operating activities	(1,537)	3,614	6,491
Cash flows from investing activities
Net change in interest bearing deposits with banks	11,907	(4,169)	(11,199)
Net change in federal funds sold and securities purchased under agreements to resell	(7,190)	9,767	2,864
Securities available-for-sale:
Purchases of securities available-for-sale	(41,763)	(37,342)	(18,868)
Proceeds from sales of securities available-for-sale	21,634	22,999	3,679
Proceeds from maturities of securities available-for-sale	2,783	11,919	9,765
Securities held-to-maturity:
Purchases of securities held-to-maturity	(2,036)	(229)	(432)
Proceeds from maturities of securities held-to-maturity	1,350	342	448
Change in loans:
Originations, net of collections	36,991	48,542	24,741
Recurring loans purchases from HSBC Finance	(35,460)	(38,040)	(24,391)
Cash paid on bulk purchase of loans from HSBC Finance	-	(8,821)	-
Auto loans sold to third parties	1,559	-	-
Loans sold to third parties	607	4,502	6,960
Net cash used for acquisitions of properties and equipment	(96)	(44)	(62)
Other, net	80	148	(2)
Cash provided by (used in) investing activities - continuing operations	(9,634)	9,574	(6,497)
Cash provided by (used in) investing activities - discontinued operations	-	-	-
Net cash provided by (used in) investing activities	(9,634)	9,574	(6,497)
Cash flows from financing activities
Net change in deposits	2,147	(962)	3,030
Debt:
Net change in short-term borrowings	8,675	(3,983)	(1,337)
Issuance of long-term debt	4,412	4,318	10,227
Repayment of long-term debt	(5,415)	(13,955)	(14,629)
Debt repayment related to VIE	(210)	(492)	(1,334)
Debt issued related to the sale and leaseback of property	309	-	-
Repayment of debt related to the sale and leaseback of property	(26)	-	-
Capital contribution from parent	-	2,167	3,563
Return of capital on preferred shares issued to CT Financial Services, Inc.	(3)	(55)	-
Other increases in capital surplus	(7)	(11)	8
Dividends paid	(74)	(73)	(80)
Cash provided by (used in) financing activities - continuing operations	9,808	(13,046)	(552)
Cash provided by (used in) financing activities - discontinued operations	(103)	45	(37)
Net cash provided by (used in) financing activities	9,705	(13,001)	(589)
Net change in cash and due from banks	(1,466)	187	(595)
Cash and due from banks at beginning of period (1)	3,159	2,972	3,567
Cash and due from banks at end of period (2)	$1,693	$3,159	$2,972
Supplemental disclosure of cash flow information
Interest paid during the period	$1,298	$1,979	$3,914
Income taxes paid during the period	32	27	75
Income taxes refunded during the period	-	(263)	(156)
Supplemental disclosure of non-cash flow investing activities
Trading securities pending settlement	$(781)	$387	$675
Transfer of loans to held for sale	1,295	6,472	6,597
Assumption of indebtedness from HSBC Finance related to the bulk loan purchase	-	6,077	-
Securities received for loan settlement	-	78	-

____________

(1)	Cash at beginning of period includes $1,060 million, $1,190 million and $957 million for discontinued operations as of December 31, 2010, 2009 and 2008, respectively.

(2)	Cash at end of period includes $117 million, $1,060 million and $1,190 million for discontinued operations as of December 31, 2010, 2009 and 2008, respectively.

The accompanying notes are an integral part of the consolidated financial statement.

CONSOLIDATED BALANCE SHEET

December 31,	2010	2009
	(in millions)
Assets
Cash and due from banks	$1,576	$2,099
Interest bearing deposits with banks	8,051	19,894
Federal funds sold and securities purchased under agreements to resell	8,236	1,046
Trading assets	32,051	25,697
Securities available-for-sale (includes $1.1 billion at December 31, 2009, collateralizing long-term debt) (1)	45,253	27,438
Securities held-to-maturity (fair value of $3.4 billion and $2.8 billion at December 31, 2010 and 2009, respectively, and includes $881 million at December 31, 2010 collateralizing short-term borrowings)(1)	3,151	2,712
Loans (includes $1.5 billion and $2.7 billion at December 31, 2010 and 2009 collateralizing debt)	72,155	77,070
Less - allowance for credit losses	2,169	3,825
Loans, net (1)	69,986	73,245
Loans held for sale (includes $1.3 billion and $1.1 billion designated under fair value option at December 31, 2010 and 2009, respectively)	2,390	3,158
Properties and equipment, net	549	532
Intangible assets, net	424	484
Goodwill	2,036	2,036
Other assets (1)	7,296	7,704
Assets of discontinued operations	119	1,120
Total assets (1)	$181,118	$167,165
Liabilities
Debt:
Deposits in domestic offices:
Noninterest bearing	$23,073	$20,809
Interest bearing (includes $7.4 billion and $4.2 billion designated under fair value option at December 31, 2010 and 2009, respectively)	72,808	69,894
Deposits in foreign offices:
Noninterest bearing	1,263	1,090
Interest bearing	31,461	32,084
Total deposits	128,605	123,877
Short-term borrowings (1)	12,167	3,566
Long-term debt (includes $2.5 billion and $2.3 billion designated under fair value option at December 31, 2010 and 2009, respectively, and $150 million and $3.0 billion at December 31, 2010 and 2009, respectively, collateralized by loans and available-for-sale securities)(1)	8,821	10,701
Total debt	149,593	138,144
Trading liabilities	10,285	7,721
Interest, taxes and other liabilities (1)	3,623	4,864
Liabilities of discontinued operations	14	586
Total liabilities (1)	163,515	151,315
Shareholders' equity
Preferred stock	-	-
Common shareholder's equity:
Common stock ($100 par; 50,000 shares authorized; 20,013 and 20,011 shares issued and outstanding at December 31, 2010 and 2009, respectively)	2	2
Additional paid-in capital	15,846	15,793
Retained earnings	1,910	286
Accumulated other comprehensive loss	(155)	(231)
Total common shareholder's equity	17,603	15,850
Total shareholders' equity	17,603	15,850
Total liabilities and shareholders' equity	$181,118	$167,165

____________

(1)	The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") as of December 31, 2010 and 2009 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation.

December 31,	2010	2009
	(in millions)
Assets
Interest bearing deposits with banks	$759	$72
Securities available-for-sale	-	1,138
Securities held-to-maturity	881	-
Loans, net	14,183	15,953
Other assets	(543)	(330)
Total assets	$15,280	$16,833
Liabilities
Deposits	$20	$20
Short-term borrowings	3,022	-
Long-term debt	205	3,020
Interest, taxes and other liabilities	373	335
Total liabilities	$3,620	$3,375

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