HSBC USA Inc FY2013 Form 10-K - Part 3

RNS Number : 7410A
HSBC Holdings PLC
24 February 2014
 


24.     Retained Earnings and Regulatory Capital Requirements

 


Bank dividends are a major source of funds for payment by us of shareholder dividends, and along with interest earned on investments, cover our operating expenses which consist primarily of interest on outstanding debt. Any significant dividend from HSBC Bank USA would require the approval of the Office of the Comptroller of the Currency (the "OCC"). Approval is also required if the total of all dividends HSBC Bank USA declares in any year exceeds the cumulative net profits for that year, combined with the profits for the two preceding years reduced by dividends attributable to those years. Under a separate restriction, payment of dividends is prohibited in amounts greater than undivided profits then on hand, after deducting actual losses and bad debts. Bad debts are debts due and unpaid for a period of six months unless well secured, as defined, and in the process of collection.

The following table summarizes the capital amounts and ratios of HSBC USA Inc. and HSBC Bank USA, calculated in accordance with current banking regulations.

 


December 31, 2013


December 31, 2012


Capital

Amount


Well-Capitalized

Minimum Ratio(1)


Actual

Ratio


Capital

Amount


Well-Capitalized

Minimum Ratio(1)


Actual

Ratio


(dollars are in millions)

Total capital ratio:












HSBC USA Inc............................

$

20,242



10.00

%


16.47

%


$

20,764



10.00

%


19.52

%

HSBC Bank USA........................

21,324



10.00



18.09



21,464



10.00



21.07


Tier 1 capital ratio:












HSBC USA Inc............................

14,409



6.00



11.73



14,480



6.00



13.61


HSBC Bank USA........................

15,763



6.00



13.37



15,482



6.00



15.20


Tier 1 common ratio:












HSBC USA Inc............................

12,301



5.00


(2)

10.01



12,373



5.00


(2)

11.63


HSBC Bank USA........................

15,763



5.00



13.37



15,482



5.00



15.20


Tier 1 leverage ratio:












HSBC USA Inc............................

14,409



3.00


(3)

7.90



14,480



3.00


(3)

7.70


HSBC Bank USA........................

15,763



5.00



9.06



15,482



5.00



8.43


Risk weighted assets:












HSBC USA Inc............................

122,888







106,395






HSBC Bank USA........................

117,894







101,865






 


(1)        HSBC USA Inc and HSBC Bank USA are categorized as "well-capitalized," as defined by their principal regulators. To be categorized as well-capitalized under regulatory guidelines, a banking institution must have the minimum ratios reflected in the above table, and must not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. As previously discussed, the minimum regulatory ratios for a depository institution to be well-capitalized will increase in 2015 under Basel III.

(2)        There is no Tier 1 common ratio component in the definition of a well-capitalized bank holding company. The ratio shown is the required minimum Tier 1 common ratio as included in the Federal Reserve Board's final rule regarding capital plans for U.S. bank holding companies with total consolidated assets of $50 billion or more. Under Basel III, a 6.5% common equity Tier 1 capital ratio will be required in 2015 for a depository institution to be well-capitalized.

(3)        There is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company. The ratio shown is the minimum required ratio.

The regulatory capital ratios in 2013 reflect the impact of the U.S. market risk final rule (known as Basel 2.5).

We did not receive any cash capital contributions from our immediate parent, HNAI during 2013 or 2012. We did not make any capital contributions to our subsidiary, HSBC Bank USA, during 2013. During 2012, we contributed $2 million, primarily to our subsidiary, HSBC Bank USA, in part to provide capital support for receivables purchased from our affiliate, HSBC Finance Corporation. See Note 22, "Related Party Transactions," for additional information.

Regulatory guidelines impose certain restrictions that may limit the inclusion of deferred tax assets in the computation of regulatory capital. We closely monitor the deferred tax assets for potential limitations or exclusions. At December 31, 2013 and 2012, deferred tax assets of $897 million and $622 million, respectively, were excluded in the computation of regulatory capital.

 


25.     Variable Interest Entities

 


In the ordinary course of business, we have organized special purpose entities ("SPEs") primarily to structure financial products to meet our clients' investment needs, to facilitate clients to access and raise financing from capital markets and to securitize financial assets held to meet our own funding needs. For disclosure purposes, we aggregate SPEs based on the purpose, risk characteristics and business activities of the SPEs. A SPE is a VIE if it lacks sufficient equity investment at risk to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack either a) the power through voting or similar rights to direct the activities of the entity that most significantly impacts the entity's economic performance; or b) the obligation to absorb the entity's expected losses, the right to receive the expected residual returns, or both.

Variable Interest Entities  We consolidate VIEs in which we hold a controlling financial interest as evidenced by the power to direct the activities of a VIE that most significantly impact its economic performance and the obligation to absorb losses of, or the right to receive benefits from, the VIE that could be potentially significant to the VIE and therefore are deemed to be the primary beneficiary. We take into account our entire involvement in a VIE (explicit or implicit) in identifying variable interests that individually or in the aggregate could be significant enough to warrant our designation as the primary beneficiary and hence require us to consolidate the VIE or otherwise require us to make appropriate disclosures. We consider our involvement to be significant where we, among other things, (i) provide liquidity put options or other liquidity facilities to support the VIE's debt obligations; (ii) enter into derivative contracts to absorb the risks and benefits from the VIE or from the assets held by the VIE; (iii) provide a financial guarantee that covers assets held or liabilities issued; (iv) design, organize and structure the transaction; and (v) retain a financial or servicing interest in the VIE.

We are required to evaluate whether to consolidate a VIE when we first become involved and on an ongoing basis. In almost all cases, a qualitative analysis of our involvement in the entity provides sufficient evidence to determine whether we are the primary beneficiary. In rare cases, a more detailed analysis to quantify the extent of variability to be absorbed by each variable interest holder is required to determine the primary beneficiary.

Consolidated VIEs  The following table summarizes assets and liabilities related to our consolidated VIEs as of December 31, 2013 and 2012 which are consolidated on our balance sheets. Assets and liabilities exclude intercompany balances that eliminate in consolidation:

 


December 31, 2013


December 31, 2012


Consolidated

Assets


Consolidated

Liabilities


Consolidated

Assets


Consolidated

Liabilities


(in millions)

Asset-backed commercial paper conduit:








Interest bearing deposits with banks..................................................

$

5



$

-



$

-



$

-


Held-to-maturity securities...................................................................

200



-



-



-


Other assets............................................................................................

45



-



-



-


Other liabilities........................................................................................

-



3



-



-


Subtotal......................................................................................................

$

250



$

3



$

-



$

-


Low income housing limited liability partnership:








Other assets............................................................................................

457



-



533



-


Long-term debt.......................................................................................

-



92



-



92


Other liabilities........................................................................................

-



90



-



152


Subtotal......................................................................................................

$

457



$

182



$

533



$

244


Total...............................................................................................................

$

707



$

185



$

533



$

244


Asset-backed conduit  During 2013, HSBC decided to restructure certain of its asset-backed commercial paper conduit programs to have only one asset-backed commercial paper conduit providing securitized financing to HSBC clients globally. As part of this initiative, our commercial paper conduit otherwise known as Bryant Park is no longer transacting new business and certain existing Bryant Park customer transactions have been refinanced by an existing commercial paper conduit currently consolidated by HSBC Bank plc. Bryant Park continues to exist but only to fund select legacy assets it currently holds. Upon completion of the restructure in 2013, HSBC Bank USA became the primary beneficiary of Bryant Park at which time Bryant Park became included in our consolidated results.

Low income housing limited liability partnership  In 2009, all low income housing investments held by us were transferred to a Limited Liability Partnership ("LLP") in exchange for debt and equity while a third party invested cash for an equity interest that is mandatorily redeemable at a future date. The LLP was created in order to ensure the utilization of future tax benefits from these low income housing tax projects. The LLP was deemed to be a VIE as it does not have sufficient equity investment at risk to finance its activities. Upon entering into this transaction, we concluded that we are the primary beneficiary of the LLP due to the nature of our continuing involvement and, as a result, consolidate the LLP and report the equity interest issued to the third party investor in other liabilities and the assets of the LLP in other assets on our consolidated balance sheet. The investments held by the LLP represent equity investments in the underlying low income housing partnerships for which the LLP applies equity-method accounting. The LLP does not consolidate the underlying partnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the economic performance of the partnerships.

Unconsolidated VIEs  We also have variable interests in other VIEs that were not consolidated at December 31, 2013 and 2012 because we were not the primary beneficiary. The following table provides additional information on those unconsolidated VIEs, the variable interests held by us and our maximum exposure to loss arising from our involvements in those VIEs as of December 31, 2013 and 2012:

 

 


Variable Interests

Held Classified

as Assets


Variable Interests

Held Classified

as Liabilities


Total Assets in

Unconsolidated

VIEs


Maximum

Exposure

to Loss


(in millions)

At December 31, 2013








Asset-backed commercial paper conduits......................

$

-



$

-



$

17,044



$

2,050


Structured note vehicles....................................................

2,272



55



6,190



5,888


Total......................................................................................

$

2,272



$

55



$

23,234



$

7,938


At December 31, 2012








Asset-backed commercial paper conduits......................

$

-



$

-



$

16,104



$

2,212


Structured note vehicles....................................................

2,117



154



7,055



6,893


Total......................................................................................

$

2,117



$

154



$

23,159



$

9,105


Information on the types of variable interest entities with which we are involved, the nature of our involvement and the variable interests held in those entities is presented below.

Asset-backed commercial paper ("ABCP") conduits  Separately from the Bryant Park facility discussed above, we provide liquidity facilities to multi-seller and single-seller ABCP conduits sponsored by HSBC affiliates and by third parties. These conduits support the financing needs of customers by facilitating the customers' access to commercial paper markets.

Customers sell financial assets, such as trade receivables, to ABCP conduits, which fund the purchases by issuing short-term highly-rated commercial paper collateralized by the assets acquired. In a multi-seller conduit, any number of companies may be originating and selling assets to the conduit whereas a single-seller conduit acquires assets from a single company. We, along with other financial institutions, provide liquidity facilities to ABCP conduits in the form of lines of credit or asset purchase commitments. Liquidity facilities provided to multi-seller conduits support transactions associated with a specific seller of assets to the conduit and we would only be required to provide support in the event of certain triggers associated with those transactions and assets. Liquidity facilities provided to single-seller conduits are not identified with specific transactions or assets and we would be required to provide support upon occurrence of certain triggers that generally affect the conduit as a whole. Our obligations are generally pari passu with 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.

Each seller of assets to an ABCP conduit typically provides credit enhancements in the form of asset overcollateralization and, therefore, bears the risk of first loss related to the specific assets transferred. We do not transfer our own assets to the conduits. We do not provide the majority of the liquidity facilities to any of these ABCP conduits. We have no ownership interests in, perform no administrative duties for, and do not service any of the assets held by the conduits. We are not the primary beneficiary and do not consolidate any of the ABCP conduits to which we provide liquidity facilities. Credit risk related to the liquidity facilities provided is managed by subjecting these facilities to our normal underwriting and risk management processes. The $2.1 billion maximum exposure to loss presented in the table above represents the maximum amount of loans and asset purchases we could be required to fund under the liquidity facilities. The maximum loss exposure is estimated assuming the facilities are fully drawn and the underlying collateralized assets are in default with zero recovery value.

Structured note vehicles  Our involvement in structured note vehicles includes derivatives such as interest rate and currency swaps and investments in the vehicles' debt instruments. With respect to several of these VIEs, we held variable interests in the form of total return swaps entered into in connection with the transfer of certain assets to the VIEs. In these transactions, we transferred financial assets from our trading portfolio to the VIEs and entered into total return swaps under which we received the total return on the transferred assets and paid a market rate of return. The transfers of assets in these transactions did not qualify as sales under the applicable accounting literature and were accounted for as secured borrowings. Accordingly, the transferred assets continued to be recognized as trading assets on our balance sheet and the funds received were recorded as liabilities in long-term debt. As of December 31, 2013, we had no trading assets or trading liabilities recorded on our balance sheet as a result of "failed sale" accounting treatment. As of December 31, 2012, we recorded approximately $140 million of trading assets and $147 million of trading liabilities on our balance sheet as a result of "failed sale" accounting treatment for certain transfers of financial assets.

We also hold credit default swaps with these structured note VIEs under which we receive credit protection on specified reference assets in exchange for the payment of a premium. Through these derivatives, the VIEs assume the credit risk associated with the reference assets which are then passed on to the holders of the debt instruments they issue. Because they create rather than absorb variability, the credit default swaps we hold are not considered variable interests. In limited circumstances, we entered into total return swaps taking on the risks and benefits of certain structured notes issued by unconsolidated VIEs. The same risks and benefits are passed on to third party entities through back-end total return swaps. We earn a spread for facilitating the transaction. Our maximum exposure to loss is the notional amount of the structured notes covered by the swap. The maximum exposure to loss will occur in the unlikely scenario where the value of the structured notes is reduced to zero and, at the same time, the counterparty of the back-end swap defaults with zero recovery.

We record all investments in, and derivative contracts with, unconsolidated structured note vehicles at fair value on our consolidated balance sheet. Our maximum exposure to loss is limited to the recorded amounts of these instruments or, where applicable, the notional amount of the derivatives wrapping the structured notes.

Beneficial interests issued by third-party sponsored securitization entities  We hold certain beneficial interests such as mortgage-backed securities issued by third party sponsored securitization entities which may be considered VIEs. The investments are transacted at arm's-length and decisions to invest are based on a credit analysis of the underlying collateral assets or the issuer. We are a passive investor in these issuers and do not have the power to direct the activities of these issuers. As such, we do not consolidate these securitization entities. Additionally, we do not have other involvements in servicing or managing the collateral assets or provide financial or liquidity support to these issuers which potentially give rise to risk of loss exposure. These investments are an integral part of the disclosure in Note 5, "Securities," and Note 27, "Fair Value Measurements," and, therefore, are not disclosed in this note to avoid redundancy.

 


26.     Guarantee Arrangements, Pledged Assets and Collateral

 


Guarantee Arrangements  As part of our normal operations, we enter into credit derivatives and various off-balance sheet guarantee arrangements with affiliates and third parties. These arrangements arise principally in connection with our lending and client intermediation activities and include standby letters of credit and certain credit derivative transactions. The contractual amounts of these arrangements represent our maximum possible credit exposure in the event that we are required to fulfill the maximum obligation under the contractual terms of the guarantee.

The following table presents total carrying value and contractual amounts of our sell protection credit derivatives and major off-balance sheet guarantee arrangements as of December 31, 2013 and 2012. Following the table is a description of the various arrangements.

 


December 31, 2013


December 31, 2012


Carrying

Value


Notional/Maximum

Exposure to Loss


Carrying

Value


Notional/Maximum

Exposure to Loss


(in millions)

Credit derivatives(1)(4)......................................................................................

$

545



$

180,534



$

(76

)


$

237,548


Financial standby letters of credit, net of participations(2)(3)....................

-



5,237



-



5,554


Performance (non-financial) guarantees(3)...................................................

-



3,172



-



2,878


Liquidity asset purchase agreements(3).......................................................

-



2,050



-



2,212


Total...................................................................................................................

$

545



$

190,993



$

(76

)


$

248,192


 


(1)        Includes $34.9 billion and $44.2 billion of notional issued for the benefit of HSBC affiliates at December 31, 2013 and 2012, respectively.

(2)        Includes $865 million and $808 million issued for the benefit of HSBC affiliates at December 31, 2013 and 2012, respectively.

(3)        For standby letters of credit and liquidity asset purchase agreements, maximum loss represents losses to be recognized assuming the letter of credit and liquidity facilities have been fully drawn and the obligors have defaulted with zero recovery.

(4)        For credit derivatives, the maximum loss is represented by the notional amounts without consideration of mitigating effects from collateral or recourse arrangements.

Credit-Risk Related Guarantees

Credit derivatives  Credit derivatives are financial instruments that transfer the credit risk of a reference obligation from the credit protection buyer to the credit protection seller who is exposed to the credit risk without buying the reference obligation. We sell credit protection on underlying reference obligations (such as loans or securities) by entering into credit derivatives, primarily in the form of credit default swaps, with various institutions. We account for all credit derivatives at fair value. Where we sell credit protection to a counterparty that holds the reference obligation, the arrangement is effectively a financial guarantee on the reference obligation. Under a credit derivative contract, the credit protection seller will reimburse the credit protection buyer upon occurrence of a credit event (such as bankruptcy, insolvency, restructuring or failure to meet payment obligations when due) as defined in the derivative contract, in return for a periodic premium. Upon occurrence of a credit event, we will pay the counterparty the stated notional amount of the derivative contract and receive the underlying reference obligation. The recovery value of the reference obligation received could be significantly lower than its notional principal amount when a credit event occurs.

Certain derivative contracts are subject to master netting arrangements and related collateral agreements. A party to a derivative contract may demand that the counterparty post additional collateral in the event its net exposure exceeds certain predetermined limits and when the credit rating falls below a certain grade. We set the collateral requirements by counterparty such that the collateral covers various transactions and products, and is not allocated to specific individual contracts.

We manage our exposure to credit derivatives using a variety of risk mitigation strategies where we enter into offsetting hedge positions or transfer the economic risks, in part or in entirety, to investors through the issuance of structured credit products. We actively manage the credit and market risk exposure in the credit derivative portfolios on a net basis and, as such, retain no or a limited net sell protection position at any time. The following table summarizes our net credit derivative positions as of December 31, 2013 and 2012.

 


December 31, 2013


December 31, 2012


Carrying (Fair)

Value


Notional


Carrying (Fair)

Value


Notional


(in millions)

Sell-protection credit derivative positions..............................................

$

545



$

180,534



$

(76

)


$

237,548


Buy-protection credit derivative positions.............................................

(505

)


186,909



120



247,384


Net position(1)..............................................................................................

$

40



$

(6,375

)


$

44



$

(9,836

)

 


 

(1)        Positions are presented net in the table above to provide a complete analysis of our risk exposure and depict the way we manage our credit derivative portfolio. The offset of the sell-protection credit derivatives against the buy-protection credit derivatives may not be legally binding in the absence of master netting agreements with the same counterparty. Furthermore, the credit loss triggering events for individual sell protection credit derivatives may not be the same or occur in the same period as those of the buy protection credit derivatives thereby not providing an exact offset.

Standby letters of credit  A standby letter of credit is issued to a third party for the benefit of a customer and is a guarantee that the customer will perform or satisfy certain obligations under a contract. It irrevocably obligates us to pay a specified amount to the third party beneficiary if the customer fails to perform the contractual obligation. We issue two types of standby letters of credit: performance and financial. A performance standby letter of credit is issued where the customer is required to perform some nonfinancial contractual obligation, such as the performance of a specific act, whereas a financial standby letter of credit is issued where the customer's contractual obligation is of a financial nature, such as the repayment of a loan or debt instrument. As of December 31, 2013, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5.2 billion and $3.2 billion, respectively. As of December 31, 2012, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5.6 billion and $2.9 billion, respectively.

The issuance of a standby letter of credit is subject to our credit approval process and collateral requirements. We charge fees 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, which represent the value of the stand-ready obligation to perform under these guarantees, amounting to $46 million and $46 million at December 31, 2013 and 2012, respectively. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of $18 million and $19 million at December 31, 2013 and 2012, respectively.

The following table summarizes the credit ratings of credit risk related guarantees including the credit ratings of counterparties against which we sold credit protection and financial standby letters of credit as of December 31, 2013 as an indicative proxy of payment risk:

 


Average

Life

(in years)


Credit Ratings of the Obligors or the Transactions

Notional/Contractual Amounts

      Investment

Grade


Non-Investment

Grade


Total


(dollars are in millions)

Sell-protection Credit Derivatives(1)








Single name credit default swaps ("CDS").................................

2.4


$

106,070



$

20,917



$

126,987


Structured CDS...............................................................................

1.8


20,690



2,508



23,198


Index credit derivatives..................................................................

3.2


20,272



203



20,475


Total return swaps..........................................................................

11.3


9,361



513



9,874


Subtotal.................................................................................................



156,393



24,141



180,534


Standby Letters of Credit(2)................................................................

1.2


6,546



1,863



8,409


Total.......................................................................................................



$

162,939



$

26,004



$

188,943


 


(1)        The credit ratings in the table represent external credit ratings for classification as investment grade and non-investment grade.

(2)        External ratings for most of the obligors are not available. Presented above are the internal credit ratings which are developed using similar methodologies and rating scale equivalent to external credit ratings for purposes of classification as investment grade and non-investment grade.

Our internal groupings are determined based on HSBC's risk rating systems and processes which assign a credit grade based on a scale which ranks the risk of default of a customer. The groupings are determined and used for managing risk and determining level of credit exposure appetite based on the customer's operating performance, liquidity, capital structure and debt service ability. In addition, we also incorporate subjective judgments into the risk rating process concerning such things as industry trends, comparison of performance to industry peers and perceived quality of management. We compare our internal risk ratings to outside external rating agency benchmarks, where possible, at the time of formal review and regularly monitor whether our risk ratings are comparable to the external ratings benchmark data.

A non-investment grade rating of a referenced obligor has a negative impact to the fair value of the credit derivative and increases the likelihood that we will be required to perform under the credit derivative contract. We employ market-based parameters and, where possible, use the observable credit spreads of the referenced obligors as measurement inputs in determining the fair value of the credit derivatives. We believe that such market parameters are more indicative of the current status of payment/performance risk than external ratings by the rating agencies which may not be forward-looking in nature and, as a result, lag behind those market-based indicators.

Mortgage Loan Repurchase Obligations

Sale of mortgage loans  In the ordinary course of business, we originate and sell mortgage loans and provide various representations and warranties related to, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and the compliance to the origination criteria established by the agencies. In the event of a breach of our representations and warranties, we may be obligated to repurchase the loans with identified defects or to indemnify the buyers. Our contractual obligation arises only when the breach of representations and warranties are discovered and repurchase is demanded. Historically, these sales have been primarily to government sponsored entities ("GSEs"). With the conversion of our mortgage processing and servicing operations to PHH Mortgage in the second quarter of 2013, new agency eligible originations beginning with May 2013 applications are sold directly to PHH Mortgage and PHH Mortgage is responsible for origination representations and warranties for all loans purchased.

We typically first become aware that a GSE or other third party is evaluating a particular loan for repurchase when we receive a request to review the underlying loan file. Generally, the reviews focus on severely delinquent loans to identify alleged fraud, misrepresentation or file documentation issues. Upon completing its review, the GSE or other third party may submit a repurchase demand. Historically, most file requests have not resulted in repurchase demands. After receipt of a repurchase demand, we perform a detailed evaluation of the substance of the request and appeal any claim that we believe is either unsubstantiated or contains errors, leveraging both dedicated internal as well as retained external resources. In some cases, we ultimately are not required to repurchase a loan as we are able to resolve the purported defect. From initial inquiry to ultimate resolution, a typical case is usually resolved within 3 months, however some cases may take as long as 12 months to resolve. Acceptance of a repurchase demand will involve either a) repurchase of the loan at the unpaid principal balance plus accrued interest or b) reimbursement for any realized loss on a liquidated property ("make-whole" payment).

To date, a majority of the repurchase demands we have received primarily relate to prime loans sourced during 2004 through 2008 from the legacy broker channel which we exited in late 2008. Loans sold to GSEs and other third parties originated in 2004 through 2008 subject to representations and warranties for which we may be liable had an outstanding principal balance of approximately $11.9 billion and $15.1 billion at December 31, 2013 and 2012, respectively, including $7.6 billion and $9.6 billion, respectively, of loans sourced from our legacy broker channel.

During the fourth quarter of 2013, we entered into a settlement with FNMA for $83 million, reflected in realized losses in the liability table rollforward below, which settled our liability for substantially all loans sold to FNMA between January 1, 2000 and June 26, 2012. The settlement resulted in a release of $15 million in repurchase reserves previously provided for this exposure. We continue to maintain repurchase reserves for FNMA exposure associated with residual risk not covered by the settlement agreement.

The following table shows the trend in repurchase demands received on loans sold to GSEs and other third parties by loan origination vintage at December 31, 2013, 2012 and 2011:

 

At December 31,

2013


2012


2011


(in millions)

Pre- 2004.........................................................................................................................................

$

12



$

7



$

5


2004.................................................................................................................................................

27



21



13


2005.................................................................................................................................................

43



28



24


2006.................................................................................................................................................

56



80



56


2007.................................................................................................................................................

106



209



146


2008.................................................................................................................................................

60



123



98


Post 2008........................................................................................................................................

14



18



68


Total repurchase demands received(1).......................................................................................

$

318



$

486



$

410


 


(1)        Includes repurchase demands on loans sourced from our legacy broker channel of $245 million, $393 million and $300 million at December 31, 2013, 2012 and 2011, respectively.

The following table provides information about outstanding repurchase demands received from GSEs and other third parties at December 31, 2013, 2012 and 2011:

 

At December 31,

2013


2012


2011


(in millions)

GSEs................................................................................................................................................

$

41



$

86



$

77


Others.............................................................................................................................................

3



3



25


Total(1) ............................................................................................................................................

$

44



$

89



$

102


 


(1)        Includes repurchase demands on loans sourced from our legacy broker channel of $26 million, $65 million and $87 million at December 31, 2013, 2012 and 2011, respectively.

In estimating our repurchase liability arising from breaches of representations and warranties, we consider the following:

•       The level of outstanding repurchase demands in inventory and our historical defense rate;

•       The level of outstanding requests for loan files and the related historical repurchase request conversion rate and defense rate on such loans;

•       The level of potential future demands based on historical conversion rates of loans which we have not received a loan file request but are two or more payments delinquent or expected to become delinquent at an estimated conversion rate; and

•       Any settlements reached with our counterparties.

The following table summarizes the change in our estimated repurchase liability for loans sold to the GSEs and other third parties during 2013, 2012 and 2011 for obligations arising from the breach of representations and warranties associated with the sale of these loans:

 


2013


2012


2011


(in millions)

Balance at beginning of period...................................................................................................

$

219



$

237



$

262


Increase in liability recorded through earnings.......................................................................

21



134



92


Realized losses..............................................................................................................................

(141

)


(152

)


(117

)

Balance at end of period..............................................................................................................

$

99



$

219



$

237


Our remaining reserve for potential repurchase liability exposures relates primarily to previously originated mortgages through broker channels that were sold to the FHLMC. Our mortgage repurchase liability of $99 million at December 31, 2013 represents our best estimate of the loss that has been incurred including interest, resulting from various representations and warranties in the contractual provisions of our mortgage loan sales. Because the level of mortgage loan repurchase losses is dependent upon economic factors, investor demand strategies and other external risk factors such as housing market trends that may change, the level of the liability for mortgage loan repurchase losses requires significant judgment. We have seen recent changes in investor demand trends and continue to evaluate our methods of determining the best estimate of loss based on these recent trends. As these estimates are influenced by factors outside our control, there is uncertainty inherent in these estimates making it reasonably possible that they could change. The range of reasonably possible losses in excess of our recorded repurchase liability is between zero and $90 million at December 31, 2013. This estimated range of reasonably possible losses was determined based upon modifying the assumptions utilized in our best estimate of probable losses to reflect what we believe to be reasonably possible adverse assumptions. 

Written Put Options, Non Credit-Risk Related and Indemnity Arrangements

Liquidity asset purchase agreements  We provide liquidity facilities to a number of multi-seller and single-seller asset-backed commercial paper conduits sponsored by affiliates and third parties. The conduits finance the purchase of individual assets by issuing commercial paper to third party investors. Each liquidity facility is transaction specific and has a maximum limit. Pursuant to the liquidity agreements, we are obligated, subject to certain limitations, to purchase the eligible assets from the conduit at an amount not to exceed the face value of the commercial paper in the event the conduit is unable to refinance its commercial paper. A liquidity asset purchase agreement is essentially a conditional written put option issued to the conduit where the exercise price is the face value of the commercial paper. As of December 31, 2013 and 2012, we have issued $2.1 billion and $2.2 billion, respectively, of liquidity facilities to provide liquidity support to the commercial paper issued by various conduits See Note 25, "Variable Interest Entities," for further information.

Visa covered litigation  We are an equity member of Visa Inc. ("Visa"). Prior to its initial public offering ("IPO") on March 19, 2008, Visa completed a series of transactions to reorganize and restructure its operations and to convert membership interests into equity interests. Pursuant to the restructuring, we, along with all the Class B shareholders, agreed to indemnify Visa for the claims and obligations arising from certain specific covered litigations. Class B shares are convertible into listed Class A shares upon (i) settlement of the covered litigations or (ii) the third anniversary of the IPO, whichever is later. Visa used a portion of the IPO proceeds to establish an escrow account to fund future claims arising from those covered litigations. From 2009 to 2011, Visa exercised its rights to sell shares of existing Class B shareholders and deposited the proceeds in order to increase the escrow account. At December 31, 2013 and 2012, there was no liability recorded relating to this litigation.

Clearinghouses and exchanges  We are a member of various exchanges and clearinghouses that trade and clear securities and/or futures contracts. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"), members of a clearinghouse may be required to contribute to a guaranty fund to backstop members' obligations to the clearinghouse. As a member, we may be required to pay a proportionate share of the financial obligations of another member who defaults on its obligations to the exchange or the clearinghouse. Our guarantee obligations would arise only if the exchange or clearinghouse had exhausted its resources. Any potential contingent liability under these membership agreements cannot be estimated.

Pledged Assets  Pledged assets included in the consolidated balance sheet consisted of the following.

 

At December 31,

2013


2012


(in millions)

Interest bearing deposits with banks........................................................................................................

$

355



$

673


Trading assets(1)...........................................................................................................................................

1,296



2,346


Securities available-for-sale(2)....................................................................................................................

21,346



17,236


Securities held-to-maturity.........................................................................................................................

362



456


Loans(3) .........................................................................................................................................................

3,969



2,142


Other assets(4)...............................................................................................................................................

2,904



2,265


Total...............................................................................................................................................................

$

30,232



$

25,118


 


(1)        Trading assets are primarily pledged against liabilities associated with repurchase agreements.

(2)        Securities available-for-sale are primarily pledged against derivatives, public fund deposits and various short-term and long term borrowings, as well as providing capacity for potential secured borrowings from the Federal Home Loan Bank and the Federal Reserve Bank.

(3)        Loans are primarily residential mortgage loans pledged against long-term borrowings from the Federal Home Loan Bank.

(4)        Other assets represent cash on deposit with non-banks related to derivative collateral support agreements.

Debt securities pledged as collateral that can be sold or repledged by the secured party continue to be reported on the consolidated balance sheet. The fair value of securities available-for-sale that can be sold or repledged was $10.9 billion and $6.5 billion at December 31, 2013 and 2012, respectively. The fair value of trading assets that can be sold or repledged was $1.3 billion and $2.2 billion at December 31, 2013 and 2012, respectively.

The fair value of collateral we accepted but not reported on the consolidated balance sheet that can be sold or repledged was $4.2 billion and $5.7 billion at December 31, 2013 and 2012, respectively. This collateral was obtained under security resale agreements. Of this collateral, $2.7 billion and $1.3 billion has been sold or repledged as collateral under repurchase agreements or to cover short sales at December 31, 2013 and 2012, respectively.

Lease Obligations  We are obligated under a number of noncancellable leases for premises and equipment. Certain leases contain renewal options and escalation clauses. Office space leases generally require us to pay certain operating expenses. Net rental expense under operating leases was $149 million in 2013, $147 million in 2012 and $148 million in 2011.

We have lease obligations on certain office space which has been subleased through the end of the lease period. Under these agreements, the sublessee has assumed future rental obligations on the lease.

Future net minimum lease commitments under noncancellable operating lease arrangements were as follows:

 

Year Ending December 31,

Minimum

Rental

Payments


Minimum

Sublease

Income


Net


(in millions)

2014................................................................................................................................................

$

148



$

(4

)


$

144


2015................................................................................................................................................

137



(3

)


134


2016................................................................................................................................................

115



(2

)


113


2017................................................................................................................................................

101



(1

)


100


2018................................................................................................................................................

88



-



88


Thereafter......................................................................................................................................

175



(1

)


174


Net minimum lease commitments...............................................................................................

$

764



$

(11

)


$

753


Securitization Activity  In addition to the repurchase risk described above, we have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by our affiliate, HSI. In this regard, we began acquiring residential mortgage loans beginning in 2005 which were warehoused on our balance sheet with the intent of selling them to HSI to facilitate HSI's whole loan securitization program which was discontinued in the second half of 2007. During 2005-2007, we purchased and sold $24 billion of such loans to HSI which were subsequently securitized and sold by HSI to third parties. See "Mortgage Securitization Activity and Litigation" in Note 28, "Litigation and Regulatory Matters" for additional discussion of related exposure.

Offsetting of Resale and Repurchase Agreements and Securities Borrowing and Lending Agreements

We enter into purchases and borrowings of securities under agreements to resell (resale agreements) and sales of securities under agreements to repurchase (repurchase agreements) identical or substantially the same securities. Resale and repurchase agreements are generally accounted for as secured lending and secured borrowing transactions, respectively.

The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the consolidated balance sheets at the amount advanced or borrowed, plus accrued interest to date. Interest earned on resale agreements is reported as interest income. Interest paid on repurchase agreements is reported as interest expense. We offset resale and repurchase agreements executed with the same counterparty under legally enforceable netting agreements that meet the applicable netting criteria as permitted by generally accepted accounting principles.

Repurchase agreements may require us to deposit cash or other collateral with the lender. In connection with resale agreements, it is our policy to obtain possession of collateral, which may include the securities purchased, with market value in excess of the principal amount loaned. The market value of the collateral subject to the resale and repurchase agreements is regularly monitored, and additional collateral is obtained or provided when appropriate, to ensure appropriate collateral coverage of these secured financing transactions.

The following table provides information about repurchase agreements and resell agreements that are subject to offset as of December 31, 2013 and 2012:

 








Gross Amounts Not Offset in the Balance Sheet




Gross Amounts Recognized


Gross Amounts Offset in the Balance Sheet(1)


Net Amounts Presented in the Balance Sheet


Financial Instruments (2)


Cash Collateral Received / Pledged


Net Amount (3)


(in millions)

As of December 31, 2013:












Assets:












Securities purchased under agreements to resell............

$

4,187



2,068



2,119



2,118



-



$

1


Liabilities:












Securities sold under repurchase agreements......

$

14,989



2,068



12,921



12,913



-



$

8














As of December 31, 2012:












Assets:












Securities purchased under agreements to resell............

$

5,736



2,587



3,149



3,146



-



$

3


Liabilities:












Securities sold under repurchase agreements......

$

9,404



2,587



6,817



6,817



-



$

-


 


(1)        Represents recognized amount of resale and repurchase agreements with counterparties subject to legally enforceable netting agreements that meet the applicable netting criteria as permitted by generally accepted accounting principles.

(2)        Represents securities received or pledged to cover financing transaction exposures.

(3)        Represents the amount of our exposure that is not collateralized / covered by pledged collateral.

 


27.     Fair Value Measurements

 


Accounting principles related to fair value measurements provide a framework for measuring fair value that focuses on the exit price that would be received to sell an asset or paid to transfer a liability in the principal market (or in the absence of the principal market, the most advantageous market) accessible in an orderly transaction between willing market participants (the "Fair Value Framework"). Where required by the applicable accounting standards, assets and liabilities are measured at fair value using the "highest and best use" valuation premise. Amendments to the fair value measurement guidance, which became effective in 2012 clarifies that financial instruments do not have alternative uses and, as such, the fair value of financial instruments should be determined using an "in-exchange" valuation premise. However, the fair value measurement literature provides a valuation exception and permits an entity to measure the fair value of a group of financial assets and financial liabilities with offsetting credit risks and/or market risks based on the exit price it would receive or pay to transfer the net risk exposure of a group of assets or liabilities if certain conditions are met. We elected to apply the measurement exception to a group of derivative instruments with offsetting credit risks and market risks, which primarily relate to interest rate, foreign currency, debt and equity price risk, and commodity price risk as of the reporting date.

Fair Value Adjustments  The best evidence of fair value is quoted market price in an actively traded market, where available. In the event listed price or market quotes are not available, valuation techniques that incorporate relevant transaction data and market parameters reflecting the attributes of the asset or liability under consideration are applied. Where applicable, fair value adjustments are made to ensure the financial instruments are appropriately recorded at fair value. The fair value adjustments reflect the risks associated with the products, contractual terms of the transactions, and the liquidity of the markets in which the transactions occur. The fair value adjustments are broadly categorized by the following major types:

Credit risk adjustment - The credit risk adjustment is an adjustment to a group of financial assets and financial liabilities, predominantly derivative assets and derivative liabilities, to reflect the credit quality of the parties to the transaction in arriving at fair value. A credit valuation adjustment to a financial asset is required to reflect the default risk of the counterparty. A debit valuation adjustment to a financial liability is recorded to reflect the default risk of HUSI.

For derivative instruments, we calculate the credit risk adjustment by applying the probability of default of the counterparty to the expected exposure, and multiplying the result by the expected loss given default. We estimate the implied probability of default based on the counterparty's credit spread. Where credit default spreads of the counterparty are not available, we use the credit default spread of a specific proxy (e.g. the credit default swap spread of the counterparty's parent). Where specific proxy credit default swaps are not available, we apply a blended approach based on a mixture of proxy credit default swap referencing to credit names of similar credit standing and the historical rating-based probability of default. During 2012, we changed our estimate of credit valuation adjustments on derivative assets and debit valuation adjustments on derivative liabilities to be based on a market-implied probability of default calculation rather than a ratings-based historical counterparty probability of default calculation, consistent with evolving market practices. This change resulted in a reduction to trading revenue of $47 million.

Liquidity risk adjustment - The liquidity risk adjustment (primarily in the form of bid-offer adjustment) reflects the cost that would be incurred to close out the market risks by hedging, disposing or unwinding the position. Valuation models generally produce mid market values. The bid-offer adjustment is made in such a way that results in a measure that reflects the exit price that most represents the fair value of the financial asset or financial liability under consideration or, where applicable, the fair value of the net market risk exposure of a group of financial assets or financial liabilities. These adjustments relate primarily to Level 2 assets.

Model valuation adjustment - Where fair value measurements are determined using an internal valuation model based on unobservable inputs, certain valuation inputs may be less readily determinable. There may be a range of possible valuation inputs that market participants may assume in determining the fair value measurement. The resultant fair value measurement has inherent measurement risk if one or more parameters are unobservable and must be estimated. An input valuation adjustment is necessary to reflect the likelihood that market participants may use different input parameters, and to mitigate the possibility of measurement error. In addition, the values derived from valuation techniques are affected by the choice of valuation model and model limitation. When different valuation techniques are available, the choice of valuation model can be subjective. Furthermore, the valuation model applied may have measurement limitations. In those cases, an additional valuation adjustment is also applied to mitigate the measurement risk. These adjustments relate primarily to Level 2 assets.

We apply stress scenarios in determining appropriate liquidity risk and model risk adjustments for Level 3 fair values by reviewing the historical data for unobservable inputs (e.g., correlation, volatility). Some stress scenarios involve a 95 percent confidence interval (i.e., two standard deviations). Other stress scenarios may be performed using highly stressed historical inputs such as credit spreads experienced during a credit crisis. We also utilize unobservable parameter adjustments when instruments are valued using internally developed models which reflects the uncertainty in the value estimates provided by the model.

Fair Value Hierarchy  The Fair Value Framework establishes a three-tiered fair value hierarchy as follows:

Level 1 quoted market price - Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 valuation technique using observable inputs - Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are inactive, and measurements determined using valuation models where all significant inputs are observable, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 valuation technique with significant unobservable inputs - Level 3 inputs are unobservable inputs for the asset or liability and include situations where fair values are measured using valuation techniques based on one or more significant unobservable input.

Classification within the fair value hierarchy is based on whether the lowest hierarchical level input that is significant to the fair value measurement is observable. As such, the classification within the fair value hierarchy is dynamic and can be transferred to other hierarchy levels in each reporting period. Transfers between leveling categories are assessed, determined and recognized at the end of each reporting period.

Valuation Control Framework We have established a control framework which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. To that end, the ultimate responsibility for the determination of fair values rests with Finance. Finance has established an independent price validation process to ensure that the assets and liabilities measured at fair value are properly stated.

A valuation committee, chaired by the Head of Business Finance of Global Banking and Markets, meets monthly to review, monitor and discuss significant valuation matters arising from credit and market risks. The committee is responsible for establishing valuation policies and procedures, approving the internal valuation techniques and models developed by the Quantitative Risk and

Valuation Group ("QRVG"), reviewing and approving valuation adjustments pertaining to, among other things, unobservable inputs, market liquidity, selection of valuation model and counterparty credit risk. Significant valuation risks identified in business activities are corroborated and addressed by the committee members and, where applicable, are escalated to the Chief Financial Officer of HUSI and the Audit Committee of the Board of Directors.

Where fair value measurements are determined based on information obtained from independent pricing services or brokers, Finance applies appropriate validation procedures to substantiate fair value. For price validation purposes, quotations from at least two independent pricing sources are obtained for each financial instrument, where possible.

The following factors are considered in determining fair values:

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

▪      collaboration of pricing by referencing to other independent market data such as market transactions and relevant benchmark indices;

▪      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;

▪      the source of the fair value information; and

▪      whether the security is traded in an active or inactive market.

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 structured such instrument and market consensus pricing based on inputs from a large number of survey participants. Any significant discrepancies among the external quotations are reviewed and adjustments to fair values are recorded where appropriate. Where the transaction volume of a specific instrument has been reduced and the fair value measurement becomes less transparent, Finance will apply more detailed procedures to understand and challenge the appropriateness of the unobservable inputs and the valuation techniques used by the independent pricing service. Where applicable, Finance will develop a fair value estimate using its own pricing model inputs to test reasonableness. Where fair value measurements are determined using internal valuation models, Finance will validate the fair value measurement by either developing unobservable inputs based on the industry consensus pricing surveys in which we participate or back testing by observing the actual settlements occurring soon after the measurement date. Any significant valuation adjustments are reported to and discussed with the valuation committee.

Fair Value of Financial Instruments  The fair value estimates, methods and assumptions set forth below for our financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and should be read in conjunction with the financial statements and notes included in this Form 10-K.

The following table summarizes the carrying value and estimated fair value of our financial instruments at December 31, 2013 and 2012.

 

December 31, 2013

Carrying

Value


Fair

Value


Level 1


Level 2


Level 3


(in millions)

Financial assets:










Short-term financial assets..................................................................

$

20,626



$

20,626



$

961



$

19,614



$

51


Securities purchased under resale agreements................................

2,119



2,119



-



2,119



-


Non-derivative trading assets............................................................

22,903



22,903



1,344



18,924



2,635


Derivatives............................................................................................

7,569



7,569



26



7,467



76


Securities...............................................................................................

56,368



56,405



39,553



16,852



-


Commercial loans, net of allowance for credit losses.....................

48,186



49,897



-



-



49,897


Commercial loans designated under fair value option and held for sale....................................................................................................

3



3



-



3



-


Commercial loans held for sale...........................................................

73



73



-



73



-


Consumer loans, net of allowance for credit losses........................

18,903



16,051



-



492



15,559


Consumer loans held for sale:










Residential mortgages....................................................................

91



92



-



36



56


Other consumer...............................................................................

63



63



-



-



63


Financial liabilities:










Short-term financial liabilities.............................................................

$

19,205



$

19,205



$

-



$

19,154



$

51


Deposits:










Without fixed maturities.................................................................

102,584



102,584



-



102,584



-


Fixed maturities................................................................................

2,284



2,289



-



2,289



-


Deposits designated under fair value option...................................

7,740



7,740



-



5,406



2,334


Non-derivative trading liabilities........................................................

4,134



4,134



308



3,826



-


Derivatives............................................................................................

7,348



7,348



5



7,294



49


Long-term debt.....................................................................................

15,261



15,729



-



15,729



-


Long-term debt designated under fair value option.......................

7,586



7,586



-



6,686



900


 

December 31, 2012

Carrying

Value


Fair

Value


Level 1


Level 2


Level 3


(in millions)

Financial assets:










Short-term financial assets..................................................................

$

14,719



$

14,719



$

1,359



$

13,279



$

81


Securities purchased under resale agreements................................

3,149



3,149



-



3,149



-


Non-derivative trading assets............................................................

25,491



25,491



2,484



20,061



2,946


Derivatives............................................................................................

6,865



6,865



30



6,664



171


Securities...............................................................................................

69,336



69,547



43,421



26,126



-


Commercial loans, net of allowance for credit losses.....................

43,833



45,153



-



-



45,153


Commercial loans designated under fair value option and held for sale....................................................................................................

465



465



-



465



-


Commercial loans held for sale...........................................................

16



16



-



16



-


Consumer loans, net of allowance for credit losses........................

18,778



15,173



-



712



14,461


Consumer loans held for sale:










Residential mortgages....................................................................

472



485



-



419



66


Other consumer...............................................................................

65



65



-



-



65


Financial liabilities:










Short-term financial liabilities.............................................................

$

15,033



$

15,033



$

-



$

14,952



$

81


Deposits:










Without fixed maturities.................................................................

104,414



104,414



-



104,414



-


Fixed maturities................................................................................

4,565



4,574



-



4,574



-


Deposits designated under fair value option...................................

8,692



8,692



-



6,056



2,636


Non-derivative trading liabilities........................................................

5,974



5,974



207



5,767



-


Derivatives............................................................................................

10,081



10,081



21



9,933



127


Long-term debt.....................................................................................

14,465



15,163



-



15,163



-


Long-term debt designated under fair value option.......................

7,280



7,280



-



6,851



429


Loan values presented in the table above were determined using the Fair Value Framework for measuring fair value, which is based on our best estimate of the amount within a range of value we believe would be received in a sale as of the balance sheet date (i.e. exit price). The secondary market demand and estimated value for our residential mortgage loans has been heavily influenced by the challenging economic conditions during the past several years, including house price depreciation, elevated unemployment, changes in consumer behavior, changes in discount rates and the lack of financing options available to support the purchase of receivables. For certain consumer loans, investors incorporate numerous assumptions in predicting cash flows, such as future interest rates, higher charge-off levels, slower voluntary prepayment speeds, different default and loss curves and estimated collateral values than we, as the servicer of these loans, believe will ultimately be the case. The investor's valuation process reflects this difference in overall cost of capital assumptions as well as the potential volatility in the underlying cash flow assumptions, the combination of which may yield a significant pricing discount from our intrinsic value. The estimated fair values at December 31, 2013 and 2012 reflect these market conditions. The increase in the relative fair value of our residential mortgage loans during 2013 is largely due to improved conditions in the housing industry driven by increased property values and, to a lesser extent, lower required market yields and increased investor demand for these types of receivables.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis  The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

 


Fair Value Measurements on a Recurring Basis

December 31, 2013

Level 1


Level 2


Level 3


Gross

Balance


Netting(1)


Net

Balance


(in millions)

Assets:












Trading Securities, excluding derivatives:












U.S. Treasury, U.S. Government agencies and sponsored enterprises......................................................................................................

$

1,344



$

178



$

-



$

1,522



$

-



$

1,522


Obligations of U.S. States and political subdivisions........................

-



25



-



25



-



25


Collateralized debt obligations........................................................

-



-



254



254



-



254


Asset-backed securities:












Residential mortgages...............................................................

-



159



-



159



-



159


Student Loans...........................................................................

-



68



-



68



-



68


Corporate and other domestic debt securities..................................

-



-



2,260



2,260



-



2,260


Debt Securities issued by foreign entities:












Corporate.................................................................................

-



495



-



495



-



495


Government.............................................................................

-



6,223



121



6,344



-



6,344


Equity securities.............................................................................

-



25



-



25



-



25


Precious metals trading..................................................................

-



11,751



-



11,751



-



11,751


Derivatives(2):












Interest rate contracts....................................................................

81



56,095



1



56,177



-



56,177


Foreign exchange contracts............................................................

7



15,291



131



15,429



-



15,429


Equity contracts.............................................................................

-



2,042



160



2,202



-



2,202


Precious metals contracts...............................................................

182



1,400



1



1,583



-



1,583


Credit contracts.............................................................................

-



4,152



512



4,664



-



4,664


Derivatives netting........................................................................

-



-



-



-



(72,486

)


(72,486

)

Total derivatives...............................................................................

270



78,980



805



80,055



(72,486

)


7,569


Securities available-for-sale:












U.S. Treasury, U.S. Government agencies and sponsored enterprises......................................................................................................

39,513



9,439



-



48,952



-



48,952


Obligations of U.S. states and political subdivisions........................

-



742



-



742



-



742


Asset-backed securities:












Residential mortgages...............................................................

-



1



-



1



-



1


Commercial mortgages.............................................................

-



126



-



126



-



126


Home equity.............................................................................

-



227



-



227



-



227


Other........................................................................................

-



94



-



94



-



94


Corporate and other domestic debt securities..................................

-



-



-



-



-



-


Debt Securities issued by foreign entities:












Corporate.................................................................................

-



881



-



881



-



881


Government-backed..................................................................

40



3,681



-



3,721



-



3,721


Equity securities.............................................................................

-



162



-



162



-



162


Loans(3).............................................................................................

-



3



-



3



-



3


Mortgage servicing rights(4)...............................................................

-



-



227



227



-



227


Total assets............................................................................

$

41,167



$

113,260



$

3,667



$

158,094



$

(72,486

)


$

85,608


Liabilities:












Deposits in domestic offices(5)...........................................................

$

-



$

5,406



$

2,334



$

7,740



$

-



$

7,740


Trading liabilities, excluding derivatives............................................

308



3,826



-



4,134



-



4,134


Derivatives(2):












Interest rate contracts....................................................................

34



56,282



-



56,316



-



56,316


Foreign exchange contracts............................................................

16



14,576



36



14,628



-



14,628


Equity contracts.............................................................................

-



1,403



157



1,560



-



1,560


Precious metals contracts...............................................................

7



847



3



857



-



857


Credit contracts.............................................................................

-



4,398



321



4,719



-



4,719


Derivatives netting........................................................................

-



-



-



-



(70,732

)


(70,732

)

Total derivatives...............................................................................

57



77,506



517



78,080



(70,732

)


7,348


Long-term debt(6)..............................................................................

-



6,686



900



7,586



-



7,586


Total liabilities

$

365



$

93,424



$

3,751



$

97,540



$

(70,732

)


$

26,808


 


Fair Value Measurements on a Recurring Basis

December 31, 2012

Level 1


Level 2


Level 3


Gross

Balance


Netting(1)


Net

Balance


(in millions)

Assets:












Trading Securities, excluding derivatives:












U.S. Treasury, U.S. Government agencies and sponsored enterprises......................................................................................................

$

2,484



$

369



$

-



$

2,853



$

-



$

2,853


Collateralized debt obligations........................................................

-



-



466



466



-



466


Asset-backed securities:












Residential mortgages...............................................................

-



221



-



221



-



221


Corporate and other domestic debt securities..................................

-



1,035



1,861



2,896



-



2,896


Debt Securities issued by foreign entities:












Corporate.................................................................................

-



468



299



767



-



767


Government.............................................................................

-



5,609



311



5,920



-



5,920


Equity securities.............................................................................

-



27



9



36



-



36


Precious metals trading..................................................................

-



12,332



-



12,332



-



12,332


Derivatives(2):












Interest rate contracts....................................................................

98



66,602



8



66,708



-



66,708


Foreign exchange contracts............................................................

4



13,825



16



13,845



-



13,845


Equity contracts.............................................................................

-



1,593



166



1,759



-



1,759


Precious metals contracts...............................................................

135



649



7



791



-



791


Credit contracts.............................................................................

-



5,961



1,168



7,129



-



7,129


Derivatives netting........................................................................

-



-



-



-



(83,367

)


(83,367

)

Total derivatives...............................................................................

237



88,630



1,365



90,232



(83,367

)


6,865


Securities available-for-sale:












U.S. Treasury, U.S. Government agencies and sponsored enterprises......................................................................................................

43,379



17,316



-



60,695



-



60,695


Obligations of U.S. states and political subdivisions........................

-



912



-



912



-



912


Asset-backed securities:












Residential mortgages...............................................................

-



1



-



1



-



1


Commercial mortgages.............................................................

-



214



-



214



-



214


Home equity.............................................................................

-



258



-



258



-



258


Other........................................................................................

-



84



-



84



-



84


Corporate and other domestic debt securities..................................

-



26



-



26



-



26


Debt Securities issued by foreign entities:












Corporate.................................................................................

-



831



-



831



-



831


Government-backed..................................................................

42



4,480



-



4,522



-



4,522


Equity securities.............................................................................

-



173



-



173



-



173


Loans(3).............................................................................................

-



465



-



465



-



465


Mortgage servicing rights(4)...............................................................

-



-



168



168



-



168


Total assets............................................................................

$

46,142



$

133,451



$

4,479



$

184,072



$

(83,367

)


$

100,705


Liabilities:












Deposits in domestic offices(5)...........................................................

$

-



$

6,056



$

2,636



$

8,692



$

-



$

8,692


Trading liabilities, excluding derivatives............................................

207



5,767



-



5,974



-



5,974


Derivatives(2):












Interest rate contracts....................................................................

90



66,258



1



66,349



-



66,349


Foreign exchange contracts............................................................

25



13,770



11



13,806



-



13,806


Equity contracts.............................................................................

-



1,244



173



1,417



-



1,417


Precious metals contracts...............................................................

19



712



7



738



-



738


Credit contracts.............................................................................

-



6,754



597



7,351



-



7,351


Derivatives netting........................................................................

-



-



-



-



(79,580

)


(79,580

)

Total derivatives...............................................................................

134



88,738



789



89,661



(79,580

)


10,081


Long-term debt(6)..............................................................................

-



6,851



429



7,280



-



7,280


Total liabilities

$

341



$

107,412



$

3,854



$

111,607



$

(79,580

)


$

32,027


 


(1)        Represents counterparty and cash collateral netting which allow the offsetting of amounts relating to certain contracts if certain conditions are met.

(2)        Includes trading derivative assets of $6.0 billion and $5.4 billion and trading derivative liabilities of $6.7 billion and $8.7 billion as of December 31, 2013 and 2012, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives.

(3)        Includes leveraged acquisition finance loans held for sale which we have elected to apply the fair value option. See Note 8, "Loans Held for Sale," for further information.

(4)        See Note 10, "Intangible Assets," for additional information.

(5)        Represents structured deposits risk-managed on a fair value basis for which we have elected to apply the fair value option.

(6)        Includes structured notes and own debt issuances which we have elected to measure on a fair value basis.

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

Transfers between Levels 1 and 2  There were no transfers between Levels 1 and 2 during 2013 and 2012.

Information on Level 3 assets and liabilities  The following table summarizes additional information about changes in the fair value of Level 3 assets and liabilities during year ended December 31, 2013 and 2012. As a risk management practice, we may risk manage the Level 3 assets and liabilities, in whole or in part, using securities and derivative positions that are classified as Level 1 or Level 2 measurements within the fair value hierarchy. Since those Level 1 and Level 2 risk management positions are not included in the table below, the information provided does not reflect the effect of such risk management activities related to the Level 3 assets and liabilities.

 


Jan. 1,

2013


Total Gains and    (Losses) Included in(1)


Purch-

ases


Issu-

ances


Settle-

ments


Transfers

Into

Level 3


Transfers

Out of

Level 3


Dec. 31,

2013


Current

Period

Unrealized

Gains

(Losses)


Trading

Revenue

(Loss)


Other

Revenue



(in millions)

Assets:




















Trading assets, excluding derivatives:




















Collateralized debt obligations

$

466



$

154



$

-



$

237



$

-



$

(603

)


$

-



$

-



$

254



$

151


Corporate and other domestic debt securities...

1,861



29



-



792



-



(422

)


-



-



2,260



29


Corporate debt securities issued by foreign entities.............

299



(10

)


-



-



-



(238

)


-



(51

)


-



-


Government debt securities issued by foreign entities.............

311



21



-



-



-



(211

)


-



-



121



2


Equity securities........................

9



(5

)


-



-



-



(4

)


-



-



-



(5

)

Derivatives, net(2):




















Interest rate contracts..........

7



-



(6

)


-



-



-



-



-



1



(7

)

Foreign exchange contracts..........

5



1



-



-



-



105



(16

)


-



95



100


Equity contracts........................

(7

)


85



-



-



-



(67

)


16



(24

)


3



9


Precious metals contracts..........

-



(2

)


-



-



-



-



-



-



(2

)


(2

)

Credit contracts

571



(215

)


-



-



-



(119

)


(45

)


(1

)


191



(369

)

Mortgage servicing rights(4).

168



-



48



-



-



11



-



-



227



48


Total assets.........

$

3,690



$

58



$

42



$

1,029



$

-



$

(1,548

)


$

(45

)


$

(76

)


$

3,150



$

(44

)

Liabilities:




















Deposits in domestic offices..

$

(2,636

)


$

301



$

-



$

-



$

(601

)


$

391



$

(305

)


$

516



(2,334

)


$

(24

)

Long-term debt...

(429

)


(278

)


-



-



(606

)


225



(38

)


226



(900

)


(183

)

Total liabilities....

$

(3,065

)


$

23



$

-



$

-



$

(1,207

)


$

616



$

(343

)


$

742



$

(3,234

)


$

(207

)

 


Jan. 1,

2012


Total Gains and              (Losses) Included in(1)


Purch-

ases


Issu-

ances


Settle-

ments


Transfers

Into

Level 3


Transfers

Out of

Level 3


Dec. 31,

2012


Current

Period

Unrealized

Gains

(Losses)


Trading

Revenue

(Loss)


Other

Revenue



(in millions)

Assets:




















Trading assets, excluding derivatives:




















Collateralized debt obligations..

$

703



$

130



$

-



$

70



$

-



$

(477

)


$

40



$

-



$

466



$

51


Corporate and other domestic debt securities.....

1,679



46



-



426



-



(290

)


-



-



1,861



27


Corporate debt securities issued by foreign entities...............

253



46



-



-



-



-



-



-



299



46


Government debt securities issued by foreign entities...............

-



65





388





(142

)






311



61


Equity securities.

13



(1

)


-



-



-



(3

)


-



-



9



(1

)

Derivatives, net(2):




















Interest rate contracts............

9



-



(2

)


-



-



-



-



-



7



(2

)

Foreign exchange contracts............

(1

)


(34

)


-



-



(6

)


15



(2

)


33



5



5


Equity contracts.

(83

)


116



-



-



-



(41

)


(1

)


2



(7

)


45


Precious metals contracts............

-



-



-



-



-



-



-



-



-



-


Credit contracts..

1,353



(698

)


-



-



-



(72

)


(12

)


-



571



(926

)

Loans(3).................

11



-



1



-



-



(12

)


-



-



-



-


Mortgage servicing rights(4)..................

220



-



(76

)


-



24



-



-



-



168



(76

)

Total assets...........

$

4,157



$

(330

)


$

(77

)


$

884



$

18



$

(1,022

)


$

25



$

35



$

3,690



$

(770

)

Liabilities:




















Deposits in domestic offices....

$

(2,867

)


$

(123

)


$

-



$

-



$

(806

)


$

346



$

(34

)


$

848



(2,636

)


$

(77

)

Long-term debt.....

(86

)


(13

)


-



-



(424

)


38



(7

)


63



(429

)


(15

)

Total liabilities......

$

(2,953

)


$

(136

)


$

-



$

-



$

(1,230

)


$

384



$

(41

)


$

911



$

(3,065

)


$

(92

)

 


(1)        Includes realized and unrealized gains and losses.

(2)        Level 3 net derivatives included derivative assets of $805 million and derivative liabilities of $517 million as of December 31, 2013 and derivative assets of $1,365 million and derivative liabilities of $789 million as of December 31, 2012.

(3)        Includes Level 3 corporate lending activities risk-managed on a fair value basis for which we have elected the fair value option.

(4)        See Note 10, "Intangible Assets," for additional information.

The following table presents quantitative information about the unobservable inputs used to determine the recurring fair value measurement of assets and liabilities classified as Level 3 fair value measurements as of December 31, 2013 and 2012.

 

December 31, 2013

Financial Instrument Type


Fair Value (in millions)


Valuation Technique(s)


Significant Unobservable Inputs


Range of Inputs

Collateralized debt obligations..............


254



Broker quotes or consensus pricing and, where applicable, discounted cash flows


Prepayment rates


0% - 5%







Conditional default rates


5% - 7%







Loss severity rates


90% -100%

Corporate and other domestic debt securities..............................................


2,260



Discounted cash flows


Spread volatility on collateral assets


1% - 3%







Correlation between insurance claim shortfall and collateral value


80%

Corporate and government debt securities issued by foreign entities.......


121



Discounted cash flows


Correlations of default among a portfolio of credit names of embedded credit derivatives


36% - 63%

Interest rate derivative contracts.........


1



Market comparable adjusted for probability to fund


Probability to fund for rate lock commitments


10% - 99%

Foreign exchange derivative contracts(1)............................................................


95



Option pricing model


Implied volatility of currency pairs


11% - 16%

Equity derivative contracts(1)................


3



Option pricing model


Equity / Equity Index volatility


6% - 69%

............................................................






Equity / Equity and Equity / Index correlation


50% - 58%

Credit derivative contracts...................


191



Option pricing model


Correlation of defaults of a portfolio of reference credit names


46% - 54%







Issuer by issuer correlation of defaults


83% - 95%

Mortgage servicing rights.....................


227



Option adjusted discounted cash flows


Constant prepayment rates


5% - 22%







Option adjusted spread


8% - 19%







Estimated annualized costs to service


$91 - $333 per account

Deposits in domestic offices (structured deposits) (1)(2)........................................


(2,334

)


Option adjusted discounted cash flows


Implied volatility of currency pairs


11% - 16%







Equity / Equity Index volatility


6% - 69%







Equity / Equity and Equity / Index correlation


50% - 58%

Long-term debt (structured notes) (1)(2)..


(900

)


Option adjusted discounted cash flows


Implied volatility of currency pairs


11% - 16%







Equity / Equity Index volatility


6% - 69%







Equity / Equity and Equity / Index correlation


50% - 58%

 

December 31, 2012

Financial Instrument Type


Fair Value (in millions)


Valuation Technique(s)


Significant Unobservable Inputs


Range of Inputs

Collateralized debt obligations..............


466



Broker quotes or consensus pricing and, where applicable, discounted cash flows


Prepayment rates


0% - 6%







Conditional default rates


4% - 14%







Loss severity rates


50% - 100%

Corporate and other domestic debt securities..............................................


1,861



Discounted cash flows


Spread volatility on collateral assets


2% - 4%







Correlation between insurance claim shortfall and collateral value


80%

Corporate and government debt securities issued by foreign entities.......


610



Discounted cash flows


Correlations of default among a portfolio of credit names of embedded credit derivatives


29%

Equity securities (investments in hedge funds)...................................................


9



Net asset value of hedge funds


Range of fair value adjustments to reflect restrictions on timing and amount of redemption and realization risks


30% - 100%

Interest rate derivative contracts.........


7



Market comparable adjusted for probability to fund


Probability to fund for rate lock commitments


8% - 100%

Foreign exchange derivative contracts(1)............................................................


5



Option pricing model


Implied volatility of currency pairs


2% - 21%

Equity derivative contracts(1)................


(7

)


Option pricing model


Equity / Equity Index volatility


6% - 104%

............................................................






Equity / Equity and Equity / Index correlation


56% - 64%

Credit derivative contracts...................


571



Option pricing model


Correlation of defaults of a portfolio of reference credit names


32% - 45%







Industry by industry correlation of defaults


44% - 67%

Mortgage servicing rights.....................


168



Option adjusted discounted cash flows


Constant prepayment rates


9% - 45%







Option adjusted spread


8% - 19%







Estimated annualized costs to service


$98 - $263 per account

Deposits in domestic offices (structured deposits) (1)(2)........................................


(2,636

)


Option adjusted discounted cash flows


Implied volatility of currency pairs


2% - 21%







Equity / Equity Index volatility


6% - 104%







Equity / Equity and Equity / Index correlation


56% - 64%

Long-term debt (structured notes) (1)(2)..


(429

)


Option adjusted discounted cash flows


Implied volatility of currency pairs


2% - 21%







Equity / Equity Index volatility


6% - 104%







Equity / Equity and Equity / Index correlation


56% - 64%

 


(1)       We are the client-facing entity and we enter into identical but opposite derivatives to transfer the resultant risks to our affiliates. With the exception of counterparty credit risks, we are market neutral. The corresponding intra-group derivatives are presented as equity derivatives and foreign currency derivatives in the table.

(2)       Structured deposits and structured notes contain embedded derivative features whose fair value measurements contain significant Level 3 inputs.

Significant Unobservable Inputs for Recurring Fair Value Measurements

Collateralized Debt Obligations (CDOs)

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

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

▪      Loss Severity Rate - Included in our Level 3 CDOs portfolio are collateralized loan obligations (CLOs) and trust preferred securities which are about equally distributed. The loss severity rate for trust preferred securities as of December 31, 2013 is about 1.8 times that of CLOs.

Derivatives

▪      Correlation of Default - The default correlation of a group of credit exposures measures the likelihood that the credit references within a group will default together. The default correlation is a significant input to structured credit products such as nth-to-default swaps. In addition, the correlation between the currency and the default risk of the reference credits is a critical input to a foreign currency denominated credit default swap where the correlation is not observable.

▪      Implied volatility - The implied volatility is a significant pricing input for freestanding or embedded options including equity, foreign currency and interest rate options. The level of volatility is a function of the nature of the underlying risk, the level of strike price and the years to maturity of the option. Depending on the underlying risk and tenure, we determine the implied volatility based on observable input where information is available. However, substantially all of the implied volatilities are derived based on historical information. The implied volatility for different foreign currency pairs is between 11 percent and 16 percent while the implied volatility for equity/equity or equity/equity index is between 6 percent and 69 percent, respectively at December 31, 2013. Although implied foreign currency volatility and equity volatility appear to be widely distributed at the portfolio level, the deviation of implied volatility on a trade-by-trade basis is narrower. The average deviation of implied volatility for the foreign currency pair and at-the-money equity option are 10 percent and 5 percent, respectively at December 31, 2013.

▪      Correlations of a group of foreign currency or equity - Correlation measures the relative change in values among two or more variables (i.e., equity or foreign currency pair). Variables can be positively or negatively correlated. Correlation is a key input in determining the fair value of a derivative referenced to a basket of variables such as equities or foreign currencies. A majority of the correlations are not observable, but are derived based on historical data. The correlation between equity/equity and equity/equity index was between 50 percent and 58 percent at December 31, 2013.

Sensitivity of Level 3 Inputs to Fair Value Measurements

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

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

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

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

Significant Transfers Into and Out of Level 3 Measurements  During 2013, we transferred $45 million of credit derivatives from Level 2 to Level 3 as result of including specific fair value adjustments related to certain credit default swaps. During 2013, we transferred $516 million of deposits in domestic offices and $226 million of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility. Additionally, during 2013, we transferred $305 million  of deposits in domestic offices and $38 million of long-term debt, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

During 2012, we transferred $848 million of deposits in domestic offices, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility.

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

 


Non-Recurring Fair Value Measurements

as of December 31, 2013


Total Gains (Losses)

For the Year Ended

December 31, 2013


Level 1


Level 2


Level 3


Total


(in millions)

Residential mortgage loans held for sale(1)..................

$

-



$

9



$

56



$

65



$

4


Impaired commercial loans(2)..........................................

-



-



108



108



26


Consumer loans(3)............................................................

-



492



-



492



(90

)

Real estate owned(4)........................................................

20



-



-



20



-


Commercial loan held for sale(5).....................................

-



55



-



55



(1

)

Goodwill(6).........................................................................

-



-



-



-



(616

)

Total assets at fair value on a non-recurring basis....

$

20



$

556



$

164



$

740



$

(677

)

 


Non-Recurring Fair Value Measurements

as of December 31, 2012


Total Gains (Losses)

For the Year Ended

December 31, 2012


Level 1


Level 2


Level 3


Total


(in millions)

Residential mortgage loans held for sale(1)..................

$

-



$

10



$

67



$

77



$

(6

)

Impaired commercial loans(2)..........................................

-



-



155



155



(31

)

Consumer loans(3)............................................................

-



712



-



712



(114

)

Real estate owned(4)........................................................

24



-



-



24



3


Total assets at fair value on a non-recurring basis....

$

24



$

722



$

222



$

968



$

(148

)

 


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

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

(3)        Represents residential mortgage loans held for investment whose carrying amount was reduced during the periods presented based on the fair value of the underlying collateral.

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

(5)        Represents a project finance syndicated loan held for sale whose fair value was below cost as of December 31, 2013.

(6)        During the fourth quarter of 2013, goodwill with a carrying amount of $616 million allocated to our Global Banking & Markets business was written down to its implied fair value of $0 million.

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

 

As of December 31, 2013









Financial Instrument Type


Fair Value (in millions)


Valuation Technique(s)


Significant Unobservable Inputs


Range of Inputs

Residential mortgage loans held for sale.............................


$

56



Valuation of third party appraisal on underlying collateral


Loss severity rates


-% - 100%

Impaired commercial loans................................................


108



Valuation of third party appraisal on underlying collateral


Loss severity rates


1% - 66%

 

As of December 31, 2012

Financial Instrument Type


Fair Value (in millions)


Valuation Technique(s)


Significant Unobservable Inputs


Range of Inputs

Residential mortgage loans held for sale..........................


$

67



Valuation of third party appraisal on underlying collateral


Loss severity rates


-% - 100%

Impaired commercial loans.............................................


155



Valuation of third party appraisal on underlying collateral


Loss severity rates


1% - 79%

Significant Unobservable Inputs for Non-Recurring Fair Value Measurements 

Residential mortgage loans held for sale primarily represent subprime residential mortgage loans which were previously acquired with the intent of securitizing or selling them to third parties. The weighted average loss severity rate for these loans was approximately 59 percent at December 31, 2013. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

Impaired loans represent commercial loans. The weighted average severity rate for these loans was approximately 23 percent at December 31, 2013. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

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

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

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

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

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

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

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

•       Commercial impaired loans - Generally represents collateral dependent commercial loans with fair value determined based on pricing quotes obtained from an independent third party appraisal.

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

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

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

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

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

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

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

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

The following tables provide additional information relating to asset-backed securities as well as certain collateralized debt obligations held as of December 31, 2013:

Trading asset-backed securities:

 

Rating of Securities:(1)

Collateral Type:

Level 2


Level 3


Total



(in millions)

AAA -A...................................................

Residential mortgages - Alt A..............................

$

91



$

-



$

91


...................................................................

Residential mortgages - Subprime......................

63



-



63


...................................................................

Student loans.........................................................

68



-



68


...................................................................

Total AAA -A.........................................................

222



-



222


BBB -B......................................................

Collateralized debt obligations............................

-



254



254


CCC-Unrated...........................................

Residential mortgages - Subprime......................

5



-



5


...................................................................

..................................................................................

$

227



$

254



$

481


Available-for-sale securities backed by collateral:

 

Rating of Securities:(1)

Collateral Type:

Level 2


Level 3


Total



(in millions)

AAA -A....................................................

Commercial mortgages.........................................

$

126



$

-



$

126


....................................................................

Home equity - Alt A..............................................

98



-



98


....................................................................

Total AAA -A........................................................

224



-



224


BBB -B.......................................................

Other - Alt A..........................................................

94



-



94


....................................................................

Total BBB -B..........................................................

94



-



94


CCC -Unrated...........................................

Residential mortgages - Alt A.............................

1



-



1


....................................................................

Home equity - Alt A..............................................

129



-



129


....................................................................

Total CCC -Unrated

130



-



130


....................................................................

.................................................................................

$

448



$

-



$

448


 


(1)     We utilize Standard & Poor's ("S&P") as the primary source of credit ratings in the tables above. If S&P ratings are not available, ratings by Moody's and Fitch are used in that order. Ratings for collateralized debt obligations represent the ratings associated with the underlying collateral.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Structured notes - Structured notes are hybrid instruments containing embedded derivatives. Structured notes are elected to be measured at fair value in their entirety under fair value option accounting principles. The valuation of hybrid instruments is predominantly driven by the derivative features embedded within the instruments. The valuation of embedded derivatives may include significant unobservable inputs such as correlation of the referenced credit names or volatility of the embedded option.

Cash flows of the funded notes are discounted at the appropriate rate for the applicable duration of the instrument adjusted for our own credit spreads. The credit spreads so applied are determined with reference to our own debt issuance rates observed in the primary and secondary markets, internal funding rates, and the structured note rates in recent executions.

Long-term debt - We elected to apply fair value option to certain own debt issuances for which fair value hedge accounting otherwise would have been applied. These own debt issuances elected under FVO are traded in secondary markets and, as such, the fair value is determined based on observed prices for the specific instrument. The observed market price of these instruments reflects the effect of our own credit spreads. The credit spreads applied to these instruments were derived from the spreads at the measurement date.

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

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

 


28.     Litigation and Regulatory Matters

 


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

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

For the litigation and governmental and regulatory matters disclosed below as to which a loss in excess of accrued liability is reasonably possible in future periods and for which there is sufficient currently available information on the basis of which management believes it can make a reliable estimate, we believe a reasonable estimate could be as much as $1.4 billion. The litigation and governmental and regulatory matters underlying this estimate of possible loss will change from time to time and actual results may differ significantly from this current estimate.

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

Litigation

Credit Card Litigation  Since June 2005, HSBC Bank USA, HSBC Finance, HSBC North America and HSBC, as well as other banks and Visa Inc. ("Visa") and MasterCard Incorporated ("MasterCard"), have been named as defendants in four class actions filed in Connecticut and the Eastern District of New York: Photos Etc. Corp. et al v. Visa U.S.A., Inc., et al.(D. Conn. No. 3:05-CV-01007 (WWE)); National Association of Convenience Stores, et al. v. Visa U.S.A., Inc., et al.(E.D.N.Y. No. 05-CV 4520 (JG)); Jethro Holdings, Inc., et al. v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-4521(JG)); and American Booksellers Asps' v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-5391 (JG)). Numerous other complaints containing similar allegations were filed across the country against Visa, MasterCard and other banks, and various individual actions also were brought by merchants against Visa and MasterCard. These class and individual merchant actions principally allege that the imposition of a no-surcharge rule by the associations and/or the establishment of the interchange fee charged for credit card transactions causes the merchant discount fee paid by retailers to be set at supracompetitive levels in violation of the Federal antitrust laws. These suits were consolidated and transferred to the Eastern District of New York as In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. ("MDL 1720"). On February 7, 2011, MasterCard, Visa, the other defendants, including HSBC Bank USA, and certain affiliates of the defendants entered into settlement and judgment sharing agreements (the "Sharing Agreements") that provide for the apportionment of certain defined costs and liabilities that the defendants, including HSBC Bank USA and our affiliates, may incur, jointly and/or severally, in the event of an adverse judgment or global settlement of one or all of these actions. The district court granted final approval of the class settlement on December 13, 2013. Certain objecting merchants have filed notices of appeal to the Court of Appeals for the Second Circuit. On January 14, 2014, the district court entered the Class Settlement Order and final judgment dismissing the class action. We have deposited our portions of the class settlement amount and individual merchants' settlements into escrow accounts pursuant to the Sharing Agreements.

Numerous merchants objected and/or opted out of the settlement during the exclusion period. We anticipate that most of the larger merchants who opted out of the settlement will initiate separate actions seeking to recover damages. To date, opt-out merchants have filed 27 opt-out suits in either state or federal court, including one, Speedy Stop Food Stores LLC v. Visa Inc. (Tex. Dist. Ct., Victoria City, No. 13-10-75377-A), that names certain HSBC entities as defendants. Pursuant to the MDL 1720 Sharing Agreements, certain HSBC entities are responsible for a pro rata portion of any judgment or settlement amount awarded in actions consolidated into MDL 1720.

Salveson v. JPMorgan Chase et al.(N.D.Cal. No. 13-CV-5816) was filed on December 16, 2013 against HSBC Bank USA, HSBC North America, HSBC Finance, and HSBC, as well as other banks. This putative class action was filed in the U.S. District Court for the Northern District of California. The complaint asserts federal and California state antitrust claims on behalf of a putative class composed of all Visa and MasterCard cardholders in the United States. The substantive allegations regarding defendants' conduct parallel the merchant claims in MDL 1720. Unlike the merchant suits, however, the Salveson complaint alleges that cardholders pay the interchange fee charged for credit card transactions, not merchants, and that card holders were therefore injured by the alleged anticompetitive conduct. In January 2014, the Judicial Panel on Multidistrict Litigation denied the Salveson defendants' request that the action be transferred to the district court for consolidation with the MDL 1720 proceedings.

Checking Account Overdraft Litigation Beginning in March 2011 and continuing until February 2013, a number of putative class actions were filed in state and federal courts on behalf of HSBC Bank USA customers who allegedly incurred overdraft fees due to the posting order of debit card transactions. The original state court action, Ofra Levin et al v. HSBC Bank USA, N.A. et al. (N.Y. Sup. Ct. 650562/11) (the "State Action") was brought in New York State Court on behalf of a putative New York class of customers. Our motion to dismiss the complaint was granted in part with leave to amend. Thereafter, plaintiffs in the State Action (the "Levin Plaintiffs") retained new attorneys and filed a new action in federal court (discussed below), and the Levin Plaintiffs' former counsel amended the complaint in the State Action and substituted a new plaintiff, Derek Jura. In August 2013, the state court granted Jura's motion to discontinue his claims without prejudice, but the claims of the Levin Plaintiffs remain.

In addition to the State Action, three purported class actions were filed in federal court, which after certain motions were filed and heard, were centralized by order of the Judicial Panel on Multidistrict Litigation on June 5, 2013 into the case captioned: HSBC Overdraft MDL in the Eastern District of New York. Interim class counsel filed their consolidated complaint on September 30, 2013, and on November 1, 2013, HSBC Bank USA filed a motion to dismiss.

DeKalb County, et al. v. HSBC North America Holdings Inc., et al.  In October 2012, three of the five counties constituting the metropolitan area of Atlanta, Georgia, filed a lawsuit pursuant to the Fair Housing Act against HSBC North America and numerous subsidiaries, including HSBC Finance and HSBC Bank USA, in connection with residential mortgage lending, servicing and financing activities. In the action, captioned DeKalb County, Fulton County, and Cobb County, Georgia v. HSBC North America Holdings Inc., et al. (N.D. Ga. No. 12-CV-03640), the plaintiff counties assert that the defendants' allegedly discriminatory lending and servicing practices led to increased loan delinquencies, foreclosures and vacancies, which in turn caused the plaintiff counties to incur damages in the form of lost property tax revenues and increased municipal services costs, among other damages. Following the denial of defendants' motion to dismiss, plaintiffs filed an answer on October 23, 2013. This action is at an early stage.

Lender-Placed Insurance Matters  Lender-placed insurance involves a lender obtaining an insurance policy (hazard or flood insurance) on a mortgaged property when the borrower fails to maintain their own policy. The cost of the lender-placed insurance is then passed on to the borrower. Industry practices with respect to lender-placed insurance are receiving heightened regulatory scrutiny from both federal and state agencies.

Beginning in October 2011, a number of mortgage servicers and insurers, including our affiliate, HSBC Insurance (USA) Inc., received subpoenas from the New York Department of Financial Services (the "NYDFS") with respect to lender-placed insurance activities dating back to September 2005. We have and will provide documentation and information to the NYDFS that is responsive to the subpoena. Additionally, in March 2013, the Massachusetts Attorney General issued a Civil Investigative Demand to HSBC Mortgage Corporation (USA) seeking information about lender-placed insurance activities, and we continue to be engaged with the Massachusetts Attorney General regarding this matter.

Several putative class actions related to lender-placed insurance were filed against various HSBC U.S. entities, including actions against HSBC USA and certain of our subsidiaries: Montanez, et al. v. HSBC Mortgage Corporation (USA), et al. (E.D. Pa. No. 11-CV-4074); West, et al. v. HSBC Mortgage Corporation (USA), et al. (South Carolina Court of Common Pleas, 14th Circuit No. 12-CP-00687); Weller, et al. v. HSBC Mortgage Services, Inc., et al. (D. Col. No. 13-CV-00185); Hoover, et al. v. HSBC Bank USA, N.A., et al. (N.D.N.Y. 13-CV-00149); Lopez v. HSBC Bank USA, N.A., et al. (S.D. Fla 13-CV-21104); Ross F. Gilmour v. HSBC Bank USA, N.A., et al. (S.D.N.Y. Case No. 1:13-CV-05896-ALC); and Blackburn v. HSBC Finance Corp., et al. (N.D. Ga. 13-CV-03714-ODE). These actions relate primarily to industry-wide practices, and include allegations regarding the relationships and potential conflicts of interest between the various entities that place the insurance, the value and cost of the insurance that is placed, back-dating policies to the date the borrower allowed it to lapse, self-dealing and insufficient disclosure. The various HSBC defendants filed motions to dismiss the complaints in the Montanez, Lopez, Weller and Hoover matters. The court denied the motion to dismiss in the Lopez matter and we await the court's ruling on the other motions. In addition, in Montanez, plaintiffs filed a motion for multi-district litigation treatment to consolidate the action with Lopez, which was denied on July 25, 2013.

Private Mortgage Insurance Matters  Private Mortgage Insurance ("PMI") is insurance required to be obtained by home purchasers who provide a down payment less than a certain percentage threshold of the purchase price, typically 20 percent. The insurance generally protects the lender against a default on the loan. In January 2013, a putative class action related to PMI was filed against various HSBC U.S. entities, including HSBC USA and certain of our subsidiaries captioned Ba v. HSBC Bank USA, N.A., et al (E.D. Pa. No. 2:13-cv-00072PD). This action relates primarily to industry-wide practices and includes allegations regarding the relationships and potential conflicts of interest between the various entities that place the insurance, self-dealing, insufficient disclosures and improper fees. Following the court's denial of the defendants' motion to dismiss, the U.S. HSBC entities answered the complaint on August 15, 2013. Discovery is ongoing.

People of the State of New York v. HSBC Bank USA, National Association and HSBC Mortgage Corporation (USA)  On June 3, 2013, the New York Attorney General ("AG") commenced a special proceeding against HSBC Bank USA and HSBC Mortgage Corporation ("HSBC Mortgage"), alleging that HSBC Bank USA and HSBC Mortgage repeatedly violated Executive Law 63(12). Specifically, the AG claims that HSBC Mortgage has an obligation to file a Request for Judicial Intervention ("RJI") at the same time that it files proof of service in a foreclosure action. The filing of an RJI triggers the scheduling of a mandatory settlement conference. According to the AG, the failure to file the RJI causes a significant delay in mandatory settlement conferences being scheduled, during which time the AG alleges additional penalties, fees and interest accrue to the borrower. The AG seeks both a change in HSBC Mortgage's practices and damages for individual homeowners. HSBC Mortgage believes it has a number of factual and legal defenses available to the AG's claims. On August 20, 2013, HSBC Mortgage filed an answer and a motion for summary judgment to dismiss the AG's Petition. A hearing was held on the motion on October 17, 2013 and the parties now await the court's decision.

Credit Default Swap Litigation  In July 2013 HSBC Bank USA, HSBC and HSBC Bank plc were named as defendants, among others, in numerous putative class actions filed in federal courts located in New York and Chicago. These class actions allege that the defendants, which include the International Swaps and Derivatives Association, Inc., Markit Group Ltd. and several financial institutions, conspired to restrain trade in violation of the federal anti-trust laws by, among other things, restricting access to credit default swap pricing exchanges and blocking new entrants into the exchange market, with the purpose and effect of artificially inflating the bid/ask spread paid to buy and sell credit default swaps in the United States. The plaintiffs in these suits purport to represent a class of all persons who purchased credit default swaps from or sold credit default swaps to defendants primarily in the United States. On October 16, 2013, the Judicial Panel on Multi-district Litigation ordered that all cases be consolidated in the Southern District of New York as In re Credit Default Swaps Antitrust Litigation, MDL No. 2476. In December 2013, the district court issued an order selecting Lead Interim Class Counsel and setting a schedule for the filing of an amended, consolidated complaint and motions to dismiss that complaint. The amended, consolidated complaint was filed on January 31, 2014 and names HSBC Bank USA and HSBC Bank plc, but not HSBC, as defendants, among others. This action is at a very early stage.

Foreign Exchange ("FX") Litigation  Since December 2013 HSBC, HSBC Bank plc, HSBC North America and HSBC Bank USA have been named as defendants, among others, in several putative class actions filed in the U.S. District Court for the Southern District of New York. These class actions allege, among other things, that the defendants conspired to restrain trade in violation of the federal anti-trust laws by, among other things, manipulating the WM/Reuters foreign currency rates, thereby injuring plaintiffs and others by forcing them to pay artificial and non-competitive prices for products based off those foreign currency rates. In February 2014, the district court judge appointed interim lead class counsel and ordered the plaintiffs to file a consolidated amended complaint. These actions are at a very early stage.

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

The U.S. District Court for the Southern District of New York  dismissed all claims against the HSBC defendants on forum non conveniens grounds and in one of the actions involving claims of investors in Thema International Fund plc also declined to consider preliminary approval of a proposed settlement between the lead plaintiff in that action and the relevant HSBC defendants (including, subject to the granting of leave to effect a proposed agreement, HSBC Bank USA). On September 16, 2013, the Court of Appeals affirmed the district court's dismissal  and on October 1, 2013 the Thema plaintiff filed a petition to have the appeal reheard by the Court of Appeals en banc. The Court of Appeals has postponed its decision on the petition until after the United States Supreme Court decides Chadbourne & Park LLP v. Troice, No. 12-179.

 In December 2010, the Madoff Securities trustee commenced suits against various HSBC companies in the U.S. Bankruptcy Court and in the English High Court. The Madoff Securities trustee filed a suit in the U.S. captioned Picard v. HSBC et al (Bankr S.D.N.Y. No. 09-01364), which also names certain funds, investment managers, and other entities and individuals, seeking $9 billion in damages and additional recoveries from HSBC Bank USA, certain of our foreign affiliates and the various other codefendants. In July 2011, the district court dismissed the trustee's various common law claims on the grounds that the trustee lacked standing to assert them. On June 20, 2013, the Court of Appeals affirmed thedecision of the district court. On October 9, 2013, the trustee filed a petition for a writ of certiorari seeking leave for a further appeal to the United States Supreme Court. The HSBC defendants' filed their response to the petition for a writ of certiorari on December 9, 2013. On January 13, 2014, the Supreme Court invited the Solicitor General to file a brief in the case expressing the views of the United States.

The district court returned the trustee's bankruptcy claims to the bankruptcy court for further proceedings. Those claims seek, pursuant to U.S. bankruptcy law, recovery of unspecified amounts received by the HSBC defendants from funds invested with Madoff, including amounts that the HSBC defendants received when they redeemed units held in the various funds. HSBC acquired those fund units in connection with financing transactions the HSBC defendants had entered into with various clients. Between September 2011 and April 2012, the HSBC defendants and certain other defendants moved again to withdraw the case from the Bankruptcy Court. The district court has granted the HSBC defendants' withdrawal motions as to certain issues, and briefing and oral arguments on the merits of the withdrawn issues are now complete. Decisions with respect to other issues remain pending and are expected in 2014. The HSBC defendants' responses to the remaining bankruptcy law claims are currently due in the bankruptcy court in April, 2014.

The trustee's English action, which names HSBC Bank USA and other HSBC entities as defendants, seeks recovery of unspecified transfers of money from Madoff Securities to or through HSBC on the ground that the HSBC defendants actually or constructively knew of Madoff's fraud. HSBC has not been served with the trustee's English action.

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

HSBC Bank USA was also a defendant in an action filed in July 2011, captioned Wailea Partners, LP v. HSBC Bank USA, N.A. (N.D. Ca. No. 11-CV-3544), arising from derivatives transactions between Wailea Partners, LP and HSBC Bank USA that were linked to the performance of a fund that placed its assets with Madoff Securities pursuant to a specified investment strategy. The plaintiff alleged, among other things, that the derivatives transactions should be rescinded because HSBC Bank USA knew or should have known that the fund's assets would not be invested as contemplated and that HSBC Bank USA marketed, sold and entered into the derivatives transactions on the basis of materially misleading statements and omissions in violation of California law. In December 2011, the district court granted HSBC Bank USA's motion to dismiss the complaint with prejudice, and the plaintiff appealed to the U.S. Court of Appeals for the Ninth Circuit, where the action is captioned Wailea Partners, LP v. HSBC Bank USA, N.A., (9th Cir., No. 11-18041). Briefing on that appeal was completed in May 2012, and oral argument was held on January 15, 2014.

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

Federal Home Loan Mortgage Corporation v. Bank of America, et al.  On March 14, 2013, the Federal Home Loan Mortgage Corporation ("Freddie Mac"), filed a lawsuit in the U.S. District Court for the Eastern District of Virginia naming as defendants HSBC Bank USA and other panel USD LIBOR panel banks, as well as the British Bankers' Association. The lawsuit alleges improper practices in connection with the setting of USD LIBOR, and claims violation of the Sherman Act, breach of contract, and fraud arising out of various swap agreements entered into by Freddie Mac with the USD LIBOR panel banks, including HSBC Bank USA. In May 2013 the lawsuit was transferred to the USD LIBOR Litigation Multi-District Proceeding pending before Judge Buchwald in the Southern District of New York where it will be subject to a stay imposed by that court. The lawsuit is at an early stage, and does not allege specific damages as to HSBC Bank USA.

Mortgage Securitization Activity and Litigation  In addition to the repurchase risk described in Note 26, "Guarantee Arrangements and Pledged Assets," HSBC Bank USA has also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by HSI. During 2005-2007, HSBC Bank USA purchased and sold $24 billion of whole loans to HSI which were subsequently securitized and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $6.5 billion and $7.4 billion at December 31, 2013 and 2012, respectively.

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

HSBC Bank USA and certain of our affiliates have been named as defendants in a number of actions in connection with residential mortgage-backed securities ("RMBS") offerings, which generally allege that the offering documents for securities issued by securitization trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans. In September 2011, the Federal Housing Finance Agency (the "FHFA"), acting in its capacity as conservator for the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), filed an action in the U.S. District Court for the Southern District of New York  against HSBC Bank USA, HSBC USA, HSBC North America, HSI, HSI Asset Securitization Corporation ("HASCO") and five former and current officers and directors of HASCO seeking damages or rescission of mortgage-backed securities purchased by Fannie Mae and Freddie Mac that were either underwritten or sponsored by HSBC entities. We expect to allocate any potential judgment or other potential payment in connection with this matter among the various HSBC entities with potential exposure. The aggregate unpaid principal balance of the securities was approximately $1.6 billion at December 31, 2013. This action, captioned Federal Housing Finance Agency, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation v. HSBC North America Holdings Inc. et al. (S.D.N.Y. No. CV 11-6189-LAK), is one of a series of similar actions filed against 17 financial institutions alleging violations of federal and state securities laws in connection with the sale of private-label RMBS purchased by Fannie Mae and Freddie Mac, primarily from 2005 to 2008. These actions were transferred to a single judge, who directed the defendant in the first-filed matter, UBS, to file a motion to dismiss. In May 2012, the district court filed its decision denying the motion to dismiss FHFA's securities law claims and granting the motion to dismiss FHFA's negligent misrepresentation claims. The district court's ruling formed the basis for rulings on the other matters, including the action filed against HSBC Bank USA and our affiliates. On April 5, 2013, the Second Circuit Court of Appeals affirmed the ruling of the district court. In January 2013, the FHFA parties met with the Magistrate Judge to discuss how to structure mediation. Since that time, a number of the FHFA defendants have resolved their lawsuits.   

Discovery in the HSBC entities' case continues. Factual discovery closed in December 2013. Expert discovery is scheduled to  continue through the end of July 2014, with the summary judgment motion scheduled to be fully briefed by the end of July 2014. The court has set September 29, 2014 as the trial date for HSBC's case. These dates are subject to change by the court.

In January 2012, Deutsche Zentral-Genossenschaftsbank ("DZ Bank") filed a summons with notice in New York County Supreme Court, State of New York, naming as defendants HSBC North America, HSBC USA, HSBC Bank USA, HSBC Markets (USA) Inc., HASCO and HSI in connection with DZ Bank's alleged purchase of $122.4 million in RMBS from the HSBC defendants. In February 2012, HSH Nordbank AG ("HSH") filed a summons with notice in New York County Supreme Court, State of New York, naming as defendants HSBC, HSBC North America, HSBC USA, HSBC Bank USA, HMUS, HASCO, and two Blaylock entities alleging HSH purchases of $41.3 million in RMBS from the HSBC and Blaylock defendants. In May 2012, HSBC removed both the DZ Bank and HSH cases to the U.S. District Court for the Southern District of New York. The cases were consolidated in an action captioned Deutsche Zentral-Genossenschaftsbank AG, New York Branch v. HSBC North America Holdings Inc., et al (S.D.N.Y. No. 12-CV-4025) following removal. In September 2012, DZ Bank and HSH filed a consolidated complaint against all defendants named in their prior summonses other than HSBC. The claims against the U.S. HSBC entities are for (i) fraud; (ii) fraudulent concealment; (iii) negligent misrepresentation; (iv) aiding and abetting fraud; and (v) rescission. In December 2013, the court granted defendants' motion to dismiss the case. DZ Bank has filed a notice of appeal.

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

In December 2013, Commerzbank AG London Branch filed a summons with notice in New York County Supreme Court, State of New York, alleging fraud in connection with the sale of RMBS against a number of financial institutions, including HSI, HASCO, HMUS and HSBC. This action is at a very early stage.

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

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

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

Governmental and Regulatory Matters

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

The Servicing Consent Orders required an independent review of foreclosures (the "Independent Foreclosure Review") pending or completed between January 2009 and December 2010 to determine if any borrower was financially injured as a result of an error in the foreclosure process. As required by the Servicing Consent Orders, an independent consultant was retained to conduct that review. On February 28, 2013, HSBC Bank USA entered into an agreement with the OCC, and HSBC Finance and HSBC North America entered into an agreement with the FRB (together the "IFR Settlement Agreements"), pursuant to which the Independent Foreclosure Review ceased and has been replaced by a broader framework under which we and twelve other participating servicers are, in the aggregate, providing in excess of $9.3 billion in cash payments and other assistance to help eligible borrowers. Pursuant to the IFR Settlement Agreements HSBC North America made a cash payment of $96 million into a fund used to make payments to borrowers that were in active foreclosure during 2009 and 2010 and is providing other assistance (e.g., loan modifications) to help eligible borrowers. As a result, in 2012, we recorded expenses of $19 million which reflects the portion of HSBC North America's total expense of $104 million that we believe is allocable to us. As of December 31, 2013, Rust Consulting, Inc., the paying agent, has issued almost all checks to eligible borrowers. Borrowers who receive compensation will not be required to execute a release or waiver of rights and will not be precluded from pursuing litigation concerning foreclosure or other mortgage servicing practices. For participating servicers, including HSBC Bank USA and HSBC Finance, fulfillment of the terms of the IFR Settlement Agreements will satisfy the Independent Foreclosure Review requirements of the Servicing Consent Orders, including the wind down of the Independent Foreclosure Review. 

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

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

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

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

Under these agreements, HSBC and HSBC Bank USA made payments totaling $1.921 billion to U.S. authorities, of which $1.381 billion was attributed to and paid by HSBC Bank USA, and are continuing to comply with ongoing obligations. Over the five-year term of the agreements with the U.S. Department of Justice and the FCA, an independent monitor (who also will be, for FCA purposes, a "skilled person" under Section 166 of the Financial Services and Markets Act) will evaluate HSBC's progress in fully implementing its obligations, and will produce regular assessments of the effectiveness of HSBC's compliance function. Michael Cherkasky was selected as the independent monitor and his monitorship is proceeding as anticipated and consistent with the timelines and requirements set forth in the relevant agreements. In July 2013, the United States District Court for the Eastern District of New York entered an order approving the U.S. DPA pursuant to the court's supervisory power and granting the parties' application to place the case in abeyance for five years. The court will maintain supervisory power over the implementation of the U.S. DPA while the case is in abeyance.

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

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

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

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

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

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

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

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

HSBC and certain of its affiliates, including HSBC Bank USA, along with a number of other firms, are being investigated by several law enforcement and/or regulatory agencies in various countries in relation to trading on the foreign exchange market. HSBC is cooperating with the investigations which all are at an early stage.

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


29.    Financial Statements of HSBC USA Inc. (Parent)

 


Condensed parent company financial statements follow.

 

Balance Sheet

At December 31,

2013


2012


(in millions)

Assets:




Cash and due from banks…………………………….……….………………………......................................

$

8



$

-


Trading assets.......................................................................................................................................................

573



985


Securities available-for-sale.................................................................................................................................

504



612


Securities held-to-maturity (fair value of $4 million and $8 million at December 31, 2013 and 2012, respectively)..........................................................................................................................................................

4



8


Loans......................................................................................................................................................................

23



28


Receivables from subsidiaries.............................................................................................................................

11,230



14,245


Receivables from other HSBC affiliates.............................................................................................................

5,304



5,107


Investment in subsidiaries:




Banking.............................................................................................................................................................

18,279



18,892


Other..................................................................................................................................................................

23



23


Goodwill..................................................................................................................................................................

-



510


Other assets...........................................................................................................................................................

320



542


Total assets............................................................................................................................................................

$

36,268



$

40,952


Liabilities:




Interest, taxes and other liabilities......................................................................................................................

$

201



$

100


Payables due to subsidiaries...............................................................................................................................

4



2,672


Payables due to other HSBC affiliates...............................................................................................................

171



956


Short-term borrowings.........................................................................................................................................

3,379



5,022


Long-term debt(1)...................................................................................................................................................

11,488



9,802


Long-term debt due to subsidiary and other HSBC affiliates(1).....................................................................

4,561



4,564


Total liabilities........................................................................................................................................................

19,804



23,116


Shareholders' equity.............................................................................................................................................

16,464



17,836


Total liabilities and shareholders' equity...........................................................................................................

$

36,268



$

40,952


 


(1)        Contractual scheduled maturities for the debt over the next five years are as follows: 2014 - $2.9 billion; 2015 - $4.3 billion; 2016 - $1.5 billion; 2017 - $1.3 billion; 2018 - $3.0 billion; and thereafter - $3.0 billion.

Statement of Income (Loss)

Year Ended December 31,

2013


2012


2011


(in millions)

Income:






Dividends from banking subsidiaries...................................................................................

$

-



$

-



$

1


Dividends from other subsidiaries........................................................................................

1



57



2


Interest from subsidiaries.......................................................................................................

67



67



67


Interest from other HSBC affiliates.......................................................................................

95



27



17


Other interest income..............................................................................................................

22



19



19


Other securities gains, net.....................................................................................................

-



21



-


Other income from subsidiaries.............................................................................................

276



(290

)


(131

)

Other income from other HSBC Affiliates............................................................................

543



472



(18

)

Other income............................................................................................................................

(799

)


(155

)


312


Total income..................................................................................................................................

205



218



269


Expenses:






Interest to subsidiaries...........................................................................................................

45



69



70


Interest to other HSBC Affiliates..........................................................................................

59



65



48


Other interest expense............................................................................................................

231



198



224


Provision for credit losses.....................................................................................................

-



-



(1

)

Goodwill impairment................................................................................................................

510



-



-


Other expenses with other HSBC Affiliates.........................................................................

-



19



12


Other expenses........................................................................................................................

124



8



2


Total expenses...............................................................................................................................

969



359



355


Loss before taxes and equity in undistributed income of subsidiaries................................

(764

)


(141

)


(86

)

Income tax benefit.........................................................................................................................

101



47



62


Loss before equity in undistributed income of subsidiaries..................................................

(663

)


(94

)


(24

)

Equity in undistributed income (loss) of subsidiaries............................................................

325



(951

)


1,042


Net income (loss)..........................................................................................................................

$

(338

)


$

(1,045

)


$

1,018


 

 

Statement of Comprehensive Income (Loss)

Year Ended December 31,

2013


2012


2011


(in millions)

Net income (loss)

$

(338

)


$

(1,045

)


$

1,018


Net changes in unrealized gains (losses). net of tax as applicable on:






Securities available-for-sale, not other-than-temporarily impaired...................................

(1,010

)


109



786


Other-than-temporary impaired debt securities available-for-sale....................................

-



-



1


Other-than-temporary impaired securities held-to-maturity...............................................

7



-



11


Adjustment to reverse other-than-temporary impairment on securities held-to-maturity due to deconsolidation of a variable interest entity............................................

-



-



142


Derivatives designated as cash flow hedges.......................................................................

118



28



(142

)

Unrecognized actuarial gains, transition obligation and prior service costs relating to pension and postretirement benefits, net of tax.....................................................................

8



6



(3

)

Other comprehensive income (loss), net of tax.........................................................................

(877

)


143



795


Comprehensive income (loss)......................................................................................................

$

(1,215

)


$

(902

)


$

1,813


 

Statement of Cash Flows

Year Ended December 31,

2013


2012


2011


(in millions)

Cash flows from operating activities:






Net income (loss).....................................................................................................................

$

(338

)


$

(1,045

)


$

1,018


Adjustments to reconcile net income (loss) to net cash provided by operating activities:






Depreciation and amortization.........................................................................................

37



1



14


Net change in other assets and liabilities.......................................................................

2,087



(3,177

)


(997

)

Undistributed loss (gain) of subsidiaries.......................................................................

(325

)


951



(1,042

)

Net change in trading assets and liabilities...................................................................

362



(321

)


(72

)

Other, net.............................................................................................................................

(16

)


58



(27

)

Net cash provided by (used in) operating activities...............................................

1,807



(3,533

)


(1,106

)

Cash flows from investing activities:






Purchases of securities...........................................................................................................

(139

)


(342

)


-


Sales and maturities of securities..........................................................................................

208



14



21


Net change in loans................................................................................................................

5



5



10


Net change in investments in and advances to subsidiaries...........................................

(1,666

)


(918

)


(886

)

Other, net..................................................................................................................................

-



1



-


Net cash used in investing activities.........................................................................

(1,592

)


(1,240

)


(855

)

Cash flows from financing activities:






Net change in short-term borrowings..................................................................................

(1,643

)


186



1,809


Issuance of long-term debt, net of issuance costs............................................................

4,401



7,209



5,646


Repayment of long-term debt................................................................................................

(2,875

)


(2,858

)


(5,450

)

Dividends paid.........................................................................................................................

(73

)


(73

)


(73

)

Capital contributions from parent.........................................................................................

-



312



-


Additions (reductions) of capital surplus...........................................................................

(17

)


(3

)


29


Net cash provided by financing activities................................................................

(207

)


4,773



1,961


Net change in cash and due from banks...................................................................................

8



-



-


Cash and due from banks at beginning of year.......................................................................

-



-



-


Cash and due from banks at end of year...................................................................................

$

8



$

-



$

-


Cash paid for:






Interest......................................................................................................................................

$

321



$

317



$

338


HSBC Bank USA is subject to legal restrictions on certain transactions with its non-bank affiliates in addition to the restrictions on the payment of dividends to us. See Note 24, "Retained Earnings and Regulatory Capital Requirements," for further discussion.

 


SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

 


The following table presents a quarterly summary of selected financial information.

 


2013


2012


Fourth


Third


Second


First


Fourth


Third


Second


First


(in millions)

Net interest income...................................................

$

526



$

492



$

518



$

505



$

526



$

510



$

535



$

587


Provision for credit losses.......................................

51



54



67



21



120



84



89



-


Net interest income after provision for credit losses......................................................................

475



438



451



484



406



426



446



587


Other revenues..........................................................

267



432



566



592



303



408



879



383


Operating expenses...................................................

1,540



855



788



789



681



1,628



1,567



872


Income from continuing operations before income tax expense (benefit)....................................

(798

)


15



229



287



28



(794

)


(242

)


98


Income tax expense (benefit)...................................

(93

)


11



49



104



(19

)


(12

)


351



18


Income (loss) from continuing operations............

(705

)


4



180



183



47



(782

)


(593

)


80


Income from discontinued operations, net of tax.

-



-



-



-



-



-



48



155


Net income (loss).......................................................

$

(705

)


$

4



$

180



$

183



$

47



$

(782

)


$

(545

)


$

235


 


Item 9.            Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 


There were no disagreements on accounting and financial disclosure matters between HSBC USA and its independent accountants during 2013.

 


Item 9A.    Controls and Procedures

 


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

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

Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management's Assessment of Internal Control over Financial Reporting Management is responsible for establishing and maintaining an adequate internal control structure and procedures over financial reporting as defined in Rule 13a-15(f) of the  Exchange Act, and has completed an assessment of the effectiveness of HSBC USA's internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria related to internal control over financial reporting described in "Internal Control - Integrated Framework (1992)" established by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on the assessment performed, management concluded that as of December 31, 2013, HSBC USA's internal control over financial reporting was effective.

 


Item 9B.    Other Information

 


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

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

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

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

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

In 2002, the HSBC Group provided a loan to Bank Tejarat with a guarantee from the Government of Iran to fund the construction of a petrochemical plant undertaken by a U.K. contractor. This loan was supported by the U.K. Export Credit Agency and is administered under license from the relevant European Government. No repayments have been received directly from Bank Tejarat in 2013 and claims have been settled by the supporting Export Credit Agency.

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

Estimated gross revenue to the HSBC Group generated by these loans in repayment for 2013, which includes interest and fees, was approximately $2.2 million. Estimated net profit for HSBC during 2013 was approximately $1.3 million. While the HSBC Group intends to continue to seek repayment, it does not intend to extend any new loans.

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

The HSBC Group has worked with relevant regulatory authorities to obtain licenses where required and ensure compliance with laws and regulations while seeking to cancel the guarantees and counter indemnities. Several were canceled during 2013 and approximately 20 remain outstanding.

Estimated gross revenue to the HSBC Group for 2013, which includes fees and/or commissions was $10,000. The HSBC Group does not allocate direct costs to fees and commissions and, therefore, has not disclosed a separate profits measure. The HSBC Group is seeking to cancel all relevant guarantees and does not intend to provide any new guarantees involving Iran.

Check clearing Certain Iranian banks sanctioned by the United States continue to participate in official clearing systems in the U.A.E., Bahrain, Oman, Lebanon, Qatar, and Turkey. The HSBC Group has a presence in these countries and, as such, participates in the clearing systems. The Iranian banks participating in the clearing systems differ by location and include Bank Saderat, Bank Melli, Future Bank, and Bank Mellat. The HSBC Group has implemented automated and manual controls in order to preclude settling check transactions with these institutions. There was no measurable gross revenue or net profit generated by this activity in 2013.

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

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

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

Ÿ      In 2010, HSBC closed its representative office in Iran. The HSBC Group maintains a local account with a U.S.-sanctioned Iranian bank in Tehran in order to facilitate residual activity related to the closure. During 2013, the HSBC Group used this account to pay tax equivalent to approximately $20,000 to Iran's Social Security Organization. The HSBC Group has been authorized by the U.S. Government (and by relevant non-U.S. regulators) to make these types of payments in connection with the liquidation and deregistration of the representative office in Tehran, and anticipates making the last of such payments in 2014.

Estimated gross revenue to the HSBC Group in 2013 for all Iranian bank-related activity described in this section, which includes fees and/or commissions, was $109,013. The HSBC Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure. The HSBC Group intends to continue to wind down this Iranian bank-related activity and not enter into any new such activity.

Iranian embassy-related activity The HSBC Group held a bank account in London for the Iranian embassy London, which was used to support Iranian students studying in the U.K. and in which there was minimal activity during 2013. The account was closed in 2013, and the funds were moved into unclaimed balances.

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

The HSBC Group held personal and business accounts in the U.K. for two individuals sanctioned by the U.S. under Executive Order 13224. U.K. and U.N. Security Council sanctions against both these individuals were lifted in 2012. All the accounts were closed during 2013. The account balances were returned to the relevant individual. There was no measurable gross revenue or net profit generated to the HSBC Group in 2013.

The HSBC Group holds a frozen personal account in the United Arab Emirates for an individual who was designated under Executive Order 13224 during 2013. Subsequent to designation and prior to the freezing of the account in the second quarter, there were several transactions. Estimated gross revenue in 2013 was approximately $250. There has been no activity and no measurable gross revenue or net profit generated since the second quarter of 2013. A second personal account held in Hong Kong for the same individual was closed in the third quarter of 2013 and the balance moved into unclaimed balances. There has been no activity and no measurable gross revenue or net profit generated on the account in 2013 since designation.

The HSBC Group held an account and had an outstanding loan for a partnership that included one individual sanctioned under Executive Order 13224. The account has been closed, and the sanctioned individual has been removed from the loan account. There was no measurable gross revenue or net profits to the HSBC Group recognized in 2013 for this activity.

Activity related to U.S. Executive Order 13382 The HSBC Group held an account for a customer in the United Arab Emirates that was sanctioned under Executive Order 13382 in 2013. The account was closed in 2013, and the funds were moved into unclaimed balances. The estimated gross revenue or net profits generated to the HSBC Group in 2013 was $37.00.

Frozen accounts and transactions The HSBC Group and HSBC Bank USA maintain several accounts that are frozen under relevant sanctions programs and on which no activity, other than the posting of nominal amounts of interest, took place during 2013. In 2013, the HSBC Group and HSBC Bank USA also froze payments where required under relevant sanctions programs. There was no gross revenue or net profit to the HSBC Group.

 


PART III  

 


Item 10.     Directors, Executive Officers and Corporate Governance

 


Directors Set forth below is certain biographical information relating to the members of HSBC USA's Board of Directors, including descriptions of the specific experience, qualifications, attributes and skills that support each such person's service as a Director of HSBC USA. We have also set forth below the minimum director qualifications reviewed by HSBC and the Board in choosing Board members.

All of our non-executive Directors are or have been either chief executive officers or senior executives at other companies or firms, with significant general and specific corporate experience and knowledge that promotes the successful implementation of the strategic plans of HSBC USA and its parent, HSBC North America, for which each of our Directors also serve as a Director. Our Directors also have high levels of personal and professional integrity and ethical character. Each possesses the ability to be collaborative but also assertive in expressing his or her views and opinions to the Board and management. Based upon his or her management experience each Director has demonstrated sound judgment and the ability to function in an oversight role.

Directors are elected to three-year terms until their tenure exceeds six years, at which point they are elected annually. Consequently, Messrs. Bader and Blakely and Ms. Mistretta will be considered for election in 2015, 2017 and 2015, respectively, and all other Directors are subject to annual elections.  There are no family relationships among the directors.

Phillip D. Ameen, age 65, joined the HSBC USA and HSBC Bank USA Boards in May 2013, and is Chair of their respective Audit Committee and a member of their respective Risk Committee.  Since April 2012, he has served as a member of the Boards of Directors of HSBC North America and HSBC Finance, and as a member of their respective Audit and Risk Committees since May 2012.   Effective May 2013, Mr. Ameen was appointed Chair of the Audit Committees of HSBC North America and HSBC Finance.  Until March 2008, he served as Vice President, Comptroller, and Principal Accounting Officer of General Electric Capital Co. ("GE").  Prior to joining GE, he was Audit Partner of KPMG Peat Marwick.  He joined GE in 1985, where he spent time in lending, leasing, and mergers and acquisitions before joining GE Headquarters staff.

Mr. Ameen served on the International Financial Reporting Interpretations Committee of the International Accounting Standards Board, the Accounting Standards Executive Committee of the American Institute of Certified Public Accounting, was the longest-serving member of the Financial Accounting Standards Board Emerging Issues Task Force and was Chair of the Committee on Corporate Reporting of Financial Executives International.  He is a member of the Keenan Flagler Business School Board of Advisers and has served as Trustee of the Financial Accounting Foundation Inc. and of Elon University.  Mr. Ameen is an alumnus of the University of North Carolina, Chapel Hill and was a Certified Public Accountant in New York and North Carolina.  He now serves on the Boards of Directors of several private equity technology enterprises.  His experience in the accounting profession provides him with highly relevant expertise for insight into business operations and financial performance and reporting, which are valuable as a member of the HSBC USA Board and Audit Committee.

Jeffrey A. Bader, Age 68, joined the HSBC USA, HSBC Bank USA and HSBC North America Boards in April 2012.  He is also a member of the HSBC USA, HSBC Bank USA and HSBC North America Risk and Compliance Committees.  Dr. Bader is a visiting scholar with the John L. Thornton China Center at the Brookings Institution ("Brookings").  Dr. Bader returned to Brookings after serving in the Obama administration as senior director for East Asian affairs on the National Security Council from January 2009 to April 2011.  Prior to his appointment to the Obama administration, Dr. Bader was the first director of the John L. Thornton China Center and senior fellow of the Foreign Policy program at Brookings.  Dr. Bader was a member of the State Department from 1975 to 2002.  His assignments as a foreign service officer included Kinshasa and Lubumbashi, Zaire (Congo); Taipei; Beijing; the U.S. Mission to the United Nations; Deputy Chief of Mission in Lusaka, Zambia; Deputy Consul General in Hong Kong; and several tours in Washington in the State Department's Bureau of East Asian & Pacific Affairs.  He served as deputy director of the Office of Chinese & Mongolian Affairs from 1987 to 1990 and director of the same office in 1995-1996.  In 1996, Dr. Bader was appointed deputy assistant secretary of state for East Asian & Pacific Affairs, with responsibility for the People's Republic of China, Taiwan, Hong Kong, Mongolia, Vietnam, Thailand, Cambodia, Burma, and Laos.  In August 1997, he was named director for Asian affairs at the National Security Council, with responsibility for U.S. relations with the People's Republic of China and Taiwan, in which capacity he served until 1999.  From 1999 to 2001, Dr. Bader served as United States ambassador to the Republic of Namibia.  From May 2001 until May 2002, Dr. Bader served as assistant United States trade representative responsible for the People's Republic of China, Hong Kong, Taiwan, and Mongolia.  After his retirement from the U.S. Government in 2002, Dr. Bader was Senior Vice President of Stonebridge International, LLC, until he joined Brookings in 2005.  He also served as a member of the Editorial Board of China Security magazine, the Academic Advisory Group of the U.S. China Congressional Working Group and the policy advisory Board of the Asia Society.

In 2011, Dr. Bader set up Jeffrey Bader, LLC, a consulting group that works with a small number of companies on their challenges in Asia.  He is the President and sole proprietor.  He has been a director of the National Committee on U.S.-China Relations, a non-profit foundation active in U.S.-China exchanges, since 2012.

Dr. Bader's experience as a member of the U.S. Department of State provided him with comprehensive knowledge of international affairs and foreign policy, particularly in Asia including China, Hong Kong, Taiwan and Mongolia.  This experience is further enhanced by his affiliations with the Brookings Institute and is highly relevant to our strategic focus on international connectivity.

Kevin M. Blakely, age 62, joined the HSBC USA, HSBC Bank USA and HSBC North America Boards in December 2013. He is also a member of the HSBC USA, HSBC Bank USA and HSBC North America Risk and Compliance Committees.  Mr. Blakely has more than forty years of financial industry experience. In 2012, Mr. Blakely established KMB Financial LLC which offers consulting and advisory services and in 2012 and 2013 he served as Senior Advisor at Deloitte & Touche, LLP. In that capacity, he focused on assisting large financial institutions in the area of Governance, Regulatory and Risk Management activities. Previously, he was Senior Vice President and Chief Risk Officer for Huntington Bancshares Incorporated from 2009 to 2011. From 2007 to 2009 he was President, Chief Executive Officer and Director of the Risk Management Association. From 1990 to 2007 he held various executive positions with KeyCorp, including Chief Risk Officer and Head of Risk Review. He began his career in 1973 with the OCC as a Bank Regulator and Field Examiner. Before leaving the OCC in 1990 he held the position of Deputy Comptroller, Special Supervision and was Chair of the agency's Enforcement Review Committee.

Mr. Blakely has often been sought out as an industry expert on matters pertaining to risk management. He has presented at numerous industry conferences, academic forums, regulatory events and has provided banking related Congressional testimony on several occasions.

William R. P. Dalton, age 70, joined the HSBC USA Board in May 2008. He has been a member of the HSBC North America and HSBC Bank USA Boards also since 2008. Mr. Dalton is a member of the HSBC USA, HSBC Bank USA and HSBC North America Audit and Risk Committees and is Co-Chair of the HSBC USA Fiduciary Committee. He was a member of HSBC Finance's Board from April 2003 to May 2008.  Mr. Dalton retired in May 2004 as an Executive Director of HSBC, a position he held from April 1998. He also served HSBC as Global Head of Personal Financial Services from August 2000 to May 2004. From April 1998 to January 2004 he was Chief Executive of HSBC Bank plc. Mr. Dalton held positions with various HSBC entities for 25 years. Mr. Dalton currently serves as a director of Associated Electric and Gas Insurance Services ("AEGIS"), AEGIS Managing Agency for Lloyds of London Syndicate 1225, United States Cold Storage Inc., and Talisman Energy Inc. He is a Governor of the Center for the Study of Financial Innovation, London. With 52 years of banking experience, including 12 as a bank chief executive officer, Mr. Dalton brings banking industry knowledge and insight to HSBC USA's strategies and operations as part of HSBC's global organization. He has held several leadership roles with HSBC, including as Executive Director of HSBC from 1998 to 2004 and Global Head of Personal Financial Services from 2000 to 2004. His extensive global experience with HSBC is highly relevant as we seek to operate our core businesses in support of HSBC's global strategy.

Anthea Disney, age 69, joined the HSBC USA and HSBC Bank USA Boards in May 2008 and has been a member of the HSBC North America Board since 2005. She is a member of the HSBC USA, HSBC Bank USA and HSBC North America Compliance Committees. Ms. Disney is also Chair of the HSBC North America Nominating and Governance Committee.

She was a member of HSBC Finance's Board from 2001 to 2005. Ms. Disney is a Partner and Co-Founder of Women's Enterprise Initiative, Northwest Connecticut founded in January 2010. She was formerly Executive Vice President for Content at News Corporation from 1999 to 2009, and a member of its worldwide Executive Management Committee. She held various positions with The News Corporation Limited from 1989 to 2009. From 2004 to 2008 she was also Executive Chairman Gemstar-TV Guide International. She has also been a director of the Center for Communication from 2001 to 2008 and served as a director of The CIT Group from 1998 to 2001. Currently she serves on the board of Western Connecticut Healthcare and the board of the North Western Connecticut Economic Development Corporation. Ms. Disney has 40 years of experience in the communications industry, of which 20 were as an executive at News Corporation and Gemstar-TV Guide International. Ms. Disney's leadership roles in the communications and marketing areas bring particular expertise to HSBC's efforts to promote HSBC's brand values and standards. In these leadership roles, Ms. Disney has also had extensive experience in running complex organizations. With her experience at Gemstar-TV Guide International, Ms. Disney obtained a strong understanding of the important issues for international businesses. In addition, Ms. Disney has served on the Board of Directors for HSBC Finance, which was previously Household International, from 2001 until 2005, which provides a historical insight into HSBC's operations in North America more generally.

Irene M. Dorner, age 59, joined the HSBC USA, HSBC Bank USA and HSBC North America Boards and was appointed President and Chief Executive Officer of HSBC USA and HSBC Bank USA in January 2010. Ms. Dorner was also appointed Chairman of the Board of HSBC USA and HSBC Bank USA and Chief Executive Officer of HSBC North America in October 2011. She is a member of the HSBC USA, HSBC Bank USA and HSBC North America Compliance Committees. She joined HSBC in 1986 and has held numerous positions in the United Kingdom and Asia. She previously held the position of Deputy Chairman and Chief Executive Officer of HSBC Bank Malaysia Berhad, Chairman of HSBC Amanah and Chairman of HSBC Amanah Takaful from 2007 to 2009. From 2006 to 2007, she was General Manager Premier and Wealth, and from 2003 to 2006 she was General Manager, North, Scotland and Northern Ireland, of HSBC Bank plc. Ms. Dorner is a Group Managing Director as of February 1, 2013, and has been a Group General Manager since 2007. Ms. Dorner also serves on the Board of the British-American Business Council, The Clearing House and the Financial Services Roundtable.

As Chief Executive Officer of HSBC USA, Ms. Dorner's insight and particular knowledge of HSBC USA's operations are critical to an effective Board of Directors. The presence of the Chief Executive Officer is also critical to efficient and effective communication of the Board's direction to management of HSBC USA. She also has many years of experience in leadership positions with HSBC and extensive global experience with HSBC, which is highly relevant as we seek to operate our core businesses in support of HSBC's global strategy.

Robert K. Herdman, age 65, joined the HSBC USA and HSBC Bank USA Boards in May 2010 and is Chair of their respective Risk Committee since May 2011.  He served as Chair of the respective HSBC USA and HSBC Bank USA Audit Committee until May 2013.   He has also been a member of HSBC Finance's Board since January 2004, and is also Chair of its Risk Committee. Since March 2005, he has served as a member of the Board of Directors of HSBC North America and as non-executive Interim Chairman of the Board from May to December 2013.  He was previously Chair of HSBC North America's Audit Committee from March 2005 until May 2013.  He has served as Chair of HSBC North America's Risk Committee since May 2011. Mr. Herdman was a member of and the Chair of the HSBC Finance Compliance Committee from December 2010 and the HSBC USA Compliance Committee from August 2010 to May 2011. Mr. Herdman has also served on the Board of Directors of Cummins Inc. since February 2008 and is the Chair of its Audit Committee, and on the Board of Directors of WPX Energy, Inc. and is Chair of its Audit Committee since December 2011. Since January 2004, Mr. Herdman has been a Managing Director of Kalorama Partners LLC, a Washington, D.C. consulting firm specializing in providing advice regarding corporate governance, risk assessment, crisis management and related matters. Mr. Herdman was the Chief Accountant of the SEC from October 2001 to November 2002. The Chief Accountant serves as the principal advisor to the SEC on accounting and auditing matters, and is responsible for formulating and administering the accounting program and policies of the SEC. Prior to joining the SEC, Mr. Herdman was Ernst & Young's Vice Chairman of Professional Practice for its Assurance and Advisory Business Services ("AABS") practice in the Americas and the Global Director of AABS Professional Practice for Ernst & Young International. Mr. Herdman was the senior Ernst & Young partner responsible for the firms' relationships with the SEC, FASB and American Institute of Certified Public Accountants ("AICPA"). He served on the AICPA's SEC Practice Section Executive Committee from 1995 to 2001 and as a member of the AICPA's Board of Directors from 2000 to 2001.

Mr. Herdman's membership on the Board is supported by his particular financial expertise, which is particularly valued as a member of the Audit Committee. His experience with the SEC and in the public accounting profession provided Mr. Herdman with broad insight into the business operations and financial performance of a significant number of public and private companies.

Richard A. Jalkut, age 69, joined the HSBC USA Board in 2000 and the HSBC Bank USA Board in 1992. He has also been a member of the HSBC North America Board since 2008. Mr. Jalkut is Co-Chair of the HSBC USA Fiduciary Committee, Chair of the HSBC USA, HSBC Bank USA and HSBC North America Compliance Committees and a member of the HSBC USA, HSBC Bank USA and HSBC North America Risk Committees. Mr. Jalkut is the President and Chief Executive Officer of Telepacific Communications. He was a director of Birch Telecom, Inc. until June 2006. Formerly, he was the President and Chief Executive of Pathnet and, prior to that, President and Group Executive, NYNEX Telecommunications. Mr. Jalkut was also a director of IKON Office Solutions and Covad Communications until 2008, and is currently the Chair of the Board of Hawaii Telecom and a director of U.S. Telepacific Corporation and Univar Corporation. Mr. Jalkut is a Trustee of Lesley University in Cambridge, Massachusetts.

Mr. Jalkut has many years of experience in the communications industry as chief executive officer of Telepacific Communications, Pathnet and NYNEX Telecommunications. As a chief executive officer, Mr. Jalkut brings experience in managing the operations of a large company. In addition, his leadership roles in the communications area bring particular knowledge that supports HSBC's efforts to enhance its internal and external communications. In addition, Mr. Jalkut has served on the Board of Directors for HSBC USA since 2000 and HSBC Bank USA since 1992, and, accordingly, he is able to provide a historical perspective to the HSBC USA Board.

Samuel Minzberg, age 64, joined the HSBC USA Board in April 2013 and the HSBC Bank USA Board in June 2013.  He has been a Director of HSBC North America since March 2005 and has served on its Audit Committee since 2005 and Nominating and Governance Committee since 2013.  He is a also a member of the HSBC USA and HSBC Bank USA Audit Committees. He was previously a member of the HSBC Finance Board from May 2008 through April 2013.  Mr. Minzberg is a partner with the law firm of Davies Ward Phillips & Vineberg, in Montreal. Mr. Minzberg is currently also Chairman of HSBC Bank Canada and a member of its Audit Committee, a Director of Reitmans (Canada) Limited, and a Director and past President of the Sir Mortimer B. Davis - Jewish General Hospital Centre Board.  He was previously a director of Quebecor Media Inc. and Richmont Mines Inc.

Mr. Minzberg's experience as a tax attorney provides a unique expertise in evaluating and advising HSBC USA on tax strategies and particularly with respect to transactional matters. As a partner with a firm with a diverse client base, he has had experience with a number of industries with varied considerations in effecting business and tax strategies. He has been a practicing attorney for over thirty years, dedicated mainly to tax and corporate matters.  As a Canadian, he brings diverse perspectives and knowledge to the Boardroom, which is also relevant for understanding the prior cross-border operations of HSBC USA and the continuing broader context of HSBC's global operations, as well as the potential tax and other considerations of potential cross-border initiatives of HSBC USA and its affiliates.

Nancy G. Mistretta, age 59, joined the HSBC USA, HSBC Bank USA and HSBC North America Boards in April 2012.  Ms. Mistretta is a member of the Compliance Committee. She is also a member of the HSBC North America Nominating and Governance Committee.

Ms. Mistretta is a retired partner of Russell Reynolds Associates ("RRA"), an executive search firm, where she served as a partner from February 2005 until June 2009.  She was a member of RRA's Not-For-Profit Sector and was responsible for managing executive officer searches for many large philanthropic organizations, with a special focus on educational searches for presidents, deans and financial officers.  Ms. Mistretta was also active in the CEO/Board Services Practice of Russell Reynolds. Prior to joining RRA, Ms. Mistretta was with JPMorgan Chase & Co. ("JPMorgan") and its heritage institutions for 29 years and served as a Managing Director in Investment Banking from 1991-2005.  Ms. Mistretta has also served as Director of The Scotts Miracle-Gro Company since 2007.  She is Chairperson of the Compensation and Organization Committee and a member of the Audit and Finance Committee of Scotts Miracle-Gro.

Ms. Mistretta's experience throughout her nearly 30-year career at JPMorgan, provided her with a broad base of leadership, international, marketing/consumer industry, retail and financial experience, including through roles as Managing Director responsible for Investment Bank Marketing and Communications, industry head responsible for the Global Diversified Industries group and industry head responsible for the Diversified, Consumer Products and Retail Industries group, is highly relevant to HSBC USA's support of HSBC's global strategy.  She provides banking industry knowledge and insight with respect to the Global Banking and Markets businesses.

Executive Officers  Information regarding the executive officers of HSBC USA as of February 24, 2014 is presented in the following table.

 

Name

Age


Year

Appointed


Present Position

Irene M. Dorner..............

59



2010


President and Chief Executive Officer

Eric K. Ferren..................

40



2014


Executive Vice President, Chief Financial Officer and Chief Accounting Officer

Stuart A. Alderoty..........

54



2011


Senior Executive Vice President and General Counsel

Stephen A. Bottomley...

54



2012


Senior Executive Vice President, Head of Commercial Banking

Steven G. Ekert................

47



2013


Senior Executive Vice President, Chief Risk Officer

Mark Martinelli...............

54



2007


Senior Executive Vice President, Chief Auditor

Kevin Newman...............

56



2014


Senior Executive Vice President, Head of Retail Banking and Wealth Management

Patrick M. Nolan............

48



2010


Senior Executive Vice President, Head of Global Banking and Markets Americas

Gregory T. Zeeman........

45



2012


Senior Executive Vice President and Chief Operating Officer

Mary E. Bilbrey..............

50



2012


Executive Vice President, Head of Human Resources

..........................................






Loren C. Klug.................

53



2013


Executive Vice President, Head of Strategy and Planning and Chief of Staff to the CEO

Patrick D. Schwartz........

56



2008


Executive Vice President and Secretary

Marlon Young................

58



2006


Executive Vice President, Head of Private Banking Americas

Irene M. Dorner, Director and President and Chief Executive Officer of HSBC USA and HSBC Bank USA. See Directors for Ms. Dorner's biography.

Eric K. Ferren, Executive Vice President, Chief Financial Officer and Chief Accounting Officer of HSBC USA, and Deputy Chief Financial Officer of HSBC North America since January 2014. He has held the title of Chief Accounting Officer of HSBC USA, HSBC Finance and HSBC North America since July 2010. Mr. Ferren is also a Director of HSBC Trust Company (Delaware), National Association.  Prior to Mr. Ferren's appointment as Chief Accounting Officer, Mr. Ferren was responsible for several accounting areas across HSBC North America and its subsidiaries. Prior to joining HSBC, Mr. Ferren was the Controller for UBS's North American Asset Management business from May 2005 to June 2006. Prior to that, Mr. Ferren was the Controller for Washington Mutual's Home Loans Capital Market's business and several finance roles within the servicing business from January 2002 through May 2005. Prior to January 2002, Mr. Ferren was a Senior Manager at Ernst & Young LLP in Chicago where he focused on global banking, commercial banking, and securitizations. He is a Certified Public Accountant registered in the U.S. and a member of the American Institute of Certified Public Accountants.

Stuart Alderoty, Senior Executive Vice President and General Counsel since June 2011. He is also Senior Executive Vice President and General Counsel of HSBC North America since November 2010. Prior to joining HSBC in 2010, Mr. Alderoty was Managing Counsel with American Express from 2006 to 2010 and prior to that he was Chief Litigation Counsel for American Express from 2002 to 2006. Prior to joining American Express in 2002, he was a litigator in private practice for 17 years, the last 13 of which were with the firm of Leboeuf, Lamb, Greene and MacRae, where he was a partner since1996. Mr. Alderoty serves on the Board of the Count Basie Theatre Foundation, a not-for-profit in Red Bank, New Jersey and is also on the Board of the Institute for Inclusion in the Legal Profession, a not-for-profit organization that addresses diversity challenges in the legal profession.

Stephen A. Bottomley, Senior Executive Vice President, Head of Commercial Banking since January 2012. Prior to this appointment, Mr. Bottomley was Regional Head of Strategy and Planning for HSBC Bank Middle East from 2009 to 2012. From 2008 to 2009 he was Head of European Strategy and from 2007 to 2008 he was Head of Commercial Banking U.K. He joined HSBC in 1982 and has held a variety of positions in Commercial Banking and Corporate & Investment Banking. Mr. Bottomley was appointed a Group General Manager of HSBC in January 2013.

Steven G. Ekert, Senior Executive Vice President, Chief Risk Officer of HSBC USA, HSBC North America and HSBC Finance since June 2013. He is responsible for all Risk and Compliance functions in North America, including Credit Risk, Operational Risk, Market Risk, Financial Crime and Regulatory Compliance as well as the enterprise-wide risk and compliance framework. Prior to joining HSBC in the United States, Mr. Ekert held various positions with Citigroup Inc. including, Chief Risk Officer of Citi Holdings and Citi Private Bank.

Mark Martinelli, Senior Executive Vice President and Chief Auditor since March 2007. He has also been the Chief Auditor of HSBC North America since November 2009 and Chief Auditor of HSBC Finance since October 2013. Prior to that time, Mr. Martinelli was President and Chief Executive Officer of hsbc.com from 2006 to 2007, and Chief Financial Officer of hsbc.com from 2002 to 2006. Mr. Martinelli joined HSBC in the U.S. as part of Republic National Bank of New York in 1991, and has held various senior officer positions in Finance, Strategy, Planning and Audit. Prior to joining HSBC in the U.S., he was a senior manager with the public accounting firm of KPMG LLP. He is a Certified Public Accountant registered in the U.S., a Chartered Global Management Accountant and a member of the American Institute of Certified Public Accountants. Mr. Martinelli has served on the Audit Committee of the New York Clearing House since 2007 and served as its Chairman from January 2011 to February 2013. He has been a director on the Baruch College Fund Board of Trustees since April 2010 and has served as the Chairman of its Audit Committee since September 2011.  Since October 2013, Mr. Martinelli has served on St. John's University Department of Accounting and Taxation Executive Advisory Board.

Kevin Newman, Senior Executive Vice President, Head of Retail Banking and Wealth Management North America since January 2014. Prior to this role, Mr. Newman was Group Head of Retail Banking from January 2011 to January 2014.  Mr. Newman first joined HSBC in 1989. From 1997 to 2001, he was Head of Global Distribution, Consumer Business at Citibank. He rejoined HSBC in 2001, serving as Head of hsbc.com moving to Head of Personal Financial Services for North America and from 2009 to 2011, was Head of the One HSBC Program before assuming his current role. Prior to joining HSBC, Mr. Newman held various information technology positions at companies in England, including Mars and Woolworth.

Patrick M. Nolan, Senior Executive Vice President, Head of Global Banking and Markets Americas since May 2010. Prior to that he was in the Global Banking and Markets division of HSBC Bank plc from 2004 to 2009, most recently as Global Head of Credit Lending from 2009 to May 2010, and previously as Managing Director, Head of Coverage Europe from 2008 to 2009, and Head of Corporate Banking U.K. from 2004 to 2008. From 2002 to 2004 he was Executive Vice President and Managing Director, Head of Corporate Finance and Advisory for HSBC Securities (Canada) Inc. He joined the HSBC Group in 1987 as an employee of Midland Bank plc. Mr. Nolan was appointed a Group General Manager of HSBC in January 2013.

Gregory T. Zeeman, Senior Executive Vice President and Chief Operating Officer USA of HSBC USA,  HSBC Finance, and HSBC North America since August 2012.  From March 2012 to August 2012 he was Executive Vice President and Chief Operating Officer USA of HSBC USA, HSBC Finance, and HSBC North America.  Prior to his current role, Mr. Zeeman served as Executive Vice President, Head of Change Delivery for the Americas since 2011. Mr. Zeeman served as Deputy Chief Executive Officer and Chief Technology Services Officer for HSBC in Singapore from 2009 through 2011 and Chief Servicing Officer for HSBC Consumer and Mortgage Lending from 2006 to 2009.  Mr. Zeeman first joined the organization in 1999, where he has served in a wide range of general management and leadership roles, primarily focused on consumer oriented lines of business. Prior to joining the organization, he worked as a strategy consultant at the Boston Consulting Group.

Mary E. Bilbrey, Executive Vice President, Head of Human Resources USA since May 2012.  Prior to that, she was Head of Human Resources for Global Banking and Markets and Global Private Banking Human Resources from April 2011 until May 2012.  Previously she was Global Head of Transformation Deployment from June 2009 until April 2011, and from 2003 to 2009 she was Executive Vice President Human Resources for HSBC Finance.

Loren C. Klug, Executive Vice President, Head of Strategy and Planning of HSBC USA, HSBC North America and HSBC Finance since January 2012 and since September 2013 he has held the additional title of Chief of Staff to the Chief Executive Officer. He was previously Executive Vice President - Strategy & Planning of HSBC Finance and HSBC North America from February 2008 through December 2011. From March 2004 to January 2008, he was Managing Director, Strategy and Development, and concurrently from January 2005 to November 2007 he was responsible for strategy development and customer group oversight for the HSBC Group's global consumer finance activities. Mr. Klug joined HSBC Finance in 1989, and since that time has held a variety of commercial finance and strategy positions. Prior to such time he held positions in commercial real estate and banking.

Patrick D. Schwartz, Executive Vice President and Secretary since May 2008. Mr. Schwartz has served as HSBC USA's Secretary since September 2007 and was previously Deputy General Counsel-Corporate of HSBC USA from May 2010 to May 2011 and a Senior Vice President from September 2007 to May 2008. He has also served as Corporate Secretary of HSBC North America and HSBC Finance since September 2007. Mr. Schwartz has held several different titles for HSBC USA since September 2007, but served as its Secretary continuously since that time. Mr. Schwartz was the General Counsel of HSBC Finance from June 2009 to April 2011, and a Deputy General Counsel from May 2004 to June 2009. He served as a senior legal advisor of HSBC North America from February 2004 to April 2011. Mr. Schwartz counsels management and the Board of Directors of HSBC USA, HSBC Finance and HSBC North America with respect to corporate governance matters.

Marlon Young, Executive Vice President, Head of Private Banking Americas since May 2010. He was previously Managing Director, Head of Private Banking Americas from October 2006 to May 2010. Mr. Young joined HSBC as Managing Director and Head of Domestic Private Banking for HSBC Bank USA in March 2006. He served as Managing Director and Head of Private Client Lending for Smith Barney from 2004 through 2006. Prior to that, Mr. Young held various positions with Citigroup from 1979, including Head of the Northeast Region for Citigroup Private Bank, Head of Investment Finance and Senior Credit Officer for the U.S. Northeast and Mid-Atlantic Regions.

Corporate Governance  

Board of Directors - Board Structure  The business of HSBC USA is managed under the oversight of the Board of Directors, whose principal responsibility is to enhance the long-term value of HSBC USA to HSBC. The Board of Directors also provides leadership in the maintenance of prudent and effective controls that enable management to assess and manage risks of the business.  The affairs of HSBC USA are governed by the Board of Directors, in conformity with the Corporate Governance Standards, in the following ways:

• providing input and endorsing business strategy formulated by management and HSBC;

• providing input and approving the annual operating, funding and capital plans prepared by management;

• monitoring the implementation of strategy by management and HSBC USA's performance relative to approved operating, funding and capital plans and risk appetite;

• reviewing and advising as to the adequacy of the succession plans for the Chief Executive Officer and senior executive management;

• reviewing and providing input to HSBC concerning evaluation of the Chief Executive Officer's performance;

• reviewing and approving the Corporate Governance Standards and monitoring compliance with the standards;

• assessing and monitoring the major risks facing HSBC USA consistent with the Board of Director's responsibilities to HSBC; and

• monitoring the risk management structure designed by management to ensure compliance with HSBC policies, ethical standards and business strategies.

Board of Directors - Committees and Charters  The Board of Directors of HSBC USA has four standing committees: the Audit Committee, the Compliance Committee, the Fiduciary Committee and the Risk Committee. The charters of the Audit Committee, the Compliance Committee, the Fiduciary Committee and the Risk Committee, as well as our Corporate Governance Standards, are available on our website at www.us.hsbc.com or upon written request made to HSBC USA Inc., 26565 North Riverwoods Boulevard, Suite 100, Mettawa, Illinois 60045 Attention: Corporate Secretary.

Audit Committee The Audit Committee is responsible, on behalf of the Board of Directors, for oversight and advice to the Board of Directors with respect to:

• the integrity of HSBC USA's financial reporting processes and effective systems of internal controls relating to financial reporting;

• HSBC USA's compliance with legal and regulatory requirements that may have a material impact on our financial statements; and

• the qualifications, independence, performance and remuneration of HSBC USA's independent auditors.

The Audit Committee is currently comprised of the following independent directors (as defined by our Corporate Governance Standards, which are based upon the rules of the New York Stock Exchange ("NYSE")): Phillip D. Ameen (Chair), William R. P. Dalton and Samuel Minzberg. The Board of Directors has determined that each of these individuals is financially literate. The Board of Directors has also determined that Mr. Ameen qualifies as an audit committee financial expert.

Audit Committee Report During the previous year, the Audit Committee met and held discussions with management and KPMG LLP. The Audit Committee reviewed and discussed with management and KPMG LLP the audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The Audit Committee also discussed with KPMG LLP the matters required to be discussed by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm's communications with the Audit Committee concerning independence, such communications also  included its findings related to internal controls in conjunction with its financial statement audit.  The Audit Committee also discussed management's assessment of the effectiveness of internal controls over financial reporting.

KPMG LLP submitted to the Audit Committee the written disclosures and the letter required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm's communications with the Audit Committee concerning independence. The Audit Committee discussed with KPMG LLP such firm's independence.

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in this Annual Report on Form 10-K for the year ended December 31, 2013 for filing with the SEC.

 


Audit Committee




Phillip D. Ameen (Chair)


William R. P. Dalton


Samuel Minzberg

Compliance Committee The Compliance Committee is responsible, on behalf of the Board of Directors, for monitoring and oversight of:

• HSBC Bank USA's adherence to the provisions of the BSA/AML Consent Order with the OCC and our efforts to achieve and maintain an effective BSA/AML compliance program;

• the corrective actions in the loan servicing, foreclosure processing and loss mitigation functions of HSBC Bank USA and to ensure that HSBC Bank USA complies with the OCC Servicing Consent Order;

• HSBC Bank USA's adherence to the provisions of the Enterprise-Wide Compliance Consent Order with the OCC and our efforts to achieve and maintain an effective enterprise-wide compliance program; and

• HSBC USA's and HSBC Bank USA's Compliance function and the development of a strong Compliance culture.

The Compliance Committee is currently comprised of the following directors: Richard A. Jalkut (Chair), Jeffrey A. Bader, Kevin M. Blakely, Anthea Disney, Nancy G. Mistretta and Irene M. Dorner.

Fiduciary Committee The primary purpose of the Fiduciary Committee is to supervise the fiduciary activities of HSBC Bank USA to ensure the proper exercise of its fiduciary powers in accordance with 12 U.S.C. § 92a - Trust Powers of National Banks and related regulations promulgated by the OCC, which define fiduciary activities to include serving traditional fiduciary duties, such as trustee, executor, administrator, registrar of stocks and bonds, guardian, receiver or assignee; providing investment advice for a fee; and processing investment discretion on behalf of another.

The duties and responsibilities of the Fiduciary Committee include ongoing evaluation and oversight of:

• the proper exercise of fiduciary powers;

• the adequacy of management, staffing, systems and facilities;

• the adequacy of ethical standards, strategic plans, policies, and control procedures;

• investment performance;

• the adequacy of risk management and compliance programs as they relate to fiduciary activities; and

• regulatory examination and internal and external audit reports of fiduciary activities.

William R.P. Dalton (Co-Chair) and Richard A. Jalkut (Co-Chair) are members of the Fiduciary Committee. All members of the Fiduciary Committee are independent directors under our Corporate Governance Standards.

Risk Committee The Risk Committee is responsible, on behalf of the Board of Directors, for oversight and advice to the Board with respect to:

• HSBC USA's risk appetite, tolerance and strategy;

• our systems of risk management and internal control to identify, measure, aggregate, control and report risk;

• management of capital levels and regulatory ratios, related targets, limits and thresholds, and the composition of our capital;

• alignment of strategy with our risk appetite, as defined by the Board of Directors; and

• maintenance and development of a supportive and proactive risk management culture that is appropriately embedded through procedures, training and leadership actions so that all employees are alert to the wider impact on the whole organization of their actions and decisions and appropriately communicate regarding identified risks.

The Risk Committee is currently comprised of the following directors: Robert K. Herdman (Chair), Phillip D. Ameen, Jeffrey A. Bader, Kevin, M. Blakely, William R. P. Dalton and Richard A. Jalkut.

Nominating and Compensation Committees The Board of Directors of HSBC USA does not maintain a standing nominating committee or compensation committee. The Nominating and Governance Committee of the HSBC North America Board of Directors (the "Nominating and Governance Committee") is responsible for, among other things, oversight and advice to the HSBC North America Board of Directors with respect to:

• making recommendations concerning the structure and composition of the HSBC North America Board of Directors and its committees and the Boards and committees of its subsidiaries, including HSBC USA, to enable these Boards to function most effectively; and

• identifying qualified individuals to serve on the HSBC North America Board of Directors and its committees and the Boards and committees of its subsidiaries, including HSBC USA.

The Nominating and Governance Committee also has specified responsibilities with respect to executive officer compensation. See Item 11. Executive Compensation - Compensation Discussion and Analysis - Oversight of Compensation Decisions. The Nominating and Governance Committee is currently comprised of the following directors: Anthea Disney (Chair), Samuel Minzberg, Nancy G. Mistretta and Beatriz R. Perez. Ms. Disney, Mr. Minzberg and Ms. Mistretta currently serve as directors of HSBC North America, HSBC USA and HSBC Bank USA. Ms. Perez currently serves as a director of HSBC North America and HSBC Finance.

Board of Directors - Director Qualifications  HSBC and the Board of Directors believe a Board comprised of members from diverse professional and personal backgrounds who provide a broad spectrum of experience in different fields and expertise best promotes the strategic objectives of HSBC USA. HSBC and the Board of Directors evaluate the skills and characteristics of prospective Board members in the context of the current makeup of the Board of Directors. This assessment includes an examination of whether a candidate is independent, as well as consideration of diversity, skills and experience in the context of the needs of the Board of Directors, including experience as a chief executive officer or other senior executive or in fields such as government, financial services, finance, technology, communications and marketing, and an understanding of and experience in a global business. Although there is no formal written diversity policy, the Board considers a broad range of attributes, including experience, professional and personal backgrounds and skills, to ensure there is a diverse Board. A majority of the non-executive Directors are expected to be active or retired senior executives of large companies, educational institutions, governmental agencies, service providers or non-profit organizations. Advice and recommendations from others, such as executive search firms, may be considered, as the Board of Directors deems appropriate.

The Board of Directors reviews all of these factors, and others considered pertinent by HSBC and the Board of Directors, in the context of an assessment of the perceived needs of the Board of Directors at particular points in time. Consideration of new Board candidates typically involves a series of internal discussions, development of a potential candidate list, review of information concerning candidates, and interviews with selected candidates. Under our Corporate Governance Standards, in the event of a major change in a Director's career position or status, including a change in employer or a significant change in job responsibilities or a change in the Director's status as an "independent director," the Director is expected to offer to resign. The Chairman of the Board, in consultation with the Chief Executive Officer and senior executive management, will determine whether to present the resignation to the Board of Directors. If presented, the Board of Directors has discretion after consultation with management to either accept or reject the resignation. In addition, the Board of Directors discusses the effectiveness of the Board and its committees on an annual basis, which discussion includes a review of the composition of the Board.

As set forth in our Corporate Governance Standards, while representing the best interests of HSBC and HSBC USA, each Director is expected to:

• promote HSBC's brand values and standards in performing their responsibilities;

• have the ability to spend the necessary time required to function effectively as a Director;

• develop and maintain a sound understanding of the strategies, business and senior executive succession planning of HSBC USA;

• carefully study all Board materials and provide active, objective and constructive participation at meetings of the Board and its committees;

• assist in affirmatively representing HSBC to the world;

• be available to advise and consult on key organizational changes and to counsel on corporate issues;

• develop and maintain a good understanding of global economic issues and trends; and

• seek clarification from experts retained by HSBC USA (including employees of HSBC USA) to better understand legal, financial or business issues affecting HSBC USA.

Under the Corporate Governance Standards, Directors have full access to senior management and other employees of HSBC USA. Additionally, the Board and its committees have the right at any time to retain independent outside financial, legal and other advisors, at the expense of HSBC USA.

Board of Directors - Delegation of Authority  The HSBC North America Board of Directors has delegated its powers, authorities and discretion, to the extent they concern the management and day to day operation of the businesses and support functions of HSBC North America and its subsidiaries to a management Executive Committee comprised of senior executives from the businesses and staff functions. Under this authority the Executive Committee approves and addresses all matters which are of a routine or technical nature and relate to matters in the ordinary course of business. The HSBC USA Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Head of Regulatory Compliance, Head of Financial Crimes Compliance, Chief Operating Officer, Heads of each Business, Head of Internal Audit, Head of Strategy and Planning, General Counsel, Secretary and Head of Communications are members of the HSBC North America Executive Committee.

The objective of the Executive Committee is to maintain a reporting and control structure in which all of the line operations of HSBC North America and all its subsidiaries, including HSBC USA, are accountable to individual members of the Executive Committee who report to the HSBC North America Chief Executive Officer, who in turn reports to the HSBC Chief Executive Officer.

Board of Directors - Risk Oversight by Board  HSBC USA has a comprehensive risk management framework designed to ensure all risks, including credit, liquidity, interest rate, market, operational, reputational and strategic risk, are appropriately identified, measured, monitored, controlled and reported. The risk management function oversees, directs and integrates the various risk-related functions, processes, policies, initiatives and information systems into a coherent and consistent risk management framework. Our risk management policies are primarily implemented in accordance with the practices and limits by the HSBC Group Management Board. Oversight of all risks specific to HSBC USA commences with the Board of Directors, which has delegated principal responsibility for a number of these matters to the Audit Committee, the Risk Committee and the Compliance Committee.

Audit Committee The Audit Committee has responsibility for oversight of and advice to the Board of Directors on matters relating to financial reporting and for oversight of internal controls over financial reporting. As set forth in our Audit Committee charter, the Audit Committee is responsible, on behalf of the Board of Directors, for oversight and advice to the Board of Directors with respect to:

 Ÿ the integrity of HSBC USA's financial reporting processes and effective systems of internal controls relating to financial reporting;

 Ÿ HSBC USA's compliance with legal and regulatory requirements that may have a material impact on our financial statements; and

 Ÿ the qualifications, independence, performance and remuneration of HSBC USA's independent auditors.

The Audit Committee also has the responsibility, power, direction and authority to receive regular reports from the Internal Audit Department concerning major findings of internal audits and to review the periodic reports from the Internal Audit Department that include an assessment of the adequacy and effectiveness of HSBC USA's processes for controlling activities and managing risks.

Risk Committee As set forth in our Risk Committee charter, the Risk Committee has the responsibility, power, direction and authority to:

• receive regular reports from the Chief Risk Officer that enable the Risk Committee to assess the risks involved in the business and how risks are monitored and controlled by management and to give explicit focus to current and forward-looking aspects of risk exposure which may require an assessment of our vulnerability to previously unknown or unidentified risks;

• review and discuss with the Chief Risk Officer the adequacy and effectiveness of our internal control and risk management framework in relation to our strategic objectives and related reporting;

• oversee and advise the Board of Directors on all high-level risks;

• approve with HSBC the appointment and replacement of the Chief Risk Officer;

• review and approve the annual key objectives and performance review of the Chief Risk Officer;

• seek appropriate assurance as to the Chief Risk Officer's authority, access, independence and reporting lines;

• review the effectiveness of our internal control and risk management framework and whether management has discharged its duty to maintain an effective internal control system;

• consider the risks associated with proposed strategic acquisitions or dispositions;

• receive regular reports from HSBC USA's Asset Liability Management Committee ("ALCO") in order to assess major financial risk exposures and the steps management has taken to monitor and control such exposures; 

• review with senior management, and, as appropriate, approve, guidelines and policies to govern the process for assessing and managing various risk topics, including litigation risk and reputational risk; and

• oversee the continuing maintenance and enhancement of a strong enterprise-wide risk management culture.

At each quarterly Risk Committee meeting, the Chief Risk Officer makes a presentation to the committee describing key and emerging risks for HSBC USA, which may include operational and internal controls, market, credit, information security, capital management, liquidity and litigation. In addition the head of each Risk functional area is available to provide the Risk Committee a review of particular potential risks to HSBC USA and management's plan for mitigating these risks.

HSBC USA maintains a Risk Management Committee that provides strategic and tactical direction to risk management functions throughout HSBC USA, focusing on: credit, funding and liquidity, capital, market, operational, security, fraud, reputational and compliance risks. The Risk Management Committee is comprised of the function heads of each of these areas, as well as other control functions within the organization. Irene Dorner, the Chief Executive Officer and a Director, is the Chair of this committee. On an annual basis, the Board reviews the Risk Management Committee's charter and framework. The Operational Risk & Internal Control Committee (the "ORIC Committee"), the Fiduciary Risk Management Committee and the HSBC USA Disclosure Committee report to the Risk Management Committee and, together with the ALCO, define the risk appetite, policies and limits; monitor excessive exposures, trends and effectiveness of risk management; and promulgate a suitable risk management culture, focused within the parameters of their specific areas of risk.

ALCO provides oversight and strategic guidance concerning the composition of the balance sheet and pricing as it affects net interest income. It establishes limits of acceptable risk and oversees maintenance and improvement of the management tools and framework used to identify, report, assess and mitigate market, interest rate and liquidity risks.

The ORIC Committee is responsible for oversight of the identification, assessment, monitoring, appetite for, and proactive management and control of, operational risk for HSBC USA.  Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The ORIC Committee is designed to ensure that senior management fully considers and effectively manages our operational risk in a cost-effective manner so as to reduce the level of operational risk losses and to protect the organization from foreseeable future operational losses.

The Fiduciary Risk Management Committee is responsible for oversight of all fiduciary activities within HSBC USA.

The HSBC USA Disclosure Committee is responsible for maintenance and evaluation of our disclosure controls and procedures and for assessing the materiality of information required to be disclosed in periodic reports filed with the SEC. Among its responsibilities is the review of quarterly certifications of business and financial officers throughout HSBC USA as to the integrity of our financial reporting process, the adequacy of our internal and disclosure control practices and the accuracy of our financial statements.

Compliance Committee As set forth in our Compliance Committee charter, the Compliance Committee has the responsibility, power, direction and authority to:

•                 receive regular reports from management on plans to strengthen our compliance risk management practices;

•                 oversee the continuing maintenance and enhancement of a strong compliance culture;

•                 receive regular reports from the Chief Risk Officer that enable the Compliance Committee to assess major compliance exposures and the steps management has taken to monitor and control such exposures, including the manner in which the regulatory and legal requirements of pertinent jurisdictions are evaluated and addressed;

• approve the appointment and replacement of the Chief Risk Officer and other statutory compliance officers and review and approve the annual key objectives and performance review of the Chief Risk Officer;

• review the budget, plan, changes in plan, activities, organization and qualifications of the compliance functions as necessary or advisable in the Committee's judgment;

• review and monitor the effectiveness of the compliance functions and the Compliance Program, including testing and monitoring functions, and obtain assurances that the compliance functions, including testing and monitoring functions, are appropriately resourced, have appropriate standing within the organization and are free from management or other restrictions;

• seek such assurance as it may deem appropriate that the Chief Risk Officer participates in the risk management and oversight process at the highest level on an enterprise-wide basis; has total independence from individual business units; reports to the Compliance Committee and has internal functional reporting lines to the HSBC Head of Group Risk; and has direct access to the Chairman of the Compliance Committee, as needed; and

• upon request of the Board, provide the Board with negative assurance as to such regulatory and legal requirements as the Compliance Committee deems possible.

In support of these responsibilities, HSBC Bank USA maintains an Executive Compliance Steering Committee, which is a management committee established to provide overall strategic direction and oversight to HSBC Bank USA's response to the consent cease and desist order issued by the OCC and significant HSBC Bank USA compliance issues. Irene Dorner, the Chief Executive Officer and a Director, is the Chair of this committee, the membership of which also includes the heads of our business segments, our Chief Risk Officer and senior management of our compliance, Legal and other control functions. The Executive Compliance Steering Committee reports to both the Compliance Committee of the Board of Directors and the HSBC North America Executive Committee. The Executive Compliance Steering Committee is supported by the HSBC North America Project Management Office, which is a management committee established as the HSBC North America Regional Compliance Officer's forum for developing and overseeing the response to the consent cease and desist orders. This committee defines deliverables, provides ongoing direction to project teams, approves all regulatory submissions and prepares materials for presentation to the Board of Directors. The Project Steering Committee also provides oversight to individual project managers, compliance and BSA/AML subject matter experts, and external consultants to ensure any regulatory requested deliverables, including FRB and OCC deliverables, are met.

For further discussion of risk management generally, see the "Risk Management" section of the MD&A.

Section 16(a) Beneficial Ownership Reporting Compliance  Section 16(a) of the Exchange Act, as amended, requires certain of our Directors, executive officers and any persons who own more than 10 percent of a registered class of our equity securities to report their initial ownership and any subsequent change to the SEC and the NYSE. With respect to the issues of HSBC USA preferred stock outstanding, we reviewed copies of all reports furnished to us and obtained written representations from our Directors and executive officers that no other reports were required. Based solely on a review of copies of such forms furnished to us and written representations from the applicable Directors and executive officers, all required reports of changes in beneficial ownership were filed on a timely basis for the 2013 fiscal year.

Code of Ethics  HSBC USA has adopted a Code of Ethics that is applicable to its chief executive officer, chief financial officer, chief accounting officer and controller, which Code of Ethics is incorporated by reference in Exhibit 14 to this Annual Report on Form 10-K. HSBC North America also has a general code of ethics applicable to all U.S. employees, including employees of HSBC USA, which is referred to as its Statement of Business Principles and Code of Ethics. That document is available on our website at www.us.hsbc.com or upon written request made to HSBC USA Inc., 26525 North Riverwoods Boulevard, Suite 100, Mettawa, Illinois 60045, Attention: Corporate Secretary.

 


Item 11.      Executive Compensation

 


Compensation Discussion and Analysis

The following compensation discussion and analysis (the "2013 CD&A") and accompanying tables summarizes the principles, objectives and factors considered in evaluating and determining the 2013 compensation for our executive officers. Specific compensation information relating to our Chief Executive Officer, Chief Financial Officer, the next three most highly compensated executives, and one additional officer who would have been included in the three most highly compensated category except that he was not serving as an executive officer at the end of the last completed fiscal year is contained in this portion of the Form 10-K.  Collectively, these officers are referred to as the Named Executive Officers ("NEOs").

Oversight of Compensation Decisions

Remuneration Committee

The HSBC Board of Directors has a Remuneration Committee ("REMCO") which meets regularly to consider Human Resources issues, particularly terms and conditions of employment, remuneration and retirement benefits.  With authority delegated by the HSBC Board, REMCO is responsible for approving the remuneration policy of HSBC, including the terms of variable pay plans, share plans and other long-term incentive plans worldwide. In this role, REMCO is also responsible for approving the individual remuneration packages for the most senior HSBC executives, generally those having an impact on HSBC's risk profile ("senior executives").

The members of REMCO during 2013 are the following non-executive directors of HSBC: Sir Simon Robertson, Chairman beginning May 24, 2013, J. D. Coombe, R. Fassbind, W. S. H. Laidlaw and J. L. Thornton, who retired as Chairman on May 24, 2013.  As an indirect wholly owned subsidiary of HSBC, HSBC USA is subject to the remuneration policy established by HSBC, and the Chief Executive Officer of HSBC USA is one of the senior executives whose compensation is reviewed and approved by REMCO.

Delegation of Authority from Remuneration Committee

The remuneration of executives who are not "senior executives" within the broader view of HSBC is determined by HSBC executives who have the authority delegated to them by REMCO to endorse remuneration (up to pre-determined levels of compensation and levels of management that differ by level of delegated authority).  At the highest level, REMCO delegates this authority to the HSBC Group Chief Executive, Stuart T. Gulliver.  Mr. Gulliver further delegated this authority regionally to approve pay packages to Irene M. Dorner, as HSBC USA's Chief Executive Officer.  Remuneration decisions can be further delegated to other relevant authorities within HSBC, as appropriate, depending on their level of responsibility and the scope of their role.

Those with delegated authority to approve remuneration for executives do so after consultation with HSBC's Group Managing Director of Human Resources as well as with the relevant heads of global business segments or heads of global staff functions, such as Finance or Legal. For example, Mr. Gulliver also delegates authority for endorsement of executive remuneration for the GB&M business to the Chief Executive, Global Banking and Markets, Samir Assaf. As a result, Ms. Dorner shares oversight and recommendation responsibility for the GB&M businesses of HSBC USA with Mr. Assaf.

Board of Directors; HSBC North America Nominating and Governance Committee

The HSBC North America Board of Directors reviewed and made recommendations concerning proposed 2013 performance assessments and variable pay compensation award proposals for the Chief Executive Officer and direct reports to the Chief Executive Officer and certain other Covered Employees ("Covered Employees"), inclusive of the NEOs.  The Board of Directors also reviewed fixed pay recommendations for 2014 for the NEOs and had the opportunity to recommend changes before awards were finalized.

The Nominating and Governance Committee of HSBC North America (the "HNAH Nominating and Governance Committee") performed certain responsibilities related to oversight and endorsements of compensation for 2013 performance with respect to HSBC North America and its subsidiaries.  The duties of the HNAH Nominating and Governance Committee, among others, include: i) reviewing the corporate governance framework to ensure that best practices are maintained and relevant stakeholders are effectively represented, ii) overseeing the framework for assessing risk in the responsibilities of employees, the determination of who are Covered Employees under the Interagency Guidelines on Incentive Based Compensation Arrangements as published by the Federal Reserve Board, and the measures used to ensure that risk is appropriately considered in making discretionary variable pay compensation recommendations, iii) making recommendations concerning proposed performance assessments and discretionary variable pay compensation award proposals for the Chief Executive Officer, direct reports of the Chief Executive Officer and certain other Covered Employees, including any recommendations for reducing or canceling discretionary variable pay compensation previously awarded, and iv) reviewing the coverage and competitiveness of employee pension and retirement plans and general benefits. The recommendations related to employee compensation are incorporated into the submissions to REMCO, or to Mr. Gulliver and Ms. Dorner, in instances where REMCO has delegated remuneration authority.  During the fourth quarter of 2013 and in January 2014, the HNAH Nominating and Governance Committee reviewed performance review summaries and compensation recommendations for senior executives for 2013 performance. During the first quarter of 2014, the HNAH Nominating and Governance Committee reviewed a summary provided by the Compensation and Performance Management Governance Committee ("CPMG Committee") of the approved risk evidence statements that are required of all U.S. business units and functions to support 2013 variable pay recommendations.

Compensation and Performance Management Governance Committee

In 2010, HSBC North America established the Compensation and Performance Management Governance Committee ("CPMG Committee"). The CPMG Committee was created to provide a more systematic approach to incentive compensation governance and ensure the involvement of the appropriate levels of leadership in a comprehensive view of compensation practices and associated risks.

The members of the CPMG Committee are senior executive representatives from HSBC North America's staff and control functions, consisting of Risk, Legal, Finance, Audit, Human Resources and Corporate Secretary. The CPMG Committee approves the list of Covered Employees and their mandatory performance objectives; reviews compensation  impact related to regulatory and control findings; and can make recommendations to reduce or cancel previous grants of incentive compensation based on actual results and risk outcomes.The CPMG Committee can make its recommendations to the HNAH Nominating and Governance Committee, REMCO, Mr. Gulliver, or Ms. Dorner, depending on the nature of the recommendation or the delegation of authority for making final decisions.  The CPMG Committee held six formal meetings in 2013, as well as two formal meetings during the first quarter of 2014.

Objectives of HSBC USA's Compensation Program

A global reward strategy for the HSBC Group, as approved by REMCO, is utilized by HSBC USA. The usage of a global reward strategy promotes a uniform compensation philosophy throughout the HSBC Group, common standards and practices throughout the HSBC Group's global operations, and a particular framework for REMCO to use in carrying out its responsibilities.  The reward strategy includes the following elements:

•       A focus on total compensation (fixed pay and annual discretionary variable pay) with the level of annual discretionary variable pay (namely, cash, deferred cash and the value of long-term equity incentives) differentiated by performance;

•       An assessment of reward with reference to clear and relevant objectives set within a performance scorecard framework.

•       Our most senior executives, including Ms. Dorner and John T. McGinnis, Patrick M. Nolan, Steven G. Ekert, Gregory T. Zeeman and C. Mark Gunton, set objectives using a performance scorecard framework.  Under a performance scorecard framework, objectives are separated into financial objectives and non-financial objectives, and the weighting between the categories varies by executive.  The performance scorecard also requires an assessment of the executive's adherence to the HSBC Group values and behaviors consistent with managing a sound financial institution.  Specific objectives are required of all Covered Employees including targets relating to Compliance, Internal Audit and general risk management and internal control measures.

•       In the performance scorecards, certain objectives have quantitative standards that may include meeting designated financial performance targets for the company or the executive's respective business unit and increasing employee engagement metrics. Qualitative objectives may include key strategic business initiatives or projects for the executive's respective business unit. Quantitative and qualitative objectives only provide some guidance with respect to 2013 compensation. However, in keeping with HSBC Group's reward strategy, discretion played a considerable role in establishing the annual discretionary variable pay awards for HSBC USA's senior executives;

•       The use of considered discretion to assess the extent to which performance has been achieved, rather than applying a formulaic approach which, by its nature, is inherently incapable of considering all factors affecting results and may encourage inappropriate risk taking. In addition, environmental factors and social and governance aspects that would otherwise not be considered by applying absolute financial metrics may be taken into consideration. While there are specific quantitative goals as outlined above, the final reward decision is not solely dependent on the achievement of one or all of the objectives;

•       Delivery of a significant proportion of variable pay in deferred HSBC ordinary shares to align recipient interests to the future performance of the HSBC Group and to retain key talent; and

•       A total compensation package (fixed pay, annual discretionary variable pay, and other benefits) that is competitive in relation to comparable organizations in the respective markets in which the HSBC Group operates.

Internal Equity

HSBC USA's executive officer compensation is analyzed internally at the direction of HSBC's Group Managing Director of Human Resources with a view to align treatment globally and across business segments and functions, taking into consideration individual responsibilities, size and scale of the businesses the executives lead, and contributions of each executive, along with geography and local labor markets. These factors are then calibrated for business and individual performance within the context of their business environment against their respective Comparator Group, as detailed herein.

Link to Company Performance

HSBC Group's compensation plans are designed to motivate its executives to improve the overall performance and profitability of the HSBC Group as well as the specific region, unit or function to which they are assigned. The HSBC Group seeks to offer competitive fixed pay with a significant portion of discretionary variable pay compensation components structured to reward performance.  Management of risk within an executive's area(s) of responsibility is also a significant consideration.  The discretionary annual variable pay awards are based on individual and business performance, as more fully described under Elements of Compensation - Annual Discretionary Variable Pay Awards.  For the NEOs, common financial objectives included:  capital and risk-weighted asset management, profit before tax, and cost discipline; and common non-financial objectives included:  people management, regulatory compliance, strategy execution, and risk management.  Each NEO also had other individual objectives specific to his or her role.

Consequently, variable pay makes up a significant proportion of total compensation, while maintaining an appropriate balance between fixed and variable elements. Actual compensation paid will increase or decrease based on the executive's individual performance, and results of his or her business unit.

As the determination of the variable pay awards relative to 2013 performance considered the overall satisfaction of objectives that could not be evaluated until the end of 2013, the final determination on 2013 total compensation was not made until February 2014. To make that evaluation, Mr. Gulliver and Ms. Dorner received reports from management concerning satisfaction of 2013 corporate, business unit and individual objectives.

Competitive Compensation Levels and Benchmarking

When making compensation decisions, we look at the compensation paid to similarly-situated executives in our Comparator Groups, a practice referred to as "benchmarking." Benchmarking provides a point of reference for measurement but does not replace analyses of internal pay equity and individual performance of the executive officers that HSBC also considers when making compensation decisions.  We strive to maintain a compensation program that may attract and retain qualified executives but also has levels of compensation that differ based on performance.

In 2013, REMCO retained Towers Watson to provide REMCO with market trend information for use during the annual pay review process and advise REMCO as to the competitive position of our total direct compensation levels in relation to the Comparator Groups. Towers Watson provided competitive positions on the highest level executives in HSBC, including HSBC USA's NEOs.  Comparative competitor information was provided to Messrs. Gulliver and Assaf and Ms. Dorner to evaluate the competitiveness of proposed executive compensation.

The Comparator Groups are reviewed annually with the assistance of Towers Watson.  The primary Comparator Group consists of our global peers with comparable business operations located within U.S. borders.  Primary Comparator Group organizations are publicly held companies that compete with HSBC for business, customers and executive talent and are broadly similar in size and international scope.  A secondary Comparator Group, consisting of the primary Comparator Group companies and a selection of U.S.-based peers, is also used.  The secondary Comparator Group is used to benchmark compensation levels for certain roles that are more regionally focused.  The Chief Financial Officer role was benchmarked using the secondary Comparator Group.  All other NEO roles were benchmarked using the primary Comparator Group.

The primary Comparator Group for 2013 consisted of:

 

Global Peers

Bank of America

JPMorgan Chase

Barclays

Santander

BNP Paribas

Standard Chartered

Citigroup

UBS

Deutsche Bank


The secondary Comparator Group for 2013 consisted of the Global Peers listed above and the following U.S.-based peers:

 

U.S.-based Peers

Bank of New York Mellon

Regions

BB&T

State Street

Fifth Third

SunTrust

KeyCorp

TD Bank

M&T

U.S. Bank

Northern Trust

Wells Fargo

PNC


The aggregate fee paid to Towers Watson for services provided to HSBC was $537,258, of which $22,019 was apportioned to HSBC USA for executive benchmarking.  Separately, the management of HSBC North America retained Towers Watson to perform non-executive compensation consulting services. In 2013, the aggregate fee paid to Towers Watson by HSBC North America for these other services was $1,704,826.

Additionally, HSBC North America periodically engages the consulting firm McLagan Partners Inc. ("McLagan") to render advice specific to executive pay policies and practices within the financial services industry.  The aggregate fee paid to McLagan for executive compensation consulting services by HSBC North America was $43,174 and for non-executive consulting services was $86,117. Additionally, the HSBC Group paid $726,507 to McLagan for fees related to compensation surveys used globally.

Elements of Compensation

The primary elements of executive compensation, which are described in further detail below, are fixed pay and annual discretionary variable pay awards, which are delivered in cash, deferred cash and long-term equity incentive awards. In addition, executives are eligible to receive company funded retirement benefits that are offered to employees at all levels who meet the eligibility requirements of such qualified and non-qualified plans. Although perquisites are provided to certain executives, they typically are not a significant component of compensation.

Fixed Pay

Fixed pay helps us attract and retain executive talent because it provides a degree of financial certainty and is less subject to risk than most other pay elements. In establishing individual fixed pay levels, consideration is given to market pay, as well as the specific responsibilities and experience of the NEO. Fixed Pay is reviewed annually and may be adjusted based on performance and changes in the competitive market. Consideration is given to compensation paid for similar positions at Comparator Group companies, particularly at the median level. Other factors such as potential for future advancement, specific job responsibilities, length of time in current position, pay history, and internal equity influence the final fixed pay recommendations for individual executives. Fixed pay increases proposed by senior management are prioritized towards high performing employees and those who have demonstrated rapid development. Additionally, consideration is given to maintaining an appropriate ratio between fixed pay and variable pay as components of total compensation.

Annual Discretionary Variable Pay Awards

Annual discretionary variable pay ("variable pay") awards differ from year to year and are offered as part of the total compensation package to motivate and reward strong performance. Superior performance is encouraged by placing a part of the executive's total compensation at risk.  In the event certain quantitative or qualitative performance goals are not met, cash awards may be reduced or not paid at all.  Variable pay awards may be granted as cash, deferred cash, and long-term equity incentive awards.  Employees will become fully entitled to deferred cash over a three to five year vesting period.

Long-term equity incentive awards may be made in the form of stock options, restricted shares, and restricted share units ("RSUs"). The purpose of equity-based compensation is to help HSBC attract and retain outstanding employees and to promote the growth and success of HSBC USA's business over a period of time by aligning the financial interests of these employees with those of HSBC's shareholders.

Historically, prior to 2005, equity awards were primarily made in the form of stock options within the retail businesses and both options and restricted share grants in the wholesale businesses. The stock options have a "total shareholder return" performance vesting condition and only vested, subject to continued employment, if and when the condition was satisfied. No stock options have been granted to executive officers after 2004.

In 2005, the HSBC Group shifted its equity-based compensation awards to restricted shares with a time vesting condition, in lieu of stock options.  Starting in 2009, RSUs have been awarded as the long-term equity incentive component of variable discretionary pay.  The restricted shares and RSUs granted consist of a number of shares to which the employee will become fully entitled, generally over a three to five year vesting period. The restricted shares and RSUs granted by HSBC also carry rights to dividends or dividend equivalents which are paid or accrue on all underlying share or share unit awards at the same rate paid to ordinary shareholders.

Following shareholder approval of the HSBC Share Plan 2011, HSBC introduced a new form of long-term equity incentive awards for senior executives under the Group Performance Share Plan ("GPSP").  Grants under the GPSP aim to achieve alignment between the interests of participants and the interests of shareholders and to encourage participants to deliver sustainable long-term business performance.  Grants under the GPSP are approved by REMCO, by considering performance delivered prior to the date of grant against a pre-determined scorecard.  Performance measures on the scorecard are composed of 60 percent financial measures, such as return on equity, capital efficiency ratio, capital strength and dividends, and 40 percent non-financial measures, including strategy execution, brand equity, compliance, reputation and people.  Grants under the GPSP comprise a number of shares to which the employee will become fully entitled, generally over a five year vesting period, subject to continued employment with the HSBC Group. Shares which are released upon vesting of an award must be retained until the employee retires from or terminates employment with the HSBC Group.

REMCO considers and decides the grant of long-term equity awards and considers individual executive performance and goal achievement as well as the total compensation package when determining the allocation of share-based awards.  While share dilution is not a primary factor in determining award amounts, there are limits to the number of shares that can be issued under HSBC equity-based compensation programs. These limits, more fully described in the various HSBC Share Plans, were established by vote of HSBC's shareholders.

Perquisites

Our philosophy is to provide perquisites that are intended to help executives be more productive and efficient or to protect us and our executives from certain business risks and potential threats. Our review of competitive market data indicates that the perquisites provided to executives are reasonable and within market practice. Perquisites are generally not a significant component of compensation, except as described below.

Ms. Dorner and Messrs. Nolan and Gunton participated in general benefits available to executives of HSBC USA and certain additional benefits and perquisites available to executives on international assignments. Compensation packages for international assignees are modeled to be competitive globally and within the country of assignment and attractive to the executive in relation to the significant commitment that must be made in connection with a global posting. The additional benefits and perquisites may be significant when compared with other compensation received by other executive officers of HSBC USA and can consist of housing expenses, children's education costs, car allowances, travel expenses and tax equalization. These benefits and perquisites are, however, consistent with those paid to similarly-situated international assignees subject to appointment to HSBC Group locations globally and are deemed appropriate by the HSBC Group senior management. Perquisites are further described in the Summary Compensation Table.

Retirement Benefits

HSBC North America offered a qualified defined benefit pension plan under which HSBC USA executives could participate and receive a benefit equal to that provided to all eligible employees of HSBC USA with similar dates of hire. Effective January 1, 2013, this pension plan was frozen such that future contributions ceased under the Cash Balance formula, the plan closed to new participants and employees no longer accrue any future benefits.  HSBC North America also maintains a qualified defined contribution plan with a 401(k) feature and company matching contributions. Executives and certain other highly compensated employees can elect to participate in a non-qualified deferred compensation plan, in which such employees can elect to defer the receipt of earned compensation to a future date. HSBC USA does not pay any above-market or preferential interest in connection with deferred amounts. As international assignees, Ms. Dorner and Mr. Nolan are accruing pension benefits under foreign-based defined benefit plans.  Mr. Gunton, who also was an international assignee, accrued pension benefits under a foreign-based defined benefit plan until his termination of employment June 1, 2013.  Additional information concerning these plans is contained in the Pension Benefits Table.

Performance Year 2013 Compensation Actions

HSBC and HSBC USA aim to have a reward policy that adheres to the governance initiatives of all relevant regulatory bodies and appropriately considers the risks associated with elements of total compensation.

Levels of fixed pay were reviewed and management determined that in one instance an adjustment in fixed pay of a NEO is  warranted.  Effective March 3, 2014, Mr. Zeeman's fixed pay will be increased to $437,750 in conjunction with HSBC's annual pay review cycle.

Variable pay recommendations were driven by HSBC USA's financial performance in 2013 and are reflective of the continued progress HSBC USA has made in repositioning and transforming our business to ensure sustainable profitability and long-term growth.  On an IFRSs continuing operations basis, profit before tax improved in 2013 driven largely by lower operating expenses and lower loan impairment charges.  CMB reported lower profit before tax excluding the gain on sale of certain branches to First Niagara driven by higher loan impairment charges and higher operating expenses to support growth, partially offset by higher net interest income and higher other operating income.  For RBWM, excluding the gain on sale of certain branches to First Niagara, loss before tax improved primarily due to lower loan impairment charges and lower operating expenses, partially offset by higher other revenues.  PB reported lower profit before tax driven by higher operating expenses and higher loan impairment charges, partially offset by higher net interest income.  Excluding goodwill impairment, GB&M reported a higher profit before tax driven by higher other operating income and lower operating expenses, partially offset by lower net interest income.  We continue to believe the strength of our strategic objectives and the direction of our executive officers are united to support the HSBC Group's interests and that of HSBC's shareholders.  Variable pay awards for HSBC USA were approved to be awarded to all of the NEOs, with the exception of Mr. Gunton whose employment terminated June 1, 2013.

Variable pay awarded to most employees in respect of 2013 performance is subject to deferral requirements under the HSBC Group Minimum Deferral Policy, which requires 10% to 50% of variable pay be awarded in the form of RSUs for HSBC Holdings plc ordinary shares that are subject to a three year vesting period. The deferral percentage increases in relation to the amount of total variable pay awarded.

Some executives, however, are subject to a different set of deferral requirements because they are designated as Code Staff ("Code Staff"), as defined by the United Kingdom's Prudential Regulation Authority ("PRA") Remuneration Code ("the Code"). HSBC USA, as a subsidiary of HSBC, must have remuneration practices for executive officers that comply with the Code, which requires firms to identify Code Staff employees.  Code Staff are defined as all employees that have a material impact on the firm's risk profile, including individuals who perform significant influence functions for a firm, executives, senior managers, and risk takers, as defined by the Code.  Certain employees whose remuneration level is commensurate with Code Staff employees are also subject to the Code Staff deferral requirements.

Variable pay typically awarded to Code Staff in respect of 2013 performance is subject to different deferral rates than other employees under the HSBC Group Minimum Deferral Policy.  Variable pay awards in excess of $750,000 are subject to a 60% deferral rate and variable pay awards below $750,000 are subject to a 40% deferral rate. Deferral rates are applied to the total variable pay award (excluding the GPSP award amounts, if any, which are fully deferred).  The deferral amounts are split equally between deferred cash and deferred RSUs.  Thirty-three percent (33%) of the deferred cash and deferred RSUs vest on each of the first and second anniversaries of the grant date, and thirty-four percent (34%) on the third anniversary of the grant date.  RSUs are subject to an additional six-month retention period upon becoming vested, with provision made for the release of shares as required to meet associated income tax obligations.  At the end of the vesting period, deferred cash is credited with a notional rate of return equivalent to the annual dividend yield of HSBC Holdings plc shares over the period.  Amounts not deferred are also split equally between non-deferred cash and non-deferred share awards.  Non-deferred share awards granted are immediately vested, yet subject to a six-month retention period with a provision made for the release of shares as required to meet associated tax obligations.  Non-deferred cash awarded for 2013 performance will be paid on March 21, 2014.  Deferred cash, deferred RSUs, and non-deferred shares will be granted on March 10, 2014.

Ms. Dorner, Mr. Nolan and Mr. Ekert were identified as Code Staff during 2013.  The proportions of the total variable pay award split between GPSP, deferred cash, deferred share award, non-deferred cash and non-deferred share award are shown below.

•       Ms. Dorner's variable pay award for performance in 2013 is $2,603,672.  She received a GPSP award of $867,804. The deferred portion of her variable pay consists of $520,760 in deferred cash and $520,760 in deferred RSUs. Ms. Dorners's remaining variable pay is delivered in equal parts non-deferred cash ($347,174) and immediately-vested shares ($347,174).  During its meeting on January 15, 2014 REMCO exercised its discretion to reduce  Ms. Dorner's overall variable pay by 20% from the original proposal for 2013.  This adjustment, impacting total compensation,  was based on a review of the general regulatory and compliance environment for the HSBC Group in the United States, as well as the context of overall HSBC Group-wide financial performance, market benchmarking and the individual recommendations and adjustments for similarly situated executives within the HSBC Group.

•       Mr. Nolan's variable pay award for performance in 2013 is $2,212,880.  He received a GPSP award of $442,576.  The deferred portion of his variable pay consists of $531,091 in deferred cash and $531,091 in deferred RSUs. Mr. Nolan's remaining variable pay is delivered in equal parts non-deferred cash ($354,061) and immediately-vested shares ($354,061).  During its meeting on January 15, 2014 the REMCO exercised its discretion to reduce Mr. Nolan's overall variable pay by approximately 20% from the original proposal for 2013.  This adjustment, impacting total compensation, was based on a review of the general regulatory and compliance environment for the HSBC Group in the United States, as well as the context of overall HSBC Group-wide financial performance, market benchmarking and the individual recommendations and adjustments for similarly situated executives within the HSBC Group.

•       Mr. Ekert's variable pay award for performance year 2013 is $1,450,000.  The deferred portion of Mr. Ekert's variable pay award consists of $435,000 in deferred cash and $435,000 in deferred RSUs.  Mr. Ekert's remaining variable pay award is delivered in equal parts non-deferred cash ($290,000) and immediately-vested shares ($290,000).

Messrs. McGinnis and Zeeman are not recognized as Code Staff employees and are not subject to the deferral rates applicable only to Code Staff.  Under the HSBC Group Minimum Deferral Policy applicable to those not recognized as Code Staff, Messrs. McGinnis and Zeeman each will receive 40% and 35%, respectively, in RSUs as a percent of their total variable pay award for performance in 2013. Messrs. McGinnis and Zeeman did not receive GPSP awards.  Mr. Gunton did not receive variable pay in respect of 2013 performance due to his termination June 1, 2013.

The following table summarizes the compensation decisions made with respect to the NEOs for the 2012 and 2013 performance years.  The table below differs from the Summary Compensation Table because we determine equity award amounts after the performance year concludes, while SEC rules require that the Summary Compensation Table include equity compensation in the year granted. Also, the Summary Compensation Table includes changes in pension value and non-qualified deferred compensation earnings and other elements of compensation as part of total compensation and those amounts are not shown in the table below.

 


Fixed Pay(1)


Annual

Discretionary

Variable Cash(2)


Long-term Equity

Incentive Award(3)


Total Compensation


Year

over

Year

%

Change


2012


2013


2012


2013


2012


2013


2012


2013


Irene M. Dorner

Chairman, President and Chief Executive Officer

$

700,000



$

966,539



$

1,024,795



$

867,934



$

2,004,795



$

1,735,738



$

3,729,590



$

3,570,211



(4

)%

John T. McGinnis(8)

Senior Executive Vice President and Chief Financial Officer

$

500,000



$

500,000



$

558,000



$

558,000



$

372,000



$

372,000



$

1,430,000



$

1,430,000



-

%

Patrick M. Nolan

Senior Executive Vice President, Head of Global Banking and Markets Americas

$

500,000



$

500,000



$

1,267,125



$

885,152



$

1,267,125



$

1,327,728



$

3,034,250



$

2,712,880



(11

)%

Steven G. Ekert(4)(5)                         Senior Executive Vice President, Chief Risk Officer

N/A


$

363,846



N/A


$

725,000



N/A


$

725,000



N/A


$

1,813,846



N/A

Gregory T. Zeeman(6)            Senior Executive Vice President and Chief Operating Officer

N/A


$

425,000



N/A


$

438,750



N/A


$

236,250



N/A


$

1,100,000



N/A

C. Mark Gunton(7)

Senior Executive Vice President, Chief Risk Officer (former)

$

513,843



$

240,811



$

362,700



$

-



$

195,300



$

-



$

1,071,843



$

240,811



(78

)%

 


(1)        Ms. Dorner received a fixed pay increase from $700,000 to $1,000,000 effective February 1, 2013.

(2)        Annual Discretionary Variable Cash amount pertains to the performance year indicated and is paid in the first quarter of the subsequent calendar year. Amounts include cash and deferred cash.

(3)        Long-term Equity Incentive Award amount pertains to the performance year indicated and is typically awarded in the first quarter of the subsequent calendar year. For example, the Long-Term Equity Incentive Award indicated for 2013 is earned in performance year 2013 but will be granted in March 2014. However, as required in the Summary Compensation Table, the grant date fair market value of equity granted in March 2013 is disclosed for the 2013 fiscal year under the column of Stock Awards in that table.  The grant date fair value of equity granted in March 2014 will be disclosed for the under the column of Stock Awards in the Summary Compensation Table reported for the 2014 fiscal year.  Long-term Equity Incentive Award amount includes immediately-vested shares, deferred RSUs and GPSP awards.

(4)        In his role as Regional Chief Risk Officer, HSBC North America, Mr. Ekert has risk oversight over HSBC Finance Corporation, as well as HSBC USA.  Amounts discussed within the 2013 CD&A and the accompanying executive compensation tables represent the full compensation paid to Mr. Ekert for his role as Regional Chief Risk Officer for all three companies.

(5)        Mr. Ekert received two additional share awards May 31, 2013, with grant date values of $450,000 and $784,900, as reported in the Grants of Plan-Based Awards Table.

(6)        Mr. Zeeman received one additional share award April 30, 2013, with a grant date value of $750,000, as reported in the Grants of Plan-Based Awards Table.

(7)        In his role as Regional Chief Risk Officer, Mr. Gunton had oversight over HSBC North America, HSBC USA, as well as HSBC Finance Corporation.  Amounts discussed within the 2013 CD&A and also the accompanying executive compensation tables represent the full compensation paid to Mr. Gunton for his role as Regional Chief Risk Officer for all three companies.  Mr. Gunton is also disclosed as a NEO in the HSBC Finance Corporation Form 10-K for the year ended December 31, 2013.  Mr. Gunton's employment with the company terminated June 1, 2013.

(8)        Mr. McGinnis's employment with the company terminated January 4, 2014.  Mr. McGinnis remains eligible for a variable pay award of $930,000 in respect of the 2013 performance year.  Under the HSBC Holdings plc deferral guidelines, $558,000 will be paid in cash and $372,000 will be awarded as phantom shares.  The phantom shares and all other outstanding unvested equity awards will be forfeited due to Mr. McGinnis's voluntary resignation.

Compensation-Related Policies

Ex-Ante Adjustments to Variable Pay Award Recommendations

REMCO has the responsibility, power, authority and discretion to review and approve performance-based remuneration by reference to corporate goals and objectives.  Further, REMCO may seek advice from the Group Risk Committee, as appropriate, on whether any adjustments for risk need to be applied when considering performance objectives or actual performance.  Adjustments made to performance-based remuneration in advance of said remuneration actually being paid are commonly referred to as ex-ante adjustments.  Additionally, the HNAH Nominating and Governance Committee includes among its duties making recommendations concerning proposed performance assessments and discretionary variable pay compensation award proposals for the Chief Executive Officer, direct reports of the Chief Executive Officer and certain other Covered Employees.

Reduction or Cancellation of Deferred Cash and Long-Term Equity Incentive Awards, including "Malus"

REMCO has the discretion to reduce or cancel all unvested awards under HSBC share plans after January 1, 2010, including RSUs, deferred cash, and any accrued dividends on unvested awards. Circumstances that may prompt such action by REMCO include, but are not limited to: participant conduct considered to be detrimental or bringing the business into disrepute; evidence that past performance was materially worse than originally understood; prior financial statements are materially restated, corrected or amended; and evidence that the employee or the employee's business unit engaged in improper or inadequate risk analysis or failed to raise related concerns.

REMCO will assess the seriousness of the circumstances to determine the award reduction, up to a cancellation of the award. Factors considered in the assessment can include the degree of individual responsibility and the proximity of individuals to the event leading to a malus action; the magnitude or the financial impact of the event; the extent of the internal mechanisms failed; circumstances pointing to control weaknesses or poor performance; and whether the financial impact of the circumstances can be adequately covered by adjustments to the variable pay awards in the year in which the circumstance is discovered.  The awards that may be reduced are not limited to unvested awards granted in the year in which the malus event occurred, and all unvested awards are available for malus treatment.

Similarly, the HNAH Nominating and Governance Committee includes among its duties making recommendations for reducing or canceling discretionary variable pay compensation previously awarded for the Chief Executive Officer, direct reports of the Chief Executive Officer and certain other Covered Employees.

Additionally, all employees with unvested share awards or awards subject to a retention period will be required to certify annually that they have not used personal hedging strategies or remuneration contracts of insurance to mitigate the risk alignment of the unvested awards.

Employment Contracts and Severance Protection

There are no employment agreements between HSBC USA and the NEOs.

The HSBC-North America (U.S.) Severance Pay Plan and the HSBC-North America (U.S.) Supplemental Severance Pay Plan  provide any eligible employees with severance pay for a specified period of time in the event that his or her employment is involuntarily terminated for certain reasons, including displacement or lack of work or rearrangement of work. Regular U.S. full-time or part-time employees who are scheduled to work 20 or more hours per week are eligible. Employees are required to sign an employment release as a condition for receiving severance benefits. Benefit amounts differ according to position. However, the benefit is limited for all employees to a 52-week maximum.

Repricing of Stock Options and Timing of Option Grants

HSBC USA does not, and our ultimate parent, HSBC, does not, reprice stock option grants. In addition, neither HSBC USA, nor HSBC has ever engaged in the practice known as "back-dating" of stock option grants, nor have we attempted to time the granting of historical stock options in order to gain a lower exercise price.  For HSBC equity option plans, the exercise price of awards made in 2003 and 2004 was the higher of the average market value for HSBC ordinary shares on the five business days preceding the grant date or the market value on the date of the grant.

The HSBC Group also offers to all employees a stock purchase plan under its Sharesave Plan in which an employee  who commits to contributing up to 250 GBP each month for one, three or five years is awarded options to acquire HSBC ordinary shares. At the end of the term, the employee may opt to use the accumulated amount, plus interest, if any, to purchase shares under the option. The exercise price for each option is the average market value of HSBC ordinary shares on the five business days preceding the date of the invitation to participate, less a 15 to 20 percent discount (depending on the term).  The Sharesave Plan was discontinued in 2013.  Option contracts awarded in previous years remain outstanding and will be administered in accordance with Plan provisions.

Tax Considerations

Limitations on the deductibility of compensation paid to executive officers under Section 162(m) of the Internal Revenue Code are not applicable to HSBC USA, as it is not a public corporation as defined by Section 162(m). As such, all compensation to our executive officers is deductible for federal income tax purposes, unless there are excess golden parachute payments under Section 4999 of the Internal Revenue Code following a change in control.

Compensation Committee Interlocks and Insider Participation

As described in the 2013 CD&A, HSBC USA is subject to the remuneration policy established by REMCO and the delegations of authority with respect to executive officer compensation described above under "Oversight of Compensation Decisions."

Compensation Committee Report

HSBC USA does not have a Compensation Committee. While the HSBC North America Board of Directors and HSBC USA Board of Directors were presented with information on proposed compensation for performance in 2013, the final decisions regarding remuneration policies and executive officer awards were made by REMCO or by Mr. Gulliver, Ms. Dorner as well as the relevant heads of global business segments or heads of global staff functions where REMCO has delegated final decisions. We, the members of the Board of Directors of HSBC USA, have reviewed the 2013 CD&A and discussed it with management, and have been advised that management of HSBC has reviewed the 2013 CD&A and believes it accurately reflects the policies and practices applicable to HSBC USA executive compensation in 2013. HSBC USA senior management has advised us that they believe the 2013 CD&A should be included in this Annual Report on Form 10-K. Based upon the information available to us, we have no reason to believe that the 2013 CD&A should not be included in this Annual Report on Form 10-K and therefore recommend that it should be included.

Board of Directors of HSBC USA Inc.

Philip Ameen

Jeffrey A. Bader

Kevin M. Blakely

William R. P. Dalton

Anthea Disney

Irene M. Dorner

Robert K. Herdman

Richard A. Jalkut

Sam Minzberg

Nancy Mistretta

 

Executive Compensation

The following tables and narrative text discuss the compensation awarded to, earned by or paid as of December 31, 2013 to (i) Ms. Irene M. Dorner who served as HSBC USA's Chief Executive Officer, (ii) Mr. John T. McGinnis, who served as HSBC USA's Chief Financial Officer, (iii) the next three most highly compensated executive officers (other than the Chief Executive Officer and Chief Financial Officer) who were serving as executive officers as of December 31, 2013, and (iv) one additional former officer who would have been included in the three most highly compensated category except that he was not serving as an executive officer at the end of the last completed fiscal year.

Summary Compensation Table

 

Name and Principal

Position

Year


Salary(1)


Bonus(2)


Stock

Awards(3)


Option

Awards


Non-

Equity

Incentive

Plan

Compen-sation


Change in

Pension Value

and Non-

Qualified

Deferred

Compensation

Earnings(4)


All Other

Compensation(5)


Total

Irene M. Dorner

2013


$

966,539



$

867,934



$

2,004,795



$

-



$

-



$

-



$

1,131,386



$

4,970,654


Chairman, President and Chief Executive Officer

2012


$

700,000



$

1,024,795



$

1,350,000



$

-



$

-



$

827,156



$

637,439



$

4,539,390



2011


$

700,000



$

1,000,000



$

1,014,583



$

-



$

-



$

509,947



$

801,764



$

4,026,294


John T. McGinnis(9)

2013


$

500,000



$

558,000



$

372,000



$

-



$

-



$

67,815



$

65,300



$

1,563,115


Senior Executive Vice President and Chief Financial Officer

2012


$

500,000



$

558,000



$

340,000



$

-



$

-



$

48,255



$

65,000



$

1,511,255



2011


$

463,077



$

510,000



$

262,500



$

-



$

-



$

-



$

532,766



$

1,768,343


Patrick M. Nolan

2013


$

500,000



$

885,152



$

1,267,125



$

-



$

-



$

-



$

705,601



$

3,357,878


Senior Executive Vice President, Head of Global Banking and Markets Americas

2012


$

500,000



$

1,267,125



$

1,103,250



$

-



$

-



$

284,749



$

728,981



$

3,884,105



2011


$

500,000



$

1,103,250



$

1,165,750



$

-



$

-



$

281,560



$

411,325



$

3,461,885


Steven G. Ekert(6)(7)

2013


$

363,846



$

725,000



$

1,234,900



$

-



$

-



$

-



$

15,300



$

2,339,046


Senior Executive Vice President, Chief Risk Officer


















Gregory T. Zeeman(6)(7)

2013


$

425,000



$

438,750



$

929,025



$

-



$

-



$

-



$

222,863



$

2,015,638


Senior Executive Vice President and Chief Operating Officer


















C. Mark Gunton(6)(8)

2013


$

240,811



$

-



$

195,300



$

-



$

-



$

-



$

2,032,330



$

2,468,441


Senior Executive Vice President, Chief Risk Officer (former)

2012


$

513,843



$

362,700



$

240,450



$

-



$

-



$

860,445



$

813,436



$

2,790,874



2011


$

523,144



$

446,550



$

227,500



$

-



$

-



$

268,826



$

540,587



$

2,006,607


 


(1)        Ms. Dorner received a fixed pay increase from $700,000 to $1,000,000 effective February 1, 2013.

(2)        The amounts disclosed in 2013 are related to 2013 performance but were paid in March 2014. For Ms. Dorner and Messrs. Nolan and Ekert, the amounts include a portion granted in the form of deferred cash, as disclosed under the Performance Year 2013 Compensation Actions. Recipients will become fully entitled to the deferred cash over a three year vesting period.  At the end of the vesting period, the deferred cash will be credited with a notional rate of return equivalent to the annual dividend yield of HSBC ordinary shares over the period.

(3)        Reflects the aggregate grant date fair value of awards granted during the year.  Aggregate grant date fair value is determined by multiplying the number of shares awarded by the prior day closing price for HSBC ordinary shares and the applicable foreign exchange rate.  The grants are subject to various time vesting conditions as disclosed in the footnotes to the Outstanding Equity Awards at Fiscal Year End Table. Dividend equivalents, in the form of cash or additional shares, are paid on all underlying shares of restricted shares or restricted share units at the same rate as dividends paid on HSBC ordinary shares.

(4)        The HSBC - North America (U.S.) Pension Plan ("Pension Plan"), the HSBC - North America Non-Qualified Deferred Compensation Plan ("NQDCP"), the Household Supplemental Retirement Income Plan ("SRIP"), the HSBC Bank (UK) Pension Scheme - Defined Benefit Section ("DBS Scheme"), the Unfunded Unapproved Retirement Benefit Scheme ("UURBS"), and the HSBC International Retirement Benefits Scheme ("ISRBS") are described under Savings and Pension Plans.

Increase/(decrease) in values by plan for each participant are: Ms. Dorner - ($123,743)(DBS Scheme, Samuel Montagu Section), $97,893 (UURBS); Mr. McGinnis - $624 (Pension Plan), ($37) (SRIP), $67,228 (NQDCP); Mr. Nolan - ($79,887) (DBS Scheme, Midland Section); Mr. Zeeman ($70,168) (Pension Plan), ($78,920) (SRIP); Mr. Gunton - ($51,976) (ISRBS).  Amounts reflected for Messrs. McGinnis, Nolan and Gunton, respectively, for 2011 have been adjusted from the previously disclosed values.

(5)        Components of All Other Compensation are disclosed in the aggregate. All Other Compensation includes perquisites and other personal benefits received by each Named Executive Officer, such as executive physicals and expatriate benefits to the extent such perquisites and other personal benefits exceeding $10,000 in 2013. The value of perquisites provided to Mr. Ekert did not exceed $10,000.  The following itemizes perquisites and other benefits for each Named Executive Officer who received perquisites and other benefits in excess of $10,000: Fixed Pay Increase (paid in the form of a periodic allowance) for Mr. Nolan and Mr. McGinnis of $177,692 and $50,000, respectively; Executive Travel Allowances for Ms. Dorner and Messrs. Nolan and Gunton were $75,195, $75,127 and $129,152, respectively; Housing, Storage and Furniture Allowances for Ms. Dorner and Messrs. Nolan and Gunton were $5,824, $318,535 and $51,749, respectively; Residential Lease Payment and Associated Living Expenss for Ms. Dorner totaling $445,729; Residential Lease Payments on behalf of Mr. Zeeman totaling $120,000; Tax Gross Up on Ms. Dorner's residential lease payment and associated living expenses of $563,164 and Mr. Zeeman's residential lease payments of $75,718; Executive Physical and Medical Expenses for Ms. Dorner was $22,758; Tax Equalization resulted in net payments to Ms. Dorner and Messrs. Nolan, Zeeman, and Gunton of $13,610, $996, $2,943 and $636,439, respectively; Mortgage Subsidies for Mr. Gunton were $5,659; Children's Educational Allowances for Messrs. Nolan and Gunton  were $133,251 and $51,518, respectively; Separation Payments to Messrs. Gunton of $1,138,149.  Time-Off Program Buyback for Mr. Zeeman of $8,173; Car and Driver for Ms. Dorner and Messrs. Zeeman and Gunton of $5,070, $729 and $312, respectively;  Additional Compensation for Ms. Dorner was $36.

All Other Compensation also includes HSBC USA's contribution of $15,300 for Messrs. McGinnis's, Ekert's and Zeeman's participation in the HSBC - North America (U.S.) Tax Reduction Investment Plan ("TRIP") in 2013. In addition, Mr. Gunton had a company contribution in the HSBC International Retirement Benefit Plan ("IRBP") for International Managers in amount of $19,352.  The values of the respective company contributions in the IRBP for Mr. Gunton is calculated using an exchange rate from GBP to U.S. dollars of 1.6163.  IRBP is described under Savings and Pension Plans - Deferred Compensation Plans.

Amounts reflected for Ms. Dorner for 2011 have been adjusted from the previously disclosed values to include additional expenses for housing, inclusive of gross-ups for taxes.

(6)        Amounts shown for Messrs. Ekert, Zeeman and Gunton represent compensation earned in connection with their respective service to HSBC North America, HSBC Finance Corporation, and for HSBC USA.  Messrs. Ekert, Zeeman and Gunton are also disclosed as Named Executive Officers in the HSBC Finance Corporation Form 10-K for year ended 2013.

(7)        This table only reflects officers who were Named Executive Officers for the particular referenced years above. Messrs. Ekert and Zeeman were not Named Executive Officers prior to fiscal year 2013 so the table only reflects compensation for the current fiscal year.

(8)        Mr. Gunton's employment with the company terminated June 1, 2013.

(9)        Mr. McGinnis's employment with the company terminated January 4, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards Table

 




Estimated Future

Payouts Under Non-

Equity Incentive Plan

Awards


Estimated Future

Payouts Under Equity

Incentive Plan

Awards


All

Other

Stock

Awards:

Number

of

Shares

of Stock

or Units

(#)


All Other

Option

Awards:

Number of

Securities

Underlying

Options (#)


Exercise

or Base

Price of

Option

Awards

($/Sh)


Grant

Date

Fair

Value of

Stock

and

Option

Awards

($)

Name

Grant

Date


Thres-

hold

($)


Target

($)


Maxi-

mum

($)


Thres-

hold

(#)


Target

(#)


Maxi-

mum

(#)


Irene M. Dorner

3/11/2013

(1)













55,438







$

614,877


Chairman, President and Chief Executive Officer

3/11/2013

(3)













36,959







$

409,918



3/11/2013

(4)



$

614,877



















3/11/2013

(5)













88,359







$

980,000


John T.    McGinnis(11)

3/11/2013

(6)













33,540







$

372,000


Senior Executive Vice President and Chief Financial Officer






















Patrick M. Nolan

3/11/2013

(2)













68,548







$

760,275


Senior Executive Vice President, Head of Global Banking and Markets Americas

3/11/2013

(3)













45,698







$

506,850



3/11/2013

(4)



$

760,275


















Steven G. Ekert

5/31/2013

(8)













40,187







$

450,000


Senior Executive Vice President, Chief Risk Officer

5/31/2013

(9)













70,096







$

784,900
























Gregory T. Zeeman

3/11/2013

(6)













16,141







$

179,025


Senior Executive Vice President and Chief Operating Officer

4/30/2013

(7)



















$

750,000
























C. Mark Gunton(10)

3/11/2013

(6)













17,608







$

195,300


Senior Executive Vice President, Chief Risk Officer (former)






















 


(1)        Reflects an award of Restricted Share Units eligible to vest on the fifth anniversary of the Award Date provided there has been a satisfactory conclusion of the Deferred Prosecution Agreement dated 12 December 2012 with the US Department of Justice.  The total grant date fair value is based on 100% of the fair market value of the underlying HSBC ordinary shares on March 11, 2013 of GBP 7.37 and converted into U.S. dollars using the GBP exchange rate as of the date of grant which was 1.5049.

(2)        Reflects grant of RSUs, which vests thirty-three percent (33%) on the first and second anniversaries of the grant date and thirty-four percent (34%) on the third anniversary of the grant date. Upon vesting, RSUs are subject to an additional six-month retention period, with provision made for the release of shares as required to meet associated income tax obligations.  The total grant date fair value is based on 100% of the fair market value of the underlying HSBC ordinary shares on March 12, 2012 of GBP 5.569 and converted into U.S. dollars using the GBP exchange rate as of the date of grant which was 1.5816.

(3)        Reflects grant of immediately-vested shares, yet subject to an additional six-month retention period, with provision made for the release of shares as required to meet associated income tax obligations.  The total grant date fair value is based on 100% of the fair market value of the underlying HSBC ordinary shares on March 11, 2013 of GBP 7.37 and converted into U.S. dollars using the GBP exchange rate as of the date of grant which was 1.5049

(4)        Reflects grant of deferred cash, eligible to vest on the fifth anniversary of the Award Date provided there has been a satisfactory conclusion of the Deferred Prosecution Agreement dated 12 December 2012 with the US Department of Justice.  At the end of the vesting period, deferred cash is credited with a notional rate of return equal to the annual dividend yield of HSBC ordinary shares over the period.

(5)        Reflects grant of GPSP awards, which vests one-hundred percent (100%) on March 12, 2018. The total grant date fair value is based on 100% of the fair market value of the underlying HSBC ordinary shares on March 11, 2013 of GBP 7.37 and converted into U.S. dollars using the GBP exchange rate as of the date of grant which was 1.5049.

(6)        Reflects grant of RSUs, which vest thirty-three percent (33%) on the first and second anniversaries of the grant date and thirty-four percent (34%) on the third anniversary of the grant date. The total grant date fair value is based on 100% of the fair market value of the underlying HSBC ordinary shares on March 11, 2013 of GBP 7.37 and converted into U.S. dollars using the GBP exchange rate as of the date of grant which was 1.5049.

(7)        Reflects an award of Restricted Share Units eligible to vest on the third anniversary of the Award Date.  The award is subject to the satisfaction of certain performance conditions. Mr. Zeeman is required to maintain a performance rating of Strong or higher throughout the duration of the performance period and demonstrate behaviors aligned to the Group Values.  The total grant date fair value is based on 100% of the fair market value of the underlying HSBC ordinary shares on April 30, 2013 of GBP 7.04 and converted into U.S. dollars using the GBP exchange rate as of the date of grant which was 1.5494.

(8)        Reflects grant of RSUs, which vest thirty-three percent (33%) on April 30, 2014 and April 30, 2015 and thirty-four percent (34%) will vest on April 29, 2016.  The total grant date fair value is based on 100% of the fair market value of the underlying HSBC ordinary shares on May 31, 2013 of GBP 7.359 and converted into U.S. dollars using the GBP exchange rate as of the date of grant which was 1.5216.  Represents a new hire award to Mr. Ekert for the purpose of retaining his services and providing an appropriate level of realized pay during the vesting period.

(9)        Reflects grant of RSUs, which vest thirty-seven percent (37%) on March 31, 2014, twenty-nine percent (29%) on March 31, 2015, twenty-three percent (23%) on March 31, 2016 and eleven percent (11%) on March 31, 2017.  The total grant date fair value is based on 100% of the fair market value of the underlying HSBC ordinary shares on May 31, 2013 of GBP 7.359 and converted into U.S. dollars using the GBP exchange rate as of the date of grant which was 1.5216.  Mr. Ekert received this award to replace deferred compensation which was forfeited with his previous employer when he joined the HSBC Group.

(10)      Mr. Gunton's employment with the company terminated June 1, 2013.

(11)      Mr. McGinnis's employment with the company terminated January 4, 2014.

 

Outstanding Equity Awards At Fiscal Year-End Table

 


Option Awards


Stock Awards

Name

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable


Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable


Equity

Incentive

Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options (#)


Option

Exercise

Price


Option

Expiration

Date


Number

of

Shares

or Units

of Stock

That

Have

Not

Vested

(#)(1)


Market

Value of

Shares or

Units of

Stock that

Have Not

Vested

($)(2)


Equity

Incentive

Plan

Awards:

Number

of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

(#)


Equity

Incentive

Plan

Awards:

Market

or Payout

Value of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

($)

Irene M. Dorner











19,022


(3)

$208,293





Chairman, President and Chief Executive Officer











49,909


(4)

$546,510
















17,237


(5)

$188,747
















43,453


(7)

$475,816
















57,938


(8)

$634,429
















92,345


(9)

$1,011,190





John T. McGinnis(15)











9,625


(3)

$105,395





Senior Executive Vice President and Chief Financial Officer











28,283


(4)

$309,703
















35,053


(6)

$383,835





Patrick M. Nolan











25,648


(3)

$280,849





Senior Executive Vice President, Global Banking and Markets Americas











55,064


(4)

$602,958
















71,640


(6)

$784,468























Steven G. Ekert











71,399


(12)

$781,829





Senior Executive Vice President, Chief Risk Officer











40,934


(13)

$448,233























Gregory T. Zeeman











5,534


(3)

$60,598





Senior Executive Vice President and Chief Operating Officer











12,028


(4)

$131,708
















16,869


(6)

$184,718
















70,705


(10)

$774,229





C. Mark  Gunton(14)











8,341


(3)

$91,335





Senior Executive Vice President, Chief Risk Officer (former)











20,002


(4)

$219,025
















18,402


(6)

$201,504





 


(1)        Share amounts include additional awards accumulated over the vesting periods.

(2)        The HSBC ordinary shares market value of the shares on December 31, 2013 was GBP 6.624 and the exchange rate from GBP to U.S. dollars was 1.6531.

(3)        Thirty-three percent (33%) of this award vested on March 15, 2012, thirty-three percent (33%) vested on March 15, 2013, and thirty-four percent (34%) vests on March 17, 2014.

(4)        Thirty-three percent (33%) of this award vested on March 12, 2013, thirty-three percent (33%) vests on March 12, 2014, and thirty-four percent (34%) will vest on March 12, 2015.

(5)        This award will vest in full on March 15, 2016.

(6)        Thirty-three percent (33%) of this award vests on March 11, 2014, thirty-three percent (33%) will vest on March 11, 2015, and thirty-four percent (34%) will vest on March 11, 2016.

(7)        This award will vest in full on March 13, 2017.

(8)        This award of Restricted Share Units is eligible to vest March 11, 2018, provided there has been a satisfactory conclusion of the Deferred Prosecution Agreement dated December 12, 2012 with the U.S. Department of Justice.

(9)        This award will vest in full on March 12, 2018.

(10)      This award of Restricted Share Units is eligible to vest April 30, 2016, subject to the satisfaction of a condition linked to performance (the "Performance Condition").  The Performance Condition requires the attainment of individual performance targets.

(11)      This award fully vested April 30, 2009.

(12)      This award will vest thirty-seven percent (37%) on March 31, 2014, twenty-nine percent (29%) on March 31, 2015, twenty-three percent (23%) on March 31, 2016 and eleven percent (11%) on March 31, 2017.

(13)      This award will vest thirty-three percent (33%) on April 30, 2014 and April 30, 2015 and thirty-four percent (34%) will vest on April 29, 2016.

(14)      Mr. Gunton's employment with the company terminated June 1, 2013.

(15)      Mr. McGinnis's employment with the company terminated January 4, 2014.

 

 

Option Exercises and Stock Vested Table

 


Option Awards


Stock Awards

Name

Number of

Shares

Acquired on

Exercise (#)


Value

Realized

on Exercise

($)(1)


Number of

Shares

Acquired on

Vesting (#)


Value

Realized

on

Vesting($)(1)

Irene M. Dorner





96,678


(2)

$

1,058,815


Chairman, President and Chief Executive Officer








John T. McGinnis(9)





29,837


(3)

$

325,769


Senior Executive Vice President and Chief Financial Officer








Patrick M. Nolan





165,517


(4)

$

1,821,759


Senior Executive Vice President, Head of Global Banking and Markets Americas








Steven G. Ekert





-


(5)

$

-


Senior Executive Vice President, Chief Risk Officer








Gregory T. Zeeman





83,291


(6)

$

931,942


Senior Executive Vice President and Chief Operating Officer








C. Mark Gunton(8)





28,360


(7)

$

307,654


Senior Executive Vice President, Chief Risk Officer (former)








 


(1)        Value realized on exercise or vesting uses the GBP fair market value on the date of exercise or release and the exchange rate from GBP to USD on the date of settlement.

(2)        Includes the partial release of 47,494 shares granted on March 1, 2010, the partial release of 49,739 shares granted on March 15, 2011, the partial release of 68,120 shares granted on March 12, 2012, and the release of 36,959 shares granted on March 11, 2013.

(3)        Includes the partial release of 19,262 shares granted on March 1, 2010, the partial release of 25,169 shares granted on March 15, 2011, and the partial release of 38,601 shares granted on March 12, 2012.

(4)        Includes the partial release of 122,671 shares granted on March 1, 2010, the partial release of 67,066 shares granted on March 15, 2011, the partial release of 75,153 shares granted on March 12, 2012 and the release of 45,698 shares granted on March 11, 2013.

(5)        Mr. Ekert did not exercise options nor had any shares released in 2013.

(6)        Includes the partial release of 12,553 shares granted on March 1, 2010, the partial release of 14,470 shares granted on March 15, 2011, the release of 62,187 shares granted on September 30, 2011, and the partial release of 16,417 shares granted on March 12, 2012.

(7)        Includes the partial release of 28,894 shares granted on March 1, 2010, the partial release of 21,813 shares granted on March 15, 2011, and the partial release of 27,299 shares granted on March 12, 2012.

(8)        Mr. Gunton's employment with the company terminated June 1, 2013.

(9)        Mr. McGinnis's employment with the company terminated January 4, 2014.

Pension Benefits

 

Name

Plan Name(1)


Number of

Years

Credited

Service (#)


Present Value

of Accumulated

Benefit ($)


Payments

During Last

Fiscal Year ($)

Irene M. Dorner

DBS Scheme - Montagu


27.5



$

2,774,653


(2)

$

-


Chairman, President and Chief Executive Officer

UURBS


27.5



$

1,068,067



$

-


John T. McGinnis(4)

Pension Plan - Account


7.8



$

36,901



$

-


Senior Executive Vice President and Chief Financial Officer

Based                       SRIP


5.8



$

50,136



$

-


Patrick M. Nolan

DBS Scheme - Midland


26.3



$

896,450


(2)

$

-


Senior Executive Vice President, Head of Global Banking and Markets Americas

Post







Steven G. Ekert

N/A(3)







Senior Executive Vice President, Chief Risk Officer








Gregory T. Zeeman

Pension Plan-Household


13.4



$

265,957



$

-


Senior Executive Vice President and Chief Operating Officer

SRIP-Household


11.4



$

361,995



$

-


C. Mark Gunton(3)

ISRBS


35.0



$

4,374,109


(2)

$

-


Senior Executive Vice President, Chief Risk Officer (former)








 


(1)   Plan described under Savings and Pension Plans.

(2)   The amount was converted from GBP to USD using the exchange rate of 1.6531 as of December 31, 2013.

(3)        Mr. Ekert does not participate in a defined benefit pension plan.

(4)        Mr. McGinnis's employment with the company terminated January 4, 2014.

(5)        Mr. Gunton's employment with the company terminated June 1, 2013.

Savings and Pension Plans

Pension Plan

Pension Plan The HSBC - North America (U.S.) Pension Plan ("Pension Plan"), formerly known as the HSBC - North America (U.S.) Retirement Income Plan, is a non-contributory, defined benefit pension plan for employees of HSBC North America and its U.S. subsidiaries who are at least 21 years of age with one year of service and not part of a collective bargaining unit. Benefits are determined under a number of different formulas that differ based on year of hire and employer. As further described in Note 21, "Pension and Other Postretirement Benefits" in the accompanying consolidated financial statements, effective January 1, 2013, the Pension Plan was frozen such that future contributions will cease under Cash Balance formula and the Pension Plan closed to new participants and employees no longer accrue any future benefits under the Pension Plan.  Effective January 1, 2011, no benefits presently were earned under any of the legacy formulas of the Pension Plan. However, the Legacy Household Formula (New) was amended in 2011 to provide an Adjusted Benefit Formula to all participants who were actively employed by of HSBC North America and its U.S. subsidiaries at any time in 2011 and did not meet the requirements for early retirement eligibility upon their termination of employment. The Adjusted Benefit Formula accelerated the service proration component of the Legacy Household benefit calculation that previously would have occurred only upon satisfying the age and service requirements for early retirement eligibility.  This change was made to ensure full compliance with applicable regulations and eliminate the need to complete annual testing of early retirement benefits.

Supplemental Retirement Income Plan (SRIP)

The Supplemental HSBC Finance Corporation Retirement Income Plan ("SRIP") is a non-qualified defined benefit retirement plan that is designed to provide benefits that are precluded from being paid to legacy Household employees by the Pension Plan due to legal constraints applicable to all qualified plans. SRIP benefits are calculated without regard to these limits but are reduced effective January 1, 2008, for compensation deferred to the HSBC - North America Non-Qualified Deferred Compensation Plan ("NQDCP"). The resulting benefit is then reduced by the value of qualified benefits payable by the Pension Plan so that there is no duplication of payments. Benefits are paid in a lump sum to executives covered by a Household or Account Based Formula between July and December in the calendar year following the year of termination.  No additional benefits will accrue under SRIP after December 31, 2010.

Formula for Calculating Benefits

Legacy Household Formula (New): Applies to executives who were hired after December 31, 1989, but prior to January 1, 2000, by Household International, Inc. The normal retirement benefit at age 65 is the sum of (i) 51% of average salary that does not exceed the integration amount and (ii) 57% of average compensation in excess of the integration amount. For this purpose, compensation includes total fixed pay and cash variable (as earned); provided, effective January 1, 2008, compensation is reduced by any amount deferred under the NQDCP, and is averaged over the 48 highest consecutive months selected from the 120 consecutive months preceding date of retirement. The integration amount is an average of the Social Security taxable wage bases for the 35 year period ending with the year of retirement. The benefit is reduced pro-rata for executives who retire with less than 30 years of service. If an executive has more than 30 years of service, the percentages in the formula, (the 51% and 57%) are increased 1/24 of 1 percentage point for each month of service in excess of 30 years, but not more than 5 percentage points. Executives who are at least age 55 with 10 or more years of service may retire before age 65 in which case the benefit percentages (51% and 57%) are reduced.

Account Based Formula: Applies to executives who were hired by Household International, Inc. after December 31, 1999. It also applies to executives who were hired by HSBC Bank USA after December 31, 1996 and became participants in the Pension Plan on January 1, 2005, or were hired by HSBC after March 28, 2003. The formula provides for a notional account that accumulates 2% of annual fixed pay for each calendar year of employment. For this purpose, compensation includes total fixed pay and cash incentives (as paid) (effective January 1, 2008, compensation is reduced by any amount deferred under the NQDCP). At the end of each calendar year, interest is credited on the notional account using the value of the account at the beginning of the year. The interest rate is based on the lesser of average yields for 10-year and 30-year Treasury bonds during September of the preceding calendar year. The notional account is payable at termination of employment for any reason after three years of service although payment may be deferred to age 65.

Provisions Applicable to All Formulas:The amount of compensation used to determine benefits is subject to an annual maximum that varies by calendar year. The limit for 2013 is $255,000. The limit for years after 2013 will increase from time-to-time as specified by IRS regulations. Benefits are payable as a life annuity, or for married participants, a reduced life annuity with 50% continued to a surviving spouse. Participants (with spousal consent, if married) may choose from a variety of other optional forms of payment, which are all designed to be equivalent in value if paid over an average lifetime. Retired executives covered by a Household or Account Based Formula may elect a lump sum form of payment (spousal consent is required for married executives).

HSBC Bank (UK) Pension Scheme - Defined Benefit Section ("DBS Scheme")

The HSBC Bank (UK) Pension Scheme - Defined Benefit Section ("DBS") is a non-contributory, defined benefit pension plan for employees of HSBC Bank plc.  Benefits are determined under a number of different formulas that differ based on year of hire and employer.  The Samuel Montagu Section of the DBS was merged into the DBS on January 17, 2000, and applies to executives who were hired by Samuel Montagu & Co. Ltd. prior to January 16, 2000.  The normal retirement benefit at age 60 for members of the Executive section is 2/3rd of final pensionable fixed pay plus a one-time 3% increase under the terms of the agreement that transferred the assets and liabilities of the Samuel Montagu Pension Scheme to the HSBC Bank (UK) Pension Scheme - Defined Benefit Section.  For executives earning over GBP100,000 at retirement, final pensionable fixed pay is the average basic annual fixed pay over the last three years before retirement.  Executives who wish to retire before age 60 are eligible for an actuarially reduced benefit if they receive the consent of HSBC Bank (UK) and the DBS Trustee.  The Midland Section for Post 74 Joiners of the DBS applies to executives who were hired after December 31, 1974, but prior to July 1, 1996, by HSBC Bank plc. The normal retirement benefit at age 60 is 1/60th of final fixed pay multiplied by number of years and complete months of Midland Section membership plus pensionable service credits up to a maximum of 40, reduced by 1/80th of the single person's Basic State Pension for the 52 weeks prior to leaving pensionable service multiplied by number of years and complete months of Midland Section membership.  For this purpose, final fixed pay is the actual fixed pay paid during the final 12 months of service for those earning an annualized fixed pay that is less than or equal to GBP100,000 at the time of retirement and the average fixed pay for the last three years before retirement for those earning an annualized fixed pay that is greater than GBP100,000 at the time of retirement.  Executives who are at least age 50 may retire before age 60 in which case the retirement benefit is reduced actuarially.

Unapproved Unfunded Retirement Benefits Scheme ("UURBS")

Unapproved Unfunded Retirement Benefits Scheme ("UURBS") is an unfunded defined benefit plan that is designed to provide executives who opt out of their tax advantaged U.K. pension plan with aggregate benefits that are equivalent to the benefits the executive would have received if they had remained active participants in the relevant pension plan.  Benefits paid by the UURBS are not paid by a pension trust but are paid directly by the employer and are not subject to additional U.K. taxes on amounts in excess of the Lifetime Allowance, GBP1,500,000 for 2012-13.

HSBC International Retirement Benefits Scheme (Jersey) ("ISRBS")

The HSBC International Staff Retirement Benefits Scheme (Jersey) ("ISRBS") is a defined benefit plan maintained for certain international managers. Each member must contribute five percent of his fixed pay to the plan during his service, but each member who has completed 20 years of service or who enters the senior management or general management sections during his service shall contribute 6 2/3 percent of his salary. In addition, a member may make voluntary contributions, but the total of voluntary and mandatory contributions cannot exceed 15 percent of his total compensation. Upon leaving service, the value of the member's voluntary contribution fund, if any, shall be commuted for a retirement benefit.

The annual pension payable at normal retirement is 1/480 of the member's final fixed pay for each completed month in the executive section, 1.25/480 of his final fixed pay for each completed month in the senior management section, and 1.50/480 of his final fixed pay for each completed month in the general management section. A member's normal retirement date is the first day of the month coincident with or next following his 53rd birthday. Payments may be deferred or suspended but not beyond age 75.

If a member leaves before normal retirement with at least 15 years of service, he will receive a pension which is reduced by 0.25 percent for each complete month by which termination precedes normal retirement. If he terminates with at least 5 years of service, he will receive an immediate lump sum equivalent of his reduced pension.

If a member dies before age 53 while he is still accruing benefits in the ISRBS then both a lump sum and a widow's pension will be payable immediately.

The lump sum payable would be the cash sum equivalent of the member's Anticipated Pension, where the Anticipated Pension is the notional pension to which the member would have been entitled if he had continued in service until age 53, computed on the assumption that his final fixed pay remains unaltered. In addition, where applicable, the member's voluntary contributions fund will be paid as a lump sum.

In general, the widow's pension payable would be equal to one half of the member's Anticipated Pension. As well as this, where applicable, a children's allowance is payable on the death of the Member equal to 25% of the amount of the widow's pension.

If the member retires before age 53 on the grounds of infirmity he will be entitled to a pension as from the date of his leaving service equal to his Anticipated Pension, where Anticipated Pension has the same definition as in the previous section.

Present Value of Accumulated Benefits

For the Account Based formula: The value of the notional account balances currently available on December 31, 2013.

For other formulas: The present value of the benefit payable at assumed retirement using interest and mortality assumptions consistent with those used for financial reporting purposes under SFAS 87 with respect to the company's audited financial statements for the period ending December 31, 2013. However, no discount has been assumed for separation prior to retirement due to death, disability or termination of employment. Further, the amount of the benefit so valued is the portion of the benefit at assumed retirement that has accrued in proportion to service earned on December 31, 2013.

Deferred Compensation Plans

Tax Reduction Investment Plan HSBC North America maintains the HSBC - North America (U.S.) Tax Reduction Investment Plan ("TRIP"), which is a deferred profit-sharing and savings plan for its eligible employees. With certain exceptions, a U.S. employee who has been employed for 30 days and who is not part of a collective bargaining unit may contribute into TRIP, on a pre-tax and after-tax basis (after-tax contributions are limited to employees classified as non-highly compensated), up to 40 percent of the participant's cash compensation (subject to a maximum annual pre-tax contribution by a participant of $17,500 for 2013 (plus an additional $5,500 catch-up contribution for participants age 50 and over for 2013), as adjusted for cost of living increases, and certain other limitations imposed by the Internal Revenue Code) and invest such contributions in separate equity or income funds.

If the employee has been employed for at least one year, HSBC USA contributes three percent of compensation on behalf of each participant who contributes one percent and matches any additional participant contributions up to four percent of compensation. However, matching contributions will not exceed six percent of a participant's compensation if the participant contributes four percent or more of compensation. The plan provides for immediate vesting of all contributions. With certain exceptions, a participant's after-tax contributions that have not been matched by us can be withdrawn at any time. Both our matching contributions made prior to 1999 and the participant's after-tax contributions that have been matched may be withdrawn after five years of participation in the plan. A participant's pre-tax contributions and our matching contributions after 1998 may not be withdrawn except for an immediate financial hardship, upon termination of employment, or after attaining age 59 ½. Participants may borrow from their TRIP accounts under certain circumstances.

Supplemental Tax Reduction Investment Plan HSBC North America also maintains the Supplemental HSBC Finance Corporation Tax Reduction Investment Plan ("STRIP"), which is an unfunded plan for eligible employees of HSBC USA and its participating subsidiaries who are legacy Household employees and whose compensation exceeded limits imposed by the Internal Revenue Code. Beginning January 1, 2008, STRIP participants received a 6% contribution for such excess compensation, reduced by any amount deferred under the NQDCP, invested in STRIP through a credit to a bookkeeping account maintained by us which deems such contributions to be invested in equity or income funds selected by the participant.  Employer contributions to STRIP participants terminated after December 31, 2010.

Non-Qualified Deferred Compensation Plan HSBC North America maintains the NQDCP for the highly compensated employees in the organization, including executives of HSBC USA. Certain Named Executive Officers are eligible to contribute up to 80 percent of their fixed pay and/or cash variable pay in any plan year. Participants are required to make an irrevocable election with regard to the percentage of compensation to be deferred and the timing and manner of future payout. Two types of distributions are permitted under the plan, either a scheduled in-service withdrawal, which must be scheduled at least 2 years after the end of the plan year in which the deferral is made, or payment upon termination of employment.

For either the scheduled in-service withdrawal or payment upon termination, the participant may elect either a lump sum payment, or if the participant has over 10 years of service, installment payments over 10 years. Due to the unfunded nature of the plan, participant elections are deemed investments whose gains or losses are calculated by reference to actual earnings of the investment choices. In order to provide the participants with the maximum amount of protection under an unfunded plan, a Rabbi Trust has been established where the participant contributions are segregated from the general assets of HSBC USA. The Investment Committee for the plan endeavors to invest the contributions in a manner consistent with the participant's deemed elections reducing the likelihood of an underfunded plan.

HSBC International Retirement Benefit Plan ("IRBP") for International Managers The HSBC International Retirement Benefit Plan ("IRBP") is a defined contribution retirement savings plan maintained for certain international managers who have attained the maximum number of years of service for participation in other plans covering international managers, including the ISRBS.  Participants receive an employer paid contribution equal to 15% of fixed pay and may elect to contribute 2.5% of fixed pay as non-mandatory employee contributions, which contributions are matched by employer contributions.  Additionally, participants can make unlimited additional voluntary contributions of fixed pay.  The plan provides for participant direction of account balances in a wide range of investment funds and immediate vesting of all contributions.

Non-Qualified Defined Contribution and Other Non-Qualified Deferred Compensation Plans

 

Name

Executive

Contributions in

2013


Employer

Contributions

in 2013(3)


Aggregate

Earnings

in 2013(4)


Aggregate

Withdrawals/

Distributions

in 2013


Aggregate

Balance at

12/31/2013(5)

Irene M. Dorner

N/A


N/A


N/A


N/A


N/A

Chairman, President and Chief Executive Officer










John T. McGinnis(7)

$

63,480


(1)

$

-



$

67,228



$

-



$

467,015


Senior Executive Vice President and Chief Financial Officer

-



$

-



32,246



-



151,657


Patrick M. Nolan

N/A


N/A


N/A


N/A


N/A

Senior Executive Vice President, Head of Global Banking and Markets Americas










Steven G. Ekert

N/A


N/A


N/A


N/A


N/A

Senior Executive Vice President, Chief Risk Officer










Gregory T. Zeeman

$

-



$

-



$

70,118



$

-



$

293,073


Senior Executive Vice President and Chief Operating Officer










C. Mark Gunton(6)

$

13,823


(2)

$

19,352



$

26,542



$

-



$

317,824


Senior Executive Vice President, Chief Risk Officer (former)










 


(1)        For Mr. McGinnis, amount reflects contributions under the HSBC-North America Non-Qualified Deferred Compensation Plan ("NQDCP").  Mr. McGinnis' elective deferrals into the NQDCP during 2013 consist of $30,000 of the 2013 fixed pay disclosed in the Summary Compensation Table and $33,480 of the 2012 cash variable pay disclosed in the Summary Compensation Table.

(2)        For Mr. Gunton the amount reflects contributions under the International Retirement Benefit Plan ("IRBP") for International Managers, converted from GBP to USD using the exchange rate of 1.6531 as of December 31, 2013. Both the NQDCP and the IRBP for International Managers are described under Savings and Pension Plans.

(3)        For Mr. Gunton the amount reflects contributions under the IRBP for International Managers, converted from GBP to USD using the exchange rate of 1.6531 as of December 31, 2013.

(4)        Aggregate earnings reflect market-based investment experience credited to participant accounts.

(5)        For Mr. McGinnis the aggregate balance includes his balance under the Supplemental HSBC Finance Corporation Tax Reduction Investment Plan ("STRIP") ($151,657), which is described under Savings and Pensions Plans, as well his balance under the NQDCP ($467,015).  For Mr. Zeeman the aggregate balance reflects his balance under the STRIP.  For Mr. Gunton the aggregate balance reflects his balance under the IRBP.

(6)        Mr. Gunton's employment with the company terminated June 1, 2013.

(7)        Mr. McGinnis's employment with the company terminated January 4, 2014.

 

Potential Payments Upon Termination Or Change-In-Control

The following tables describe the payments that HSBC USA would be required to make as of December 31, 2013 to Ms. Dorner and Messrs. McGinnis, Nolan, Ekert, Zeeman and Gunton as a result of termination, retirement, disability or death or a change in control of the company as of that date. These amounts shown are in addition to those generally available to salaried employees, such as disability benefits and accrued vacation pay, or are specific to the Named Executive Officers, such as the amounts under the HSBC - North America (U.S.) Severance Pay Plan which is dependent on an employee's fixed pay. The specific circumstances that would trigger such payments are identified, and the terms of such payments are defined under the HSBC - North America (U.S.) Severance Pay Plan and the particular terms of deferred cash awards and long-term equity incentive awards.  As indicated in the 2013 CD&A, there are no employment agreements between HSBC USA and the Named Executive Officers.

Irene M. Dorner

 

Executive Benefits

and Payments

Upon Termination

Voluntary

Termination

Disability


Normal

Retirement


Involuntary

Not for Cause

Termination


For Cause

Termination

Voluntary for

Good Reason

Termination


Death


Change in

Control

Termination


Fixed Pay















Restricted Stock/Units


$

3,064,986


(1)

$

3,064,986


(1)

$

3,064,986


(1)


$

3,064,986


(1)

$

3,064,986


(1)

$

3,064,986


(1)

Deferred Cash


$

1,193,252


(2)

$

1,193,252


(2)

$

1,193,252


(2)


$

1,193,252


(2)

$

1,193,252


(2)

$

1,193,252


(2)

 


(1)        This amount represents a full vesting of the outstanding restricted shares and/or restricted share units assuming "good leaver" status is granted by REMCO and a termination date of December 31, 2013, and the amount is calculated using the closing price of HSBC ordinary shares and exchange rate on December 31, 2013.

(2)        This amount represents a full vesting of the outstanding deferred cash assuming "good leaver" status is granted by REMCO and a termination date of December 31, 2013.

John T. McGinnis(3)

 

Executive Benefits

and Payments

Upon Termination

Voluntary

Termination

Disability


Normal

Retirement


Involuntary

Not for

Cause

Termination


For Cause

Termination

Voluntary

for

Good

Reason

Termination


Death


Change in

Control

Termination


Fixed Pay






$

153,846


(1)








Restricted Stock/Units


$

798,933


(2

)

$

798,933


(2

)

$

798,933


(2)


$

798,933


(2

)

$

798,933


(2

)

$

798,933


(2

)

 

 


(1)        Under the terms of the HSBC - North America (U.S.) Severance Pay Plan, Mr. McGinnis would receive 16 weeks of his current fixed pay upon separation from the company.

(2)        This amount represents a full vesting of the outstanding restricted shares and/or restricted share units assuming "good leaver" status is granted by REMCO and a termination date of December 31, 2013, and the amount is calculated using the closing price of HSBC ordinary shares and exchange rate on December 31, 2013.

(3)        Mr. McGinnis's employment with the company terminated January 4, 2014.

Patrick M. Nolan

 

 

 

Executive Benefits

and Payments

Upon Termination

Voluntary

Termination

Disability


Normal

Retirement


Involuntary

Not for Cause

Termination


For Cause

Termination

Voluntary for

Good Reason

Termination


Death


Change in

Control

Termination


Fixed Pay















Restricted Stock/Units


$

1,668,275


(1

)

$

1,668,275


(1

)

$

1,668,275


(1

)


$

1,668,275


(1

)

$

1,668,275


(1

)

$

1,668,275


(1

)

Deferred Cash


$

1,441,595


(2

)

$

1,441,595


(2

)

$

1,441,595


(2

)


$

1,441,595


(2

)

$

1,441,595


(2

)

$

1,441,595


(2

)

 


(1)        This amount represents a full vesting of the outstanding restricted shares and/or restricted share units assuming "good leaver" status is granted by REMCO and a termination date of December 31, 2013, and the amount is calculated using the closing price of HSBC ordinary shares and exchange rate on December 31, 2013.

(2)        This amount represents a full vesting of the outstanding deferred cash assuming "good leaver" status is granted by REMCO and a termination date of December 31, 2013.

 

Steven G. Ekert

Executive Benefits

and Payments

Upon Termination

Voluntary

Termination

Disability


Normal

Retirement


Involuntary

Not for Cause

Termination


For Cause

Termination

Voluntary for

Good Reason

Termination


Death


Change in

Control

Termination


Fixed Pay






$

169,231


(1

)








Restricted Stock/Units


$

313,886


(2

)

$

313,886


(2

)

$

313,886


(2

)


$

313,886


(2

)

$

313,886


(2

)

$

313,886


(2

)

 


(1)       Under the terms of the HSBC - North America (U.S.) Severance Pay Plan, Mr. Ekert would receive 16 weeks of his current fixed pay upon separation from the company.

(2)       This amount represents a full vesting of the outstanding restricted share units assuming "good leaver" status is granted by REMCO and a termination date of December 31, 2013, and is calculated using the closing price of HSBC ordinary shares and exchange rate on December 31, 2013.

 

 

Gregory T. Zeeman 

 

Executive Benefits

and Payments

Upon Termination

Voluntary

Termination

Disability


Normal

Retirement


Involuntary

Not for Cause

Termination


For Cause

Termination

Voluntary for

Good Reason

Termination


Death


Change in

Control

Termination


Fixed Pay






$

228,846


(1

)








Restricted Stock/Units


$

549,073


(3

)

$

549,073


(3

)

$

549,073


(3

)


$

549,073


(3

)

$

1,151,253


(2

)

$

549,073


(3

)

 


(1)        Under the terms of the HSBC - North America (U.S.) Severance Pay Plan, Mr. Zeeman would receive 28 weeks of his current fixed pay upon separation from the company.

(2)        This amount represents a full vesting of the outstanding time-based and performance-based vesting restricted share units assuming "good leaver" status is granted by REMCO and a termination date of December 31, 2013, and the amount is calculated using the closing price of HSBC ordinary shares and exchange rate on December 31, 2013.

(3)        This amount represents a full vesting of the outstanding time-based vesting restricted share units and pro-rata vesting of the outstanding performance-based vesting restricted share units assuming "good leaver" status is granted by REMCO and a termination date of December 31, 2013, and the amount is calculated using the closing price of HSBC ordinary shares and exchange rate on December 31, 2013.

 

 

C. Mark Gunton

 

Executive Benefits

and Payments

Upon Termination

Voluntary

Termination

Disability


Normal

Retirement


Involuntary

Not for Cause

Termination


For Cause

Termination

Voluntary for

Good Reason

Termination


Death


Change in

Control

Termination


Special Termination Agreement






$

1,138,149


(1

)








Restricted Stock/Units






$

506,569


(2

)








 


(1)        Mr. Gunton's employment with the company terminated June 1, 2013.  This amount represents consideration for entering into a special termination agreement  upon separation from service.

(2)        This amount represents the aggregate fair market value of outstanding restricted shares and/or restricted share units, calculated using the closing price of HSBC ordinary shares and exchange rate on June 1, 2013.

 

Director Compensation

The following tables and narrative footnotes discuss the compensation earned by our Non-Executive Directors in 2013. As an Executive Director, Ms. Dorner does not receive any additional compensation for her service on the Board of Directors.

The table below outlines the annual compensation program for Non-Executive Directors for 2013.  Amounts are pro-rated based on dates of service for newly appointed Non-Executive Directors.

Annualized Compensation Rates for Non-Executive Directors

Related to Service on the Board of Directors and Committees for HSBC USA and HSBC North America

 

 

Board Retainer



HSBC North America


$

105,000


HSBC USA


$

105,000


Audit Committee



Audit Committee Chair for HSBC North America, HSBC USA and HSBC Finance Corporation


$

80,000


Audit Committee Member for HSBC North America and HSBC USA


$

20,000


Risk Committee



Risk Committee Chair for HSBC North America, HSBC USA and HSBC Finance Corporation


$

80,000


Risk Committee Member for HSBC North America and HSBC USA


$

20,000


Fiduciary Committee



HSBC USA Co-Chair


$

10,000


Compliance Committee



Compliance Committee Chair for HSBC North America and HSBC USA


$

80,000


Compliance Committee Member for HSBC North America and HSBC USA


$

50,000


Nominating and Governance Committee



Nominating Committee Chair for HSBC North America and HSBC USA


$

40,000


Nominating Committee Member for HSBC North America and HSBC USA


$

20,000


The 2013 total compensation of our Non-Executive Directors in their capacities as directors of HSBC North America and HSBC USA, and in the case of Messrs. Ameen, Herdman and Minzberg, also as directors of HSBC Finance Corporation, is shown in the following table:

 

Name


Fees Earned or

Paid inCash

($)(1)


Stock

Awards

($)(2)


Option

Awards

($)(2)


Change in

Pension Value

And

Non-Qualified

Deferred

Compensation

Earnings ($)(3)


All Other

Compensation

($)(4)


Total

($)

Philip Ameen


$

347,917



$

-



$

-



$

98,347



$

182



$

446,446


Jeffrey A. Bader


$

280,000



$

-



$

-



$

5



$

1,870



$

281,875


Kevin M. Blakely


$

23,333



$

-



$

-



$

-



$

-



$

23,333


William R.P. Dalton


$

255,000



$

-



$

-



$

-



$

1,870



$

256,870


Anthea Disney


$

320,000



$

-



$

-



$

301,171



$

1,870



$

623,041


Robert K. Herdman


$

735,000



$

-



$

-



$

-



$

182



$

735,182


Louis Hernandez, Jr.


$

130,000



$

-



$

-



$

-



$

-



$

130,000


Richard A. Jalkut


$

320,000



$

-



$

-



$

-



$

1,870



$

321,870


Samuel Minzberg


$

265,000



$

-



$

-



$

-



$

1,870



$

266,870


Nancy Mistretta


$

300,000



$

-



$

-



$

-



$

1,870



$

301,870


 


(1)        Represents aggregate compensation for service on Board of Directors and Committees of HSBC North America, HSBC USA and, in the case of Messrs. Ameen, Herdman and Minzberg, HSBC Finance Corporation.

Fees paid to Mr. Ameen include the following amounts for 2013:  $105,000 annual cash retainer for membership on each of the HSBC North America and HSBC Finance Corporation boards, and $61,250 annual cash retainer for membership on the HSBC USA board; $18,889 for membership and serving as Chair of the HSBC North America Audit Committee, $22,222 for membership and serving as Chair of the HSBC Finance Corporation Audit Committee, and $15,556 for membership and serving as Chair of the HSBC USA Audit Committee;  $6,667 for membership on the HSBC North America Risk Committee, and $13,333 for membership on the HSBC Finance Corporation Risk Committee.

Fees paid to Mr. Bader include the following amounts for 2013: $105,000 annual cash retainer for membership on each of the HSBC North America and HSBC USA boards; $16,667 for membership on the HSBC North America Compliance Committee, and $33,333 for membership on the HSBC USA Compliance Committee; $6,667 for membership on the HSBC North America Risk Committee, and $13,333 for membership on the HSBC USA Risk Committee.

Fees paid to Mr. Blakely include the following amounts for 2013:  $8,750 annual cash retainer for membership on each of the HSBC North America and HSBC USA boards; $1,389 for membership on the HSBC North America Compliance Committee, $2,777 for membership on the HSBC USA Compliance Committee; $556 for membership on the HSBC North America Risk Committee, $1,111 for membership on the HSBC USA Risk Committee.

Fees paid to Mr. Dalton include the following amounts for 2013: $105,000 annual cash retainer for membership on each of the HSBC North America and HSBC USA boards; $6,667 for membership on the HSBC North America Audit Committee, and $13,333 for membership on the HSBC USA Audit Committee; $6,667 for membership on the HSBC North America Risk Committee, and $13,333 for membership on the HSBC USA Risk Committee; $5,000 for serving as Co-Chair of the HSBC USA Fiduciary Committee.

Fees paid to Ms. Disney include the following amounts for 2013: $105,000 as part of annual cash retainer for membership on the HSBC North America and HSBC USA boards; $16,667 for membership on the HSBC North America Compliance Committee, $33,333 for membership on the HSBC USA Compliance Committee; $40,000 for serving as Chair of the Nominating Committee for HSBC North America; $6,667 for membership on the HSBC North America Risk Committee, and $13,333 for membership on the HSBC USA Risk Committee.

Fees paid to Mr. Herdman include the following amounts for 2013:  $300,000 for serving as Interim Chair of the HSBC North America board; $105,000 annual cash retainer for membership on each of the HSBC North America, HSBC Finance Corporation and HSBC USA boards; $13,333 for serving as Chair of each of the Audit Committees of HSBC North America, HSBC Finance Corporation and HSBC USA until May 2013; and $26,667 for serving as Chair of each of the Risk Committees of HSBC North America, HSBC Finance Corporation and HSBC USA.

Fees paid to Mr. Hernandez include the following amounts for 2013: $52,500 annual cash retainer for membership on each of the HSBC North America and HSBC USA boards; $5,000 for serving as Co-Chair of the HSBC USA Fiduciary Committee; $3,333 for membership on the HSBC North America Audit Committee, and $6,667 for membership on the HSBC USA Audit Committee; $3,333 for membership on the HSBC North America Risk Committee, and $6,667 for membership on the HSBC USA Risk Committee.  Mr. Hernandez left the Board June 30, 2013.

Fees paid to Mr. Jalkut include the following amounts for 2013: $105,000 annual cash retainer for membership on each of the HSBC North America and HSBC USA boards; $10,000 for serving as Co-Chair of the HSBC USA Fiduciary Committee; $26,667 for serving as Chair of the Compliance Committee for HSBC North America, and $53,333 for serving as Chair of the Compliance Committee for HSBC USA; $6,667 for membership on the HSBC North America Risk Committee, and $13,333 for membership on the HSBC USA Risk Committee.

Fees paid to Mr. Minzberg include the following amounts for 2013:  $105,000 annual cash retainer for membership on the HSBC North America board, $26,250 annual cash retainer for membership on the HSBC Finance Corporation board, and $78,750 annual cash retainer for membership on the HSBC USA board; $6,667 for membership on the HSBC North America Audit Committee, $3,333 for membership on the HSBC Finance Corporation Audit Committee, and $10,000 for membership on the HSBC USA Audit Committee; $6,667 for membership on the HSBC North America Risk Committee,  $3,333 for membership on the HSBC Finance Corporation Risk Committee, and $10,000 for membership on the HSBC USA Risk Committee.

Fees paid to Ms. Mistretta include the following amounts for 2013: $105,000 annual cash retainer for membership on each of the HSBC North America and HSBC USA boards; $16,667 for membership on the Compliance Committee for HSBC North America, and $33,333 for serving as Chair of the Compliance Committee for HSBC USA; $20,000 for membership on the Nominating Committee for HSBC North America; $6,667 for membership on the HSBC North America Risk Committee, and $13,333 for membership on the HSBC USA Risk Committee.

(2)        HSBC USA does not grant stock awards or stock options to its Non-Executive Directors

(3)        The HSBC USA Director Retirement Plan covers Non-Executive Directors elected prior to 1998. As an eligible Non-Executive Director with at least five years of service, Mr. Jalkut is eligible for the maximum retirement benefit upon the conclusion of his service on the Board. Mr. Jalkut will receive quarterly retirement benefit payments commencing at the later of age 65 or retirement from the Board, and continuing for ten years. Because he has completed at least 15 years of service, the annual amount of the retirement benefit he will receive is the annual retainer in effect at the time of the last Board meeting Mr. Jalkut will attend. If Mr. Jalkut should die, his beneficiary will receive a death benefit calculated as if Mr. Jalkut had retired on the date of death. If Mr. Jalkut is retired and dies before receiving retirement benefit payments for the ten year period, the balance of the payments will be continued to his beneficiary. The plan is unfunded and payment will be made out of the general funds of HSBC USA or HSBC Bank USA. Non-Executive Directors elected prior to 1999 may elect to participate in the HSBC USA/HBUS Plan for Deferral of Directors' Fees. Under this plan, they may elect to defer receipt of all or a part of their retainer. The deferred retainers accrue interest on a quarterly basis at the one year Employee Extra CD rate in effect on the first business day of each quarter. Upon retirement from the Board, the deferrals plus interest are paid to the Director in quarterly or annual installments over a five or ten year period. No eligible Director elected to defer receipt of their 2013 retainer into the HSBC USA/HBUS Plan for Deferral of Directors' Fees.

The HSBC North America Directors Non-Qualified Deferred Compensation Plan allows Non-Executive Directors to elect to defer their cash fees in any plan year.  Directors have the ability to defer up to 100% of their annual retainers and/or fees into the HSBC-North America Directors Non-Qualified Deferred Compensation Plan. Under this plan, pre-tax dollars may be deferred with the choice of receiving payouts while still serving on the Board of HSBC USA according to a schedule established by the Director at the time of deferral or a distribution after leaving the Board in either lump sum or quarterly installments. Amounts shown for Mr. Ameen, Mr. Bader and Ms. Disney reflect the gains or losses calculated by reference to the actual earnings of the investment choices.

(4)        Components of All Other Compensation are disclosed in aggregate. Non-Executive Directors are offered, on terms that are not more favorable than those available to the general public, a MasterCard/Visa credit card issued by one of our subsidiaries with a credit limit of $15,000. HSBC USA guarantees the repayment of amounts charged on each card. We provide each Director with $250,000 of accidental death and dismemberment insurance for which the company paid a premium of $181 per annum for each participating Director and a $10,000,000 personal excess liability insurance policy for which the company paid premium of $1,689 per annum for each participating Director.  Mr. Ameen and Mr. Herdman declined the personal excess liability insurance policy; the amount shown pertains to the annual premium for AD&D insurance exclusively.

Under HSBC's Matching Gift Program, for all Non-Executive Directors who were members of the Board in 2006 and continue to be on the Board, we match charitable gifts to qualified organizations (subject to a maximum of $10,000 per year), including eligible non-profit organizations which promote neighborhood revitalization or economic development for low and moderate income populations, with a double match for the first $500 donated to higher education institutions (both public and private).  Additionally, each current Non-Executive Director, who was a member of the HSBC Finance Corporation Board in 2006 and continues to be on the HSBC USA Board, may ask us to contribute up to $10,000 annually to charities of the Director's choice which qualify under our philanthropic program.  We made charitable donations of $10,000 under the Matching Gift Program at Ms. Disney's request and $10,500 under the Matching Gift Program at Mr. Jalkut's request.

 

Compensation Policies and Practices Related to Risk Management

Most HSBC USA employees are eligible for some form of incentive compensation; however, those who actually receive payments are a subset of eligible employees, based on positions held and individual and business performance.  Employees in direct sales environments participate in either the annual discretionary variable pay plan, the primary incentive compensation plan for all employees, or in quarterly and annual discretionary business incentive plans.  Specific groups of employees who are typically involved in servicing environments participate in formulaic plans.

A key feature of our remuneration policy is that it is risk informed, seeking to ensure that risk-adjusted returns on capital are factored into the determination of annual variable pay and that variable pay pools are calculated only after appropriate risk-adjusted return has accrued on shareholders' capital. We apply Economic Profit (defined as the average annual difference between return on invested capital and HSBC's benchmark cost of capital) and other metrics to develop variable pay levels and target a 12% to 15% return on shareholder equity. These requirements are built into the performance scorecard of the senior HSBC executives and are incorporated in regional and business scorecards in an aligned manner, thereby ensuring that return, risk, and efficient capital usage shape reward considerations. The HSBC Group Chief Risk Officer and the Global Risk Function of HSBC provide input into the performance scorecard, ensuring that key risk measures are included.

The use of a performance scorecard framework ensures an aligned set of objectives and impacts the level of individual pay received, as achievement of objectives is considered when determining the level of variable pay awarded under the annual discretionary cash award plan. On a performance scorecard, objectives are separated into two categories: financial and non-financial. Financial objectives, as well as other objectives relating to efficiency and risk mitigation, customer development and the productivity of human capital are all measures of performance that may influence reward levels. Overall performance under both scorecards is also judged on adherence to the HSBC Group values principles of being 'open, connected and dependable' and acting with 'courageous integrity.'

In 2010, building upon the combined strengths of our performance scorecard and risk management processes, outside consultants were engaged to assist in the development of a formal incentive compensation risk management framework. Commencing with the 2011 objectives-setting process, standard risk performance measures and targets were established and monitored for employees who were identified as having the potential to expose the organization to material risks, or who are responsible for controlling those risks.

The Nominating and Governance Committee of HSBC North America and the Compensation and Performance Management Governance Committee ("CPMG Committee") have been established, which among other duties, have oversight for objectives-setting and risk monitoring.  The Nominating and Governance Committee of HSBC North America has oversight and endorsement of certain compensation matters. As part of its duties, the Nominating and Governance Committee oversees the framework for assessing risk in the responsibilities of employees, the determination of who are Covered Employees ("Covered Employees") under the Interagency Guidelines on Incentive Based Compensation Arrangements as published by the Federal Reserve Board, and the measures used to ensure that risk is appropriately considered in making variable pay recommendations. The Nominating and Governance Committee also can make recommendations concerning proposed performance assessments and incentive compensation award proposals for the Chief Executive Officer, direct reports of the Chief Executive Officer and certain other Covered Employees, including any recommendations for reducing or canceling incentive compensation previously awarded. The recommendations related to employee compensation are incorporated into the submissions to the HSBC Holdings plc Remuneration Committee ("REMCO") of the Board of Directors of HSBC, or to Mr. Gulliver and Ms. Dorner, in instances where REMCO has delegated remuneration authority.

In 2010, HSBC North America established the CPMG Committee. The CPMG Committee was created to provide a more systematic approach to incentive compensation governance and to ensure the involvement of the appropriate levels of leadership, while providing a comprehensive view of compensation practices and associated risks. The CPMG Committee comprises senior executive representatives from HSBC North America's staff and control functions, consisting of Risk, Compliance, Legal, Finance, Audit, Human Resources and Company Secretary. The CPMG Committee has responsibility for oversight of the compensation framework for Covered Employees; compensation-related regulatory and audit findings and recommendations related to such findings; incentive plan review; review of guaranteed bonuses and buyouts of bonuses and equity grants, including any exceptions to established policies; and recommendation to REMCO of malus actions pertaining to previous grants of incentive compensation based on actual results and risk outcomes. Additionally, compensation processes for employees are evaluated by the CPMG Committee to ensure adequate controls are in place, while reinforcing the distinct performance expectations for employees. The CPMG Committee can make its recommendations to the Nominating and Governance Committee, REMCO, Mr. Gulliver, or Ms. Dorner, depending on the nature of the recommendation or the delegation of authority for making final decisions.

Incentive compensation awards are subject to controls established under a comprehensive risk management framework that provides the necessary controls, limits, and approvals for risk taking initiatives on a day-to-day basis ("Risk Management Framework"). Business management cannot bypass these risk controls to achieve scorecard targets or performance measures. As such, the Risk Management Framework is the foundation for ensuring excessive risk taking is avoided. The Risk Management Framework is governed by a defined risk committee structure, which oversees the development, implementation, and monitoring of the risk appetite process for HSBC USA. Risk Appetite is set by the Board of HSBC.  A risk appetite for U.S. operations is annually reviewed and approved by the HSBC North America Risk Management Committee and the HSBC North America Board of Directors.

Risk Adjustment of Incentive Compensation

HSBC USA uses a number of techniques to ensure that the amount of incentive compensation received by an employee appropriately reflects risk and risk outcomes, including risk adjustment of awards, deferral of payment, appropriate performance periods, and reducing sensitivity to short-term performance. The techniques used differ depending on whether the incentive compensation is paid under the general discretionary cash award plan, discretionary business incentive plan, or a formulaic plan.

The discretionary plan is designed to allow managers to exercise judgment in making variable pay recommendations, subject to appropriate oversight. When making award recommendations for an employee participating in the discretionary plan, performance against the objectives established in the performance scorecard is considered. Where objectives have been established with respect to risk and risk outcomes, managers will consider performance against these objectives when making variable pay award recommendations. Managers will also consider pertinent material risk events when making variable pay award recommendations.

Participants in the discretionary plan are subject to the HSBC Group Minimum Deferral Policy, which provides minimum deferral guidelines for variable pay awards. Deferral rates applicable to compensation earned in performance year 2013, ranging from 0 to 60%, increase in relation to the level of variable pay earned and in respect of an employee's classification under the United Kingdom's Prudential Regulation Authority ("PRA") Remuneration Code ("the Code"), as further described under the section "Performance Year 2013 Compensation Actions" in the 2013 CD&A. Variable pay is deferred in the form of cash and/or through the use of Restricted Share Units.  The deferred Restricted Share Units generally have a three-year graded vesting period.  At the end of the vesting period, deferred cash is credited with a notional rate of return equivalent to the annual dividend yield of HSBC ordinary shares over the period.  The economic value of pay deferred in the form of Restricted Share Units will ultimately be determined by the ordinary share price and foreign exchange rate in effect when each tranche of shares awarded is released. Grants under the Group Performance Share Plan ("GPSP") consist of a number of shares to which the employee will become fully entitled, generally over a five-year vesting period, subject to the individual remaining in employment. Shares that are released upon vesting of an award must be retained until the employee retires from or terminates employment with the HSBC Group.  An employee who retires from or terminates employment with "good leaver" status will have vested awards under the GPSP released immediately.  An employee who terminates employment without "good leaver" status will have vested awards under the GPSP released in three equal installments on the first, second and third anniversaries of the termination of employment with the HSBC Group.

An employee who terminates employment without "good leaver" status being granted by REMCO forfeits all unvested equity and deferred cash. Deferred variable pay awards are also subject to malus treatment, as further described under the section "Reduction or Cancellation of Long-Term Equity Awards" in the 2013 CD&A.  Additionally, all employees with unvested awards or awards subject to a retention period are required to certify annually that they have not used personal hedging strategies or remuneration contracts of insurance to mitigate the risk alignment of the unvested awards.

Employees in discretionary business incentive and formulaic plans are held to performance standards that may result in a loss of incentive compensation when quality standards are not met. For example, participants in these plans may be subject to a reduction in variable pay if they commit a "reportable event" (e.g., an error or omission resulting in a loss or expense to the company) or fail to follow required regulations, procedures, policies, and/or associated training. Participants may be altogether disqualified from participation in the plans for unethical acts, breach of company policy, or any other conduct that, in the opinion of HSBC USA, is sufficient reason for disqualification or subject to a recapture provision. Some formulaic incentive plans in servicing environments include limits or caps on the financial measures that are considered in the determination of incentive award amounts.

Performance periods for the discretionary business incentive plans are often one quarter or annual, with a greater proportion of payment at year-end to align the reward cycle to the successful performance of job responsibilities.  Performance periods for formulaic plans are often one month.

Incentive Compensation Monitoring

HSBC North America monitors and evaluates the performance of its incentive compensation arrangements, both the discretionary and formulaic plans, to ensure adequate focus and control.

The nature of the discretionary plan allows for compensation decisions to reflect individual and business performance based on performance scorecard achievements. Payments under the discretionary plan are not tied to a formula, which enables payments to be adjusted as appropriate based on individual performance, business performance, and risk assessment. Performance scorecards may also be updated as needed by leadership during the performance year to reflect significant changes in the operating plan, risk, or business strategy of HSBC USA. The discretionary plan is reviewed annually by REMCO to ensure that it is meeting the desired objectives. The review includes a comparison of actual payouts against the targets established, a cost/benefit analysis, the ratio of payout to overall business performance and a review of any unintended consequences (e.g., deteriorating service standards).

In 2013, HSBC USA continued to progress enhanced monitoring activity consisting of: 1) validating relationships among measures of financial performance, risks taken, risk outcomes, and amounts of incentive compensation awards/payouts; 2) reviewing how discretion is used in evaluating performance and adjusting incentive compensation awards for high levels of risk taking and adverse risk outcomes, and whether discretionary decisions are having an appropriate impact; and 3) evaluating the extent to which automated systems play, or could play a role in monitoring activities. Consequently, HSBC USA identified areas for improvement, not only with respect to tactical reward decisions and documenting discretion, but also in terms of utilizing information systems to support monitoring and validation activities. HSBC USA will strive to make improvements to its monitoring and validation activities in future reward cycles.

Business Incentive and formulaic programs are reviewed and revised annually by HSBC North America. Because business incentive plans are discretionary, variable pay decisions are determined based on employee performance to key performance indicators, which align with their Performance Management scorecards.  Formulaic plans leverage a specific plan template, and include an examination of overall plan expenditures versus actual business performance; an examination of individual pay out levels within plans; and a determination of whether payment levels align with expected performance levels and market indicators.  Compensation mix is reviewed for business incentive and formulaic plans to ensure it is appropriate based on global alignment and business philosophy.

In addition to the annual review, plan performance is monitored regularly by the business management and periodically by HSBC North America Human Resources, which tracks plan expenditures and plan performance to ensure that plan payouts are consistent with expectations.  All performance payouts are subject to the review of the designated plan administrator to ensure payment and performance of the plan are tracking in line with expectations. Finally, all plans contain provisions that enable modification of the plan if necessary to meet business objectives.

 


Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 


Security Ownership of Certain Beneficial Owners

HSBC USA Inc.'s common stock is 100 percent owned by HSBC North America Inc. ("HNAI"). HNAI is an indirect wholly owned subsidiary of HSBC.

Security Ownership by Management

The following table lists the beneficial ownership, as of January 31, 2014, of HSBC ordinary shares or interests in HSBC ordinary shares and any of HSBC USA's outstanding series of preferred stock, held by each director and each executive officer named in the Summary Compensation Table, individually, and the directors and executive officers as a group. Each of the individuals listed below and all directors and executive officers as a group own less than one percent of the HSBC ordinary shares and any HSBC USA outstanding series of preferred stock. No director or executive officer of HSBC USA owned any of HSBC's American Depositary Shares, Series A at January 31, 2014.

 

 


Number of

Shares

Beneficially

Owned of HSBC(1)(2)


HSBC Shares

That May Be

Acquired Within

60 Days By

Exercise of

Options(3)


HSBC

Restricted

Shares

Released

Within 60

Days(4)


Number of

HSBC

Ordinary

Share

Equivalents(5)


Total

HSBC

Ordinary

Shares(2)


HSBC USA

Preferred

Stock

Directors












Irene M. Dorner(6).....

45,184



-



43,946



-



89,130



-


Philip D. Ameen........

-



-



-



-



-



-


Jeffrey A. Bader........

47,839



-



-



-



47,839



-


Kevin M. Blakely......

-



-



-



-



-



-


William R. P. Dalton..

11,955



-



-



-



11,955



-


Anthea Disney.........

85



-



-



-



85



-


Robert K. Herdman..

82



-



-



-



82



-


Richard A. Jalkut......

50



-



-



-



50



-


Samuel Minzberg......

500



-



-



-



500



-


Nancy G. Mistretta...

101



-



-



-



101



-


Named Executive Officers












John T. McGinnis.....

5,227



-



-



-



5,227



-


Patrick M. Nolan.......

213,176



-



76,808



-



289,984



-


Steven G. Ekert..........

-



-



26,418



-



26,418



-


Gregory T. Zeeman...

13,814



-



17,112



-



30,926



-


C. Mark Gunton........

115



-



28,360



-



28,475



-


All directors and executive officers as a group

477,784



-



270,691



-



748,475



-


 


(1)   Directors and executive officers have sole voting and investment power over the shares listed above, except that the number of ordinary shares held by spouses, children and charitable or family foundations in which voting and investment power is shared (or presumed to be shared) is as follows: Directors and executive officers as a group, 16,782.

(2)   Some of the shares included in the table above were held in American Depositary Shares, each of which represents five HSBC ordinary shares.

(3)   Represents the number of ordinary shares that may be acquired by HSBC USA directors and executive officers through April 1, 2014 pursuant to the exercise of stock options.

(4)   Represents the number of ordinary shares that may be acquired by HSBC USA directors and executive officers through April 1, 2014 pursuant to the satisfaction of certain conditions.

(5)   Represents the number of ordinary share equivalents owned by executive officers under the HSBC-North America Employee Non-Qualified Deferred Compensation Plan. Some of the shares are held in American Depositary Shares, each of which represents five HSBC ordinary shares.

(6)   Also a Named Executive Officer.

 


Item 13.     Certain Relationships and Related Transactions, and Director Independence.


Transactions with Related Persons During the fiscal year ended December 31, 2013, HSBC USA was not a participant in any transaction, and there is currently no proposed transaction, in which the amount involved exceeded or will exceed $120,000, and in which a director or an executive officer, or a member of the immediate family of a director or an executive officer, had or will have a direct or indirect material interest, other than as described under --Compliance Consulting Services and Personnel below. During 2013, HSBC Bank USA provided loans to certain directors and executive officers of HSBC USA and its subsidiaries in the ordinary course of business. Such loans were provided on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to HSBC USA and do not involve more than the normal risk of collectability or present other unfavorable features.

HSBC USA maintains a written Policy for the Review, Approval or Ratification of Transactions with Related Persons (the "Policy"), which provides that any "Transaction with a Related Person" must be reviewed and approved or ratified in accordance with specified procedures. The term "Transaction with a Related Person" includes any transaction, arrangement or relationship, or series of similar transactions, arrangements or relationships (including any indebtedness or guarantee of indebtedness), in which (1) the aggregate dollar amount involved will or may be expected to exceed $120,000 in any calendar year, (2) HSBC USA or any of its subsidiaries is, or is proposed to be, a participant, and (3) a director or an executive officer, or a member of the immediate family of a director or an executive officer, has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of another entity). The following categories of transactions are deemed pre-approved even if the aggregate amount involved exceeds $120,000, provided, however, that if a Transaction with a Related Person falling in a category described below would cause one of our directors whom the Board of Directors currently deems independent to lose or risk losing their independence, the director must consult with the Chair of the Audit Committee prior to entering such Transaction with a Related Person:

•       Compensation paid to directors and executive officers reportable under rules and regulations promulgated by the Securities and Exchange Commission;

•       Transactions with other companies if the only relationship of the director, executive officer or family member to the other company is as an employee (other than an executive officer), director or beneficial owner of less than 10 percent of such other company's equity interests so long as the aggregate amount involved does not exceed the greater of $1,000,000 or 2 percent of the other company's total annual revenues;

•       Charitable contributions, grants or endowments by us or any of our subsidiaries to charitable organizations, foundations or universities if the only relationship of the director, executive officer or family member to the organization, foundation or university is as an employee (other than an executive officer) trustee or director so long as the aggregate annual amount of such contribution, grant or endowment, excluding any matching contributions from us, do not exceed the lesser of $1 million or 2 percent of the organization's total annual revenues;

•       Transactions where the interest of the director, executive officer or family member arises solely from the ownership of our equity securities and all holders of such securities received or will receive the same benefit on a pro rata basis;

•       Transactions involving the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or government authority;

•       Transactions where the rates or charges involved are determined by competitive bids;

•       Payments under directors and officers insurance policies and indemnification payments made in accordance with our articles of incorporation or by-laws;

•       Certain ordinary course transactions:

◦      Any financial services, including brokerage services, investment management or advisory services, banking services, loans, insurance services and other financial services, provided to any director or an immediate family member of a director, provided that the services are on substantially the same terms as those prevailing at the time for comparable services provided to persons not related to us or our subsidiaries;

◦      Personal loans to a related person and loans to a director's primary business affiliation or the primary business affiliation of an immediate family member of a director, in each case that (i) are made or maintained in the ordinary course of business on substantially the same terms (including interest rates and collateral requirements) as those prevailing at the time for comparable loans with persons not related to us or our subsidiaries; (ii) when made do not involve more than the normal risk for collectability or present other unfavorable features; (iii) comply with applicable law including the Sarbanes-Oxley Act of 2002 and Regulation O of the Board of Governors of the Federal Reserve; (iv) are not classified as Substandard (II) or worse, as defined in the OCC's "Rating Credit Risk" Comptroller's Handbook; and (v) in the case of and loans to a director's primary business affiliation or the primary business affiliation of an immediate family member of a director, complies with any applicable FDIC Guidelines; and

◦      All business relationships, lending relationships, brokerage, investment advisory relationships, insurance, deposit and other banking relationships with a director's primary business affiliation or the primary business affiliation of an Immediate Family Member of a director made in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with persons not related to us or our subsidiaries; and

•       Transactions involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture or similar services.

The Policy requires each director and executive officer to promptly notify the Office of the General Counsel in writing of any Transaction with a Related Person in which the director, executive officer or an immediate family member has or will have an interest and to provide specified details of the transaction. The Office of the General Counsel, through the Corporate Secretary, will provide a copy of the notice to the Chair of the Audit Committee along with any other information as the Office of the General Counsel or the Corporate Secretary believes would be useful to the Audit Committee in performing its review. The Audit Committee will review the material facts of each proposed Transaction with a Related Person at each regularly scheduled committee meeting and approve or disapprove the transaction.  If it is impractical or undesirable to delay a decision on a proposed Transaction with a Related Person, the Chair of the Audit Committee may review and approve the transaction in accordance with the criteria set forth in the Policy or may convene a special meeting of the Audit Committee to consider the transaction, at the Chair's discretion.  Any such approval must be reported to the Audit Committee at its next regularly scheduled meeting.

The vote of a majority of disinterested members of the Audit Committee is required for the approval or ratification of any Transaction with a Related Person. The Audit Committee may approve or ratify a Transaction with a Related Person if the Audit Committee determines, in its business judgment, based on the facts and circumstances it deems relevant in its sole good faith discretion that the transaction is fair and reasonable to, and consistent with our best interests and those of our subsidiaries. Any transaction that is not fair and reasonable to, and consistent with our best interests and those of our subsidiaries will be discontinued, allowing for a reasonable transition period as may be necessary or advisable so as not to prejudice us and our subsidiaries.  In making this determination, the Audit Committee will consider, among other things:

•       Information about the goods and services to be or being provided;

•       The nature or business purpose of the transaction and the costs to be incurred by us or the payments to us;

•       The terms of the transaction and whether it is entered into on an arms-length basis or in the ordinary course of our business; 

•       Whether the related person's interest in the transaction is material;

•       The apparent benefits of the transaction to us;

•       The availability of other sources for the product or services involved in the transaction;

•       The potential public perception of the transaction;

•       The potential impact of the transaction on the independence of any of our or our subsidiaries' directors; and

•       Whether the transaction violates any provisions of the HSBC USA Statement of Business Principles and Code of Ethics, the HSBC USA Code of Ethics for Senior Financial Officers or the HSBC USA Corporate Governance Standards, as applicable

In any case where the Audit Committee determines not to approve or ratify a Transaction with a Related Person, the matter will be referred to the Office of the General Counsel for review and consultation regarding the appropriate disposition of such transaction including, but not limited to, termination of the transaction, rescission of the transaction or modification of the transaction in a manner that would permit it to be ratified and approved.

If we become aware of a Transaction with a Related Person that has not been approved under the Policy, the matter will be referred by the Audit Committee for review.  The Audit Committee will consider the relevant facts and circumstances respecting such Transaction with a Related Person, and will evaluate the options available, including ratification, revision or termination of the transaction.

Compliance Consulting Services and Personnel  In April 2010, we retained IMAG Consulting Services LLC ("IMAG Consulting"), a wholly owned subsidiary of IMAG Holdings LLC ("IMAG Holdings" and, together with its subsidiaries, "IMAG") to provide compliance services and personnel to HSBC Bank USA and certain of its affiliates, from time to time, in support of the BSA/AML, OFAC and general compliance functions.  Gary E. Peterson was our Senior Executive Vice President, Chief Compliance Officer, and an executive officer from March 15, 2012 until November 18, 2013, and therefore also a related person of ours for purposes of the U.S. securities laws and our Policy.  Prior to joining HSBC USA in August 2010, Mr. Peterson was the president of, and the holder of a majority of the member interests in, IMAG Holdings.  In connection with his employment by HSBC USA, Mr. Peterson disclosed his ownership interest in IMAG, resigned his positions with IMAG and terminated all management and oversight of IMAG, including with respect to consulting services provided to HSBC Bank USA.  Mr. Peterson retained his ownership interest in IMAG Holdings, which, as of the date of his departure on November 18, 2013, was [58.74] percent of the outstanding member interest in IMAG Holdings.  Mr. Peterson's spouse is the chief financial officer of IMAG and receives a salary from IMAG.

Mr. Peterson was not involved in the day-to-day operations, decision-making or management of IMAG, nor was he involved in decisions to retain IMAG or monitoring or reviewing IMAG's performance on specific projects.  Rather, proposals to retain IMAG on specific projects were generated and evaluated pursuant to an independent process that was designed to remove Mr. Peterson from the decision-making process in light of his continuing ownership interest in IMAG.

From April 2010 through May 2013, HSBC Bank USA retained IMAG in connection with a number of compliance-related projects.  Consulting fees paid to IMAG totaled approximately $9.7 million in 2011, $2.3 million in 2012 and $464,000 in 2013.  Fees paid in 2013 included fees with respect to three compliance-related consulting services projects and related personnel initiated in accordance with the independent evaluation process described above.  Pursuant to the Policy, the Board of Directors reviewed and ratified all projects that were initiated, extended or completed on or after March 15, 2012.  All consulting services projects with IMAG ended in 2013 and the Master Consulting Agreement with IMAG to which all consulting services projects are subject terminates on May 29, 2014.

In May 2013, an affiliate of ours retained Visual Technologies, Inc ("VisTech") to provide certain webhosting and consulting services for us, including the hosting of a COOLMaps portal and consulting services for process mapping projects and training that involves the use of COOLMaps technology in support of compliance functions.  VisTech licenses the COOLMaps technology from IMAG COOL Ventures LLC ("IMAG COOL Ventures"), a subsidiary of IMAG Holdings.

During 2013, our affiliate paid Vistech user fees, monthly maintenance and process review fees and hourly consulting fees.  Our affiliate incurred aggregate fees payable to VisTech of approximately $323,000 during 2013.  Vistech has advised us that it in turn paid IMAG COOL Ventures LLC user fees and royalties for its use of the COOLMaps technology and it also contracted for consultants through IMAG COOL Ventures.  We have been advised that of the approximately $323,000 payable to VisTech, it paid approximately $289,000 to IMAG COOL Ventures in connection with the services we have obtained from VisTech.

Proposals to retain VisTech on specific projects were generated and evaluated pursuant to our standard vendor risk management and procurement and purchasing process, which did not include Mr. Peterson as part of the decision-making process. Mr. Petersen was also not involved in monitoring or reviewing VisTech's performance on specific projects.  Mr. Peterson's benefit in the transactions, however, was not timely disclosed as required under the Policy, although the retention of VisTech and the related payments were ratified by the Board of Directors under the Policy following such disclosure.

Director Independence The HSBC USA Inc. Corporate Governance Standards, together with the charters of the committees of the Board of Directors, provide the framework for our corporate governance. Director independence is defined in the HSBC USA Inc. Corporate Governance Standards, which are based upon the rules of the New York Stock Exchange. The HSBC USA Inc. Corporate Governance Standards are available on our website at www.us.hsbc.com or upon written request made to HSBC USA Inc., 26525 North Riverwoods Boulevard, Mettawa, Illinois 60045, Attention: Corporate Secretary.

According to the HSBC USA's Inc. Corporate Governance Standards, a majority of the members of the Board of Directors must be independent. The composition requirement for each committee of the Board of Directors is as follows:

 

Committee


Independence/Member Requirements

Audit Committee................................................................................


Chair and all voting members

Compliance Committee......................................................................


A majority of voting members

Fiduciary Committee..........................................................................


Chair and all voting members

Risk Committee...................................................................................


Chair and all voting members

Ms. Disney, Ms. Mistretta and Messrs. Ameen, Bader, Blakely, Dalton, Herdman, Jalkut and Minzberg are considered to be independent directors. Ms. Dorner currently serves as President and Chief Executive Officer of HSBC USA and HSBC Bank USA. She also serves as a director and Chief Executive Officer of HSBC North America and a Group Managing Director at HSBC. Because of the positions held by Ms. Dorner, she is not considered to be an independent director.

See Item 10. Directors, Executive Officers and Corporate Governance - Corporate Governance - Board of Directors - Committees and Charters for more information about our Board of Directors and its committees.


Item 14.     Principal Accounting Fees and Services

 


 Audit Fees The aggregate amount billed by our principal accountant, KPMG LLP, for audit services performed during the fiscal years ended December 31, 2013 and 2012 was $5,212,000 and $5,524,000, respectively.  Audit services include the auditing of financial statements, quarterly reviews, statutory audits, and the preparation of comfort letters, consents and review of registration statements.

Audit Related Fees The aggregate amount billed by KPMG LLP in connection with audit related services performed during the fiscal years ended December 31, 2013 and 2012 was $1,320,100 and $1,453,200, respectively. Audit related services include employee benefit plan audits, and audit or attestation services not required by statute or regulation.

Tax Fees Total fees billed by KPMG LLP for tax related services for the fiscal year ended December 31, 2013 and 2012 was $120,740 and $222,777, respectively. These services include tax related research, general tax services in connection with transactions and legislation and tax services for review of Federal and state tax accounts for possible over assessment of interest and/or penalties.

 

All Other Fees The aggregate amount billed by KPMG LLP for other services performed during the fiscal years ended December 31, 2013 and 2012 were $1,283,029 and $454,103, respectively.   These services included fees related to corporate governance matters.

All of the fees described above were approved by HSBC USA's Audit Committee.

The Audit Committee has a written policy that requires pre-approval of all services to be provided by KPMG LLP, including audit, audit-related, tax and all other services. Pursuant to the policy, the Audit Committee annually pre-approves the audit fee and terms of the audit services engagement. The Audit Committee also approves a specified list of audit, audit-related, tax and permissible non-audit services deemed to be routine and recurring services. Any service not included on this list must be submitted to the Audit Committee for pre-approval. On an interim basis, any proposed engagement that does not fit within the definition of a pre-approved service may be presented to the Chair of the Audit Committee for approval and to the full Audit Committee at its next regular meeting.

 


PART IV 

 


Item 15.     Exhibits and Financial Statement Schedules.

 


(a)(1) Financial Statements

The consolidated financial statements listed below, together with an opinion of KPMG LLP dated March 4, 2013 with respect thereto, are included in this Form 10-K pursuant to Item 8. Financial Statements and Supplementary Data of this Form 10-K.

HSBC USA Inc. and Subsidiaries:

Report of Independent Registered Public Accounting Firm

Consolidated Statement of Income (Loss)

Consolidated Balance Sheet

Consolidated Statement of Cash Flows

Consolidated Statement of Changes in Shareholders' Equity

HSBC Bank USA, National Association and Subsidiaries:

Consolidated Balance Sheet

Notes to Financial Statements

(a)(2) Not applicable.

(a)(3) Exhibits

 

3(i)

Articles of Incorporation and amendments and supplements thereto (incorporated by reference to Exhibit 3(a) to HSBC USA Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999, Exhibit 3 to HSBC USA Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, Exhibits 3.2 and 3.3 to HSBC USA Inc.'s Current Report on Form 8-K filed April 4, 2005; Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed October 14, 2005 and Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed May 22, 2006).



3(ii)

Bylaws of HSBC USA Inc., as Amended and Restated effective April 24, 2013 (incorporated by reference to Exhibit 3.1 to HSBC USA Inc.'s Current Report on Form 8-K filed April 29, 2013).



4.1



4.2

Senior Indenture, dated as of March 31, 2006, by and between HSBC USA Inc. and Deutsche Bank Trust Companies Americas, as trustee, as amended and supplemented (incorporated by reference to Exhibit 4.1 to HSBC USA Inc.'s Registration Statement on Form S-3, Registration No. 333-133007, Exhibit 4.16 to HSBC USA Inc.'s Current Report on Form 8-K filed April 21, 2008, Exhibit 4.17 to HSBC USA Inc.'s Current Report on Form 8-K filed August 15, 2008, Exhibit 4.18 to HSBC USA Inc.'s Current Report on Form 8-K filed August 15, 2008, Exhibit 4.19 to HSBC USA Inc.'s Current Report on Form 8-K filed December 16, 2008, and Exhibit 4.20 to HSBC USA Inc.'s Current Report on Form 8-K filed December 17, 2008).

4.3

Senior Indenture, dated as of October 24, 1996, by and between HSBC USA Inc. and Deutsche Bank Trust Companies Americas (as successor in interest to Bankers Trust Company), as trustee, as amended and supplemented (incorporated by reference to Exhibits 4.1 and 4.2 to Post-Effective Amendment No. 1 to HSBC USA Inc.'s Registration Statement on Form S-3, Registration No. 333-42421, and Exhibit 4.1 to HSBC USA Inc.'s Current Report on Form 8-K filed November 28, 2005).

4.4

Subordinated Indenture, dated as of October 24, 1996, by and between HSBC USA Inc. and Deutsche Bank Trust Companies Americas (as successor in interest to Bankers Trust Company), as trustee, as amended and supplemented (incorporated by reference to Exhibits 4.3, 4.4, 4.5 and 4.6 to Post-Effective Amendment No. 1 to HSBC USA Inc.'s Registration Statement on Form S-3, Registration No. 333-42421, and Exhibit 4.1 to HSBC USA Inc.'s Current Report on Form 8-K filed September 27, 2010).



10.1

Deferred Prosecution Agreement dated December 11, 2012, between HSBC Holdings plc, HSBC Bank USA, N.A., HSBC North America Holdings, Inc., the United States Department of Justice, the United States Attorney's Office for the Eastern District of New York and the United States Attorney's Office for the Northern District of West Virginia (incorporated by reference to Exhibit 10.1 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).



10.2

Consent Order dated December 11, 2012, of the Comptroller of the Currency of the United States in the Matter of HSBC Bank USA, N.A. (incorporated by reference to Exhibit 10.2 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).



10.3

Consent Order for the Assessment of a Civil Money Penalty dated December 11, 2012, of the Comptroller of the Currency of the United States in the Matter of HSBC Bank USA, N.A. (incorporated by reference to Exhibit 10.3 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).



10.4

Agreement by and between HSBC Bank USA, N.A. McLean, Virginia and the Office of the Comptroller of the Currency dated December 11, 2012 (incorporated by reference to Exhibit 10.4 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).



10.5

Consent to the Assessment of a Civil Money Penalty dated December 11, 2012, of the United States Department of Treasury Financial Crimes Enforcement Network in the Matter of HSBC Bank USA, N.A. (incorporated by reference to Exhibit 10.5 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).



12

Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.



14

Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14 to HSBC USA Inc.'s Annual Report on Form 10-K for the year ended December 31, 2006).



21

Subsidiaries of HSBC USA Inc.



23

Consent of KPMG LLP, Independent Registered Public Accounting Firm.



24

Power of Attorney (included on the signature page of this Form 10-K).



31

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



101.INS

XBRL Instance Document(1,2)



101.SCH

XBRL Taxonomy Extension Schema Document(1,2)



101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document(1,2)



101.DEF

XBRL Taxonomy Extension Definition Linkbase Document(1,2)



101.LAB

XBRL Taxonomy Extension Label Linkbase Document(1,2)



101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document(1,2)

 


1.         Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in HSBC USA Inc.'s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in eXentsible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income (Loss) for the year ended December 31, 2012, 2011 and 2010, (ii) the Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2012, 2011 and 2010, (iii) the Consolidated Balance Sheet as of December 31. 2012 and 2011, (iv) the Consolidated Statement of Changes in Shareholders' Equity for the year ended December 31, 2012, 2011 and 2010, (v) the Consolidated Statement of Cash Flows for the year ended December 31, 2012, 2011 and 2010, and (vi) the Notes to Consolidated Financial Statements.

2.          As provided in Rule 406T of Regulation S-T, this information shall be not be deemed "filed" for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

 

Upon receiving a written request, we will furnish copies of the exhibits referred to above free of charge. Requests should be made to HSBC USA Inc., 26525 North Riverwoods Boulevard, Mettawa, Illinois 60045, Attention: Corporate Secretary.

 

 


Index

 

Accounting:

adjustment 

new pronouncements

component of fair value option 

policies (critical) 

concentration 

policies (significant)

critical accounting policy 

Assets:

exposure 

by business segment

management 

consolidated average balances 

related contingent features 

fair value measurements 

related arrangements 

nonperforming 

Compliance risk 

trading 

Critical accounting policies and estimates

Asset-backed commercial paper conduits 

Current environment 

Asset-backed securities 

Deferred tax assets 

Audit committee 

Deposits 

Auditors' report:

Derivatives:

financial statement opinion 

accounting policy 

Balance sheet:

cash flow hedges 

consolidated 

critical accounting policy 

consolidated average balances 

fair value hedges 

review 

notional value 

Basel II 

trading and other 

Basel III 

Directors:

Basis of reporting 

biographies 

Business:

board of directors 

consolidated performance review 

executive

operations 

compensation (executives) 

organization history 

responsibilities

Capital:

Discontinued operations 

2014 funding strategy 

Employees:

common equity movements 

compensation and benefits 

consolidated statement of changes 

number of

regulatory capital 

Equity:

selected capital ratios 

consolidated statement of changes 

Cash flow (consolidated) 

ratios 

Cautionary statement regarding forward-looking statements 

Equity securities available-for-sale 

Collateral - pledged assets 

Estimates and assumptions 

Collateralized debt obligations 

Eurozone exposures 

Commercial banking segment results (IFRSs) 

Executive overview 

Committees 

Fair value measurements:

Competition 

assets and liabilities recorded at fair value on a recurring basis 

Compliance risk 

assets and liabilities recorded at fair value on a non-recurring basis 

Contingent liabilities 

control over valuation process 

Controls and procedures 

financial instruments 

Corporate governance and controls 

hierarchy 

Customers 

transfers into/out of level one and two 

Credit card fees 

transfers into/out of level two and three 

Credit quality 

valuation techniques 

Credit risk:

Fiduciary risk 

accounting policy 

Financial assets:


designated at fair value 





reclassification under IFRSs 

by charge-off (net) 

Financial highlights metrics

by delinquency 

Financial liabilities:

criticized assets 

designated at fair value 

geographic concentration 

fair value of financial liabilities 

held for sale 

Forward looking statements 

impaired

Funding 

nonperforming 

Future prospects 

overall review 

Gain on instruments designated at fair value and related derivatives 

purchases from HSBC Finance 

Gains less losses from securities 

risk concentration 

Global Banking and Markets:

troubled debt restructures 

balance sheet data (IFRSs) 

Loan impairment charges - see Provision for credit losses

loans and securities reclassified (IFRSs) 

Loan-to-deposits ratio 

segment results (IFRSs)

Market risk 

Geographic concentration of receivables 

Market turmoil:

Goodwill :

current environment 

accounting policy 

exposures 

critical accounting policy 

impact on liquidity risk 

Guarantee arrangements 

structured investment vehicles 

Impairment:

variable interest entities 

available-for-sale securities 

Monoline insurers

credit losses  

Mortgage lending products 

nonperforming loans 

Mortgage servicing rights 

impaired loans 

Net interest income 

Income (loss) from financial instruments designated at fair value, net 

New accounting pronouncement adopted 

Income statement  

New accounting pronouncements to be adopted in future periods

Intangible assets 

Off balance sheet arrangements 

Income taxes:

Operating expenses 

accounting policy 

Operational risk 

critical accounting policy - deferred taxes

Other revenue 

expense 

Other segment results (IFRSs) 

Internal control 

Pension and other postretirement benefits:

Interest rate risk

accounting policy 

Key performance indicators 

Performance, developments and trends 

Legal proceedings

Pledged assets 

Leveraged finance transactions 

Private banking segment results (IFRSs) 

Liabilities:

Profit (loss) before tax:

commitments, lines of credit 

by segment - IFRSs 

deposits 

consolidated 

financial liabilities designated at fair value 

Properties 

long-term debt 

Property, plant and equipment:

short-term borrowings 

accounting policy 

trading

Provision for credit losses 

Lease commitments 

Ratios:

Liquidity and capital resources 

capital 

Litigation and regulatory matters 

charge-off (net) 

Loans:

credit loss reserve related 

by category 

delinquency 


earnings to fixed charges - Exhibit 12


efficiency 





financial 

commercial banking 

loans-to-deposits 

global banking and markets 

Real estate owned 

private banking 

Reconciliation of U.S. GAAP results to IFRSs 

other 

Refreshed loan-to-value

overall summary

Regulation 

Selected financial data

Related party transactions 

Senior management:

Reputational risk 

biographies 

Results of operations 

Sensitivity:

Retail banking and wealth management segment results (IFRSs) 

projected net interest income 

Risks and uncertainties 

Share-based payments:

Risk elements in the loan portfolio 

accounting policy 

Risk factors 

Statement of changes in shareholders' equity 

Risk management:

Statement of changes in comprehensive income 

credit 

Statement of income (loss) 

compliance 

Strategic risk 

fiduciary 

Stress testing 

interest rate 

Table of contents

liquidity 

Tax expense 

market 

Trading:

operational 

assets 

reputational 

derivatives

strategic 

liabilities 

Securities:

portfolios 

fair value 

Trading revenue (net) 

impairment 

Troubled debt restructures 

maturity analysis

Value at risk 

Segment results - IFRSs basis:

Variable interest entities 

retail banking and wealth management 

Unresolved staff comments 

 


Signatures

 


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, HSBC USA Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this the 24th day of February 2014.

 

HSBC USA INC.




By:


/s/ IRENE M. DORNER



Irene M. Dorner



President and Chief Executive Officer

Each person whose signature appears below constitutes and appoints P.D. Schwartz and K. P. Pisarczyk as his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him/her in his/her name, place and stead, in any and all capacities, to sign and file, with the Securities and Exchange Commission, this Form 10-K and any and all amendments and exhibits thereto, and all documents in connection therewith, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or their substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of HSBC USA Inc. and in the capacities indicated on this the 24th day of February 2014.

 




Signature


Title



/s/ I. M. DORNER


President, Chief Executive Officer, Chairman and Director

(as Principal Executive Officer)

(I. M. Dorner)




/s/ P. D. AMEEN


Director

(P. D. Ameen)






/S/ J. A. BADER


Director

(J. A. Bader)






/s/ K. M. BLAKELY


Director

(K. M. Blakely)






/s/ W. R. P. DALTON


Director

(W. R. P. Dalton)





/s/ A. DISNEY


Director

(A. Disney)





/s/ R. K. HERDMAN


Director

(R. K. Herdman)





/s/ R. A. JALKUT


Director

(R. A. Jalkut)





/s/ S. MINZBERG


Director

(S. Minzberg)






/s/ N. G. MISTRETTA


Director

(N. G. Mistretta)






/s/ E. K. FERREN


Executive Vice President, Chief Financial Officer and Chief Accounting Officer

(as Principal Financial Officer and Principal Accounting Officer)

(E. K. Ferren)



Exhibit Index

 

 

3(i)

Articles of Incorporation and amendments and supplements thereto (incorporated by reference to Exhibit 3(a) to HSBC USA Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999, Exhibit 3 to HSBC USA Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, Exhibits 3.2 and 3.3 to HSBC USA Inc.'s Current Report on Form 8-K filed April 4, 2005; Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed October 14, 2005 and Exhibit 3.2 to HSBC USA Inc.'s Current Report on Form 8-K filed May 22, 2006).

3(ii)

Bylaws of HSBC USA Inc., as Amended and Restated effective April 24, 2013 (incorporated by reference to Exhibit 3.1 to HSBC USA Inc.'s Current Report on Form 8-K filed April 29, 2013).

 

 

4.1

Senior Indenture, dated as of March 31, 2009, by and between HSBC USA Inc. and Wells Fargo Bank, National Association, as trustee, as amended and supplemented (incorporated by reference to Exhibit 4.1 to HSBC USA Inc.'s Registration Statement on Form S-3, Registration No. 333-158358 and Exhibit 4.2 to HSBC USA Inc.'s Registration Statement on Form S-3, Registration No. 333-180289).

4.2

Senior Indenture, dated as of March 31, 2006, by and between HSBC USA Inc. and Deutsche Bank Trust Companies Americas, as trustee, as amended and supplemented (incorporated by reference to Exhibit 4.1 to HSBC USA Inc.'s Registration Statement on Form S-3, Registration No. 333-133007, Exhibit 4.16 to HSBC USA Inc.'s Current Report on Form 8-K filed April 21, 2008, Exhibit 4.17 to HSBC USA Inc.'s Current Report on Form 8-K filed August 15, 2008, Exhibit 4.18 to HSBC USA Inc.'s Current Report on Form 8-K filed August 15, 2008, Exhibit 4.19 to HSBC USA Inc.'s Current Report on Form 8-K filed December 16, 2008, and Exhibit 4.20 to HSBC USA Inc.'s Current Report on Form 8-K filed December 17, 2008).

4.3

Senior Indenture, dated as of October 24, 1996, by and between HSBC USA Inc. and Deutsche Bank Trust Companies Americas (as successor in interest to Bankers Trust Company), as trustee, as amended and supplemented (incorporated by reference to Exhibits 4.1 and 4.2 to Post-Effective Amendment No. 1 to HSBC USA Inc.'s Registration Statement on Form S-3, Registration No. 333-42421, and Exhibit 4.1 to HSBC USA Inc.'s Current Report on Form 8-K filed November 28, 2005).

4.4

Subordinated Indenture, dated as of October 24, 1996, by and between HSBC USA Inc. and Deutsche Bank Trust Companies Americas (as successor in interest to Bankers Trust Company), as trustee, as amended and supplemented (incorporated by reference to Exhibits 4.3, 4.4, 4.5 and 4.6 to Post-Effective Amendment No. 1 to HSBC USA Inc.'s Registration Statement on Form S-3, Registration No. 333-42421, and Exhibit 4.1 to HSBC USA Inc.'s Current Report on Form 8-K filed September 27, 2010).

10.1

Deferred Prosecution Agreement dated December 11, 2012, between HSBC Holdings plc, HSBC Bank USA, N.A., HSBC North America Holdings, Inc., the United States Department of Justice, the United States Attorney's Office for the Eastern District of New York and the United States Attorney's Office for the Northern District of West Virginia (incorporated by reference to Exhibit 10.1 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).

10.2

Consent Order dated December 11, 2012, of the Comptroller of the Currency of the United States in the Matter of HSBC Bank USA, N.A. (incorporated by reference to Exhibit 10.2 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).

10.3

Consent Order for the Assessment of a Civil Money Penalty dated December 11, 2012, of the Comptroller of the Currency of the United States in the Matter of HSBC Bank USA, N.A. (incorporated by reference to Exhibit 10.3 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).

10.4

Agreement by and between HSBC Bank USA, N.A. McLean, Virginia and the Office of the Comptroller of the Currency dated December 11, 2012 (incorporated by reference to Exhibit 10.4 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).

10.5

Consent to the Assessment of a Civil Money Penalty dated December 11, 2012, of the United States Department of Treasury Financial Crimes Enforcement Network in the Matter of HSBC Bank USA, N.A. (incorporated by reference to Exhibit 10.5 to HSBC USA Inc.'s Current Report on Form 8-K filed December 12, 2012).

12

Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.

14

Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14 to HSBC USA Inc.'s Annual Report on Form 10-K for the year ended December 31, 2006).

21

Subsidiaries of HSBC USA Inc.

23

Consent of KPMG LLP, Independent Registered Public Accounting Firm.

24

Power of Attorney (included on the signature page of this Form 10-K).

31

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document(1,2)

101.SCH

XBRL Taxonomy Extension Schema Document(1,2)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document(1,2)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document(1,2)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document(1,2)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document(1,2)

 


1.         Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in HSBC USA Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in eXentsible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income (Loss) for the year ended December 31, 2013, 2012 and 2011, (ii) the Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2013, 2012 and 2011, (iii) the Consolidated Balance Sheet as of December 31. 2013 and 2012, (iv) the Consolidated Statement of Changes in Shareholders' Equity for the year ended December 31, 2013, 2012 and 2011, (v) the Consolidated Statement of Cash Flows for the year ended December 31, 2013, 2012 and 2011, and (vi) the Notes to Consolidated Financial Statements.             

2.         As provided in Rule 406T of Regulation S-T, this information shall be not be deemed "filed" for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

 

 



 

EXHIBIT 12

HSBC USA INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND

EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

 

 


Year Ended December 31,


2013


2012


2011


2010


2009


(dollars are in millions)

Ratios excluding interest on deposits:










Income (loss) from continuing operations..............................................

$

(338

)


$

(1,248

)


$

455



$

1,006



$

(167

)

Income tax expense...................................................................................

71



338



227



439



(98

)

Less: Undistributed equity earnings......................................................

-



-



-



28



28


Fixed charges:










Interest on:










Borrowed funds..............................................................................

40



28



44



78



61


Long-term debt................................................................................

661



671



600



492



514


Others...............................................................................................

53



33



99



5



-


One third of rents, net of income from subleases...........................

33



31



31



29



24


Total fixed charges, excluding interest on deposits.............................

787



763



774



604



599


Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings......................................

520



(147

)


1,456



2,021



306


Ratio of earnings to fixed charges..........................................................

.66



(.19

)


1.88



3.35



.51


Total preferred stock dividend factor(1)..................................................

$

103



$

103



$

103



$

106



$

116


Fixed charges, including the preferred stock dividend factor............

$

890



$

866



$

877



$

710



$

715


Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends..................................................

.58



(.17

)


1.66



2.85



.43


Ratios including interest on deposits:










Total fixed charges, excluding interest on deposits.............................

$

787



$

763



$

774



$

604



$

599


Add: Interest on deposits........................................................................

184



316



251



329



551


Total fixed charges, including interest on deposits.............................

$

971



$

1,079



$

1,025



$

933



$

1,150


Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings................................

$

520



$

(147

)


$

1,456



$

2,021



$

306


Add: Interest on deposits........................................................................

184



316



251



329



551


Total.............................................................................................................

$

704



$

169



$

1,707



$

2,350



$

857


Ratio of earnings to fixed charges..........................................................

.73



.16



1.67



2.52



.75


Fixed charges, including the preferred stock dividend factor............

$

890



$

866



$

877



$

710



$

715


Add: Interest on deposits........................................................................

184



316



251



329



551


Fixed charges, including the preferred stock dividend factor and interest on deposits..................................................................................

$

1,074



$

1,182



$

1,128



$

1,039



$

1,266


Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends..................................................

.66



.14



1.51



2.26



.68


 


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

 



 

EXHIBIT 21

 

Subsidiaries of HSBC USA Inc.

                U.S. Affiliates

 

 



Names of Subsidiaries

 

USA or

U.S. State

Organized

 

Cabot Park Holdings, Inc.

Delaware

Capco/Cove, Inc.

New York

Card-Flo #1, Inc.

Delaware

Card-Flo #3, Inc.

Delaware

CBS/Holdings, Inc.

New York

Eagle Rock Holdings, Inc.

New York

Ellenville Holdings, Inc.

New York

F-Street Holdings, Inc.

Delaware

Giller Ltd.

New York

GWML Holdings, Inc.

Delaware

Hampton Owners LLC

Delaware

Hampton I Owners LLC

Delaware

Hampton II Owners LLC

Delaware

Hampton III Owners LLC

Delaware

Hampton IV Owners LLC

Delaware

High Meadow Management, Inc.

New York

HITG, Inc.

Delaware

Housing (USA) LLP

Delaware

HSBC AFS (USA) LLC

New York

HSBC Bank USA, National Association

USA

HSBC Columbia Funding, LLC

Delaware

HSBC Diamond (USA) LP

Delaware

HSBC Global Asset Management (USA) Inc.

New York

HSBC Insurance Agency (USA) Inc.

New York

HSBC International Finance Corporation (Delaware)

USA

HSBC Jade Limited Partnership

Nevada

HSBC Land Title Agency (USA) LLC

New York

HSBC Logan Holdings USA, LLC

Delaware

HSBC Mortgage Corporation (USA)

Delaware

HSBC Overseas Corporation (Delaware)

Delaware

HSBC Overseas Investments Corporation (New York)

Maryland

HSBC Private Bank International

USA

HSBC Processing Services (USA) Inc.

Delaware

HSBC Realty Credit Corporation (USA)

Delaware

HSBC Retail Credit (USA) Inc.

New York

HSBC Trust Company (Delaware), National Association

USA

HSBC USA Capital Trust I

Delaware

HSBC USA Capital Trust II

Delaware

HSBC USA Capital Trust III

Delaware

Icon Brickell LLC

Florida

Katonah Close Corp.

New York

LLV 345 SHN Holdings LLC

Nevada

MM Mooring #2 Corp.

New York

Oakwood Holdings, Inc.

New York

One Main Street, Inc.

Florida

PTC New LLC

Delaware

R/CLIP Corp.

Delaware

REDUS Halifax Landing, LLC

Delaware

REDUS Imagine, LLC

Delaware

Republic Overseas Capital Corporation

New York

Somers & Co.

New York

Timberlink Settlement Services (USA) Inc.

Delaware

Tower Holding New York Corp.

New York

TPBC Acquisition Corp.

Florida

Trumball Management, Inc.

New York

Westminster House, LLC

Delaware



Non-U.S. Affiliates:




Names of Subsidiaries

 

Country

Organized

 

HSBC Alternative Investments (Guernsey) Limited

Guernsey

HSBC Financial Services (Uruguay) S.A.

Uruguay

 

 

 

 

 



 

EXHIBIT 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

HSBC USA Inc.:

 

We consent to the incorporation by reference in Registration Statement No. 333-180289 on Form S3 ASR of HSBC USA Inc. of our report dated February 24, 2014, with respect to the consolidated balance sheet of HSBC USA Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders' equity, and cash flows for each of the years in the threeyear period ended December 31, 2013, and the consolidated balance sheet of HSBC Bank USA, National Association and subsidiaries as of December 31, 2013 and 2012, which report appears in the December 31, 2013 annual report on Form 10K of HSBC USA Inc.

 

 

/s/  KPMG LLP

New York, New York

February 24, 2014

 



 

EXHIBIT 31

Certification of Chief Executive Officer and Chief Financial Officer

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

Certification of Chief Executive Officer

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

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

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

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

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

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

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

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

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

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

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

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

Date: February 24, 2014

 

 


/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

 

 


Certification of Chief Financial Officer

I, Eric K. Ferren, Executive Vice President and Chief Financial Officer of HSBC USA Inc., certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: February 24, 2014

 

 


/s/ ERIC K. FERREN

Eric K. Ferren

Executive Vice President and

Chief Financial Officer

 



 

EXHIBIT 32

Certification of Chief Executive Officer and Chief Financial Officer

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

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

Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted in connection with the HSBC USA Inc. (the "Company") annual report on Form 10-K for the period ending December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code.

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

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

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

Date: February 24, 2014

 


/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

 

 


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

Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted in connection with the HSBC USA Inc. (the "Company") annual report on Form 10-K for the period ending December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code.

I, Eric K. Ferren, Executive Vice President and Chief Financial Officer of the Company, certify that:

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

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

Date: February 24, 2014

 

 


/s/ ERIC K. FERREN

Eric K. Ferren

Executive Vice President and

Chief Financial Officer

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

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

 

 

 


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