HSBC USA Q1 2005 10-Q-2

HSBC Holdings PLC
16 May 2005


PART 2


     Rate Shock Analysis

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



------------------------------------------------------------------------------------------------------------------------
                                                                                                   March 31, 2005 Values
                                                                                                  ----------------------
                                                                                                   Amount              %
------------------------------------------------------------------------------------------------------------------------
                                                                                                       (in millions)

Projected change in net market value of hedged MSRs portfolio (reflects
 projected rate movements on April 1, 2005):
      Value of hedged MSRs portfolio .........................................................    $  320
      Change resulting from an immediate 50 basis point decrease in the yield curve:
         Change limit (no worse than) ........................................................                     -   4
         Calculated change in net market value ...............................................        (3)          -   1
      Change resulting from an immediate 50 basis point increase in the yield curve:
         Change limit (no worse than) ........................................................                     -   2
         Calculated change in net market value ...............................................         4           +   1
      Change resulting from an immediate 100 basis point increase in the yield curve:
         Change limit (no worse than) ........................................................                     -   3
         Calculated change in net market value ...............................................         8           +   2


      Hedge Volatility

The following tables summarize the frequency distribution of the weekly economic
value of the MSR asset, net of changes in the market value of the related hedge
positions.



-------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2005
-------------------------------------------------------------------------------------------------------------------

Ranges of mortgage trading revenue earned
  from market risk-related activities
                                                            Below      $(4) to     $(2) to         $0 to       Over
(in millions)                                                $(4)         $(2)          $0            $2         $2
Number of trading weeks market risk-related
  revenue was within the stated range .......................   1            2           1             6          2



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Item 3. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------------------

Refer to Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations, under the captions "Interest Rate Risk Management" and
"Trading Activities", beginning on page 37 of this Form 10-Q.

Item 4. Controls and Procedures
--------------------------------------------------------------------------------

Disclosure Controls

With the participation of the Chief Executive Officer and Chief Financial
Officer, the effectiveness of HUSI's disclosure controls and procedures was
evaluated as of the end of the period covered by this report. The disclosure
controls and procedures are designed to ensure that information required to be
disclosed by HUSI in the reports we file under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), is recorded, processed, summarized and
reported on a timely basis. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that 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 filed under the Exchange Act.

Internal Controls

There have not been any changes in HUSI's internal control over financial
reporting during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, HUSI's
internal controls over financial reporting.

Sarbanes-Oxley Section 404 Compliance

As an SEC registrant of public debt and preferred shares HUSI is required to
comply with the Sarbanes-Oxley Act of 2002 (the Act). Section 404 of the Act
(Section 404) requires registrants and their auditors to assess and report on
internal controls over financial reporting on an annual basis. As a subsidiary
of a foreign registrant, HUSI is required to comply with Section 404 of the Act
for the fiscal year ending December 31, 2006.


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Part II - OTHER INFORMATION
--------------------------------------------------------------------------------

      Item 1 - Legal Proceedings

            HUSI is named in and is defending legal actions in various
            jurisdictions arising from its normal business. None of these
            proceedings is regarded as material litigation. In addition, there
            are certain proceedings related to the "Princeton Note Matter" that
            are described below.

            In relation to the Princeton Note Matter, as disclosed in HUSI's
            2002 Annual Report on Form 10-K, two of the noteholders were not
            included in the settlement and their civil suits are continuing. The
            U.S. Government excluded one of them from the restitution order
            (Yakult Honsha Co., Ltd.) because a senior officer of the noteholder
            was being criminally prosecuted in Japan for his conduct relating to
            its Princeton Notes. The senior officer in question was convicted
            during September 2002 of various criminal charges related to the
            sale of the Princeton Notes. The U.S. Government excluded the other
            noteholder (Maruzen Company, Limited) because the sum it is likely
            to recover from the Princeton Receiver exceeds its losses
            attributable to its funds transfers with Republic New York
            Securities Corporation as calculated by the U.S. Government. Both of
            these civil suits seek compensatory, punitive, and treble damages
            pursuant to RICO and assorted fraud and breach of duty claims
            arising from unpaid Princeton Notes with face amounts totaling
            approximately $125 million. No amount of compensatory damages is
            specified in either complaint. These two complaints name HUSI, HBUS,
            and Republic New York Securities Corporation as defendants. HUSI and
            HBUS have moved to dismiss both complaints. The motion is fully
            briefed and sub judice. Mutual production of documents took place in
            2001, but additional discovery proceedings have been suspended
            pending the Court's resolution of the motions to dismiss.

      Item 5 - Other Information

            As approved by the Audit and Examining Committee of the Board of
            Directors, HUSI has engaged KPMG to perform certain non-audit
            services during 2005, including tax compliance and consultation
            services, litigation support services and general accounting
            consultation services.

      Item 6 - Exhibits

            3(i)        Registrant's Restated Certificate of Incorporation and
                        Amendments thereto, effective March 30, 2005.

             (ii)       Registrant's By-Laws, as Amended and Restated, effective
                        April 21, 2005.

            4           Instruments Defining the Rights of Security Holders,
                        including Indentures, incorporated by reference to
                        previously filed periodic reports.

            31.1        Certification of Chief Executive Officer pursuant to
                        Section 302 of the Sarbanes-Oxley Act of 2002.

            31.2        Certification of Chief Financial Officer pursuant to
                        Section 302 of the Sarbanes-Oxley Act of 2002.

            32.0        Certification of Chief Executive Officer and Chief
                        Financial Officer pursuant to Section 906 of the
                        Sarbanes-Oxley Act of 2002.


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SIGNATURE
--------------------------------------------------------------------------------

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

                                                 HSBC USA Inc.
                                                 -------------
                                                 (Registrant)


Date: May 16, 2005                               /s/ Joseph R. Simpson
                                                 -------------------------------
                                                 Joseph R. Simpson
                                                 Chief Accounting Officer
                                                 (On behalf of Registrant)


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