HSBC USA Inc 1Q 2013 Form 10-Q

RNS Number : 0999E

HSBC Holdings PLC

07 May 2013

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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

For the transition period from to

Commission file number 1-7436

HSBC USA Inc.

(Exact name of registrant as specified in its charter)

Maryland		13-2764867
(State of incorporation)		(I.R.S. Employer Identification No.)
452 Fifth Avenue, New York		10018
(Address of principal executive offices)		(Zip Code)

(212) 525-5000

Registrant's telephone number, including area code

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

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

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

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

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

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

As of April 30, 2013, there were 713 shares of the registrant's common stock outstanding, all of which are owned by HSBC North America Inc.

TABLE OF CONTENTS

Part/Item No.		Page
Part I
Item 1.	Financial Statements (Unaudited):
	Consolidated Statement of Income....................................................................................................................
	Consolidated Statement of Comprehensive Income.......................................................................................
	Consolidated Balance Sheet...............................................................................................................................
	Consolidated Statement of Changes in Shareholder's Equity.......................................................................
	Consolidated Statement of Cash Flows............................................................................................................
	Notes to the Consolidated Financial Statements.............................................................................................
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations:
	Forward-Looking Statements..............................................................................................................................
	Executive Overview..............................................................................................................................................
	Basis of Reporting................................................................................................................................................
	Balance Sheet Review..........................................................................................................................................
	Residential Real Estate Owned...........................................................................................................................
	Results of Operations..........................................................................................................................................
	Segment Results - IFRS Basis.............................................................................................................................
	Credit Quality........................................................................................................................................................
	Liquidity and Capital Resources........................................................................................................................
	Off-Balance Sheet Arrangements.......................................................................................................................
	Fair Value...............................................................................................................................................................
	Risk Management.................................................................................................................................................
	Consolidated Average Balances and Interest Rates.......................................................................................
Item 3.	Quantitative and Qualitative Disclosures about Market Risks.........................................................................
Item 4.	Controls and Procedures.........................................................................................................................................

Part II
Item 1.	Legal Proceedings....................................................................................................................................................
Item 5.	Other Information.....................................................................................................................................................
Item 6.	Exhibits.......................................................................................................................................................................
Index
Signatures

PART I

Item 1. Financial Statements (Unaudited)

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended March 31,	2013			2012
	(in millions)
Interest income:
Loans...............................................................................................................................................................	$	464		$	463
Securities.........................................................................................................................................................	228			305
Trading assets................................................................................................................................................	24			33
Short-term investments.................................................................................................................................	14			26
Other................................................................................................................................................................	10			11
Total interest income..........................................................................................................................................	740			838
Interest expense:
Deposits..........................................................................................................................................................	43			76
Short-term borrowings..................................................................................................................................	9			9
Long-term debt...............................................................................................................................................	167			154
Other................................................................................................................................................................	16			12
Total interest expense.........................................................................................................................................	235			251
Net interest income...............................................................................................................................................	505			587
Provision for credit losses...................................................................................................................................	21			-
Net interest income after provision for credit losses....................................................................................	484			587
Other revenues:
Credit card fees...............................................................................................................................................	13			30
Other fees and commissions........................................................................................................................	170			194
Trust income...................................................................................................................................................	32			25
Trading revenue.............................................................................................................................................	164			198
Other securities gains, net............................................................................................................................	131			30
Servicing and other fees from HSBC affiliates...........................................................................................	54			56
Residential mortgage banking revenue......................................................................................................	46			25
Loss on instruments designated at fair value and related derivatives..................................................	(27		)	(212		)
Other income...................................................................................................................................................	9			21
Total other revenues...........................................................................................................................................	592			367
Operating expenses:
Salaries and employee benefits....................................................................................................................	252			280
Support services from HSBC affiliates........................................................................................................	324			368
Occupancy expense, net...............................................................................................................................	59			59
Other expenses...............................................................................................................................................	154			149
Total operating expenses...................................................................................................................................	789			856
Income from continuing operations before income tax expense...................................................................	287			98
Income tax expense...............................................................................................................................................	104			18
Income from continuing operations................................................................................................................	183			80
Discontinued Operations (Note 2):
Income from discontinued operations before income tax expense...............................................................	-			241
Income tax expense...............................................................................................................................................	-			86
Income from discontinued operations............................................................................................................	-			155
Net income............................................................................................................................................................	$	183		$	235

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,	2013			2012
	(in millions)
Net income..........................................................................................................................................................	$	183		$	235
Net change in unrealized gains (losses), net of tax as applicable on:
Securities available-for-sale, not other-than-temporarily impaired....................................................	(150		)	(127		)
Derivatives designated as cash flow hedges........................................................................................	23			37
Unrecognized actuarial gains, transition obligation and prior service costs relating to pension and postretirement benefits, net of tax.....................................................................................................	-			1
Other comprehensive loss, net of tax.............................................................................................................	(127		)	(89		)
Comprehensive income....................................................................................................................................	$	56		$	146

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	March 31,		December 31,
	2013		2012
	(in millions, except share data)
Assets⁽¹⁾
Cash and due from banks..............................................................................................................................	$	1,238	$	1,359
Interest bearing deposits with banks............................................................................................................	17,059		13,279
Securities purchased under agreements to resell...........................................................................................	6,361		3,149
Trading assets...............................................................................................................................................	34,658		35,995
Securities available-for-sale...........................................................................................................................	59,458		67,716
Securities held-to-maturity (fair value of $1.6 billion and $1.8 billion at March 31, 2013 and December 31, 2012, respectively)................................................................................................................	1,434		1,620
Loans.............................................................................................................................................................	62,932		63,258
Less - allowance for credit losses.................................................................................................................	568		647
Loans, net...............................................................................................................................................	62,364		62,611
Loans held for sale (includes $3 million and $465 million designated under fair value option at March 31, 2013 and December 31, 2012, respectively).................................................................................................	399		1,018
Properties and equipment, net......................................................................................................................	267		276
Intangible assets, net.....................................................................................................................................	267		247
Goodwill.......................................................................................................................................................	2,228		2,228
Other assets..................................................................................................................................................	7,277		7,069
Total assets....................................................................................................................................................	$	193,010	$	196,567
Liabilities⁽¹⁾
Debt:
Deposits in domestic offices:
Noninterest bearing...........................................................................................................................	$	30,426	$	31,315
Interest bearing (includes $8.4 billion and $8.7 billion designated under fair value option at March 31, 2013 and December 31, 2012, respectively)...............................................................................	65,840		66,520
Deposits in foreign offices:
Noninterest bearing...........................................................................................................................	1,742		1,813
Interest bearing..................................................................................................................................	19,041		18,023
Total deposits........................................................................................................................................	117,049		117,671
Short-term borrowings...........................................................................................................................	11,802		14,933
Long-term debt (includes $7.7 billion and $7.3 billion designated under fair value option at March 31, 2013 and December 31, 2012, respectively)....................................................................................	22,039		21,745
Total debt......................................................................................................................................................	150,890		154,349
Trading liabilities...........................................................................................................................................	19,488		19,820
Interest, taxes and other liabilities.................................................................................................................	4,794		4,562
Total liabilities.............................................................................................................................................	175,172		178,731
Shareholders' equity
Preferred stock..............................................................................................................................................	1,565		1,565
Common shareholder's equity:
Common stock ($5 par; 150,000,000 shares authorized; 713 shares issued and outstanding at March 31, 2013 and December 31, 2012).........................................................................................	-		-
Additional paid-in capital.................................................................................................................	14,087		14,123
Retained earnings..............................................................................................................................	1,528		1,363
Accumulated other comprehensive income.......................................................................................	658		785
Total common shareholder's equity.............................................................................................................	16,273		16,271
Total shareholders' equity............................................................................................................................	17,838		17,836
Total liabilities and shareholders' equity...................................................................................................	$	193,010	$	196,567

⁽¹⁾The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") as of March 31, 2013 and December 31, 2012 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation.

	March 31,		December 31,
	2013		2012
	(in millions)
Assets
Interest bearing deposits with banks.............................................................................................................	$	210	$	216
Other assets.................................................................................................................................................	514		533
Total assets..................................................................................................................................................	$	724	$	749
Liabilities
Long-term debt............................................................................................................................................	$	92	$	92
Interest, taxes and other liabilities................................................................................................................	125		152
Total liabilities.............................................................................................................................................	$	217	$	244

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Three Months Ended March 31,	2013			2012
	(dollars are in millions)
Preferred stock
Balance at beginning and end of period.............................................................................................................	$	1,565		$	1,565
Common stock
Balance at beginning and end of period.............................................................................................................	-			-
Additional paid-in capital
Balance at beginning of period..........................................................................................................................	14,123			13,814
Other.................................................................................................................................................................	(36		)	(1		)
Balance at end of period....................................................................................................................................	14,087			13,813
Retained earnings
Balance at beginning of period..........................................................................................................................	1,363			2,481
Net income........................................................................................................................................................	183			235
Cash dividends declared on preferred stock......................................................................................................	(18		)	(19		)
Balance at end of period....................................................................................................................................	1,528			2,697
Accumulated other comprehensive income
Balance at beginning of period..........................................................................................................................	785			642
Other comprehensive loss, net of tax................................................................................................................	(127		)	(89		)
Balance at end of period....................................................................................................................................	658			553
Total common shareholders' equity.................................................................................................................	16,273			17,063
Total shareholders' equity................................................................................................................................	$	17,838		$	18,628

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,	2013			2012
	(in millions)
Cash flows from operating activities
Net income...................................................................................................................................................................	$	183		$	235
Income from discontinued operations.........................................................................................................................	-			155
Income from continuing operations.............................................................................................................................	183			80
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..............................................................................................................................	83			51
Provision for credit losses.....................................................................................................................................	21			-
Realized gains on securities available-for-sale.......................................................................................................	(123		)	(30		)
Realized gains on securities held-to-maturity.......................................................................................................	(8		)	-
Net change in other assets and liabilities...............................................................................................................	410			31
Net change in loans held for sale:..........................................................................................................................
Originations of loans........................................................................................................................................	(639		)	(675		)
Sales and collection of loans held for sale........................................................................................................	804			816
Net change in trading assets and liabilities............................................................................................................	979			6,689
Lower of amortized cost or fair value adjustments on loans held for sale............................................................	(8		)	10
Mark-to-market loss on financial instruments designated at fair value and related derivatives............................	27			212
Cash provided by operating activities - continuing operations..................................................................................	1,729			7,184
Cash provided by operating activities - discontinued operations...............................................................................	-			489
Net cash provided by operating activities...................................................................................................................	1,729			7,673
Cash flows from investing activities
Net change in interest bearing deposits with banks.....................................................................................................	(3,780		)	2,416
Net change in federal funds sold and securities purchased under agreements to resell................................................	(3,212		)	(5,330		)
Securities available-for-sale:
Purchases of securities available-for-sale..............................................................................................................	(6,357		)	(9,575		)
Proceeds from sales of securities available-for-sale..............................................................................................	12,378			4,392
Proceeds from maturities of securities available-for-sale......................................................................................	1,909			4,409
Securities held-to-maturity:
Proceeds from sales of securities held-to-maturity...............................................................................................	79			-
Proceeds from maturities of securities held-to-maturity......................................................................................	116			86
Change in loans:
Originations, net of collections.............................................................................................................................	697			(1,704		)
Loans sold to third parties....................................................................................................................................	-			48
Net cash used for acquisitions of properties and equipment......................................................................................	(6		)	(1		)
Other, net.....................................................................................................................................................................	(31		)	(79		)
Cash provided by (used in) investing activities - continuing operations....................................................................	1,793			(5,338		)
Cash provided by investing activities - discontinued operations...............................................................................	-			1,407
Net cash provide by (used in) investing activities.......................................................................................................	1,793			(3,931		)
Cash flows from financing activities
Net change in deposits.................................................................................................................................................	(716		)	(2,340		)
Debt:
Net change in short-term borrowings....................................................................................................................	(3,131		)	(4,018		)
Issuance of long-term debt....................................................................................................................................	1,965			3,436
Repayment of long-term debt...............................................................................................................................	(1,707		)	(839		)
Repayment of debt related to the sale and leaseback of 452 Fifth Avenue property..........................................	-			(9		)
Other decreases in capital surplus...............................................................................................................................	(36		)	(1		)
Dividends paid.............................................................................................................................................................	(18		)	(19		)
Cash used in financing activities - continuing operations...........................................................................................	(3,643		)	(3,790		)
Cash provided by financing activities - discontinued operations...............................................................................	-			5
Net cash used in financing activities............................................................................................................................	(3,643		)	(3,785		)
Net change in cash and due from banks.......................................................................................................................	(121		)	(43		)
Cash and due from banks at beginning of period.........................................................................................................	1,359			1,616
Cash and due from banks at end of period................................................................................................................	$	1,238		$	1,573
Supplemental disclosure of non-cash investing activities
Trading securities pending settlement.........................................................................................................................	$	(26	)	$	18
Transfer of loans to held for sale.................................................................................................................................	41			138

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note		Page	Note		Page
1	Organization...........................................................		12	Fair Value Option...................................................
2	Discontinued Operations.....................................		13	Income Taxes.........................................................
3	Trading Assets and Liabilities............................		14	Accumulated Other Comprehensive Income (Loss)......................................................................
4	Securities................................................................		15	Pension and Other Postretirement Benefits......
5	Loans.......................................................................		16	Related Party Transactions..................................
6	Allowance for Credit Losses...............................		17	Business Segments...............................................
7	Loans Held for Sale...............................................		18	Retained Earnings and Regulatory Capital Requirements.........................................................
8	Intangible Assets..................................................		19	Variable Interest Entities......................................
9	Goodwill..................................................................		20	Guarantee Arrangements and Pledged Assets.
10	Derivative Financial Instruments........................		21	Fair Value Measurements.....................................
11	Disclosures about Offsetting Assets and Liabilities.................................................................		22	Litigation and Regulatory Matters.....................
			23	New Accounting Pronouncements....................

1. Organization

HSBC USA Inc. ("HSBC USA"), incorporated under the laws of Maryland, is a New York State based bank holding company and an indirect wholly-owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect wholly-owned subsidiary of HSBC Holdings plc ("HSBC"). The accompanying unaudited interim consolidated financial statements of HSBC USA Inc. and its subsidiaries (collectively "HUSI") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. HSBC USA (together with its subsidiaries, "HUSI") may also be referred to in these notes to the consolidated financial statements as "we," "us" or "our." These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Form 10-K"). Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Unless otherwise noted, information included in these notes to the consolidated financial statements relates to continuing operations for all periods presented. See Note 2, "Discontinued Operations" for further details. Interim results should not be considered indicative of results in future periods.

2. Discontinued Operations

Sale of Certain Credit Card Operations to Capital One On August 10, 2011, HSBC, through its wholly-owned subsidiaries HSBC Finance Corporation ("HSBC Finance"), HSBC USA Inc. and other wholly-owned affiliates entered into an agreement to sell its Card and Retail Services business to Capital One Financial Corporation ("Capital One"). This transaction was completed on May 1, 2012. The sale included our General Motors ("GM") and Union Plus ("UP") credit card receivables as well as our private label credit card and closed-end receivables, all of which were purchased from HSBC Finance. Prior to completing the transaction, we recorded lower of amortized cost or fair value adjustments on these receivables which, prior to the sale were classified as held for sale on our balance sheet as a component of assets of discontinued operations which totaled $333 million in the first quarter of 2012 and is reflected in net interest income and other revenues in the table below. These fair value adjustments were largely offset by held for sale accounting adjustments in which loan impairment charges and premium amortization were no longer recorded. The total final cash consideration allocated to us was approximately $19.2 billion, which did not result in the recognition of a gain or loss upon completion of the sale as the receivables were recorded at fair value. The sale to Capital One did not include credit card receivables associated with HSBC Bank USA's legacy credit card program and, therefore, are excluded from the table below. However a portion of these receivables were included as part of the branch sale to First Niagara Bank, N.A. in 2012 and HSBC Bank USA continues to offer credit cards to its customers. No significant one-time closure costs were incurred as a result of exiting these portfolios. In connection with the sale of our credit card portfolio to Capital One, we have entered into an outsourcing arrangement with Capital One with respect to the servicing of our remaining credit card portfolio.

Because the credit card and private label receivables sold were classified as held for sale prior to disposition and the operations and cash flows from these receivables were eliminated from our ongoing operations post-disposition without any significant continuing involvement, we determined we had met the requirements to report the results of these credit card and private label card receivables sold as discontinued operations for all periods presented.

The following summarizes the results of our discontinued credit card operations for the periods presented:

Three Months Ended March 31,	2013		2012
	(in millions)
Net interest income and other revenues ⁽¹⁾.....................................................................................................	$	-	$	412
Income from discontinued operations before income tax.............................................................................	-		241

⁽¹⁾Interest expense in 2012 was allocated to discontinued operations in accordance with our existing internal transfer pricing policy. This policy uses match funding based on the expected lives of the assets and liabilities of the business at the time of origination, subject to periodic review, as demonstrated by the expected cash flows and re-pricing characteristics of the underlying assets.

At March 31, 2013 and December 31, 2012 there were no remaining assets and liabilities of our discontinued credit cards operations reported as a component of assets of discontinued operations and liabilities of discontinued operations on our consolidated balance sheet.

3. Trading Assets and Liabilities

Trading assets and liabilities are summarized in the following table.

	March 31, 2013		December 31, 2012
	(in millions)
Trading assets:
U.S. Treasury..................................................................................................................................................	$	1,234	$	2,484
U.S. Government agency...............................................................................................................................	330		337
U.S. Government sponsored enterprises⁽¹⁾............................................................................................	87		32
Asset backed securities................................................................................................................................	704		687
Corporate and foreign bonds⁽²⁾....................................................................................................................	8,043		9,583
Other securities...............................................................................................................................................	33		36
Precious metals...............................................................................................................................................	15,875		12,332
Derivatives......................................................................................................................................................	8,352		10,504
	$	34,658	$	35,995
Trading liabilities:
Securities sold, not yet purchased..............................................................................................................	$	841	$	207
Payables for precious metals........................................................................................................................	6,186		5,767
Derivatives......................................................................................................................................................	12,461		13,846
	$	19,488	$	19,820

⁽¹⁾Includes mortgage backed securities of $19 million and $16 million issued or guaranteed by the Federal National Mortgage Association ("FNMA") and $69 million and $16 million issued or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") at March 31, 2013 and December 31, 2012, respectively.

⁽²⁾We did not hold any foreign bonds issued by the governments of Greece, Ireland, Italy, Portugal or Spain at either March 31, 2013 or December 31, 2012.

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

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

4. Securities

The amortized cost and fair value of the securities available-for-sale and securities held-to-maturity portfolios are summarized in the following tables.

March 31, 2013	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury......................................................................................................	$	26,715	$	475	$	(26	)	$	27,164
U.S. Government sponsored enterprises:⁽¹⁾
Mortgage-backed securities.......................................................................	176		1		(2		)	175
Direct agency obligations...........................................................................	4,029		374		(2		)	4,401
U.S. Government agency issued or guaranteed:
Mortgage-backed securities.......................................................................	15,471		536		(8		)	15,999
Collateralized mortgage obligations..........................................................	4,865		130		(19		)	4,976
Direct agency obligations...........................................................................	1		-		-			1
Obligations of U.S. states and political subdivisions..................................	743		30		(3		)	770
Asset backed securities collateralized by:
Residential mortgages.................................................................................	1		-		-			1
Commercial mortgages.................................................................................	180		5		-			185
Home equity..................................................................................................	299		-		(44		)	255
Student loans................................................................................................	-		-		-			-
Other...............................................................................................................	102		-		(17		)	85
Corporate and other domestic debt securities..............................................	24		2		-			26
Foreign debt securities⁽²⁾⁽⁴⁾...............................................................................	5,267		14		(33		)	5,248
Equity securities................................................................................................	167		5		-			172
Total available-for-sale securities..........................................................................	$	58,040	$	1,572	$	(154	)	$	59,458
Securities held-to-maturity:
U.S. Government sponsored enterprises:⁽³⁾
Mortgage-backed securities.......................................................................	$	1,035	$	146	$	-		$	1,181
U.S. Government agency issued or guaranteed:
Mortgage-backed securities.......................................................................	62		11		-			73
Collateralized mortgage obligations..........................................................	261		39		-			300
Obligations of U.S. states and political subdivisions..................................	37		2		-			39
Asset backed securities collateralized by:
Residential mortgages.................................................................................	39		2		-			41
Total held-to-maturity securities.....................................................................	$	1,434	$	200	$	-		$	1,634

December 31, 2012	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury......................................................................................................	$	34,800	$	566	$	(24	)	$	35,342
U.S. Government sponsored enterprises:⁽¹⁾
Mortgage-backed securities.......................................................................	166		1		(1		)	166
Direct agency obligations...........................................................................	4,039		364		(2		)	4,401
U.S. Government agency issued or guaranteed:
Mortgage-backed securities.......................................................................	15,646		674		(6		)	16,314
Collateralized mortgage obligations..........................................................	4,315		156		-			4,471
Direct agency obligations...........................................................................	1		-		-			1
Obligations of U.S. states and political subdivisions..................................	877		37		(2		)	912
Asset backed securities collateralized by:
Residential mortgages.................................................................................	1		-		-			1
Commercial mortgages.................................................................................	208		6		-			214
Home equity..................................................................................................	310		-		(52		)	258
Student loans................................................................................................	-		-		-			-
Other...............................................................................................................	102		-		(18		)	84
Corporate and other domestic debt securities..............................................	24		2		-			26
Foreign debt securities⁽²⁾⁽⁴⁾...............................................................................	5,385		16		(48		)	5,353
Equity securities................................................................................................	167		6		-			173
Total available-for-sale securities..........................................................................	$	66,041	$	1,828	$	(153	)	$	67,716
Securities held-to-maturity:
U.S. Government sponsored enterprises:⁽³⁾
Mortgage-backed securities.......................................................................	$	1,121	$	148	$	-		$	1,269
U.S. Government agency issued or guaranteed:
Mortgage-backed securities.......................................................................	66		12		-			78
Collateralized mortgage obligations..........................................................	277		42		-			319
Obligations of U.S. states and political subdivisions..................................	38		3		-			41
Asset backed securities collateralized by:
Residential mortgages.................................................................................	118		6		-			124
Total held-to-maturity securities............................................................................	$	1,620	$	211	$	-		$	1,831

⁽¹⁾Includes securities at amortized cost of $152 million and $153 million issued or guaranteed by FNMA at March 31, 2013 and December 31, 2012, respectively, and $24 million and $13 million issued or guaranteed by FHLMC at March 31, 2013 and December 31, 2012, respectively.

⁽²⁾At March 31, 2013 and December 31, 2012, foreign debt securities consisted of $1.4 billion and $1.5 billion, respectively, of securities fully backed by foreign governments. The remainder of foreign debt securities represents foreign bank or corporate debt.

⁽³⁾Includes securities at amortized cost of $477 million and $507 million issued or guaranteed by FNMA at March 31, 2013 and December 31, 2012, respectively, and $558 million and $614 million issued and guaranteed by FHLMC at March 31, 2013 and December 31, 2012, respectively.

⁽⁴⁾We did not hold any foreign debt securities issued by the governments of Greece, Ireland, Italy, Portugal or Spain at March 31, 2013 and December 31, 2012.

A summary of gross unrealized losses and related fair values as of March 31, 2013 and December 31, 2012 classified as to the length of time the losses have existed follows:

	One Year or Less						Greater Than One Year
March 31, 2013	Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury................................................	4	$	(7	)	$	686	6	$	(19	)	$	568
U.S. Government sponsored enterprises..	13	(4		)	468		12	-			7
U.S. Government agency issued or guaranteed....................................................	39	(27		)	2,593		1	-			-
Obligations of U.S. states and political subdivisions.................................................	14	(3		)	171		1	-			6
Asset backed securities..............................	1	-			1		15	(61		)	353
Foreign debt securities................................	-	-			-		9	(33		)	3,733
Securities available-for-sale..............................	71	$	(41	)	$	3,919	44	$	(113	)	$	4,667
Securities held-to-maturity:
U.S. Government sponsored enterprises..	20	$	-		$	-	48	$	-		$	-
U.S. Government agency issued or guaranteed....................................................	78	-			-		916	-			2
Obligations of U.S. states and political subdivisions.................................................	4	-			2		2	-			1
Asset backed securities..............................	-	-			-		-	-			-
Securities held-to-maturity.........................	102	$	-		$	2	966	$	-		$	3

	One Year or Less						Greater Than One Year
December 31, 2012	Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury................................................	6	$	(3	)	$	3,344	6	$	(21	)	$	587
U.S. Government sponsored enterprises..	9	(3		)	431		14	-			7
U.S. Government agency issued or guaranteed....................................................	18	(6		)	1,059		-	-			-
Obligations of U.S. states and political subdivisions.................................................	14	(2		)	168		1	-			7
Asset backed securities..............................	3	-			20		13	(70		)	354
Foreign debt securities................................	-	-			-		9	(48		)	3,787
Securities available-for-sale..............................	50	$	(14	)	$	5,022	43	$	(139	)	$	4,742
Securities held-to-maturity:
U.S. Government sponsored enterprises..	24	$	-		$	-	52	$	-		$	-
U.S. Government agency issued or guaranteed....................................................	75	-			-		947	-			2
Obligations of U.S. states and political subdivisions.................................................	2	-			1		1	-			-
Asset backed securities..............................	1	-			4		2	-			7
Securities held-to-maturity................................	102	$	-		$	5	1,002	$	-		$	9

Net unrealized gains decreased within the available-for-sale portfolio in the first three months of 2013 primarily due to higher rates on U.S. Treasury and Government Agency securities since December 31, 2012 and security sales during the first quarter of 2013. We have reviewed the securities for which there is an unrealized loss for other-than-temporary impairment in accordance with our accounting policies. During the three months ended March 31, 2013 and 2012, none of our debt securities were determined to have either initial other-than-temporary impairment or changes to previous other-than-temporary impairment estimates relating to the credit component.

We do not consider any debt securities to be other-than-temporarily impaired at March 31, 2013 as we expect to recover the amortized cost basis of these securities and we neither intend nor expect to be required to sell these securities prior to recovery, even if that equates to holding securities until their individual maturities. However, additional other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.

On-going Assessment for Other-Than-Temporary Impairment On a quarterly basis, we perform an assessment to determine whether there have been any events or economic circumstances to indicate that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if its fair value is less than its amortized cost at the reporting date. If impaired, we assess whether the unrealized loss is other-than-temporary.

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss attributable to factors other than credit loss is recognized, net of tax, in other comprehensive income provided we do not intend to sell the underlying debt security and it is more likely than not that we would not have to sell the debt security prior to recovery.

For all securities held in the available-for-sale or held-to-maturity portfolio for which unrealized losses attributed to factors other than credit loss have existed for a period of time, we do not have the intention to sell and believe we will not be required to sell the securities for contractual, regulatory or liquidity reasons as of the reporting date. As debt securities issued by U.S. Treasury, U.S. Government agencies and government sponsored entities accounted for 89 percent and 90 percent of total available-for-sale and held-to-maturity securities as of March 31, 2013 and December 31, 2012, respectively, our assessment for credit loss was concentrated on private label asset-backed securities and foreign securities. Substantially all of the private label asset-backed securities are supported by residential mortgages, home equity loans or commercial mortgages. Our assessment for credit loss was concentrated on this particular asset class because of the following inherent risk factors:

• The recovery of the U.S. economy has been slow;

• The continued uncertainty in the U.S. housing markets with high levels of pending foreclosure volume;

• A lack of significant traction in government sponsored programs in loan modifications;

• A lack of refinancing activities within certain segments of the mortgage market, even at the current low interest rate environment, and the re-default rate for refinanced loans;

• The unemployment rate although improving remains high compared to historical levels;

• The decline in the occupancy rate in commercial properties; and

• The severity and duration of unrealized loss.

In determining whether a credit loss exists and the period over which the debt security is expected to recover, we considered the following factors:

• The length of time and the extent to which the fair value has been less than the amortized cost basis;

• The level of credit enhancement provided by the structure, which includes but is not limited to credit subordination positions, over collateralization, protective triggers and financial guarantees provided by monoline wraps;

• Changes in the near term prospects of the issuer or underlying collateral of a security such as changes in default rates, loss severities given default and significant changes in prepayment assumptions;

• The level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

• Any adverse change to the credit conditions of the issuer, the monoline insurer or the security such as credit downgrades by the rating agencies.

We use a standard valuation model to measure the credit loss for available-for-sale and held-to-maturity securities. The valuation model captures the composition of the underlying collateral and the cash flow structure of the security. Management develops inputs to the model based on external analyst reports and forecasts and internal credit assessments. Significant inputs to the model include delinquencies, collateral types and related contractual features, estimated rates of default, loss given default and prepayment assumptions. Using the inputs, the model estimates cash flows generated from the underlying collateral and distributes those cash flows to respective tranches of securities considering credit subordination and other credit enhancement features. The projected future cash flows attributable to the debt security held are discounted using the effective interest rates determined at the original acquisition date if the security bears a fixed rate of return. The discount rate is adjusted for the floating index rate for securities which bear a variable rate of return, such as LIBOR-based instruments.

For the three months ended March 31, 2013 and 2012 there were no other-than-temporary impairment losses recognized related to credit loss. At March 31, 2013 and December 31, 2012, there were no remaining non-credit component unrealized loss amounts recognized.

At March 31, 2013, we held 27 individual asset-backed securities in the available-for-sale portfolio, of which 8 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $339 million of the total aggregate fair value of asset-backed securities of $526 million at March 31, 2013. The gross unrealized losses on these monoline securities were $61 million at March 31, 2013. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of March 31, 2013 and, therefore, we only considered the financial guarantee of monoline insurers on securities for purposes of evaluating other-than-temporary impairment with a fair value of $110 million. No security wrapped by a below investment grade monoline insurance company was deemed to be other-than-temporarily impaired at March 31, 2013.

At December 31, 2012, we held 27 individual asset-backed securities in the available-for-sale portfolio, of which 8 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $343 million of the total aggregate fair value of asset-backed securities of $557 million at December 31, 2012. The gross unrealized losses on these monoline securities were $69 million at December 31, 2012. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of December 31, 2012 and, therefore, we only considered the financial guarantee of monoline insurers on securities with a fair value of $110 million for purposes of evaluating other-than-temporary impairment. No security wrapped by a below investment grade monoline insurance company was deemed to be other-than-temporarily impaired at December 31, 2012.

As discussed above, certain asset-backed securities have an embedded financial guarantee provided by monoline insurers. Because the financial guarantee is not a separate and distinct contract from the asset-backed security, they are considered as a single unit of account for fair value measurement and impairment assessment purposes. The monoline insurers are regulated by the insurance commissioners of the relevant states and certain monoline insurers that write the financial guarantee contracts are public companies. As discussed above, we do not consider the value of the monoline wrap of any non-investment grade monoline insurer at March 31, 2013 and December 31, 2012. In evaluating the extent of our reliance on investment grade monoline insurance companies, consideration is given to our assessment of the creditworthiness of the monoline and other market factors. We perform both a credit as well as a liquidity analysis on the monoline insurers each quarter. Our analysis also compares market-based credit default spreads, when available, to assess the appropriateness of our monoline insurer's creditworthiness. Based on the public information available, including the regulatory reviews and actions undertaken by the state insurance commissions and the published financial results, we determine the degree of reliance to be placed on the financial guarantee policy in estimating the cash flows to be collected for the purpose of recognizing and measuring impairment loss.

A credit downgrade to non-investment grade is a key but not the only factor in determining the credit risk or the monoline insurer's ability to fulfill its contractual obligation under the financial guarantee arrangement. Although a monoline may have been down-graded by the credit rating agencies or have been ordered to commute its operations by the insurance commissioners, it may retain the ability and the obligation to continue to pay claims in the near term. We evaluate the short-term liquidity of and the ability to pay claims by the monoline insurers in estimating the amounts of cash flows expected to be collected from specific asset-backed securities for the purpose of assessing and measuring credit loss.

The following table summarizes realized gains and losses on investment securities transactions attributable to available-for-sale securities.

Three Months Ended March 31,	2013			2012
	(in millions)
Gross realized gains............................................................................................................................................	$	124		$	70
Gross realized losses..........................................................................................................................................	(1		)	(40		)
Net realized gains................................................................................................................................................	$	123		$	30

The following table summarizes realized gains and losses on investment securities transactions attributable to held-to-maturity securities.

Three Months Ended March 31,	2013		2012
	(in millions)
Gross realized gains............................................................................................................................................	$	8	$	-
Gross realized losses..........................................................................................................................................	-		-
Net realized gains (losses).................................................................................................................................	$	8	$	-

During the first quarter of 2013, we sold six asset-backed securities out of our held-to-maturity portfolio with a total carrying value of $71 million. These sales were in response to the significant credit deterioration which had occurred on these securities which had been classified as substandard for regulatory reporting purposes and, therefore, these disposals do not affect our intent and ability to hold our remaining held-to-maturity portfolio until maturity.

The amortized cost and fair values of securities available-for-sale and securities held-to-maturity at March 31, 2013, are summarized in the table below by contractual maturity. Expected maturities differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties in certain cases. Securities available-for-sale amounts exclude equity securities as they do not have stated maturities. The table below also reflects the distribution of maturities of debt securities held at March 31, 2013, together with the approximate taxable equivalent yield of the portfolio. The yields shown are calculated by dividing annual interest income, including the accretion of discounts and the amortization of premiums, by the amortized cost of securities outstanding at March 31, 2013. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates.

	Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years
Taxable Equivalent Basis	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(dollars are in millions)
Available-for-sale:
U.S. Treasury.......................................	$	2,002	.41	%	$	19,694	.48	%	$	2,880	2.60	%	$	2,139	3.57	%
U.S. Government sponsored enterprises........................................	50		.39		333		3.26		3,000		3.05		822		3.64
U.S. Government agency issued or guaranteed........................................	-		-		4		4.66		88		1.88		20,245		2.79
Obligations of U.S. states and political subdivisions..........................	-		-		49		4.20		293		4.01		401		3.68
Asset backed securities.....................	-		-		1		1.83		11		.41		570		2.77
Other domestic debt securities..........	-		-		-		-		-		-		24		4.00
Foreign debt securities.......................	665		3.48		4,602		1.87		-		-		-		-
Total amortized cost..................................	$	2,717	1.16	%	$	24,683	.79	%	$	6,272	2.87	%	$	24,201	2.90	%
Total fair value............................................	$	2,721			$	24,769			$	6,794			$	25,002
Held-to-maturity:
U.S. Government sponsored enterprises........................................	$	1	7.98	%	$	5	7.68	%	$	1	7.89	%	$	1,028	6.16	%
U.S. Government agency issued or guaranteed........................................	-		-		1		7.59		3		7.69		319		6.50
Obligations of U.S. states and political subdivisions..........................	5		5.05		14		5.13		9		4.42		9		5.02
Asset backed securities.....................	-		-		-		-		-		-		39		6.41
Total amortized cost..................................	$	6	5.57	%	$	20	5.87	%	$	13	5.41	%	$	1,395	6.23	%
Total fair value............................................	$	6			$	20			$	14			$	1,594

Investments in Federal Home Loan Bank ("FHLB") stock and Federal Reserve Bank ("FRB") stock of $143 million and $483 million, respectively, were included in other assets at March 31, 2013 and December 31, 2012.

5. Loans

Loans consisted of the following:

	March 31, 2013		December 31, 2012
	(in millions)
Commercial loans:
Construction and other real estate.........................................................................................................	$	8,319	$	8,457
Business and corporate banking............................................................................................................	12,725		12,608
Global banking⁽¹⁾........................................................................................................................................	19,718		20,009
Other commercial.......................................................................................................................................	2,877		3,076
Total commercial........................................................................................................................................	43,639		44,150
Consumer loans:
Home equity mortgages...........................................................................................................................	2,236		2,324
Residential mortgages, excluding home equity mortgages.................................................................	15,730		15,371
Credit cards................................................................................................................................................	749		815
Other consumer.........................................................................................................................................	578		598
Total consumer..........................................................................................................................................	19,293		19,108
Total loans........................................................................................................................................................	$	62,932	$	63,258

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

Net deferred origination costs totaled $64 million and $30 million at March 31, 2013 and December 31, 2012, respectively.

At March 31, 2013 and December 31, 2012, we had net unamortized premium on our loans of $23 million and $25 million, respectively. We amortized net premiums of $2 million and $9 million on our loans in the three months ended March 31, 2013 and 2012, respectively.

Age Analysis of Past Due Loans The following table summarizes the past due status of our loans at March 31, 2013 and December 31, 2012. The aging of past due amounts are determined based on the contractual delinquency status of payments under the loan. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status may be affected by customer account management policies and practices such as re-age or modification.

	Days Past Due
At March 31, 2013	1 - 29 days		30 - 89 days		90+ days		Total Past Due		Current		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate................	$	94	$	31	$	62	$	187	$	8,132	$	8,319
Business and corporate banking...................	684		36		42		762		11,963		12,725
Global banking..................................................	547		17		8		572		19,146		19,718
Other commercial..............................................	343		28		19		390		2,487		2,877
Total commercial.....................................................	1,668		112		131		1,911		41,728		43,639
Consumer loans:
Home equity mortgages..................................	338		34		69		441		1,795		2,236
Residential mortgages, excluding home equity mortgages.............................................	85		448		931		1,464		14,266		15,730
Credit cards.......................................................	22		12		13		47		702		749
Other consumer................................................	5		3		27		35		543		578
Total consumer.......................................................	450		497		1,040		1,987		17,306		19,293
Total loans...............................................................	$	2,118	$	609	$	1,171	$	3,898	$	59,034	62,932

	Days Past Due
At December 31, 2012	1 - 29 days		30 - 89 days		90+ days		Total Past Due		Current		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate...........	$	27	$	89	$	152	$	268	$	8,189	$	8,457
Business and corporate banking..............	558		73		70		701		11,907		12,608
Global banking............................................	777		30		8		815		19,194		20,009
Other commercial........................................	37		16		31		84		2,992		3,076
Total commercial.........................................	1,399		208		261		1,868		42,282		44,150
Consumer loans:
Home equity mortgages.............................	348		40		82		470		1,854		2,324
Residential mortgages, excluding home equity mortgages........................................	100		493		976		1,569		13,802		15,371
Credit cards..................................................	28		14		15		57		758		815
Other consumer...........................................	7		5		33		45		553		598
Total consumer...........................................	483		552		1,106		2,141		16,967		19,108
Total loans...............................................................	$	1,882	$	760	$	1,367	$	4,009	$	59,249	$	63,258

Nonaccrual Loans Nonaccrual loans totaled $1.5 billion and $1.6 billion at March 31, 2013 and December 31, 2012, respectively. Interest income that would have been recorded if such nonaccrual loans had been current and in accordance with contractual terms was approximately $31 million and $29 million in the three months ended March 31, 2013 and 2012. Interest income that was included in interest income on these loans was $5 million and $(2) million in the three months March 31, 2013 and 2012. For an analysis of reserves for credit losses, see Note 6 "Allowance for Credit Losses."

Nonaccrual loans and accruing receivables 90 days or more delinquent are summarized in the following table:

	March 31, 2013		December 31, 2012
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:........................................................................................................................................
Construction and land loans.....................................................................................................	$	47	$	104
Other real estate..........................................................................................................................	218		281
Business and corporate banking...................................................................................................	30		47
Global banking..................................................................................................................................	18		18
Other commercial..............................................................................................................................	14		13
Total commercial....................................................................................................................................	327		463
Consumer:
Residential mortgages, excluding home equity mortgages.......................................................	1,026		1,038
Home equity mortgages..................................................................................................................	74		86
Total residential mortgages⁽¹⁾...................................................................................................	1,100		1,124
Other consumer loans.....................................................................................................................	5		5
Total consumer loans......................................................................................................................	1,105		1,129
Nonaccrual loans held for sale.......................................................................................................	34		37
Total nonaccruing loans..................................................................................................................................	1,466		1,629
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:........................................................................................................................................
Construction and land loans.....................................................................................................	-		-
Other real estate..........................................................................................................................	2		8
Business and corporate banking...................................................................................................	2		28
Other commercial..............................................................................................................................	1		1
Total commercial..............................................................................................................................	5		37
Consumer:
Credit card receivables....................................................................................................................	13		15
Other consumer................................................................................................................................	22		28
Total consumer loans......................................................................................................................	35		43
Total accruing loans contractually past due 90 days or more..................................................................	40		80
Total nonperforming loans.............................................................................................................................	$	1,506	$	1,709

⁽¹⁾ Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.

Impaired Loans A loan is considered to be impaired when it is deemed probable that not all principal and interest amounts due according to the contractual terms of the loan agreement will be collected. Probable losses from impaired loans are quantified and recorded as a component of the overall allowance for credit losses. Commercial and consumer loans for which we have modified the loan terms as part of a troubled debt restructuring are considered to be impaired loans. Additionally, commercial loans in nonaccrual status, or that have been partially charged-off or assigned a specific allowance for credit losses are also considered impaired loans.

Troubled debt restructurings Troubled debt restructurings represent loans for which the original contractual terms have been modified to provide for terms that are less than what we would be willing to accept for new loans with comparable risk because of deterioration in the borrower's financial condition.

Modifications for consumer and commercial loans may include changes to one or more terms of the loan, including, but not limited to, a change in interest rate, extension of the amortization period, reduction in payment amount and partial forgiveness or deferment of principal. A substantial amount of our modifications involve interest rate reductions which lower the amount of interest income we are contractually entitled to receive in future periods. Through lowering the interest rate and other loan term changes, we believe we are able to increase the amount of cash flow that will ultimately be collected from the loan, given the borrower's financial condition. TDR Loans are reserved for either based on the present value of expected future cash flows discounted at the loans' original effective interest rate which generally results in a higher reserve requirement for these loans or in the case of certain secured commercial loans, the estimated fair value of the underlying collateral. Once a consumer loan is classified as a TDR Loan, it continues to be reported as such until it is paid off or charged-off. For commercial loans, if subsequent performance is in accordance with the new terms and such terms reflect current market rates at the time of restructure, they will no longer be reported as a TDR loan beginning in the year after restructuring. From 2010, approximately $11 million of commercial loans have met the criteria and have been removed from TDR classification.

The following table presents information about receivables which were modified during the three months ended March 31, 2013 and 2012 and as a result of this action became classified as TDR Loans.

Three Months Ended March 31,	2013		2012
	(in millions)
Commercial loans:
Construction and other real estate..................................................................................................................	$	-	$	73
Business and corporate banking.....................................................................................................................	4		22
Total commercial.................................................................................................................................................	4		95
Consumer loans:
Residential mortgages.......................................................................................................................................	44		55
Credit cards.........................................................................................................................................................	-		1
Total consumer...................................................................................................................................................	44		56
Total............................................................................................................................................................................	$	48	$	151

The weighted-average contractual rate reduction for loans which became classified as TDR Loans during the three months ended March 31, 2013 and 2012 was 1.99 percent and 1.81 percent, respectively, for consumer loans. Weighted-average contractual rate reduction for commercial loans was not significant in both number of loans and rate.

The following tables present information about our TDR Loans and the related credit loss reserves for TDR Loans:

	March 31, 2013		December 31, 2012
	(in millions)
TDR Loans⁽¹⁾⁽²⁾:
Commercial loans:
Construction and other real estate.....................................................................................................	$	297	$	343
Business and corporate banking........................................................................................................	34		86
Other commercial..................................................................................................................................	30		31
Total commercial...................................................................................................................................	361		460
Consumer loans:
Residential mortgages ⁽³⁾......................................................................................................................	869		960
Credit cards............................................................................................................................................	13		14
Total consumer.....................................................................................................................................	882		974
Total TDR Loans⁽⁴⁾........................................................................................................................................	$	1,243	$	1,434

	March 31, 2013		December 31, 2012
	(in millions)
Allowance for credit losses for TDR Loans⁽⁵⁾:
Commercial loans:
Construction and other real estate.......................................................................................................	$	21	$	23
Business and corporate banking..........................................................................................................	2		3
Other commercial....................................................................................................................................	-		-
Total commercial.....................................................................................................................................	23		26
Consumer loans:
Residential mortgages............................................................................................................................	80		109
Credit cards..............................................................................................................................................	5		5
Total consumer.......................................................................................................................................	85		114
Total allowance for credit losses for TDR Loans........................................................................................	$	108	$	140

⁽¹⁾TDR Loans are considered to be impaired loans. For consumer loans, all such loans are considered impaired loans regardless of accrual status. For commercial loans, impaired loans include other loans in addition to TDRs which totaled $171 million and $237 million at March 31, 2013 and December 31, 2012, respectively.

⁽²⁾The TDR Loan balances included in the table above reflect the current carrying amount of TDR Loans and includes all basis adjustments on the loan, such as unearned income, unamortized deferred fees and costs on originated loans, partial charge-offs and premiums or discounts on purchased loans. The following table reflects the unpaid principal balance of TDR Loans:

	March 31, 2013		December 31, 2012
	(in millions)
Commercial loans:
Construction and other real estate.............................................................................................	$	318	$	398
Business and corporate banking..................................................................................................	73		137
Other commercial......................................................................................................................	33		34
Total commercial...........................................................................................................................	424		569
Consumer loans:
Residential mortgages................................................................................................................	1,029		1,118
Credit cards................................................................................................................................	13		14
Total consumer...............................................................................................................................	1,042		1,132
Total.....................................................................................................................................................	$	1,466	$	1,701

⁽³⁾Includes $632 million and $445 million at March 31, 2013 and December 31, 2012, respectively, of loans that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽⁴⁾Includes balances of $416 million and $519 million at March 31, 2013 and December 31, 2012, respectively, which are classified as nonaccrual loans.

⁽⁵⁾Included in the allowance for credit losses.

Additional information relating to TDR Loans is presented in the table below.

Three Months Ended March 31,	2013		2012
	(in millions)
Average balance of TDR Loans
Commercial loans:
Construction and other real estate.............................................................................................................	$	320	$	355
Business and corporate banking................................................................................................................	60		100
Other commercial...........................................................................................................................................	31		36
Total commercial............................................................................................................................................	411		491
Consumer loans:
Residential mortgages..................................................................................................................................	849		638
Credit cards....................................................................................................................................................	14		20
Total consumer..............................................................................................................................................	863		658
Total average balance of TDR Loans.....................................................................................................................	$	1,274	$	1,149
Interest income recognized on TDR Loans
Commercial loans:
Construction and other real estate.............................................................................................................	$	2	$	2
Business and corporate banking................................................................................................................	-		-
Other commercial...........................................................................................................................................	1		1
Total commercial............................................................................................................................................	3		3
Consumer loans:
Residential mortgages..................................................................................................................................	8		6
Credit cards....................................................................................................................................................	-		-
Total consumer..............................................................................................................................................	8		6
Total interest income recognized on TDR Loans.................................................................................................	$	11	$	9

The following table presents loans which were classified as TDR Loans during the previous 12 months which for commercial loans became 90 days or greater contractually delinquent or for consumer loans became 60 days or greater contractually delinquent during the twelve months ended March 31, 2013 and 2012:

Three Months Ended March 31,	2013		2012
	(in millions)
Commercial loans:
Construction and other real estate..................................................................................................................	$	2	$	-
Business and corporate banking.....................................................................................................................	-		-
Other commercial................................................................................................................................................	-		-
Total commercial.................................................................................................................................................	2		-
Consumer loans:
Residential mortgages.......................................................................................................................................	13		19
Credit cards.........................................................................................................................................................	1		1
Total consumer...................................................................................................................................................	14		20
Total............................................................................................................................................................................	$	16	$	20

Impaired commercial loans Impaired commercial loan statistics are summarized in the following table:

	Amount with Impairment Reserves		Amount without Impairment Reserves		Total Impaired Commercial Loans^(1)(2)(3)		Impairment Reserve
	(in millions)
At March 31, 2013
Construction and other real estate........................................................	$	101	$	292	$	393	$	27
Business and corporate banking...........................................................	20		27		47		8
Global banking.........................................................................................	-		18		18		-
Other commercial.....................................................................................	10		64		74		-
Total...........................................................................................................	$	131	$	401	$	532	$	35
At December 31, 2012
Construction and other real estate........................................................	$	192	$	305	$	497	$	86
Business and corporate banking...........................................................	57		49		106		10
Global banking.........................................................................................	-		18		18		-
Other commercial.....................................................................................	1		75		76		-
Total...........................................................................................................	$	250	$	447	$	697	$	96

⁽¹⁾The reduction in impaired commercial loans for construction and other real estate loans primarily relates to the charge-off of a single loan totaling $57 million in the first quarter of 2013 for which we were fully reserved.

⁽²⁾Includes impaired commercial loans which are also considered TDR Loans as follows:

	March 31, 2013		December 31, 2012
	(in millions)
Construction and other real estate.........................................................................................................	$	297	$	343
Business and corporate banking..............................................................................................................	34		86
Other commercial..................................................................................................................................	30		31
Total.....................................................................................................................................................	$	361	$	460

⁽³⁾The impaired commercial loan balances included in the table above reflect the current carrying amount of the loan and includes all basis adjustments, such as unamortized deferred fees and costs on originated loans and any premiums or discounts. The unpaid principal balance of impaired commercial loans included in the table above are as follows:

	March 31, 2013		December 31, 2012
	(in millions)
Construction and other real estate.........................................................................................................	$	414	$	552
Business and corporate banking..............................................................................................................	86		157
Global banking.......................................................................................................................................	18		18
Other commercial..................................................................................................................................	77		79
Total.....................................................................................................................................................	$	595	$	806

The following table presents information about average impaired commercial loan balances and interest income recognized on the impaired commercial loans:

Three Months Ended March 31,	2013		2012
	(in millions)
Average balance of impaired commercial loans:
Construction and other real estate............................................................................................................	$	445	$	694
Business and corporate banking...............................................................................................................	77		133
Global banking..............................................................................................................................................	18		78
Other commercial..........................................................................................................................................	75		90
Total average balance of impaired commercial loans.............................................................................	$	615	$	995
Interest income recognized on impaired commercial loans:
Construction and other real estate............................................................................................................	$	1	$	1
Business and corporate banking...............................................................................................................	-		1
Global banking..............................................................................................................................................	-		-
Other commercial..........................................................................................................................................	-		-
Total interest income recognized on impaired commercial loans..........................................................	$	1	$	2

Commercial Loan Credit Quality Indicators The following credit quality indicators are monitored for our commercial loan portfolio:

Criticized asset classifications These classifications are based on the risk rating standards of our primary regulator. Problem loans are assigned various criticized facility grades. We also assign obligor grades which are used under our allowance for credit losses methodology. Criticized assets for commercial loans are summarized in the following table:

	Special Mention		Substandard		Doubtful		Total
	(in millions)
At March 31, 2013
Construction and other real estate........................................................	$	510	$	611	$	28	$	1,149
Business and corporate banking...........................................................	363		81		9		453
Global banking.........................................................................................	242		50		-		292
Other commercial.....................................................................................	29		68		3		100
Total...........................................................................................................	$	1,144	$	810	$	40	$	1,994
At December 31, 2012
Construction and other real estate........................................................	$	627	$	677	$	105	$	1,409
Business and corporate banking...........................................................	369		115		10		494
Global banking.........................................................................................	93		50		-		143
Other commercial.....................................................................................	36		74		2		112
Total...........................................................................................................	$	1,125	$	916	$	117	$	2,158

Nonperforming The status of our commercial loan portfolio is summarized in the following table:

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At March 31, 2013
Commercial:
Construction and other real estate.....................................	$	8,052	$	265	$	2	$	8,319
Business and corporate banking........................................	12,693		30		2		12,725
Global banking.......................................................................	19,700		18		-		19,718
Other commercial...................................................................	2,862		14		1		2,877
Total commercial..........................................................................	$	43,307	$	327	$	5	$	43,639
At December 31, 2012
Commercial:
Construction and other real estate.....................................	$	8,064	$	385	$	8	$	8,457
Business and corporate banking........................................	12,533		47		28		12,608
Global banking.......................................................................	19,991		18		-		20,009
Other commercial...................................................................	3,062		13		1		3,076
Total commercial..........................................................................	$	43,650	$	463	$	37	$	44,150

Credit risk profile The following table shows the credit risk profile of our commercial loan portfolio:

	Investment Grade⁽¹⁾		Non-Investment Grade		Total
	(in millions)
At March 31, 2013
Construction and other real estate...........................................................................................	$	3,492	$	4,827	$	8,319
Business and corporate banking..............................................................................................	6,098		6,627		12,725
Global banking............................................................................................................................	16,472		3,246		19,718
Other commercial........................................................................................................................	1,142		1,735		2,877
Total commercial..................................................................................................................	$	27,204	$	16,435	$	43,639
At December 31, 2012
Construction and other real estate...........................................................................................	$	4,727	$	3,730	$	8,457
Business and corporate banking..............................................................................................	6,012		6,596		12,608
Global banking............................................................................................................................	16,206		3,803		20,009
Other commercial........................................................................................................................	1,253		1,823		3,076
Total commercial..................................................................................................................	$	28,198	$	15,952	$	44,150

⁽¹⁾Investment grade includes commercial loans with credit ratings of at least BBB- or above or the equivalent based on our internal credit rating system.

Consumer Loan Credit Quality Indicators The following credit quality indicators are utilized for our consumer loan portfolio:

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

	March 31, 2013				December 31, 2012
	Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgage, excluding home equity mortgages⁽¹⁾..................	$	1,158	7.23	%	$	1,233	7.78	%
Home equity mortgages..............................................................................	85		3.80		75		3.23
Total residential mortgages........................................................................	1,243		6.81		1,308		7.20
Credit card receivables................................................................................	18		2.40		21		2.58
Other consumer............................................................................................	24		3.74		30		4.52
Total consumer...................................................................................................	$	1,285	6.54	%	$	1,359	6.92	%

Nonperforming The status of our consumer loan portfolio is summarized in the following table:

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At March 31, 2013
Consumer:
Residential mortgage, excluding home equity mortgages....	$	14,704	$	1,026	$	-	$	15,730
Home equity mortgages.............................................................	2,162		74		-		2,236
Total residential mortgages.................................................	16,866		1,100		-		17,966
Credit card receivables...............................................................	736		-		13		749
Other consumer...........................................................................	551		5		22		578
Total consumer..................................................................................	$	18,153	$	1,105	$	35	$	19,293
At December 31, 2012
Consumer:
Residential mortgage, excluding home equity mortgages....	$	14,333	$	1,038	$	-	$	15,371
Home equity mortgages.............................................................	2,238		86		-		2,324
Total residential mortgages.................................................	16,571		1,124		-		17,695
Credit card receivables...............................................................	800		-		15		815
Other consumer...........................................................................	565		5		28		598
Total consumer..................................................................................	$	17,936	$	1,129	$	43	$	19,108

Troubled debt restructurings See discussion of impaired loans above for further details on this credit quality indicator.

Concentration of Credit Risk A concentration of credit risk is defined as a significant credit exposure with an individual or group engaged in similar activities or affected similarly by economic conditions. We enter into a variety of transactions in the normal course of business that involve both on and off-balance sheet credit risk. Principal among these activities is lending to various commercial, institutional, governmental and individual customers. We participate in lending activity throughout the United States and internationally. In general, we manage the varying degrees of credit risk involved in on and off-balance sheet transactions through specific credit policies. These policies and procedures provide for a strict approval, monitoring and reporting process. It is our policy to require collateral when it is deemed appropriate. Varying degrees and types of collateral are secured depending upon management's credit evaluation. As with any nonconforming and non-prime loan products, we utilize high underwriting standards and price these loans in a manner that is appropriate to compensate for higher risk.

Our loan portfolio includes the following types of loans:

• High loan-to-value ("LTV") loans - Certain residential mortgages on primary residences with LTV ratios equal to or exceeding 90 percent at the time of origination and no mortgage insurance, which could result in the potential inability to recover the entire investment in loans involving foreclosed or damaged properties.

• Interest-only loans - A loan which allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period. However, subsequent events affecting a customer's financial position could affect the ability of customers to repay the loan in the future when the principal payments are required.

• Adjustable rate mortgage ("ARM") loans - A loan which allows us to adjust pricing on the loan in line with market movements. A customer's financial situation and the general interest rate environment at the time of the interest rate reset could affect the customer's ability to repay or refinance the loan after the adjustment.

The following table summarizes the balances of high LTV, interest-only and ARM loans in our loan portfolios, including certain loans held for sale, at March 31, 2013 and December 31, 2012, respectively.

	March 31, 2013		December 31, 2012
	(in billions)
Residential mortgage loans with high LTV and no mortgage insurance⁽¹⁾..............................................	$	.9	$	.9
Interest-only residential mortgage loans......................................................................................................	3.9		4.0
ARM loans⁽²⁾.....................................................................................................................................................	10.4		10.4

⁽¹⁾Residential mortgage loans with high LTV and no mortgage insurance includes both fixed rate and adjustable rate mortgages. Excludes $19 million and $20 million of subprime residential mortgage loans held for sale at March 31, 2013 and December 31, 2012, respectively.

⁽²⁾ARM loan balances above exclude $18 million and $19 million of subprime residential mortgage loans held for sale at March 31, 2013 and December 31, 2012, respectively. In 2013 and 2014, approximately $232 million and $327 million, respectively, of the ARM loans will experience their first interest rate reset.

Concentrations of first and second liens within the outstanding residential mortgage loan portfolio are summarized in the following table. Amounts in the table exclude residential mortgage loans held for sale of $277 million and $472 million at March 31, 2013 and December 31, 2012, respectively.

	March 31, 2013		December 31, 2012
	(in millions)
Closed end:
First lien......................................................................................................................................................	$	15,730	$	15,371
Second lien.................................................................................................................................................	175		186
Revolving:
Second lien.................................................................................................................................................	2,061		2,138
Total...................................................................................................................................................................	$	17,966	$	17,695

6. Allowance for Credit Losses

An analysis of the allowance for credit losses is presented in the following table.

Three Months Ended March 31,	2013			2012
	(In millions)
Balance at beginning of period.........................................................................................................................	$	647		$	743
Provision for credit losses.................................................................................................................................	21			-
Charge-offs..........................................................................................................................................................	(110		)	(162		)
Recoveries...........................................................................................................................................................	10			22
Balance at end of period....................................................................................................................................	$	568		$	603

The following table summarizes the changes in the allowance for credit losses by product and the related loan balance by product during the three months ended March 31, 2013 and 2012:

	Commercial												Consumer
	Construction and Other Real Estate			Business and Corporate Banking			Global Banking			Other Comm'l			Residential Mortgage, Excl Home Equity Mortgages			Home Equity Mortgages			Credit Card			Other Consumer			Total
	(in millions)
Three Months Ended March 31, 2013
Allowance for credit losses - beginning of period...........................	$	162		$	97		$	41		$	17		$	210		$	45		$	55		$	20		$	647
Provision charged to income............	9			2			(1		)	-			(3		)	17			(2		)	(1		)	21
Charge offs.......................................	(58		)	(6		)	-			-			(16		)	(12		)	(12		)	(6		)	(110		)
Recoveries........................................	3			3			-			-			1			-			1			2			10
Net charge offs.................................	(55		)	(3		)	-			-			(15		)	(12		)	(11		)	(4		)	(100		)
Allowance for credit losses - end of period...............................................	$	116		$	96		$	40		$	17		$	192		$	50		$	42		$	15		$	568
Ending balance: collectively evaluated for impairment..................	$	89		$	88		$	40		$	17		$	115		$	47		$	37		$	15		$	448
Ending balance: individually evaluated for impairment.................................	27			8			-			-			77			3			5			-			120
Total allowance for credit losses.......	$	116		$	96		$	40		$	17		$	192		$	50		$	42		$	15		$	568

Loans:
Collectively evaluated for impairment.......................................	$	7,926		$	12,678		$	19,700		$	2,803		$	13,962		$	2,215		$	736		$	578		$	60,598
Individually evaluated for impairment⁽¹⁾....................................	393			47			18			74			216			21			13			-			782
Loans carried at lower of amortized cost or fair value less cost to sell.......	-			-			-			-			1,552			-			-			-			1,552
Total loans.......................................	$	8,319		$	12,725		$	19,718		$	2,877		$	15,730		$	2,236		$	749		$	578		$	62,932

Three Months Ended March 31, 2012
Allowance for credit losses - beginning of period...........................	$	212		$	78		$	131		$	21		$	192		$	52		$	39		$	18		$	743
Provision charged to income............	(20		)	6			(22		)	(2		)	15			8			11			4			-
Charge offs.......................................	(1		)	(10		)	(84		)	-			(26		)	(17		)	(17		)	(7		)	(162		)
Recoveries........................................	14			2			-			1			1			-			2			2			22
Net charge offs.................................	13			(8		)	(84		)	1			(25		)	(17		)	(15		)	(5		)	(140		)
Allowance for credit losses - end of period...............................................	$	205		$	76		$	25		$	20		$	182		$	43		$	35		$	17		$	603
Ending balance: collectively evaluated for impairment..................	$	95		$	64		$	25		$	20		$	95		$	39		$	29		$	17		$	384
Ending balance: individually evaluated for impairment.................................	110			12			-			-			87			4			6			-			219
Total allowance for credit losses.......	$	205		$	76		$	25		$	20		$	182		$	43		$	35		$	17		$	603

Loans:
Collectively evaluated for impairment.	$	7,122	$	10,750	$	13,834	$	2,962	$	12,990	$	2,477	$	767	$	679	$	51,581
Individually evaluated for impairment⁽¹⁾............................................................	655		139		18		89		596		14		19		-		1,530
Loans carried at lower of amortized cost or fair value less cost to sell..........	-		-		-		-		758		-		-		-		758
Total loans..........................................	$	7,777	$	10,889	$	13,852	$	3,051	$	14,344	$	2,491	$	786	$	679	$	53,869

⁽¹⁾For consumer loans, these amounts represent TDR Loans for which we evaluate reserves using a discounted cash flow methodology. Each loan is individually identified as a TDR Loan and then grouped together with other TDR Loans with similar characteristics. The discounted cash flow analysis is then applied to these groups of TDR Loans. The loan balance above excludes TDR loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell which totaled $632 million and $445 million at March 31, 2013 and 2012, respectively.

7. Loans Held for Sale

Loans held for sale consisted of the following:

	March 31, 2013		December 31, 2012
	(in millions)
Commercial loans...........................................................................................................................................	$	58	$	481
Consumer loans:
Residential mortgages............................................................................................................................	277		472
Other consumer.......................................................................................................................................	64		65
Total consumer..............................................................................................................................................	341		537
Total loans held for sale...............................................................................................................................	$	399	$	1,018

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale at March 31, 2013 and December 31, 2012. The fair value of commercial loans held for sale under this program was $3 million and $465 million at March 31, 2013 and December 31, 2012, respectively. We have elected to designate all of the leveraged acquisition finance syndicated loans classified as held for sale at fair value under fair value option. See Note 12, "Fair Value Option," for additional information.

Commercial loans held for sale also includes commercial real estate loans of $55 million and $16 million at March 31, 2013 and December 31, 2012, respectively, which were originated with the intent to sell to government sponsored enterprises.

Residential mortgage loans held for sale include first mortgage loans originated and held for sale primarily to various government sponsored enterprises. Gains and losses from the sale of residential mortgage loans are reflected as a component of residential mortgage banking revenue in the accompanying consolidated statement of income. We retained the servicing rights in relation to the mortgages upon sale. Also included in residential mortgage loans held for sale are subprime residential mortgage loans with a fair value of $51 million and $52 million at March 31, 2013 and December 31, 2012, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties.

Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value. While the initial carrying amount of loans held for sale continued to exceed fair value at March 31, 2013, we experienced a decrease in the valuation allowance for consumer loans held for sale during 2013 due primarily to loan sales. The valuation allowance on consumer loans held for sale was $106 million and $114 million at March 31, 2013 and December 31, 2012, respectively.

Loans held for sale are subject to market risk, liquidity risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions, as well as the interest rate and credit environment. Interest rate risk for residential mortgage loans held for sale is partially mitigated through an economic hedging program to offset changes in the fair value of the mortgage loans held for sale attributable to changes in market interest rates. Trading related revenue associated with this economic hedging program, which is included in net interest income and residential mortgage banking revenue in the consolidated statement of income, was a loss of less than $1 million during the three months ended March 31, 2013 compared to a gain of $7 million during the three months ended March 31, 2012.

8. Intangible Assets

Intangible assets consisted of the following:

	March 31, 2013		December 31, 2012
	(in millions)
Mortgage servicing rights..............................................................................................................................	$	202	$	179
Purchased credit card relationships..............................................................................................................	58		60
Other..................................................................................................................................................................	7		8
Total other intangible assets..........................................................................................................................	$	267	$	247

Mortgage Servicing Rights ("MSRs") A servicing asset is a contract under which estimated future revenues from contractually specified cash flows, such as servicing fees and other ancillary revenues, are expected to exceed the obligation to service the financial assets. We recognize the right to service mortgage loans as a separate and distinct asset at the time they are acquired or when originated loans are sold.

MSRs are subject to credit, prepayment and interest rate risk, in that their value will fluctuate as a result of changes in these economic variables. Interest rate risk is mitigated through an economic hedging program that uses securities and derivatives to offset changes in the fair value of MSRs. Since the hedging program involves trading activity, risk is quantified and managed using a number of risk assessment techniques.

Residential mortgage servicing rights Residential MSRs are initially measured at fair value at the time that the related loans are sold and are remeasured at fair value at each reporting date. Changes in fair value of MSRs are reflected in residential mortgage banking revenue in the period in which the changes occur. Fair value is determined based upon the application of valuation models and other inputs. The valuation models incorporate assumptions market participants would use in estimating future cash flows. The reasonableness of these valuation models is periodically validated by reference to external independent broker valuations and industry surveys.

Fair value of residential MSRs is calculated using the following critical assumptions:

	March 31, 2013		December 31, 2012
Annualized constant prepayment rate ("CPR")..........................................................................................	18.2	%	22.4	%
Constant discount rate...................................................................................................................................	12.5	%	11.3	%
Weighted average life.....................................................................................................................................	3.8		3.4

Residential MSRs activity is summarized in the following table:

Three Months Ended March 31,	2013			2012
	(in millions)
Fair value of MSRs:
Beginning balance.....................................................................................................................................	$	168		$	220
Additions related to loan sales...............................................................................................................	6			8
Changes in fair value due to:
Change in valuation inputs or assumptions used in the valuation models................................	26			16
Realization of cash flows....................................................................................................................	(10		)	(16		)
Ending balance.................................................................................................................................................	$	190		$	228

Information regarding residential mortgage loans serviced for others, which are not included in the consolidated balance sheet, is summarized in the following table:

	March 31, 2013		December 31, 2012
	(in millions)
Outstanding principal balances at period end.............................................................................................	$	31,039	$	32,041
Custodial balances maintained and included in noninterest bearing deposits at period end..............	$	722	$	810

Servicing fees collected are included in residential mortgage banking revenue and totaled $21 million and $25 million during the three months ended March 31, 2013 and 2012, respectively.

Commercial mortgage servicing rights Commercial MSRs, which are accounted for using the lower of amortized cost or fair value method, totaled $12 million and $11 million at March 31, 2013 and December 31, 2012, respectively.

Purchased credit card relationships In March 2012, we purchased from HSBC Finance the account relationships associated with $746 million of credit card receivables which were not included in the sale to Capital One at a fair value of $108 million. Approximately $43 million of this value was associated with the credit card receivables sold to First Niagara. The remaining $65 million was included in intangible assets and is being amortized over its estimated useful life of ten years

Other Intangible Assets Other intangible assets, which result from purchase business combinations, are comprised of favorable lease arrangements of $7 million and $8 million at March 31, 2013 and December 31, 2012, respectively.

9. Goodwill

Goodwill was $2.2 billion at both March 31, 2013 and December 31, 2012, and includes accumulated impairment losses from prior years of $54 million.

Based on the results of our interim goodwill impairment testing in December 2012, including the historically narrow differences between fair value and book value in both our Global Banking and Markets and Global Private Banking reporting units, we performed an interim review of goodwill impairment for both of these reporting units during the first quarter of 2013. As a result of this testing, the fair value of these reporting units continued to exceed their carrying values, including goodwill. At March 31, 2013, the book value of our Global Banking and Markets reporting unit including allocated goodwill of $612 million, was 97 percent of fair value, while the book value of our Global Private Banking reporting unit including allocated goodwill of $415 million was less than 50 percent of its fair value. Our goodwill impairment testing is, however, highly sensitive to certain assumptions and estimates used. As our testing results continue to indicate that there is only a marginal excess of fair value over book value for our Global Banking and Markets reporting unit, we will continue to monitor this reporting unit and perform interim impairment testing in future periods as very small changes in projections could result in either partial or full goodwill impairment of this reporting unit. We continue to perform periodic analyses of the risks and strategies of all our business and product offerings. If deterioration in economic conditions occurs or changes in the strategy or performance of our businesses or product offerings occur, interim impairment tests in addition to Global Banking and Markets could be required in 2013.

10. Derivative Financial Instruments

In the normal course of business, the derivative instruments entered into are for trading, market making and risk management purposes. For financial reporting purposes, a derivative instrument is designated in one of the following categories: (a) financial instruments held for trading, (b) hedging instruments designated as a qualifying hedge under derivative and hedge accounting principles or (c) a non-qualifying economic hedge. The derivative instruments held are predominantly swaps, futures, options and forward contracts. All freestanding derivatives, including bifurcated embedded derivatives, are stated at fair value. Where we enter into enforceable master netting arrangements with counterparties, the master netting arrangements permit us to net those derivative asset and liability positions and to offset cash collateral held and posted with the same counterparty.

Derivatives Held for Risk Management Purposes Our risk management policy requires us to identify, analyze and manage risks arising from the activities conducted during the normal course of business. We use derivative instruments as an asset and liability management tool to manage our exposures in interest rate, foreign currency and credit risks in existing assets and liabilities, commitments and forecasted transactions. The accounting for changes in fair value of a derivative instrument will depend on whether the derivative has been designated and qualifies for hedge accounting.

We designate derivative instruments to offset the fair value risk and cash flow risk arising from fixed-rate and floating-rate assets and liabilities as well as forecasted transactions. We assess the hedging relationships, both at the inception of the hedge and on an ongoing basis, using a regression approach to determine whether the designated hedging instrument is highly effective in offsetting changes in the fair value or the cash flows attributable to the hedged risk. Accounting principles for qualifying hedges require us to prepare detailed documentation describing the relationship between the hedging instrument and the hedged item, including, but not limited to, the risk management objective, the hedging strategy and the methods to assess and measure the ineffectiveness of the hedging relationship. We discontinue hedge accounting when we determine that the hedge is no longer highly effective, the hedging instrument is terminated, sold or expired, the designated forecasted transaction is not probable of occurring, or when the designation is removed by us.

In the tables below, the fair value disclosed does not include collateral that we either receive or deposit with our interest rate swap counterparties. Such collateral is recorded on our balance sheet at an amount which approximates fair value and is netted on the balance sheet with the fair value amount recognized for derivative instruments.

Fair Value Hedges In the normal course of business, we hold fixed-rate loans and securities and issue fixed-rate senior and subordinated debt obligations. The fair value of fixed-rate (USD and non-USD denominated) assets and liabilities fluctuates in response to changes in interest rates or foreign currency exchange rates. We utilize interest rate swaps, forward and futures contracts and foreign currency swaps to minimize the effect on earnings caused by interest rate and foreign currency volatility.

For reporting purposes, changes in fair value of a derivative designated in a qualifying fair value hedge, along with the changes in the fair value of the hedged asset or liability attributable to the hedged risk, are recorded in current period earnings. We recognized net losses of $4 million during the three months ended March 31, 2013 compared to net gains of $11 million during the three months ended March 31, 2012 which are reported in other income in the consolidated statement of income which represents the ineffective portion of all fair value hedges. The interest accrual related to the derivative contract is recognized in interest income.

The changes in the fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying amount of the hedged item (basis adjustment). If the hedging relationship is terminated and the hedged item continues to exist, the basis adjustment is amortized over the remaining life of the hedged item. We recorded basis adjustments for active fair value hedges which decreased the carrying amount of our debt by $1 million and increased the carrying amount of our debt by $4 million during the three months ended March 31, 2013 and 2012, respectively. We amortized $3 million and $3 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships during the three months ended March 31, 2013 and 2012, respectively. The total accumulated unamortized basis adjustment amounted to an increase in the carrying amount of our debt of $45 million and $49 million as of March 31, 2013 and December 31, 2012, respectively. Basis adjustments for active fair value hedges of available-for-sale securities decreased the carrying amount of the securities by $155 million during the three months ended March 31, 2013 compared to a decrease in the carrying amount of the securities by $294 million during the three months ended March 31, 2012. Total accumulated unamortized basis adjustments for active fair value hedges of available-for-sale securities amounted to an increase in carrying amount of $631 million and $836 million as of March 31, 2013 and December 31, 2012, respectively.

The following table presents the fair value of derivative instruments designated and qualifying as fair value hedges and their location on the balance sheet.

Derivative Assets⁽¹⁾

Derivative Liabilities⁽¹⁾

Balance Sheet

Fair Value as of

Balance Sheet

Fair Value as of

Location

March 31, 2013

December 31, 2012

Location

March 31, 2013

December 31, 2012

(in millions)

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

Other assets

Interest, taxes and
other liabilities

668

875

⁽¹⁾The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in fair value hedges and the hedged items in fair value hedges and their location on the consolidated statement of income.

	Gain (Loss) on Derivative						Gain (Loss) on Hedged Items
	Interest Income (Expense)			Other Income			Interest Income (Expense)			Other Income
	(in millions)
Three Months Ended March 31, 2013
Interest rate contracts/AFS Securities.....................................	$	(56	)	$	170		$	112		$	(174	)
Interest rate contracts/subordinated debt...............................	4			(1		)	(14		)	1
Total...............................................................................................	$	(52	)	$	169		$	98		$	(173	)
Three Months Ended March 31, 2012
Interest rate contracts/AFS Securities.....................................	$	(46	)	$	298		$	179		$	(287	)
Interest rate contracts/subordinated debt...............................	(14		)	4			(15		)	(4		)
Total...............................................................................................	$	(60	)	$	302		$	164		$	(291	)

Cash Flow Hedges We own or issue floating rate financial instruments and enter into forecasted transactions that give rise to variability in future cash flows. As a part of our risk management strategy, we use interest rate swaps, currency swaps and futures contracts to mitigate risk associated with variability in the cash flows. Changes in fair value of a derivative instrument associated with the effective portion of a qualifying cash flow hedge are recognized initially in other comprehensive income. When the cash flows for which the derivative is hedging materialize and are recorded in income or expense, the associated gain or loss from the hedging derivative previously recorded in accumulated other comprehensive income is reclassified into earnings in the same accounting period in which the designated forecasted transaction or hedged item affects earnings. If a cash flow hedge of a forecasted transaction is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in accumulated other comprehensive income (loss) unless it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period as documented at the inception of the hedge, at which time the cumulative gain or loss is released into earnings. As of March 31, 2013 and December 31, 2012, active cash flow hedge relationships extend or mature through July 2036. During the three months ended March 2013 and 2012, $4 million and $4 million, respectively, of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income. During the next twelve months, we expect to amortize $11 million of remaining losses to earnings resulting from these terminated and/or re-designated cash flow hedges. The interest accrual related to the derivative contract is recognized in interest income.

The following table presents the fair value of derivative instruments that are designated and qualify as cash flow hedges and their location on the consolidated balance sheet.

Derivative Assets⁽¹⁾

Derivative Liabilities⁽¹⁾

Balance Sheet

Fair Value as of

Balance Sheet

Fair Value as of

Location

March 31, 2013

December 31, 2012

Location

March 31, 2013

December 31, 2012

(in millions)

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

Other assets

Interest, taxes and
other liabilities

198

236

(1) The derivative asset and derivative liabilities presented above may be eligible for netting and consequently may be shown net against a different line item on the consolidated balance sheet. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

The following table presents information on gains and losses on derivative instruments designated and qualifying as hedging instruments in cash flow hedges (including amounts recognized in AOCI from all terminated cash flow hedges) and their locations on the consolidated statement of income.

	Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)				Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Gain (Loss) Reclassed From AOCI into Income (Effective Portion)						Location of Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion)
Three Months Ended March 31,	2013		2012			2013			2012				2013		2012
	(in millions)
Interest rate contracts.	$	34	$	58	Interest income (expense)	$	(4	)	$	(4	)	Other income	$	-	$	(1	)

Trading and Other Derivatives In addition to risk management, we enter into derivative instruments for trading and market making purposes, to repackage risks and structure trades to facilitate clients' needs for various risk taking and risk modification purposes. We manage our risk exposure by entering into offsetting derivatives with other financial institutions to mitigate the market risks, in part or in full, arising from our trading activities with our clients. In addition, we also enter into buy protection credit derivatives with other market participants to manage our counterparty credit risk exposure. Where we enter into derivatives for trading purposes, realized and unrealized gains and losses are recognized in trading revenue or residential mortgage banking revenue. Credit losses arising from counterparty risk on over-the-counter derivative instruments and offsetting buy protection credit derivative positions are recognized as an adjustment to the fair value of the derivatives and are recorded in trading revenue.

Derivative instruments designated as economic hedges that do not qualify for hedge accounting are recorded at fair value through profit and loss. Realized and unrealized gains and losses are recognized in other income or residential mortgage banking revenue while the derivative asset or liability positions are reflected as other assets or other liabilities. As of March 31, 2013, we have entered into credit default swaps which are designated as economic hedges against the credit risks within our loan portfolio. In the event of an impairment loss occurring in a loan that is economically hedged, the impairment loss is recognized as provision for credit losses while the gain on the credit default swap is recorded as other income. In addition, we also from time to time have designated certain forward purchase or sale of to-be-announced ("TBA") securities to economically hedge mortgage servicing rights. Changes in the fair value of TBA positions, which are considered derivatives, are recorded in residential mortgage banking revenue.

The following table presents the fair value of derivative instruments held for trading purposes and their location on the consolidated balance sheet.

	Derivative Assets⁽¹⁾					Derivative Liabilities⁽¹⁾
	Balance Sheet	Fair Value as of				Balance Sheet	Fair Value as of
	Location	March 31, 2013		December 31, 2012		Location	March 31, 2013		December 31, 2012
	(in millions)
Interest rate contracts................	Trading assets	$	63,052	$	70,865	Trading liabilities	$	63,355	$	70,450
Foreign exchange contracts......	Trading assets	14,331		13,799		Trading liabilities	14,353		13,601
Equity contracts.........................	Trading assets	1,304		1,287		Trading liabilities	1,310		1,291
Precious metals contracts.........	Trading assets	805		791		Trading liabilities	622		738
Credit contracts..........................	Trading assets	6,685		7,128		Trading liabilities	6,700		7,347
Total.............................................		$	86,177	$	93,870		$	86,340	$	93,427

The following table presents the fair value of derivative instruments held for other purposes and their location on the consolidated balance sheet.

	Derivative Assets⁽¹⁾					Derivative Liabilities⁽¹⁾
	Balance Sheet	Fair Value as of December 31,				Balance Sheet	Fair Value as of December 31,
	Location	March 31, 2013		December 31, 2012		Location	March 31, 2013		December 31, 2012
	(in millions)
Interest rate contracts.............	Other assets	$	801	$	901	Interest, taxes and other liabilities	$	90	$	97
Foreign exchange contracts...	Other assets	37		52		Interest, taxes and other liabilities	33		17
Equity contracts.......................	Other assets	653		472		Interest, taxes and other liabilities	116		126
Credit contracts........................	Other assets	5		1		Interest, taxes and other liabilities	9		4
Total...........................................		$	1,496	$	1,426		$	248	$	244

The following table presents information on gains and losses on derivative instruments held for trading purposes and their locations on the consolidated statement of income.

	Location of Gain (Loss)	Amount of Gain (Loss) Recognized in Income on Derivatives
Three Months Ended March 31,	Recognized in Income on Derivatives	2013			2012
	(in millions)
Interest rate contracts.....................................	Trading revenue	$	86		$	18
Interest rate contracts.....................................	Residential mortgage banking revenue	(7		)	(16		)
Foreign exchange contracts...........................	Trading revenue	(138		)	399
Equity contracts..............................................	Trading revenue	(2		)	18
Precious metals contracts..............................	Trading revenue	42			35
Credit contracts...............................................	Trading revenue	147			(228		)
Total..................................................................		$	128		$	226

The following table presents information on gains and losses on derivative instruments held for other purposes and their locations on the consolidated statement of income.

	Location of Gain (Loss)	Amount of Gain (Loss) Recognized in Income on Derivatives
Three Months Ended March 31,	Recognized in Income on Derivatives	2013			2012
	(in millions)
Interest rate contracts.....................................	Other income	$	(62	)	$	(90	)
Interest rate contracts.....................................	Residential mortgage banking revenue	(1		)	7
Foreign exchange contracts...........................	Other income	(31		)	14
Equity contracts..............................................	Other income	315			364
Credit contracts...............................................	Other income	-			(3		)
Total..................................................................		$	221		$	292

Credit-Risk Related Contingent Features We enter into total return swap, interest rate swap, cross-currency swap and credit default swap contracts, amongst others which contain provisions that require us to maintain a specific credit rating from each of the major credit rating agencies. Sometimes the derivative instrument transactions are a part of broader structured product transactions. If HSBC Bank USA's credit ratings were to fall below the current ratings, the counterparties to our derivative instruments could demand us to post additional collateral. The amount of additional collateral required to be posted will depend on whether HSBC Bank USA is downgraded by one or more notches and whether the downgrade is in relation to long-term or short-term ratings. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of March 31, 2013, is $8.8 billion for which we have posted collateral of $7.0 billion. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of December 31, 2012, is $8.7 billion for which we have posted collateral of $7.9 billion. Substantially all of the collateral posted is in the form of available-for-sale. See Note 20, "Guarantee Arrangements and Pledged Assets," for further details.

In the event of a credit downgrade, we currently do not expect HSBC Bank USA's long-term ratings to go below A2 and A+ or the short-term ratings to go below P-2 and A-1 by Moody's and S&P, respectively. The following tables summarize our obligation to post additional collateral (from the current collateral level) in certain hypothetical commercially reasonable downgrade scenarios. It is not appropriate to accumulate or extrapolate information presented in the tables below to determine our total obligation because the information presented to determine the obligation in hypothetical rating scenarios is not mutually exclusive.

Moody's	Long-Term Ratings
Short-Term Ratings	A1		A2		A3
	(in millions)
P-1.................................................................................................................................................	$	-	$	2	$	269
P-2.................................................................................................................................................	2		70		269

S&P	Long-Term Ratings
Short-Term Ratings	AA-		A+		A
	(in millions)
A-1+..............................................................................................................................................	$	-	$	68	$	68
A-1................................................................................................................................................	19		19		286

We would be required to post $21 million of additional collateral on total return swaps and certain other transactions if HSBC Bank USA is downgraded by S&P and Moody's by two notches on our long term rating accompanied by one notch downgrade in our short term rating.

Notional Value of Derivative Contracts The following table summarizes the notional values of derivative contracts.

	March 31, 2013		December 31, 2012
	(in billions)
Interest rate:
Futures and forwards................................................................................................................................	$	242.7	$	313.9
Swaps...........................................................................................................................................................	3,077.2		2,842.6
Options written...........................................................................................................................................	110.0		43.3
Options purchased....................................................................................................................................	107.8		44.2
	3,537.7		3,244.0
Foreign Exchange:
Swaps, futures and forwards....................................................................................................................	946.5		743.7
Options written...........................................................................................................................................	74.6		54.9
Options purchased....................................................................................................................................	-		55.5
Spot..............................................................................................................................................................	86.0		56.3
	1,107.1		910.4
Commodities, equities and precious metals:
Swaps, futures and forwards....................................................................................................................	49.4		48.1
Options written...........................................................................................................................................	22.7		21.0
Options purchased....................................................................................................................................	23.2		21.4
	95.3		90.5
Credit derivatives..............................................................................................................................................	463.5		484.9
Total....................................................................................................................................................................	$	5,203.6	$	4,729.8

11. Disclosures about Offsetting Assets and Liabilities

The following table provides information about derivative assets and securities sold under repurchase agreements that are subject to offset as of March 31, 2013 and December 31, 2012:

							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets Presented in the Balance Sheet		Financial Instruments ⁽²⁾		Cash Collateral Received		Net Amount
	(in millions)
As of March 31, 2013:
Derivatives ⁽¹⁾.....................	$	87,732	$	77,825	$	9,907	$	853	$	-	$	9,054
Securities purchased under agreements to resell.............................................	12,833		6,472		6,361		6,358		-		3
Total....................................	$	100,565	$	84,297	$	16,268	$	7,211	$	-	$	9,057

As of December 31, 2012:
Derivatives ⁽¹⁾.....................	$	95,353	$	83,367	$	11,986	$	627	$	-	$	11,359
Securities purchased under agreements to resell.............................................	5,736		2,587		3,149		3,146		-		3
Total....................................	$	101,089	$	85,954	$	15,135	$	3,773	$	-	$	11,362

⁽¹⁾The gross amounts of recognized assets includes $86.2 billion of trading related derivatives which are included in trading assets in our consolidated balance sheet and $1.6 billion of derivatives designated in hedging activities that are included in other assets in our consolidated balance sheet at March 31, 2013.The gross amounts of recognized assets includes $93.9 billion of trading related derivatives which are included in trading assets in our consolidated balance sheet and $1.5 billion of derivatives designated in hedging activities that are included in other assets in our consolidated balance sheet at December 31, 2012.

⁽²⁾Represents securities received to cover derivative and financing transaction exposures.

The following table provides information about derivative liabilities and securities purchased under agreements to resell that are subject to offset as of March 31, 2013 and December 31, 2012:

							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Liabilities Presented in the Balance Sheet		Financial Instruments ⁽²⁾		Cash Collateral Pledged		Net Amount
	(in millions)
As of March 31, 2013:
Derivatives ⁽¹⁾......................	$	87,454	$	73,879	$	13,575	$	4,886	$	-	$	8,689
Securities sold under repurchase agreements......	10,131		6,472		3,659		3,659		-		-
Total......................................	$	97,585	$	80,351	$	17,234	$	8,545	$	-	$	8,689

As of December 31, 2012:
Derivatives ⁽¹⁾......................	$	94,782	$	79,580	$	15,202	$	4,887	$	-	$	10,315
Securities sold under repurchase agreements......	9,404		2,587		6,817		6,817		-		-
Total......................................	$	104,186	$	82,167	$	22,019	$	11,704	$	-	$	10,315

⁽¹⁾The gross amounts of recognized liabilities includes $86.3 billion of trading related derivatives which are included in trading liabilities in our consolidated balance sheet and $1.1 billion of derivatives designated in hedging activities that are included in interest, taxes and other liabilities in our consolidated balance sheet at March 31, 2013.The gross amounts of recognized liabilities includes $93.4 billion of trading related derivatives which are included in trading liabilities in our consolidated balance sheet and $1.4 billion of derivatives designated in hedging activities that are included in interest, taxes and other liabilities in our consolidated balance sheet at December 31, 2012.

⁽²⁾Represents securities pledged to cover derivative and financing transaction exposures.

12. Fair Value Option

We report our results to HSBC in accordance with its reporting basis, International Financial Reporting Standards ("IFRSs"). We have elected to apply fair value option accounting to selected financial instruments in most cases to align the measurement attributes of those instruments under U.S. GAAP and IFRSs and to simplify the accounting model applied to those financial instruments. We elected to apply fair value option ("FVO") reporting to commercial leveraged acquisition finance loans and related unfunded commitments, certain fixed rate long-term debt issuances and hybrid instruments which include all structured notes and structured deposits. Changes in fair value for these assets and liabilities are reported as gain (loss) on instruments designated at fair value and related derivatives in the consolidated statement of income.

Loans We elected to apply FVO to all commercial leveraged acquisition finance loans held for sale and related unfunded commitments. The election allows us to account for these loans and commitments at fair value which is consistent with the manner in which the instruments are managed. During the first quarter of 2013, we completed the sale of substantially all of our remaining leveraged acquisition finance syndicated loans which we had been holding since the financial crisis. As of March 31, 2013, commercial leveraged acquisition finance loans held for sale and related unfunded commitments of $3 million carried at fair value had an aggregate unpaid principal balance of $3 million. As of December 31, 2012, commercial leveraged acquisition finance loans held for sale and related unfunded commitments of $465 million carried at fair value had an aggregate unpaid principal balance of $486 million.

These loans are included in loans held for sale in the consolidated balance sheet. Interest from these loans is recorded as interest income in the consolidated statement of income. Because a substantial majority of the loans elected for the fair value option are floating rate assets, changes in their fair value are primarily attributable to changes in loan-specific credit risk factors. The components of gain (loss) related to loans designated at fair value are summarized in the table below. As of March 31, 2013 and December 31, 2012, no loans for which the fair value option has been elected are 90 days or more past due or on nonaccrual status.

Long-Term Debt (Own Debt Issuances) We elected to apply FVO for certain fixed-rate long-term debt for which we had applied or otherwise would elect to apply fair value hedge accounting. The election allows us to achieve a similar accounting effect without having to meet the hedge accounting requirements. We measure the fair value of these debt issuances based on inputs observed in the secondary market. Changes in fair value of these instruments are attributable to changes of our own credit risk and interest rates.

The fair value of fixed-rate debt accounted for under FVO at March 31, 2013 totaled $2.0 billion and had an aggregate unpaid principal balance of $1.8 billion. The fair value of fixed-rate debt accounted for under FVO at December 31, 2012 totaled $2.0 billion and had an aggregate unpaid principal balance of $1.8 billion. Interest on the fixed-rate debt accounted for under FVO is recorded as interest expense in the consolidated statement of income. The components of gain (loss) related to long-term debt designated at fair value are summarized in the table below.

Hybrid Instruments We elected to apply fair value option accounting to all of our hybrid instruments, inclusive of structured notes and structured deposits, issued after January 1, 2006. As of March 31, 2013, interest bearing deposits in domestic offices included $8.4 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $8.0 billion. As of December 31, 2012, interest bearing deposits in domestic offices included $8.7 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $8.4 billion. Long-term debt at March 31, 2013 included structured notes of $5.7 billion accounted for under FVO which had an unpaid principal balance of $5.4 billion. Long-term debt at December 31, 2012 included structured notes of $5.3 billion accounted for under FVO which had an unpaid principal balance of $5.0 billion. Interest on this debt is recorded as interest expense in the consolidated statement of income. The components of gain (loss) related to hybrid instruments designated at fair value which reflect the instruments described above are summarized in the table below.

Components of Gain on Instruments at Fair Value and Related Derivatives Gain (loss) on instruments designated at fair value and related derivatives includes the changes in fair value related to interest, credit and other risks as well as the mark-to-market adjustment on derivatives related to the financial instrument designated at fair value and net realized gains or losses on these derivatives. The components of gain (loss) on instruments designated at fair value and related derivatives related to the changes in fair value of the financial instrument accounted for under FVO are as follows:

	Loans			Long-Term Debt			Hybrid Instruments			Total
	(in millions)
Three Months Ended March 31, 2013
Interest rate and other components⁽¹⁾......................................................	$	-		$	63		$	(316	)	$	(253	)
Credit risk component.................................................................................	21			(42		)	33			12
Total mark-to-market on financial instruments designated at fair value..............................................................................................................	21			21			(283		)	(241		)
Net realized loss on financial instruments...............................................	(8		)	-			-			(8		)
Mark-to-market on the related derivatives...............................................	-			(62		)	268			206
Net realized gain on the related long-term debt derivatives..................	-			16			-			16
Gain (loss) on instruments designated at fair value and related derivatives....................................................................................................	$	13		$	(25	)	$	(15	)	$	(27	)

Three Months Ended March 31, 2012
Interest rate and other components⁽¹⁾......................................................	$	1		$	83		$	(429	)	$	(345	)
Credit risk component.................................................................................	32			(221		)	33			(156		)
Total mark-to-market on financial instruments designated at fair value..............................................................................................................	33			(138		)	(396		)	(501		)
Net realized loss on financial instruments...............................................	(1		)	-			-			(1		)
Mark-to-market on the related derivatives...............................................	-			(115		)	389			274
Net realized gain on the related long-term debt derivatives..................	-			16			-			16
Gain (loss) on instruments designated at fair value and related derivatives....................................................................................................	$	32		$	(237	)	$	(7	)	$	(212	)

⁽¹⁾As it relates to hybrid instruments, interest rate and other components includes interest rate, foreign exchange and equity contract risks.

13. Income Taxes

The following table is an analysis of the difference between effective rates based on the total income tax provision attributable to pretax income and the statutory U.S. Federal income tax rate.

Three Months Ended March 31,	2013					2012
	(dollars are in millions)
Tax expense at the U.S. federal statutory income tax rate..................................	$	100		35.0	%	$	34		35.0	%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit...................................................	17			5.9		6			6.1
Adjustment of tax rate used to value deferred taxes....................................	2			0.6		(10		)	(10.2	)
Validation of tax accounts................................................................................	(10		)	(3.5	)	-			-
Accrual of tax reserves⁽¹⁾..................................................................................	14			4.9		16			16.3
Tax exempt interest income..............................................................................	(3		)	(1.0	)	(2		)	(2.0	)
Tax credits and foreign operations.................................................................	(18		)	(6.3	)	(25		)	(25.6	)
Other....................................................................................................................	2			0.6		(1		)	(1.2	)
Total income tax expense........................................................................................	$	104		36.2	%	$	18		18.4	%

⁽¹⁾Tax reserves in 2013 and 2012 relate to state uncertain tax positions which we no longer believe we meet the more likely than not requirement for recognition.

It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to settlements or statutory expirations in various state and local tax jurisdictions. The total amount of unrecognized tax benefits at March 31, 2013 that, if recognized, would affect the effective income tax rate is $329 million and $319 million at March 31, 2013 and December 31, 2012, respectively.

It is our policy to recognize accrued interest related to unrecognized tax positions in interest expense in the consolidated statement of income and to recognize penalties, if any, related to unrecognized tax positions as a component of other operating expenses in the consolidated statement of income. We had accruals for the payment of interest associated with uncertain tax positions of $169 million and $159 million at March 31, 2013 and December 31, 2012, respectively. Our accrual for the payment of interest associated with uncertain tax positions increased by $10 million during the three months ended March 31, 2013. We have no penalty accruals recorded as of March 31, 2013.

HSBC North America Consolidated Income Taxes We are included in HSBC North America's consolidated Federal income tax return and in various combined state income tax returns. As such, we have entered into a tax allocation agreement with HSBC North America and its subsidiary entities (the "HNAH Group") included in the consolidated returns which govern the current amount of taxes to be paid or received by the various entities included in the consolidated return filings. As a result, we have looked at the HNAH Group's consolidated deferred tax assets and various sources of taxable income, including the impact of HSBC and HNAH Group tax planning strategies, in reaching conclusions on recoverability of deferred tax assets. Where a valuation allowance is determined to be necessary at the HSBC North America consolidated level, such allowance is allocated to principal subsidiaries within the HNAH Group as described below in a manner that is systematic, rational and consistent with the broad principles of accounting for income taxes.

The HNAH Group evaluates deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax planning strategies and any available carryback capacity.

In evaluating the need for a valuation allowance, the HNAH Group estimates future taxable income based on management approved business plans, future capital requirements and ongoing tax planning strategies, including capital support from HSBC necessary as part of such plans and strategies. The HNAH Group has continued to consider the impact of the economic environment on the U.S. businesses and the expected growth of the deferred tax assets. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period.

In conjunction with the HNAH Group deferred tax evaluation process, based on our forecasts of future taxable income, which include assumptions about the depth and severity of home price depreciation and the U.S. economic environment, including unemployment levels and their related impact on credit losses, we currently anticipate that our results of future operations will generate sufficient taxable income to allow us to realize our deferred tax assets. However, since these market conditions have created losses in the HNAH Group in recent periods and volatility in our pre-tax book income, our analysis of the realizability of the deferred tax assets significantly discounts any future taxable income expected from continuing operations and relies to a greater extent on continued capital support from our parent, HSBC, including tax planning strategies implemented in relation to such support. HSBC has indicated it remains fully committed and has the capacity and willingness to provide capital as needed to run operations, maintain sufficient regulatory capital, and fund certain tax planning strategies.

Only those tax planning strategies that are both prudent and feasible, and which management has the ability and intent to implement, are incorporated into our analysis and assessment. The primary and most significant strategy is HSBC's commitment to reinvest excess HNAH Group capital to reduce debt funding or otherwise invest in assets to ensure that it is more likely than not that the deferred tax assets will be utilized.

Currently, it has been determined that the HNAH Group's primary tax planning strategy, in combination with other tax planning strategies, provides support for the realization of the net deferred tax assets recorded for the HNAH Group. Such determination is based on HSBC's business forecasts and assessment as to the most efficient and effective deployment of HSBC capital, most importantly including the length of time such capital will need to be maintained in the U.S. for purposes of the tax planning strategy.

Notwithstanding the above, the HNAH Group had valuation allowances against certain state deferred tax assets and certain Federal tax loss carry forwards for which the aforementioned tax planning strategies did not provide appropriate support.

HNAH Group valuation allowances are allocated to the principal subsidiaries, including us. The methodology allocates the valuation allowance to the principal subsidiaries based primarily on the entity's relative contribution to the growth of the HSBC North America consolidated deferred tax asset against which the valuation allowance is being recorded.

If future results differ from the HNAH Group's current forecasts or the tax planning strategies were to change, a valuation allowance against some or all of the remaining net deferred tax assets may need to be established which could have a material adverse effect on our results of operations, financial condition and capital position. The HNAH Group will continue to update its assumptions and forecasts of future taxable income, including relevant tax planning strategies, and assess the need for such incremental valuation allowances.

Absent the capital support from HSBC and implementation of the related tax planning strategies, the HNAH Group, including us, would be required to record a valuation allowance against the remaining deferred tax assets.

HSBC USA Inc. Income Taxes We recognize deferred tax assets and liabilities for the future tax consequences related to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits and state net operating losses. Our net deferred tax assets, including deferred tax liabilities and valuation allowances, totaled $967 million and $905 million as of March 31, 2013 and December 31, 2012, respectively.

The IRS is currently auditing our income tax returns for the period 2006 through 2009 with an anticipated completion in 2013. We remain subject to state and local income tax examinations for years 2004 and forward. We are currently under audit by various state and local tax jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and the closing of statute of limitations. Such adjustments are reflected in the tax provision. As a result of a 2011 state court decision related to a state tax uncertainty, we no longer believe that we can uphold the more likely than not conclusion taken on one of these uncertain tax positions. At March 31, 2013, tax reserves include $265 million (net of federal tax benefit) along with related accrued interest expense of $139 million in relation to the estimated exposure on this matter.

14. Accumulated Other Comprehensive Income

Accumulated other comprehensive income includes certain items that are reported directly within a separate component of shareholders' equity. The following table presents changes in accumulated other comprehensive income balances.

Three Months Ended March 31,	2013			2012
	(in millions)
Unrealized gains (losses) on securities available-for-sale, not other-than temporarily impaired:
Balance at beginning of period.........................................................................................................................	$	992		$	883
Other comprehensive loss for period:
Net unrealized holding losses arising during period, net of tax of ($61) million and $(75) million, respectively................................................................................................................................	(82		)	(109		)
Reclassification adjustment for gains realized in net income, net of tax of ($47) million and $(12) million, respectively ⁽¹⁾..................................................................................................................	(68		)	(18		)
Total other comprehensive loss for period..............................................................................................	(150		)	(127		)
Balance at end of period....................................................................................................................................	842			756
Unrealized (losses) gains on derivatives classified as cash flow hedges:
Balance at beginning of period.........................................................................................................................	(201		)	(229		)
Other comprehensive income for period:
Net gains arising during period, net of tax of $13 million and $27 million, respectively..............	21			35
Reclassification adjustment for losses realized in net income, net of tax of $2 million and $2 million, respectively ⁽²⁾...........................................................................................................................	2			2
Total other comprehensive income for period.........................................................................................	23			37
Balance at end of period....................................................................................................................................	(178		)	(192		)
Pension and postretirement benefit liability:
Balance at beginning of period..................................................................................................................	(6		)	(12		)
Other comprehensive income for period:
Change in unfunded pension postretirement liability, net of tax of $1 million..............................	-			1
Amortization of prior service costs and transition obligation included in net income ⁽³⁾............	-			-
Total other comprehensive income for period.........................................................................................	-			1
Balance at end of period....................................................................................................................................	(6		)	(11		)
Total accumulated other comprehensive income at end of period.............................................................	$	658		$	553

⁽¹⁾Amount reclassified to net income is included in other securities gains, net in our consolidated statement of income.

⁽²⁾Amount reclassified to net income relates to interest rate contracts and is included in interest income (expense) in our consolidated statement of income.

⁽³⁾Amount reclassified to net income is included in salaries and employee benefits in our consolidated statement of income.

15. Pension and Other Postretirement Benefits

Defined Benefit Pension Plans Effective January 1, 2005, our previously separate qualified defined benefit pension plan was combined with that of HSBC Finance into a single HSBC North America qualified defined benefit pension plan (either the "HSBC North America Pension Plan" or the "Plan") which facilitates the development of a unified employee benefit policy and unified employee benefit plan administration for HSBC companies operating in the U.S. The table below reflects the portion of pension expense and its related components of the HSBC North America Pension Plan which has been allocated to us and is recorded in our consolidated statement of income.

Three Months Ended March 31,	2013			2012
	(in millions)
Service cost - benefits earned during the period..........................................................................................	$	1		$	3
Interest cost on projected benefit obligation.................................................................................................	17			17
Expected return on assets.................................................................................................................................	(20		)	(21		)
Amortization of prior service cost (benefit)....................................................................................................	-			(1		)
Recognized losses..............................................................................................................................................	13			11
Pension expense.................................................................................................................................................	$	11		$	9

Postretirement Plans Other Than Pensions Our employees also participate in plans which provide medical, dental and life insurance benefits to retirees and eligible dependents. These plans cover substantially all employees who meet certain age and vested service requirements. We have instituted dollar limits on payments under the plans to control the cost of future medical benefits.

The net postretirement benefit cost included the following components:

Three Months Ended March 31,	2013		2012
	(in millions)
Interest cost........................................................................................................................................................	$	1	$	1
Amortization of transition obligation..............................................................................................................	-		1
Net periodic postretirement benefit cost........................................................................................................	$	1	$	2

16. Related Party Transactions

In the normal course of business, we conduct transactions with HSBC and its subsidiaries. These transactions occur at prevailing market rates and terms and include funding arrangements, derivative execution, purchases and sales of receivables, servicing arrangements, information technology and some centralized services, item and statement processing services, banking and other miscellaneous services. All extensions of credit by (and certain credit exposures of) HSBC Bank USA to other HSBC affiliates (other than FDIC-insured banks) are legally required to be secured by eligible collateral. The following table presents related party balances and the income and expense generated by related party transactions:

	March 31, 2013		December 31, 2012
	(in millions)
Assets:
Cash and due from banks...........................................................................................................................	$	152	$	114
Interest bearing deposits with banks.......................................................................................................	672		714
Securities purchased under agreements to resell...................................................................................	180		-
Trading assets⁽¹⁾..........................................................................................................................................	19,625		21,370
Loans.............................................................................................................................................................	4,779		4,514
Other..............................................................................................................................................................	915		858
Total assets..................................................................................................................................................	$	26,323	$	27,570
Liabilities:
Deposits........................................................................................................................................................	$	19,830	$	13,863
Trading liabilities⁽¹⁾......................................................................................................................................	22,940		23,910
Short-term borrowings................................................................................................................................	2,376		2,721
Long-term debt............................................................................................................................................	3,990		3,990
Other..............................................................................................................................................................	501		459
Total liabilities..............................................................................................................................................	$	49,637	$	44,943

⁽¹⁾Trading assets and liabilities exclude the impact of netting which allows the offsetting of amounts relating to certain contracts if certain conditions are met.

Three Months Ended March 31,	2013			2012
	(in millions)
Income/(Expense):
Interest income......................................................................................................................................................	$	22		$	13
Interest expense....................................................................................................................................................	(20		)	(24		)
Net interest income (loss)....................................................................................................................................	$	2		$	(11	)
Servicing and other fees from HSBC affiliate:
Fees and commissions:
HSBC Finance............................................................................................................................................	$	21		$	14
HSBC Markets (USA) Inc. ("HMUS")...................................................................................................	5			5
Other HSBC affiliates................................................................................................................................	16			28
Other HSBC affiliates income.......................................................................................................................	12			9
Total affiliate income............................................................................................................................................	$	54		$	56
Residential mortgage banking revenue.............................................................................................................	$	-		$	2
Support services from HSBC affiliates:
HSBC Finance.................................................................................................................................................	$	(4	)	$	(10	)
HMUS..............................................................................................................................................................	(52		)	(73		)
HSBC Technology & Services (USA) ("HTSU")......................................................................................	(233		)	(234		)
Other HSBC affiliates.....................................................................................................................................	(35		)	(51		)
Total support services from HSBC affiliates.....................................................................................................	$	(324	)	$	(368	)
Stock based compensation expense with HSBC..............................................................................................	$	(9	)	$	(12	)

Transactions Conducted with HSBC Finance Corporation

• In July 2004, we sold the account relationships associated with $970 million of credit card receivables to HSBC Finance and on a daily basis, we purchased new originations on these credit card receivables. As discussed in Note 8, "Intangible Assets," on March 29, 2012 we re-purchased these account relationships from HSBC Finance for $108 million and as a result, we stopped purchasing new originations on these credit card accounts from HSBC Finance. We purchased $492 million of credit card receivables from HSBC Finance during the three months ended March 31, 2012. HSBC Finance continued to service these loans for us for a fee through April 30, 2012. Effective with the close of the sale of our General Motors ("GM") and Union Plus ("UP") credit card receivables and our private label credit card and closed-end receivables on May 1, 2012, these loans are now serviced by Capital One for a fee. Premiums previously paid are amortized to interest income over the estimated life of the receivables purchased. We paid HSBC Finance fees for servicing these loans of $5 million during the three months ended March 31, 2012.

• In 2003 and 2004, we purchased approximately $3.7 billion of residential mortgage loans from HSBC Finance. HSBC Finance continues to service these loans for us for a fee. At March 31, 2013 and December 31, 2012, HSBC Finance was servicing $1.1 billion and $1.2 billion, respectively, of residential mortgage loans for us. We paid HSBC Finance fees for servicing these loans of $1 million and $1 million during the three months ended March 31, 2013 and 2012, respectively.

• In the fourth quarter of 2009, an initiative was begun to streamline the servicing of real estate secured receivables across North America. As a result, certain functions that we had previously performed for our mortgage customers were being performed by HSBC Finance for all North America mortgage customers, including our mortgage customers. Additionally, we began performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During 2011, we began a process to separate these functions so that each entity will be servicing its own mortgage customers when the process is completed. During the three months ended March 31, 2013 and 2012, we paid $2 million and $2 million, respectively, for services we received from HSBC Finance and received less than $1 million and $2 million, respectively, for services we provided to HSBC Finance.

• In July 2010, certain employees in the real estate receivable default servicing department of HSBC Finance were transferred to the mortgage loan servicing department of a subsidiary of HSBC Bank USA and subsequently to HSBC Bank USA. These employees continue to service defaulted real estate secured receivables for HSBC Finance and we receive a fee for providing these services. During the three months ended March 31, 2013 and 2012, we received servicing revenue from HSBC Finance of $16 million and $14 million, respectively.

• We extended a secured $1.5 billion uncommitted 364 day credit facility to certain subsidiaries of HSBC Finance. This facility was renewed for an additional 364 days in November 2012. Any draws on this credit facility by HSBC Finance require regulatory approval. There were no balances outstanding at March 31, 2013 and December 31, 2012.

• During the fourth quarter of 2011, we extended an unsecured $3.0 billion 364 day uncommitted revolving credit agreement to HSBC Finance which allowed for borrowings with maturities of up to 15 years. During the second quarter of 2012, an amendment was executed to increase this uncommitted revolving credit agreement to $4.0 billion. As of March 31, 2013 and December 31, 2012, $2.0 billion was outstanding under this credit agreement with $512 million maturing in September 2017 and $1.5 billion maturing in January 2018.

• In May 2012, we extended a $2.0 billion committed revolving credit facility to HSBC Finance which expires in May 2017. As of March 31, 2013 and December 31, 2012 there were no amounts outstanding under this credit facility.

Transactions Conducted with HSBC Finance Corporation Involving Discontinued Operations As it relates to our discontinued credit card and private label operations, in January 2009, we purchased the GM and UP Portfolios from HSBC Finance, with an outstanding principal balance of $12.4 billion at the time of sale, at a total net premium of $113 million. Additionally, in December 2004, we purchased the private label credit card receivable portfolio as well as private label commercial and closed end loans from HSBC Finance. HSBC Finance retained the customer account relationships for both the GM and UP receivables and the private label credit card receivables and by agreement we purchased on a daily basis substantially all new originations from these account relationships from HSBC Finance. Premiums paid for these receivables are amortized to interest income over the estimated life of the receivables purchased and are included as a component of Income from Discontinued Operations. HSBC Finance serviced these credit card loans for us for a fee through April 30, 2012. Fees paid for servicing these loan portfolios, which are included as a component of Income from discontinued operations, totaled $152 million during the three months ended March 31, 2012. Information regarding these loans is summarized in the table below.

Private Label

Credit Card

Cards

Commercial and

Closed

End Loans

General

Motors

Union

Privilege

Other

Total

(in billions)

Total loans purchased on a daily basis from HSBC Finance during:

Three Months Ended March 31, 2012.............................

3.3

2.9

7.4

The GM and UP credit card receivables as well as the private label credit card receivables were purchased from HSBC Finance on a daily basis at a sales price for each type of portfolio determined using a fair value calculated semi-annually in April and October by an independent third party based on the projected future cash flows of the receivables. The projected future cash flows were developed using various assumptions reflecting the historical performance of the receivables and adjusting for key factors such as the anticipated economic and regulatory environment. The independent third party used these projected future cash flows and a discount rate to determine a range of fair values. We used the mid-point of this range as the sales price. If significant information became available that altered the projected future cash flows, an analysis was performed to determine if fair value rates needed to be updated prior to the normal semi-annual cycles. With the announcement of the Capital One transaction, an analysis was performed and an adjustment to the fair value rates was made effective in August 2011 to reflect the sale of the receivables to a third party during the first half of 2012. The rates continued to be updated as part of our normal semi-annual process until the time the transaction was completed.

Transactions Conducted with HMUS and Subsidiaries

• We utilize HSBC Securities (USA) Inc. ("HSI") for broker dealer, debt and preferred stock underwriting, customer referrals, loan syndication and other treasury and traded markets related services, pursuant to service level agreements. Fees charged by HSI for broker dealer, loan syndication services, treasury and traded markets related services are included in support services from HSBC affiliates. Debt underwriting fees charged by HSI are deferred as a reduction of long-term debt and amortized to interest expense over the life of the related debt. Preferred stock issuance costs charged by HSI are recorded as a reduction of capital surplus. Customer referral fees paid to HSI are netted against customer fee income, which is included in other fees and commissions.

• We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $3.8 billion and $3.8 billion at March 31, 2013 and December 31, 2012. At March 31, 2013 and December 31, 2012, $250 million and $310 million, respectively, was outstanding on these loans and lines. Interest income on these loans and lines totaled $1 million and $1 million during the three months ended March 31, 2013 and 2012, respectively.

Other Transactions with HSBC Affiliates

• HNAH extended a $1.0 billion senior debt to us in August 2009. This is a five year floating rate debt which matures in August 2014. In addition, in April 2011, we borrowed an additional $3.0 billion from HNAH. This senior debt matures in three equal installments of $1.0 billion in April 2013, 2015 and 2016. The debt bears interest at 90 day USD Libor plus a spread, with each maturity at a different spread. Interest expense on this debt totaled $14 million and $16 million during the three months ended March 31, 2013 and 2012, respectively.

• In addition to purchases of U.S. Treasury and U.S. Government Agency securities, we purchased both foreign-denominated and USD denominated marketable securities from certain affiliates including HSI, HSBC Asia-Pacific, HSBC Mexico, HSBC London, HSBC Brazil, HSBC Chile and HSBC Canada. Marketable securities outstanding from these purchases are reflected in trading assets and totaled $13 million and $14 million at March 31, 2013 and December 31, 2012, respectively.

• We have a committed unused line of credit with HSBC Investment (Bahamas) Limited of $900 million at March 31, 2013 and December 31, 2012.

• We have a committed unused line of credit with HSBC Holdings plc of $500 million at March 31, 2013 and December 31, 2012.

• We have an uncommitted unused line of credit with HNAI of $150 million at March 31, 2013 and December 31, 2012.

• We have extended loans and lines of credit to various other HSBC affiliates totaling $460 million at March 31, 2013 and December 31, 2012. At March 31, 2013 and December 31, 2012, there were no amounts outstanding under these loans or lines of credit.

• Historically, we have provided support to several HSBC affiliate sponsored asset-backed commercial paper ("ABCP") conduits by purchasing A-1/P-1 rated commercial paper issued by them. At March 31, 2013 and December 31, 2012, no ABCP issued by such conduits was held.

• We routinely enter into derivative transactions with HSBC Finance and other HSBC affiliates as part of a global HSBC strategy to offset interest rate or other market risks associated with debt issues and derivative contracts with unaffiliated third parties. The notional value of derivative contracts related to these contracts was approximately $1,213.0 billion and $1,066.5 billion at March 31, 2013 and December 31, 2012, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities) related to the contracts was approximately $673 million and $691 million at March 31, 2013 and December 31, 2012, respectively. Our Global Banking and Markets business accounts for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.

• HSBC North America's technology and certain centralized support services including human resources, corporate affairs, risk management, legal, compliance, tax, finance and other shared services are centralized within HTSU. Technology related assets and software purchased are generally purchased and owned by HTSU. HTSU also provides certain item processing and statement processing activities which are included in Support services from HSBC affiliates in the consolidated statement of income. We also receive fees from HTSU for providing them certain administrative services. The fees we receive from HTSU are recorded as a component of servicing and other fees from HSBC affiliates.

• Our domestic employees participate in a defined benefit pension plan sponsored by HSBC North America. Additional information regarding pensions is provided in Note 15 "Pension and Other Post retirement Benefits."

• Employees participate in one or more stock compensation plans sponsored by HSBC. Our share of the expense of these plans on a pre-tax basis was $9 million and $12 million during the three months ended March 31, 2013 and 2012, respectively.

• We use HSBC Global Resourcing (UK) Ltd., an HSBC affiliate located outside of the United States, to provide various support services to our operations including among other areas customer service, systems, collection and accounting functions. The expenses related to these services of $23 million and $25 million during the three months ended March 31, 2013 and 2012, respectively, are included as a component of Support services from HSBC affiliates in the table above. Through February 2011, the expenses for these services for all HSBC North America operations were billed directly to HTSU who then billed these services to the appropriate HSBC affiliate who benefited from the services. Beginning in March 2011, HSBC Global Resourcing (UK) Ltd. began billing us directly for the services we receive from them.

• We did not pay any dividends to our parent company, HNAI, on our common stock during the three months ended March 31, 2013 and 2012.

17. Business Segments

We have four distinct business segments that we utilize for management reporting and analysis purposes, which are generally based upon global business. Our segment results are reported on a continuing operations basis. There have been no changes in the basis of our segmentation or measurement of segment profit as compared with the presentation in our 2012 Form 10-K accept as noted below.

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

Net interest income of each segment represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for a funding charge or credit. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates. The objective of these charges/credits is to transfer interest rate risk from the segments to one centralized unit in Global Banking and Markets and more appropriately reflect the profitability of segments.

Certain other revenue and operating expense amounts are also apportioned among the business segments based upon the benefits derived from this activity or the relationship of this activity to other segment activity. These inter-segment transactions are accounted for as if they were with third parties.

Our segment results are presented in accordance with IFRSs (a non-U.S. GAAP financial measure) on a legal entity basis ("IFRSs Basis") as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources, such as employees are made almost exclusively on an IFRSs basis since we report financial information to our parent, HSBC in accordance with IFRSs. We continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP legal entity basis.

Net Interest Income

Effective interest rate - The calculation of effective interest rates under IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"), requires an estimate of changes in estimated contractual cash flows, including fees and points paid or received between parties to the contract that are an integral part of the effective interest rate to be included. U.S. GAAP generally prohibits recognition of interest income to the extent the net interest in the loan would increase to an amount greater than the amount at which the borrower could settle the obligation. Under U.S. GAAP, prepayment penalties are generally recognized as received. U.S. GAAP also includes interest income on loans originated as held for sale which is included in other operating income for IFRSs.

Deferred loan origination costs and fees - Certain loan fees and incremental direct loan costs, which would not have been incurred but for the origination of loans, are deferred and amortized to earnings over the life of the loan under IFRSs. Certain loan fees and direct incremental loan origination costs, including certain internal costs directly attributable to the origination of loans in addition to direct salaries, are deferred and amortized to earnings under U.S. GAAP.

Loan origination deferrals under IFRSs are more stringent and generally result in lower costs being deferred than permitted under U.S. GAAP. In addition, all deferred loan origination fees, costs and loan premiums must be recognized based on the expected life of the loan under IFRSs as part of the effective interest calculation while under U.S. GAAP they may be recognized on either a contractual or expected life basis.

Derivative interest expense - Under IFRSs, net interest income includes the interest element for derivatives which corresponds to debt designated at fair value. For U.S. GAAP, this is included in gain (loss) on instruments designated at fair value and related derivatives which is a component of other revenues.

Other Operating Income (Total Other Revenues)

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

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

Loans held for sale - IFRSs requires loans originated with the intent to sell to be classified as trading assets and recorded at their fair value. Under U.S. GAAP, loans designated as held for sale are reflected as loans and recorded at the lower of amortized cost or fair value. Under IFRSs, the income related to loans held for sale is reported in trading revenue. Under U.S. GAAP, the income related to loans held for sale is reported similarly to loans held for investment.

For loans transferred to held for sale subsequent to origination, IFRSs requires these receivables to be reported separately on the balance sheet when certain criteria are met which are generally more stringent than those under U.S. GAAP, but does not change the recognition and measurement criteria. Accordingly, for IFRSs purposes such loans continue to be accounted for and impairment continues to be measured in accordance with IAS 39 with any gain or loss recorded at the time of sale. U.S. GAAP requires loans that meet the held for sale classification requirements be transferred to a held for sale category at the lower of amortized cost or fair value. Under U.S. GAAP, the component of the lower of amortized cost or fair value adjustment related to credit risk is recorded in the statement of income (loss) as provision for credit losses while the component related to interest rates and liquidity factors is reported in the statement of income (loss) in other revenues.

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

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

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

Other-than-temporary impairments - Under U.S. GAAP, a decline in fair value of an available-for-sale debt security below its amortized cost may indicate that the security is other-than-temporarily impaired under certain conditions. IFRSs do not have an "other than temporary" impairment concept. Under IFRSs, a decline in fair value of an available-for-sale debt security below its amortized cost is considered evidence of impairment if the decline can, at least partially, be attributed to an incurred loss event that impacts the estimated future cash flows of the security (i.e., a credit loss event). Thus a security may not be considered impaired if the decline in value is the result of events that do not negatively impact the estimated future cash flows of the security (e.g., an increase in the risk-free interest rate). However, until the entity sells the security, it will have to assess the security for credit losses at each reporting date.

Another difference between U.S. GAAP and IFRSs is the amount of the loss that an entity recognizes in earnings on an impaired (other-than-temporarily impaired for U.S. GAAP) available-for-sale debt security. Under U.S. GAAP, if an entity has decided to sell a debt security whose fair value has declined below its amortized cost, or will be more likely than not required to sell the debt security before it recovers its amortized cost basis, it will recognize an impairment loss in earnings equal to the difference between the debt security's carrying amount and its fair value. If the entity has not decided to sell the debt security and will not be more likely than not required to sell the debt security before it recovers its amortized cost basis, but nonetheless expects that it will not recover the security's amortized cost basis, it will bifurcate the impairment loss into a credit loss component and a non-credit loss component, and recognize the credit loss component in earnings and the non-credit loss component in other comprehensive income. Under IFRSs, the entity recognizes the entire decline in fair value below amortized cost in earnings.

REO expense - Other revenues under IFRSs include losses on sale and the lower of amortized cost or fair value of the collateral less cost to sell adjustments on REO properties which are classified as other expense under U.S. GAAP.

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

Loan Impairment Charges (Provision for Credit Losses)

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

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

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

For loans collectively evaluated for impairment under US GAAP, bank industry practice adopted in the fourth quarter of 2012 generally results in a loss emergence period for these loans using a roll rate migration analysis which results in 12 months of losses in our allowance for credit losses. Under IFRSs, we completed a review in the fourth quarter of 2012 which concluded that the estimated average period of time from current status to write-off for loans collectively evaluated for impairment using a roll rate migration analysis was 10 months (previously a period of 7 months was used) which was also adopted in the fourth quarter of 2012.

Operating Expenses

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

Share-based bonus arrangements - Under IFRSs, the recognition of compensation expense related to share-based bonuses begins on January 1 of the current year for awards expected to be granted in the first quarter of the following year. Under U.S. GAAP, the recognition of compensation expense related to share-based bonuses does not begin until the date the awards are granted.

Property - Under IFRSs, the carrying amount of property held for own use reflects revaluation surpluses recorded prior to January 1, 2004. Consequently, the carrying amounts of tangible fixed assets and shareholders' equity are lower under U.S. GAAP than under IFRSs. There is a correspondingly lower depreciation charge and higher net income as well as higher gains (or smaller losses) on the disposal of fixed assets under U.S. GAAP. For investment properties, net income under U.S. GAAP does not reflect the unrealized gain or loss recorded under IFRSs for the period. In addition, the sale of our 452 Fifth Avenue property, including the 1 W. 39th Street building in April 2010, resulted in the recognition of a gain under IFRSs while under U.S. GAAP, such gain is deferred and recognized over the lease term due to our continuing involvement.

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

Assets

Customer loans (Loans) - As discussed more fully above under "Other Operating Income (Total Other Revenues) - Loans held for sale," on an IFRSs basis loans designated as held for sale at the time of origination and accrued interest are classified as trading assets. However, the accounting requirements governing when receivables previously held for investment are transferred to a held for sale category are more stringent under IFRSs than under U.S. GAAP which results in loans generally being reported as held for sale later than under U.S. GAAP.

Precious metals - Precious metals leased or loaned to customers are reclassified from trading precious metals into loans. Precious metal leases or loans are stated at spot price of the underlying precious metals with changes in value arising from changes in spot price recorded in other income. Interest is recorded as interest income in the consolidated statement of income. Under IFRSs, precious metals leased or loaned to customers continue to be part of the precious metal inventory which is stated at fair value. We take into consideration any financing and leasing arrangement in determining the fair value of precious metals.

Derivatives - Under U.S. GAAP, derivative receivables and payables with the same counterparty may be reported on a net basis in the balance sheet when there is an executed International Swaps and Derivatives Association, Inc. ("ISDA") Master Netting Arrangement. In addition, under U.S. GAAP, fair value amounts recognized for the obligation to return cash collateral received or the right to reclaim cash collateral paid are offset against the fair value of derivative instruments. Under IFRSs, these agreements do not necessarily meet the requirements for offset, and therefore such derivative receivables and payables are presented gross on the balance sheet.

Goodwill - IFRSs and U.S. GAAP require goodwill to be tested for impairment at least annually, or more frequently if circumstances indicate that goodwill may be impaired. There are also differences between IFRSs and U.S. GAAP in how impairment is measured as U.S GAAP requires a two-step impairment test which requires the fair value of goodwill to be determined in the same manner as the amount of goodwill recognized in a business combination. For IFRSs, goodwill was amortized until 2005, however goodwill was amortized under U.S. GAAP until 2002, which resulted in a lower carrying amount of goodwill under IFRSs.

VIEs - The requirements for consolidation of variable interest entities ("VIEs") under U.S. GAAP are based on both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses, or the right to receive benefits that could potentially be significant to the VIE. As a result, under U.S. GAAP we were determined to be the primary beneficiary of and consolidated a commercial paper conduit effective January 1, 2010. However in the first quarter of 2011, changes involving liquidity asset purchase agreements were made that caused us to no longer be considered the primary beneficiary and this commercial paper conduit was deconsolidated at March 31, 2011. Under IFRSs this conduit was not consolidated.

Results for each segment on an IFRSs basis, as well as a reconciliation of total results under IFRSs to U.S. GAAP consolidated totals, are provided in the following tables.

	IFRS Consolidated Amounts
	RBWM			CMB			GBM			PB			Other			Adjustments/ Reconciling Items			Total			IFRS Adjustments⁽⁴⁾			IFRS Reclassi- fications⁽⁵⁾			U.S. GAAP Consolidated Totals
	(in millions)
Three Months Ended March 31, 2013
Net interest income⁽¹⁾..............	$	215		$	170		$	109		$	45		$	(14	)	$	(4	)	$	521		$	(17	)	$	1		$	505
Other operating income.................	107			65			382			28			(25		)	4			561			34			(3		)	592
Total operating income.................	322			235			491			73			(39		)	-			1,082			17			(2		)	1,097
Loan impairment charges⁽³⁾..............	32			14			3			1			-			-			50			(23		)	(6		)	21
	290			221			488			72			(39		)	-			1,032			40			4			1,076
Operating expenses⁽²⁾............	291			162			230			60			42			-			785			-			4			789
Profit before income tax expense................	$	(1	)	$	59		$	258		$	12		$	(81	)	$	-		$	247		$	40		$	-		$	287
Balances at end of period:
Total assets..........	$	19,634		$	20,919		$	207,785		$	7,831		$	164		$	-		$	256,333		$	(63,415	)	$	92		$	193,010
Total loans, net...	16,747			19,449			23,244			5,722			-			-			65,162			1,194			(3,992		)	62,364
Goodwill...............	581			358			480			325			-			-			1,744			484			-			2,228
Total deposits......	34,253			21,464			36,135			12,941			-			-			104,793			(5,319		)	17,575			117,049
Three Months Ended March 31, 2012
Net interest income⁽¹⁾..............	$	247		$	170		$	143		$	45		$	(11	)	$	(6	)	$	588		$	(15	)	$	14		$	587
Other operating income.................	97			68			326			29			(235		)	6			291			68			8			367
Total operating income.................	344			238			469			74			(246		)	-			879			53			22			954
Loan impairment charges⁽³⁾..............	41			(17		)	(31		)	(2		)	-			-			(9		)	(3		)	12			-
	303			255			500			76			(246		)	-			888			56			10			954
Operating expenses⁽²⁾............	321			164			259			58			40			-			842			4			10			856
Profit before income tax expense................	$	(18	)	$	91		$	241		$	18		$	(286	)	$	-		$	46		$	52		$	-		$	98
Balances at end of period:
Total assets..........	$	27,570		$	22,633		$	199,218		$	6,931		$	624		$	-		$	256,976		$	(65,781	)	$	137		$	191,332
Total loans, net...	16,093			17,450			27,665			4,962			-			-			66,170			(2,677		)	(10,227		)	53,266
Goodwill...............	581			358			480			325			-			-			1,744			484			-			2,228
Total deposits......	37,758			21,219			40,461			12,033			-			-			111,471			(4,441		)	30,497			137,527

⁽¹⁾Net interest income of each segment represents the difference between actual interest earned on assets and interest paid on liabilities of the segment adjusted for a funding charge or credit. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates. The objective of these charges/credits is to transfer interest rate risk from the segments to one centralized unit in Treasury and more appropriately reflect the profitability of segments.

⁽²⁾Expenses for the segments include fully apportioned corporate overhead expenses.

⁽³⁾The provision assigned to the segments is based on the segments' net charge offs and the change in allowance for credit losses.

⁽⁴⁾Represents adjustments associated with differences between IFRSs and U.S. GAAP bases of accounting.

⁽⁵⁾Represents differences in financial statement presentation between IFRSs and U.S. GAAP.

18. Retained Earnings and Regulatory Capital Requirements

Capital amounts and ratios of HSBC USA Inc. and HSBC Bank USA, calculated in accordance with current banking regulations, are summarized in the following table.

	March 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...........................	$	20,929	10.00	%		18.11	%	$	20,764	10.00	%		19.52	%
HSBC Bank USA.......................	21,696		10.00			19.54		21,464		10.00			21.07
Tier 1 capital ratio:
HSBC USA Inc...........................	14,717		6.00			12.74		14,480		6.00			13.61
HSBC Bank USA.......................	16,326		6.00			14.70		15,482		6.00			15.20
Tier 1 common ratio:
HSBC USA Inc...........................	12,610		5.00		⁽²⁾	10.91		12,373		5.00		⁽²⁾	11.63
HSBC Bank USA.......................	16,326		5.00			14.70		15,482		5.00			15.20
Tier 1 leverage ratio:
HSBC USA Inc...........................	14,717		3.00		⁽³⁾	8.00		14,480		3.00		⁽³⁾	7.70
HSBC Bank USA.......................	16,326		5.00			9.26		15,482		5.00			8.43
Risk weighted assets:
HSBC USA Inc...........................	115,552							106,395
HSBC Bank USA.......................	111,059							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.

⁽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.

⁽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.

We did not receive any cash capital contributions from our immediate parent, HNAI during the first three months of 2013. We did not make any capital contributions to our subsidiary, HSBC Bank USA, during the three months ended March 31, 2013.

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 March 31, 2013 and December 31, 2012, deferred tax assets of $513 million and $622 million, respectively, were excluded in the computation of regulatory capital.

19. 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 variable interest entity ("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 VIE as of March 31, 2013 and December 31, 2012 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation:

	March 31, 2013				December 31, 2012
	Consolidated Assets		Consolidated Liabilities		Consolidated Assets		Consolidated Liabilities
	(in millions)
Low income housing limited liability partnership:
Interest bearing deposits with banks...............................................	$	210	$	-	$	216	$	-
Other assets.........................................................................................	514		-		533		-
Long term debt.....................................................................................	-		92		-		92
Other liabilities.....................................................................................	-		125		-		152
Total.............................................................................................................	$	724	$	217	$	749	$	244

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.

Asset-backed commercial paper conduit During the first quarter of 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 Funding LLC ("Bryant Park") will no longer transact new business and certain existing Bryant Park customer transactions will be refinanced by an existing commercial paper conduit currently consolidated by HSBC Bank plc. Bryant Park will continue to exist but only to fund selected legacy assets it currently holds. Upon completion of the restructure HSBC Bank USA, through the loan financing, will absorb all of the risk including the credit risk in Bryant Park as a whole (compared to less than a majority risk prior to restructure). In addition, HSBC Bank USA will assume unilateral decision-making power (which it does not have prior to restructure) to decide whether the assets held in Bryant Park should be disposed of in the future. Accordingly, HSBC Bank USA will become the primary beneficiary and will be required to consolidate Bryant Park. The restructure is expected to be completed in the second quarter of 2013 which we currently estimate will result in an increase to assets of approximately $200 million; an increase to liabilities of approximately $325 million and a decrease to shareholders' equity of approximately $125 million upon completion.

Unconsolidated VIEs We also have variable interests in other VIEs that were not consolidated at March 31, 2013 and December 31, 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 March 31, 2013 and December 31, 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 March 31, 2013
Asset-backed commercial paper conduits.....................	$	-	$	-	$	16,273	$	2,454
Structured note vehicles...................................................	1,827		117		6,655		1,927
Total.....................................................................................	$	1,827	$	117	$	22,928	$	4,381
At December 31, 2012
Asset-backed commercial paper conduits.....................	$	-	$	-	$	16,104	$	2,212
Structured note vehicles...................................................	2,117		154		7,055		2,217
Total.....................................................................................	$	2,117	$	154	$	23,159	$	4,429

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 conduits Separately from the Bryant Park facility discussed above, we provide liquidity facilities to a number of 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 $2.5 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 hold 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 receive the total return on the transferred assets and pay a market rate of return. The transfers of assets in these transactions do not qualify as sales under the applicable accounting literature and are accounted for as secured borrowings. Accordingly, the transferred assets continue to be recognized as trading assets on our balance sheet and the funds received are recorded as liabilities in long-term debt. As of March 31, 2013, we recorded approximately $64 million of trading assets and $69 million of trading liabilities on our balance sheet as a result of "failed sale" accounting treatment for certain transfers of financial assets. 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. The financial assets and financial liabilities were not legally ours and we have no control over the financial assets which are restricted solely to satisfy the liability.

In addition to our variable interests, 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.

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.

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 4 "Securities" and Note 21 "Fair Value Measurements" and, therefore, are not disclosed in this note to avoid redundancy.

20. Guarantee Arrangements and Pledged Assets

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 March 31, 2013 and December 31, 2012. Following the table is a description of the various arrangements.

	March 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⁾...................................... ..................................................	$	(621	)	$	229,166	$	(76	)	$	237,548
Financial standby letters of credit, net of participations⁽²⁾⁽³⁾...... ................	-			5,405		-			5,554
Performance (non-financial) guarantees⁽³⁾........ .............................................	-			2,747		-			2,878
Liquidity asset purchase agreements⁽³⁾....................................... ...................	-			2,454		-			2,212
Total.....................................................................................................................	$	(621	)	$	239,772	$	(76	)	$	248,192

⁽¹⁾Includes $42.4 billion and $44.2 billion of notional issued for the benefit of HSBC affiliates at March 31, 2013 and December 31, 2012, respectively.

⁽²⁾Includes $840 million and $808 million issued for the benefit of HSBC affiliates at March 31, 2013 and December 31, 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 March 31, 2013 and December 31, 2012.

	March 31, 2013						December 31, 2012
	Carrying (Fair) Value			Notional			Carrying (Fair) Value			Notional
	(in millions)
Sell-protection credit derivative positions........................................	$	(621	)	$	229,166		$	(76	)	$	237,548
Buy-protection credit derivative positions.......................................	777			234,311			120			247,384
Net position⁽¹⁾...... ..................................................................................	$	156		$	(5,145	)	$	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 March 31, 2013, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5.4 billion and $2.7 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 $45 million and $46 million at March 31, 2013 and December 31, 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 March 31, 2013 and December 31, 2012, respectively.

Below is a summary of 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 March 31, 2013 as an indicative proxy of payment risk:

	Average Life (in years)	Credit Ratings of the Obligors or the Transactions
Notional/Contractual Amounts	Average Life (in years)	Investment Grade		Non-Investment Grade		Total
	(dollars are in millions)
Sell-protection Credit Derivatives⁽¹⁾
Single name CDS.........................................................................	2.4	$	128,824	$	27,325	$	156,149
Structured CDS...........................................................................	1.7	30,714		3,324		34,038
Index credit derivatives..............................................................	3.3	25,166		58		25,224
Total return swaps......................................................................	7.3	11,710		2,045		13,755
Subtotal...............................................................................................		196,414		32,752		229,166
Standby Letters of Credit⁽²⁾................. .............................................	1.3	6,694		1,458		8,152
Total....................................................................................................		$	203,108	$	34,210	$	237,318

⁽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 primarily to government sponsored entities ("GSEs") 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.

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 $14.2 billion and $15.1 billion at March 31, 2013 and December 31, 2012, respectively, including $9.1 billion and $9.6 billion, respectively, of loans sourced from our legacy broker channel.

The following table shows the trend in repurchase demands received on loans sold to GSEs and other third parties by loan origination vintage for the three months ended March 31, 2013 and 2012:

Three Months Ended March 31,	2013		2012
	(in millions)
Pre- 2004...............................................................................................................................................................	$	2	$	2
2004.......................................................................................................................................................................	9		4
2005.......................................................................................................................................................................	4		4
2006.......................................................................................................................................................................	15		16
2007.......................................................................................................................................................................	37		45
2008.......................................................................................................................................................................	23		27
Post 2008..............................................................................................................................................................	5		4
Total repurchase demands received⁽¹⁾...................... .......................................................................................	$	95	$	102

⁽¹⁾Includes repurchase demands on loans sourced from our legacy broker channel of $77 million and $84 million at March 31, 2013 and 2012, respectively.

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

	March 31, 2013		December 31, 2012
	(in millions)
GSEs.................................................................................................................................................................	$	74	$	86
Others...............................................................................................................................................................	4		3
Total⁽¹⁾ ........................................................ .....................................................................................................	$	78	$	89

⁽¹⁾Includes repurchase demands on loans sourced from our legacy broker channel of $64 million and $65 million at March 31, 2013 and December 31, 2012, 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; and

• 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.

The following table summarizes the change in our estimated repurchase liability for loans sold to the GSEs and other third parties during the three months ended March 31, 2013 and December 31, 2012 for obligations arising from the breach of representations and warranties associated with the sale of these loans:

Three Months Ended March 31,	2013			2012
	(in millions)
Balance at beginning of period..................................................................................................................	$	219		$	237
Increase in liability recorded through earnings......................................................................................	13			21
Realized losses.............................................................................................................................................	(21		)	(35		)
Balance at end of period.............................................................................................................................	$	211		$	223

Our reserve for potential repurchase liability exposures relates primarily to previously originated mortgages through broker channels. Our mortgage repurchase liability of $211 million at March 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 are 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 $205 million at March 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 March 31, 2013 and December 31, 2012, we have issued $2.5 billion and $2.2 billion, respectively, of liquidity facilities to provide liquidity support to the commercial paper issued by various conduits See Note 19, "Variable Interest Entities," for further information.

Clearinghouses and exchanges We are a member of various exchanges and clearinghouses that trade and clear securities and/or futures contracts. 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. 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.

Pledged Assets The following table presents pledged assets included in the consolidated balance sheet.

	March 31, 2013		December 31, 2012
	(in millions)
Interest bearing deposits with banks............................................................................................................	$	462	$	673
Trading assets⁽¹⁾...............................................................................................................................................	2,616		2,346
Securities available-for-sale⁽²⁾........................................................................................................................	18,323		17,236
Securities held-to-maturity.............................................................................................................................	432		456
Loans⁽³⁾ ................................. ............................................................................................................................	1,935		2,142
Other assets⁽⁴⁾........................................................................................... ........................................................	2,244		2,265
Total...................................................................................................................................................................	$	26,012	$	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 $6.6 billion and $6.5 billion at March 31, 2013 and December 31, 2012, respectively. The fair value of trading assets that can be sold or repledged was $2.5 billion and $2.2 billion at March 31, 2013 and December 31, 2012, respectively.

The fair value of collateral we accepted but not reported on the consolidated balance sheet that can be sold or repledged was $12.8 billion and $5.7 billion at March 31, 2013 and December 31, 2012, respectively. This collateral was obtained under security resale agreements. Of this collateral, $1.3 billion and $1.3 billion has been sold or repledged as collateral under repurchase agreements or to cover short sales at March 31, 2013 and December 31, 2012, respectively.

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, HSBC Securities (USA) Inc. ("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. Based on the specifics of these transactions, the obligation to repurchase loans in the event of a breach of loan level representations and warranties resides predominantly with the organization that originated the loan. While certain of these originators are or may become financially impaired and, therefore, unable to fulfill their repurchase obligations, we do not believe we have significant exposure for repurchases on these loans.

21. 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 HSBC USA.

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 observed in the credit default swap market. Where credit default spreads of the counterparty are not available, we use the credit default spread of 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 in the same industry sector 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 recent changes in industry practice.

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 of 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.

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 significant 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.

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.

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 quarterly report.

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

March 31, 2013	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets.............................................................	$	18,759	$	18,759	$	1,238	$	17,059	$	462
Securities purchased under resale agreements...........................	6,361		6,361		-		6,361		-
Non-derivative trading assets........................................................	26,306		26,306		1,234		22,619		2,453
Derivatives........................................................................................	9,907		9,907		26		9,732		149
Securities...........................................................................................	60,892		61,092		34,692		26,400		-
Commercial loans, net of allowance for credit losses.................	43,370		45,051		-		-		45,051
Commercial loans designated under fair value option and held for sale...............................................................................................	3		3		-		3		-
Commercial loans held for sale.......................................................	55		55		-		55		-
Consumer loans, net of allowance for credit losses...................	18,994		15,704		-		-		15,704
Consumer loans held for sale:
Residential mortgages................................................................	277		282		-		-		282
Other consumer...........................................................................	64		64		-		-		64
Financial liabilities:
Short-term financial liabilities.........................................................	$	12,314	$	12,314	$	-	$	12,314	$	-
Deposits:
Without fixed maturities............................................................	105,074		105,074		-		105,074		-
Fixed maturities...........................................................................	3,599		3,604		-		3,604		-
Deposits designated under fair value option..............................	8,376		8,376		-		5,500		2,876
Non-derivative trading liabilities...................................................	7,027		7,027		841		6,186		-
Derivatives........................................................................................	13,575		13,575		17		13,437		121
Long-term debt.................................................................................	14,349		15,014		-		15,014		-
Long-term debt designated under fair value option...................	7,690		7,690		-		7,072		618

December 31, 2012	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets.............................................................	$	15,074	$	15,074	$	1,359	$	13,279	$	436
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........................................................................................	11,986		11,986		30		11,785		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		-		-		15,173
Consumer loans held for sale:
Residential mortgages................................................................	472		485		-		-		485
Other consumer...........................................................................	65		65		-		-		65
Financial liabilities:
Short-term financial liabilities.........................................................	$	15,421	$	15,421	$	-	$	15,421	$	-
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........................................................................................	15,202		15,202		21		15,054		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 prevailing economic conditions during the past few years, including changes in house prices, unemployment, consumer behavior, and discount rates. Many investors are non-bank financial institutions or hedge funds. For certain consumer loans, investors incorporate numerous assumptions in predicting cash flows, such as higher charge-off levels and/or slower voluntary prepayment speeds than we, as the servicer of these loans, believe will ultimately be the case. The investor discount rates reflect this difference in overall cost of capital 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 March 31, 2013 and December 31, 2012 reflect these market conditions.

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 March 31, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

	Fair Value Measurements on a Recurring Basis
March 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.....................................................................................	$	1,234	$	417	$	-	$	1,651	$	-		$	1,651
Collateralized debt obligations........................................................	-		64		481		545		-			545
Asset-backed securities:
Residential mortgages...............................................................	-		159		-		159		-			159
Corporate and other domestic debt securities..................................	-		426		1,524		1,950		-			1,950
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		84		294		378		-			378
Government.............................................................................	-		5,572		143		5,715		-			5,715
Equity securities.............................................................................	-		22		11		33		-			33
Precious metals trading..................................................................	-		15,875		-		15,875		-			15,875
Derivatives⁽²⁾:
Interest rate contracts....................................................................	77		63,829		6		63,912		-			63,912
Foreign exchange contracts............................................................	17		14,194		157		14,368		-			14,368
Equity contracts.............................................................................	-		1,766		191		1,957		-			1,957
Precious metals contracts...............................................................	135		648		22		805		-			805
Credit contracts.............................................................................	-		5,746		944		6,690		-			6,690
Derivatives netting........................................................................	-		-		-		-		(77,825		)	(77,825		)
Total derivatives................................................................................	229		86,183		1,320		87,732		(77,825		)	9,907
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises.....................................................................................	34,651		18,065		-		52,716		-			52,716
Obligations of U.S. states and political subdivisions........................	-		770		-		770		-			770
Asset-backed securities:
Residential mortgages...............................................................	-		1		-		1		-			1
Commercial mortgages.............................................................	-		185		-		185		-			185
Home equity.............................................................................	-		255		-		255		-			255
Other........................................................................................	-		85		-		85		-			85
Corporate and other domestic debt securities..................................	-		26		-		26		-			26
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		4,678		-		4,678		-			4,678
Government-backed..................................................................	41		529		-		570		-			570
Equity securities.............................................................................	-		172		-		172		-			172
Loans⁽³⁾..............................................................................................	-		3		-		3		-			3
Mortgage servicing rights⁽⁴⁾................................................................	-		-		190		190		-			190
Total assets............................................................................	$	36,155	$	133,571	$	3,963	$	173,689	$	(77,825	)	$	95,864
Liabilities:
Deposits in domestic offices⁽⁵⁾............................................................	$	-	$	5,500	$	2,876	$	8,376	$	-		$	8,376
Trading liabilities, excluding derivatives.............................................	841		6,186		-		7,027		-			7,027
Derivatives⁽²⁾:
Interest rate contracts....................................................................	99		64,212		-		64,311		-			64,311
Foreign exchange contracts............................................................	1		14,362		23		14,386		-			14,386
Equity contracts.............................................................................	-		1,269		157		1,426		-			1,426
Precious metals contracts...............................................................	8		592		22		622		-			622
Credit contracts.............................................................................	-		6,129		580		6,709		-			6,709
Derivatives netting........................................................................	-		-		-		-		(73,879		)	(73,879		)
Total derivatives................................................................................	108		86,564		782		87,454		(73,879		)	13,575
Long-term debt⁽⁶⁾...............................................................................	-		7,072		618		7,690		-			7,690
Total liabilities	$	949	$	105,322	$	4,276	$	110,547	$	(73,879	)	$	36,668

	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		71,717		8		71,823		-			71,823
Foreign exchange contracts............................................................	4		13,831		16		13,851		-			13,851
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		93,751		1,365		95,353		(83,367		)	11,986
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	$	138,572	$	4,479	$	189,193	$	(83,367	)	$	105,826
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		71,567		1		71,658		-			71,658
Foreign exchange contracts............................................................	25		13,582		11		13,618		-			13,618
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		93,859		789		94,782		(79,580		)	15,202
Long-term debt⁽⁶⁾...............................................................................	-		6,851		429		7,280		-			7,280
Total liabilities	$	341	$	112,533	$	3,854	$	116,728	$	(79,580	)	$	37,148

⁽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 $8.4 billion and $10.5 billion and trading derivative liabilities of $12.5 billion and $13.8 billion as of March 31, 2013 and December 31, 2012, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives.

⁽³⁾Includes leveraged acquisition finance and other commercial loans held for sale or risk-managed on a fair value basis for which we have elected to apply the fair value option. See Note 7, "Loans Held for Sale," for further information.

⁽⁴⁾See Note 8, "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.

Significant transfers between Levels 1 and 2 There were no significant transfers between Levels 1 and 2 during March 31, 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 the three months ended March 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			Mar. 31, 2013			Current Period Unrealized Gains (Losses)
	Jan 1, 2013			Trading Revenue (Loss)			Other Revenue			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Mar. 31, 2013			Current Period Unrealized Gains (Losses)

(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations.......................	$	466		$	35		$	-		$	21	$	-		$	(41	)	$	-		$	-		$	481		$	35
Corporate and other domestic debt securities..	1,861			7			-			15		-			(359		)	-			-			1,524			4
Corporate debt securities issued by foreign entities............	299			(5		)	-			-		-			-			-			-			294			(5		)
Government debt securities issued by foreign entities	311			22			-			-		-			(190		)	-			-			143			19
Equity securities.........	9			2			-			-		-			-			-			-			11			2
Derivatives⁽²⁾:
Interest rate contracts.........	7			-			(1		)	-		-			-			-			-			6			(1		)
Foreign exchange contracts.........	5			15			-			-		-			122			(8		)	-			134			137
Equity contracts.........	(7		)	61			-			-		-			(20		)	7			(7		)	34			41
Credit contracts.........	571			(49		)	-			-		-			(112		)	(46		)	-			364			(197		)
Mortgage servicing rights⁽⁴⁾.	168			-			16			-		6			-			-			-			190			16
Total assets.........	$	3,690		$	88		$	15		$	36	$	6		$	(600	)	$	(47	)	$	(7	)	$	3,181		$	51
Liabilities:
Deposits in domestic offices..	$	(2,636	)	$	(40	)	$	-		$	-	$	(404	)	$	108		$	11		$	85		(2,876		)	$	(32	)
Long-term debt...	(429		)	(31		)	-			-		(210		)	51			-			1			(618		)	(25		)
Total liabilities....	$	(3,065	)	$	(71	)	$	-		$	-	$	(614	)	$	159		$	11		$	86		$	(3,494	)	$	(57	)

	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			Mar. 31, 2012			Current Period Unrealized Gains (Losses)
	Jan 1, 2012			Trading Revenue (Loss)			Other Revenue		Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Mar. 31, 2012			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations.	$	703		$	39		$	-	$	1	$	-		$	(82	)	$	-		$	-		$	661		$	33
Corporate and other domestic debt securities....	1,679			20			-		82		-			(28		)	-			-			1,753			20
Corporate debt securities issued by foreign entities..............	253			41			-		-		-			-			-			-			294			41
Equity securities	13			-			-		-		-			-			-			-			13			3
Derivatives⁽²⁾:
Interest rate contracts...........	9			-			-		-		-			-			-			-			9			-
Foreign exchange contracts...........	(1		)	(1		)	-		-		-			-			(3		)	-			(5		)	(1		)
Equity contracts	(83		)	50			-		-		-			(19		)	-			(1		)	(53		)	27
Credit contracts.	1,353			(375		)	-		-		-			6			-			-			984			(346		)
Loans⁽³⁾.................	11			-			-		-		-			-			-			(11		)	-			(12		)
Mortgage servicing rights⁽⁴⁾..................	220			-			-		-		8			-			-			-			228			-
Total assets...........	$	4,157		$	(226	)	$	-	$	83	$	8		$	(123	)	$	(3	)	$	(12	)	$	3,884		$	(235	)
Liabilities:
Deposits in domestic offices....	$	(2,867	)	$	(56	)	$	-	$	-	$	(287	)	$	82		$	3		$	161		(2,964		)	$	(41	)
Long-term debt.....	(86		)	(1		)	-		-		(89		)	3			-			13			(160		)	-
Total liabilities......	$	(2,953	)	$	(57	)	$	-	$	-	$	(376	)	$	85		$	3		$	174		$	(3,124	)	$	(41	)

⁽¹⁾Includes realized and unrealized gains and losses.

⁽²⁾Level 3 net derivatives included derivative assets of $1.3 billion and derivative liabilities of $782 million as of March 31, 2013 and derivative assets of $2.0 billion and derivative liabilities of $2.2 billion as of March 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 8, "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 March 31, 2013 and December 31, 2012.

As of March 31, 2013
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations.........	481		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	-% - 6%
				Conditional default rates	4% - 11%
				Loss severity rates	50% -95%
Corporate and other domestic debt securities.........................................	1,524		Discounted cash flows	Spread volatility on collateral assets	1.1% - 4.0%
				Correlation between insurance claim shortfall and collateral value	80%
Corporate and government debt securities issued by foreign entities..	437		Discounted cash flows	Correlations of default among a portfolio of credit names of embedded credit derivatives	34.3% - 34.4%
Equity securities (investments in hedge funds)....................................	11		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....	6		Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	8% - 100%
Foreign exchange derivative contracts⁽¹⁾......................................	134		Option pricing model	Implied volatility of currency pairs	1.6% - 20.9%
Equity derivative contracts⁽¹⁾..........	34		Option pricing model	Equity / Equity Index volatility	5% - 120%
				Equity / Equity and Equity / Index correlation	52% - 61%
Credit derivative contracts..............	364		Option pricing model	Correlation of defaults of a portfolio of reference credit names	36.3% - 45.8%
				Industry by industry correlation of defaults	48% - 75%
Mortgage servicing rights................	190		Option adjusted discounted cash flows	Constant prepayment rates	7.3% - 33.1%
				Option adjusted spread	8.07% - 19.07%
				Estimated annualized costs to service	$91 - $256 per account
Deposits in domestic offices (structured deposits) ⁽¹⁾⁽²⁾.................	(2,876	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	1.6% - 20.9%
				Equity / Equity Index volatility	5% - 120%
				Equity / Equity and Equity / Index correlation	52% - 61%
Long-term debt (structured notes) ⁽¹⁾⁽²⁾.................................................	(618	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	1.6% - 20.9%
				Equity / Equity Index volatility	5% - 120%
				Equity / Equity and Equity / Index correlation	52% - 61%

As of 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	-% - 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	1.5% - 4.0%
				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	28.56% - 28.57%
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	1.6% - 20.9%
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	32.04% - 45.31%
				Industry by industry correlation of defaults	44% - 67%
Mortgage servicing rights................	168		Option adjusted discounted cash flows	Constant prepayment rates	8.5% - 44.8%
				Option adjusted spread	8.07% - 19.07%
				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	1.6% - 20.9%
				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	1.6% - 20.9%
				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 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 March 31, 2013 is about 1.8 times of CLOs.

Equity Securities (Investments in Hedge Funds)

▪ Equity Interest in Hedge Funds - As of March 31, 2013, HUSI owns interests in about 30 distressed hedge funds where the majority of the funds have been discounted at 50% to 60% to reflect our expectation of recovery.

Derivatives

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

▪ Implied volatility - The implied volatility is a significant pricing input for freestanding or embedded options including equity, foreign currency and interest rate options. The level of volatility is a function of the nature of the underlying risk, the level of strike price and the years to maturity of the option. Depending on the underlying risk and tenure, we determine the implied volatility based on observable input where information is available. However, substantially all of the implied volatilities are derived based on historical information. The implied volatility for different foreign currency pairs is between 1.6% and 20.9% while the implied volatility for equity/equity or equity/equity index is between 5% and 120%, respectively at March 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 4.4% and 4.6%, respectively at March 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 52% and 61% at March 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.

Material Additions to and Transfers Into (Out of) Level 3 Measurements During the three months ended March 31, 2013, we transferred $46 million of credit derivatives from Level 2 to Level 3 as result of including specific fair value adjustments related to certain credit default swaps. We transferred $85 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 to maturity and there is more observability in short term volatility.

During the three months ended March 31, 2012, we transferred $161 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 and consumer loans classified as held for sale reported at the lower of amortized cost or fair value and (b) impaired loans or assets that are written down to fair value based on the valuation of underlying collateral during the period. These instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances (e.g., impairment). The following table presents the fair value hierarchy level within which the fair value of the financial and non-financial assets has been recorded as of March 31, 2013 and December 31, 2012. The gains (losses) during the three months ended March 31, 2013 and 2012 are also included.

	Non-Recurring Fair Value Measurements as of March 31, 2013								Total Gains (Losses) For the Three Months Ended Mar. 31 2013
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale⁽¹⁾................	$	-	$	8	$	66	$	74	$	3
Impaired loans⁽²⁾.............................................................	-		-		125		125		(1		)
Real estate owned⁽³⁾.......................................................	28		-		-		28		2
Total assets at fair value on a non-recurring basis...	$	28	$	8	$	191	$	227	$	4

	Non-Recurring Fair Value Measurements as of December 31, 2012								Total Gains (Losses) For the Three Months Ended Mar. 31 2012
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale⁽¹⁾................	$	-	$	10	$	67	$	77	$	(2	)
Impaired loans⁽²⁾.............................................................	-		-		155		155		(11		)
Real estate owned⁽³⁾.......................................................	24		-		-		24		-
Total assets at fair value on a non-recurring basis...	$	24	$	10	$	222	$	256	$	(13	)

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

⁽²⁾Represents impaired commercial loans. 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 commercial loans are classified as a Level 3 fair value measurement within the fair value hierarchy.

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

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

As of March 31, 2013
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale.........................	$	66	Valuation of third party appraisal on underlying collateral	Loss severity rates	-% - 100%
Impaired loans...............................................................	125		Valuation of third party appraisal on underlying collateral	Loss severity rates	.3% - 80.6%

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 loans...............................................................	155		Valuation of third party appraisal on underlying collateral	Loss severity rates	.6% - 78.9%

Significant Unobservable Inputs for Non-Recurring Fair Value Measurements

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

Impaired loans represent commercial loans. Loss severity rates for impaired loans are also primarily impacted by the outstanding loan balance and the value of the underlying collateral securing the loan. The weighted average severity rate for these loans was approximately 22% at March 31, 2013. These severity rates are primarily impacted by the outstanding balances of the loans and the value of the underlying collateral securing the loans.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Additional information relating to asset-backed securities and collateralized debt obligations as of March 31, 2013 is presented in the following tables:

Trading asset-backed securities and related collateral:

		Prime				Alt-A				Subprime
Rating of Securities:⁽¹⁾	Collateral Type:	Level 2		Level 3		Level 2		Level 3		Level 2		Level 3		Total
		(in millions)
AAA -A........................................	Residential mortgages...............	$	-	$	-	$	88	$	-	$	68	$	-	$	156
CCC-Unrated................................	Residential mortgages...............	-		-		-		-		3		-		3
		$	-	$	-	$	88	$	-	$	71	$	-	$	159

Trading collateralized debt obligations and related collateral:

Rating of Securities:⁽¹⁾	Collateral Type:	Level 2		Level 3
		(in millions)
AAA -A.....................................................................	Student loans...........................................................	$	64	$	-
BBB -B.......................................................................	Corporate loans........................................................	$	-	$	303
	Other..........................................................................	-		178
	Total BBB -B.............................................................	-		481
		$	64	$	481

Available-for-sale securities backed by collateral:

		Commercial Mortgages				Prime				Alt-A				Subprime
Rating of Securities:⁽¹⁾	Collateral Type:	Level 2		Level 3		Level 2		Level 3		Level 2		Level 3		Level 2		Level 3		Total
		(in millions)
AAA -A.......................	Residential mortgages	$	185	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	185
	Home equity................	-		-		-		-		111		-		-		-		111
	Total AAA -A.............	185		-		-		-		111		-		-		-		296
BBB -B..........................	Home equity................	-		-		-		-		79		-		-		-		79
	Other.............................	-		-		-		-		85		-		-		-		85
	Total BBB -B................	-		-		-		-		164		-		-		-		164
CCC -Unrated..............	Residential mortgages	-		-		-		-		1		-		-		-		1
	Home equity................	-		-		-		-		65		-		-		-		65
	Total CCC -Unrated....	-		-		-		-		66		-		-		-		66
		$	185	$	-	$	-	$	-	$	341	$	-	$	-	$	-	$	526

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

22. Litigation and Regulatory Matters

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

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

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

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

Litigation

Credit Card Litigation Since June 2005, HSBC Bank USA, HSBC Finance Corporation, HSBC North America and HSBC, as well as other banks and Visa Inc. and MasterCard Incorporated, have been named as defendants in four class actions filed in Connecticut and the Eastern District of New York: Photos Etc. Corp. et al v. Visa U.S.A., Inc., et al.(D. Conn. No. 3:05-CV-01007 (WWE)); National Association of Convenience Stores, et al. v. Visa U.S.A., Inc., et al.(E.D.N.Y. No. 05-CV 4520 (JG)); Jethro Holdings, Inc., et al. v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-4521(JG)); and American Booksellers Asps' v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-5391 (JG)). Numerous other complaints containing similar allegations (in which no HSBC entity is named) were filed across the country against Visa Inc., MasterCard Incorporated and other banks. Various individual (non-class) actions were also brought by merchants against Visa Inc., and MasterCard Incorporated. These class and individual merchant actions principally allege that the imposition of a no-surcharge rule by the associations and/or the establishment of the interchange fee charged for credit card transactions causes the merchant discount fee paid by retailers to be set at supracompetitive levels in violation of the Federal antitrust laws. These suits were consolidated and transferred to the Eastern District of New York. The consolidated case is: In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. ("MDL 1720"). On February 7, 2011, MasterCard Incorporated, Visa Inc., the other defendants, including HSBC Bank USA, and certain affiliates of the defendants entered into settlement and judgment sharing agreements (the "Sharing Agreements") that provide for the apportionment of certain defined costs and liabilities that the defendants, including HSBC Bank USA and our affiliates, may incur, jointly and/or severally, in the event of an adverse judgment or global settlement of one or all of these actions. The parties engaged in a mediation process and the putative class plaintiffs filed a class settlement agreement with the District Court on October 19, 2012, and the District Court entered an order preliminarily approving the class settlement on November 27, 2012. The class settlement is subject to final approval by the District Court. Pursuant to the class settlement agreement and the Sharing Agreements, we have deposited our portion of the class settlement amount into an escrow account for payment in the event the class settlement is approved. On October 22, 2012, a settlement agreement with the individual merchant plaintiffs became effective, and pursuant to the Sharing Agreements we have deposited our portion of that settlement amount into an escrow account.

Checking Account Overdraft Litigation In February 2011, an action captioned Ofra Levin et al v. HSBC Bank USA, N.A. et al (E.D.N.Y. 11-CV-0701) was filed in the Eastern District of New York against HSBC Bank USA, HSBC USA and HSBC North America on behalf of a putative nationwide class and New York sub-class of customers who allegedly incurred overdraft fees due to the posting of debit card transactions to deposit accounts in high-to-low order. The plaintiffs (the "Levin Plaintiffs") dismissed the federal court action after the case was transferred to the multi-district litigation pending in Miami, Florida, and re-filed the case in New York state court on March 1, 2011. The action captioned Ofra Levin et al v. HSBC Bank USA, N.A. et al. (N.Y. Sup. Ct. 650562/11), alleges a variety of common law claims on behalf of a New York class, including breach of contract and the implied covenant of good faith and fair dealing, conversion and unjust enrichment, and a violation of the New York deceptive acts and practices statute. In May 2011, we filed a motion to dismiss the complaint. The court denied in part and granted in part the motion to dismiss, granting the Levin Plaintiffs leave to amend their complaint with regard to their claims for conversion and unjust enrichment. On July 26, 2012, we appealed the court's order. The appeal is still pending. On August 27, 2012, the Levin Plaintiffs filed an amended complaint asserting the same causes of action. In October 2012, counsel for the Levin Plaintiffs sought to withdraw as their counsel and to amend the complaint to, among other things, substitute a new named plaintiff, Darek Jura ("Jura") and amend the case caption. The court granted counsel's requests-they are no longer counsel for the Levin Plaintiffs, Jura has been added as a named plaintiff and the action is now captioned In Re HSBC Bank USA, N.A. Checking Account Overdraft Litigation (the "Overdraft Litigation"). On November 9, 2012, Jura filed a motion for class certification. HSBC's deadline to respond to the motion for class certification is May 2, 2013. On December 3, 2012, the Levin Plaintiffs, represented by new counsel, filed a motion to dismiss the Overdraft Litigation solely on the basis that the Levin Action, discussed below, is pending. The Levin Plaintiffs' motion to dismiss was denied on April 2, 2013.

On November 19, 2012, the Levin Plaintiffs filed a new action captioned Ofra Levin et al. v. HSBC Bank USA, N.A. et al. (E.D.N.Y. 12-CV-5696) in the Eastern District of New York (the "Levin Action"). The Levin Action seeks relief for a nationwide class and asserts the same claims as in the Overdraft Litigation as well as alleges that deposited funds are not made available pursuant to our funds availability disclosures. On December 21, 2012, the Levin Plaintiffs filed their first amended complaint. On February 11, 2013, we filed a motion to dismiss the complaint. The motion is fully briefed and oral argument has been requested. On March 13, 2013, the Levin Plaintiffs filed a motion for leave to file a second amended complaint. This motion is also currently pending.

On December 18, 2012, Jura filed a new action captioned Darek Jura v. HSBC Bank USA, N.A. et al. (E.D.N.Y. 12-CV-6224) in the Eastern District of New York (the "Jura Action"). On December 28, 2012, Jura filed a motion to consolidate this action with the Levin Action. Jura also filed a motion to appoint his counsel as interim class counsel. We filed a non-opposition to the motion to consolidate and motion to appoint Jura's counsel as interim class counsel. The Levin Plaintiffs filed a partial opposition to the motion to consolidate-they do not oppose consolidation, but seek to have their own attorney appointed as interim lead class counsel. The motions are still pending. On February 26, 2013, we filed a motion to dismiss the complaint and it will be fully briefed on April 16, 2013. Oral argument has been requested for the motion to dismiss.

On February 20, 2013, an action captioned Hanes v. HSBC Bank USA, N.A. (E.D. Va. 13-CV-00229) was filed in the Eastern District of Virginia only as to HSBC Bank USA. We are required to respond to the complaint by April 15, 2013.

On April 3, 2013, we filed a motion with the Judicial Panel on Multidistrict Litigation to consolidate all of the federal actions to the Eastern District of New York for coordinated or consolidated pretrial proceedings ("MDL Petition"). Plaintiffs response to the MDL Petition are due on April 25, 2013. On April 4, 2013, we filed motions to stay the federal actions while the MDL Petition is pending.

DeKalb County, et al. v. HSBC North America Holdings Inc., et al. In October 2012, three of the five counties constituting the metropolitan area of Atlanta, Georgia, filed a lawsuit pursuant to the Fair Housing Act against HSBC North America and numerous subsidiaries, including HSBC Finance Corporation and HSBC Bank USA, in connection with residential mortgage lending, servicing and financing activities. In the action, captioned DeKalb County, Fulton County, and Cobb County, Georgia v. HSBC North America Holdings Inc., et al. (N.D. Ga. No. 12-CV-03640), the plaintiff counties assert that the defendants' allegedly discriminatory lending and servicing practices led to increased loan delinquencies, foreclosures and vacancies, which in turn caused the plaintiff counties to incur damages in the form of lost property tax revenues and increased municipal services costs, among other damages. Defendants' motion to dismiss the case was filed in January 2013, and plaintiffs filed their opposition to the motion on April 1, 2013. Defendants' reply brief on the motion is scheduled to be filed on May 1, 2013.

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

Between June 2011 and April 2013, several putative class actions related to lender-placed insurance were filed against various HSBC U.S. entities, including actions against HSBC USA, Inc. and certain of our subsidiaries captioned Montanez et al v. HSBC Mortgage Corporation (USA) et al. (E.D. Pa. No. 11-CV-4074); West et al. v. HSBC Mortgage Corporation (USA) et al. (South Carolina Court of Common Pleas, 14th Circuit No. 12-CP-00687); Weller et al. v. HSBC Mortgage Services, Inc. et al. (D. Col. No. 13-CV-00185); and Hoover et al. v. HSBC Bank USA, N.A. et al. (N.D.N.Y. 13-CV-00149); and Lopez v. HSBC Bank USA, N.A. et al. (S.D. Fla 13-CV-21104). These actions relate primarily to industry-wide practices, and include allegations regarding the relationships and potential conflicts of interest between the various entities that place the insurance, the value and cost of the insurance that is placed, back-dating policies to the date the borrower allowed it to lapse, self-dealing and insufficient disclosure.

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

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

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

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

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

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

Greenwich Sentry LP v. HSBC USA Inc. (Del. Ch. No. 6829) was filed in September 2011 in the Delaware Court of Chancery. The complaint seeks the return of specified redemption payments made to HSBC USA as a limited partner in Greenwich Sentry LP, a fund whose assets were invested with Madoff Securities, and asserts claims of unjust enrichment, mistaken payment, and constructive trust. HSBC USA was served with a copy of the complaint in December 2011. In May 2012, the Court of Chancery granted an unopposed motion by the Madoff Securities trustee to substitute itself for Greenwich Sentry LP as plaintiff in this action. HSBC USA filed a notice of its motion to dismiss the complaint in June 2012. In January 2013, the parties filed a stipulation and proposed order for the withdrawal of the action against HSBC USA without prejudice, and the Court of Chancery approved the parties' stipulation.

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.

Knox Family Trust Litigation. HSBC Bank USA, N.A. is the defendant in seven separate proceedings collectively described as Matter of Knox (N.Y. Surrogate's Court, Erie County, File Nos. DO-0659, DO-0663, DO-0664, DO-0665, DO-0666, 1996-2486/B, and 1996-2486/D), concerning seven trusts for which HSBC Bank USA served as trustee that were established by Seymour Knox II and his descendants for various members of the Knox family. In these proceedings, the beneficiaries of the various trusts objected to HSBC Bank USA's final accountings and claimed that HSBC Bank USA mismanaged certain assets and investments. In November 2010, the court awarded the plaintiffs in the seven proceedings damages totaling approximately $26 million plus interest and attorneys' fees to be determined. In May 2011, the court entered final judgments totaling approximately $25 million in two of the seven proceedings (DO-0659 and 1996-2486/B). HSBC Bank USA appealed the judgments and secured the judgments in order to suspend execution of the judgments while the appeals are ongoing by depositing cash in the amount of the judgments in an interest-bearing escrow account. In May 2011, HSBC Bank USA agreed to settle three of the other proceedings (DO-0664, DO-0665 and DO-0666) for an immaterial amount. HSBC Bank USA also filed appeals of the two other proceedings. In August 2011, HSBC Bank USA agreed in principle to settle one proceeding on appeal (1996-2486/B) for an immaterial amount. On June 19, 2012 the N.Y. Appellate Division, 4th Department issued rulings on HSBC Bank USA's three pending appeals modifying the Surrogate Court's decisions by vacating all its determinations of liability (except for an appellate finding in DO-0659 to the extent that HSBC Bank USA held certain stock in F.W. Woolworth Co. after March 1, 1995, which leaves potential liability in an immaterial amount), and as modified, affirming them. The Appellate Division then remitted the three matters to the Surrogate Court for further proceedings. Prior to the Appellate Division's decision, the parties largely had agreed in principle to a consensual resolution of the remaining issues in DO-0659, and the Surrogate Court has approved a resolution of the claims for an immaterial amount. Several co-trustees and beneficiaries have attempted to pursue further appeals of the Appellate Division's decision, which HSBC Bank USA views as procedurally and substantively without merit. In September 2012, those motions for re-argument or leave to appeal to the New York Court of Appeals were denied by the Appellate Division. In November 2012, the same co-trustees and beneficiaries filed motions for leave to appeal directly to the Court of Appeals. The Court of Appeals denied those motions for leave to appeal on February 19, 2013.

Federal Home Loan Mortgage Corporation v. Bank of America, et al. On March 14, 2013, the Federal Home Loan Mortgage Corporation ("Freddie Mac"), filed a lawsuit in the United States District Court for the Eastern District of Virginia naming as defendants HSBC Bank USA and other panel USD LIBOR panel banks, as well as the British Bankers' Association. The lawsuit alleges improper practices in connection with the setting of USD LIBOR, and claims violation of the Sherman Act, breach of contract, and fraud arising out of various swap agreements entered into by Freddie Mac with the USD LIBOR panel banks, including HSBC Bank USA. The lawsuit is at a very early stage, and does not allege specific damages as to HSBC Bank USA.

Governmental and Regulatory Matters

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

The Servicing Consent Orders required an independent review of foreclosures (the "Independent Foreclosure Review") pending or completed between January 2009 and December 2010 to determine if any borrower was financially injured as a result of an error in the foreclosure process. As required by the Servicing Consent Orders, an independent consultant was retained to conduct that review. On February 28, 2013, HSBC Bank USA entered into an agreement with the OCC, and HSBC Finance Corporation and HSBC North America entered into an agreement with the Federal Reserve, pursuant to which the Independent Foreclosure Review has ceased and been replaced by a broader framework under which we and twelve other participating servicers will, in the aggregate, provide in excess of $9.3 billion in cash payments and other assistance to help eligible borrowers. Pursuant to the agreements, HSBC North America has made a cash payment of $96 million into a fund that will be used to make payments to borrowers that were in active foreclosure during 2009 and 2010 and, in addition, will provide other assistance (e.g., loan modifications) to help eligible borrowers. As a result, in 2012, we recorded expenses of $19 million which reflects the portion of HSBC North America's total expense of $104 million that we believe is allocable to us. The mailing of checks to eligible borrowers by Rust Consulting, Inc., the paying agent, has begun and is targeted for completion by mid-July 2013. Borrowers who receive compensation will not be required to execute a release or waiver of rights and will not be precluded from pursuing litigation concerning foreclosure or other mortgage servicing practices. For participating servicers, including HSBC Bank USA and HSBC Finance Corporation, fulfillment of the terms of these agreements will satisfy the Independent Foreclosure Review requirements of the 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 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 consent orders, provided the terms of the agreement are fulfilled. The OCC's agreement not to assess civil money penalties is further conditioned on HSBC North America making payments or providing borrower assistance pursuant to any agreement that may be entered into with the U.S. Department of Justice in connection with the servicing of residential mortgage loans within two years. The Federal Reserve has agreed that any assessment of civil money penalties by the Federal Reserve will reflect a number of adjustments, including amounts expended in consumer relief and payments made pursuant to any agreement that may be entered into with the U.S. Department of Justice in connection with the servicing of residential mortgage loans. In addition, the agreement does not preclude private litigation concerning these practices.

Separate from the Servicing Consent Orders and the settlement related to the Independent Foreclosure Review discussed above, in February 2012, the U.S. Department of Justice, the U.S. Department of Housing and Urban Development and State Attorneys General of 49 states announced a settlement with the five largest U.S. mortgage servicers with respect to foreclosure and other mortgage servicing practices. HSBC North America, HSBC Finance Corporation and HSBC Bank USA 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 reflects the portion of the HSBC North America accrual that we currently believe is allocable to HSBC Bank USA. As this matter progresses and more information becomes available, we will continue to evaluate our portion of the HSBC North America liability which may result in a change to our current estimate. Any such settlement, however, may not completely preclude other enforcement actions by state or federal agencies, regulators or law enforcement agencies related to foreclosure and other mortgage servicing practices, including, but not limited to, matters relating to the securitization of mortgages for investors. In addition, such a settlement would not preclude private litigation concerning these practices.

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

In December 2012, HSBC, HSBC North America and HSBC Bank USA entered into agreements to achieve a resolution with U.S. and United Kingdom government agencies that have investigated HSBC's conduct related to inadequate compliance with anti-money laundering, BSA and sanctions laws, including the previously reported investigations by the U.S. Department of Justice, the Federal Reserve, the OCC and the U.S. Department of Treasury's Financial Crimes Enforcement Network ("FinCEN") in connection with AML/BSA compliance, including cross-border transactions involving our cash handling business in Mexico and banknotes business in the U.S., and the U.S. Department of Justice, the New York County District Attorney's Office, the Office of Foreign Assets Control ("OFAC"), the Federal Reserve and the OCC regarding historical transactions involving Iranian parties and other parties subject to OFAC economic sanctions. As part of the resolution, HSBC entered into a deferred prosecution agreement among HSBC, HSBC Bank USA, 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 a deferred prosecution agreement with the New York County District Attorney, and consented to a cease and desist order and, along with HSBC North America, consented to a monetary penalty order with the Federal Reserve. In addition, HSBC Bank USA entered into the U.S. DPA, and a consent order with FinCEN. HSBC also entered into an undertaking with the U.K. Financial Services Authority ("FSA") to comply with certain forward-looking obligations with respect to anti-money laundering 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 will continue to cooperate fully with U.S. and U.K. regulatory and law enforcement authorities and take further action to strengthen their compliance policies and procedures. Over the five-year term of the agreements with the U.S. Department of Justice and FSA, a "skilled person" under Section 166 of the Financial Services and Markets Act (also referred to as an independent monitor) will evaluate HSBC's progress in fully implementing these and other measures it recommends, and will produce regular assessments of the effectiveness of HSBC's compliance function. If HSBC fulfills all of the requirements imposed by the U.S. DPA and other agreements, the U.S. Department of Justice's charges against it will be dismissed at the end of the five-year period. The US DPA remains subject to certain proceedings before the United States District Court for the Eastern District of New York. The U.S. Department of Justice or the New York County District Attorney's Office may prosecute HSBC or HSBC Bank USA in relation to the matters that are subject of the US DPA if HSBC or HSBC Bank USA breaches the terms of the US DPA. HSBC Bank USA also entered into a separate consent order with the OCC requiring adoption of an enterprise-wide compliance program, and an agreement with the OCC under which it may not directly or indirectly acquire control of, or hold an interest in, any new financial subsidiary, nor commence a new activity in its existing financial subsidiary, unless it receives prior approval from the OCC.

Steps continue to be taken to address the requirements of the U.S. DPA and the FSA undertaking to ensure compliance, and that effective policies and procedures are maintained. In addition, the settlement with regulators does not preclude private litigation relating to, among other things, HSBC's compliance with applicable anti-money laundering, BSA and sanctions laws.

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

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

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

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

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.

Mortgage Securitization Activity and Litigation In addition to the repurchase risk described in Note 28, "Guarantee Arrangements and Pledged Assets," we have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by HSI. In this regard, beginning in 2005 we began acquiring residential mortgage loans, the vast majority of which were originated by non-HSBC entities that 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. The outstanding principal balance on these loans was approximately $7.2 billion and $7.4 billion at March 31, 2013 and December 31, 2012, respectively. Based on the specifics of these transactions, the obligation to repurchase loans in the event of a breach of loan level representations and warranties resides predominantly with the organization that originated the loan. Certain of these originators, however, are or may become financially impaired and, therefore, unable to fulfill their repurchase obligations.

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

HSBC Bank USA and certain of our affiliates have been named as defendants in a number of actions in connection with residential mortgage-backed securities ("RMBS") offerings, which generally allege that the offering documents for securities issued by securitization trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans. In September 2011, the Federal Housing Finance Agency (the "FHFA"), acting in its capacity as conservator for the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), filed an action in the U.S. District Court for the Southern District of New York against HSBC Bank USA, HSBC USA, HSBC North America, HSI, HSI Asset Securitization Corporation ("HASCO") and five former and current officers and directors of HASCO seeking damages or rescission of mortgage-backed securities purchased by Fannie Mae and Freddie Mac that were either underwritten or sponsored by HSBC entities. The aggregate unpaid principal balance of the securities was approximately $1.7 billion at March 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. This action, along with all of the similar FHFA RMBS actions that were filed in the U.S. District Court for the Southern District of New York, was transferred to a single judge, who directed the defendant in the first-filed matter, UBS, to file a motion to dismiss. In May 2012, the District Court filed its decision denying the motion to dismiss FHFA's securities law claims and granting the motion to dismiss FHFA's negligent misrepresentation claims. The District Court's ruling will form the basis for rulings on the other matters, including the action filed against HSBC Bank USA and our affiliates. Subsequently, UBS sought leave to appeal to the U.S. Court of Appeals for the Second Circuit on certain issues raised in the motion to dismiss. The District Court and the Court of Appeals granted the request for leave to appeal, and on April 5, 2013, the Court of Appeals affirmed the ruling of the District Court. In December 2012, the District Court directed the FHFA parties to schedule mediation with the Magistrate Judge assigned to the action. In January 2013, the FHFA parties met with the Magistrate Judge to discuss how to structure a mediation.

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

In December 2012, Bayerische Landesbank ("BL") filed a summons with notice in New York County Supreme Court, State of New York, naming as defendants HSBC, HSBC North America, HSBC USA, HSBC Markets (USA) Inc., HSBC Bank USA, HSI Asset Securitization Corp. and HSI. The summons alleges that BL purchased $75 million in RMBS from the defendants and has sustained unspecified damages as a result of material misrepresentations and omissions regarding loan underwriting standards contained in the offering documents. The claims against the HSBC entities are for (i) fraud, (ii) fraudulent inducement, (iii) negligent misrepresentation, (iv) aiding and abetting fraud, (v) breach of contract, and (vi) declaratory judgment. In February 2013 BL served the HSBC entities with the summons with notice.

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

We expect this level of focus will continue and, potentially, intensify, so long as the U.S. real estate markets continue to be distressed. As a result, we may be subject to additional 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.

23. New Accounting Pronouncements

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

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

Obligations Arising from Joint and Several Liability Arrangement In February 2013, the FASB finalized its guidance for obligations arising from joint and several liabilities for which the total amount of the obligation is fixed at the reporting date. The new guidance addresses the diversity in practice and requires entities to recognize these liabilities at the sum of (a) the amount that the reporting entity agreed to pay pursuant to agreement entered into with co-obligors, and (b) any additional amount the entity expects to pay on behalf of co-obligors. The guidance should be applied retrospectively on January 1, 2014. The adoption of this guidance is not expected to have a significant impact on our financial statements.

Accounting for the CTA upon Derecognition of Certain Subsidiaries or Group of Assets In March 2013, the FASB issued the final guidance related to the release of a cumulative translation adjustment ("CTA") upon derecognition of subsidiaries or group of assets within a foreign entity into net income. The guidance clarifies that when a parent ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity and the sale represents the complete or substantially complete liquidation of the investment in the foreign entity, or when a parent loses its controlling financial interest in an investment in a foreign entity, it should release the CTA into net income. The standard also requires the release of CTA into net income upon acquiring a controlling interest in a foreign entity that was accounted for under equity method investment prior to obtaining control, and consistent with current U.S. GAAP in this area, upon a partial sale of an equity method investment. The guidance is effective prospectively from January 1, 2014. The adoption of this guidance is not expected to have a significant impact on our financial statements.

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

Forward-Looking Statements

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

Executive Overview

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

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

Current Environment The U.S. economy continued its gradual recovery during the first quarter of 2013, with GDP continuing to grow but well below the economy's potential growth rate. Reduced levels of business investment spending continues to restrain economic growth as businesses continue to be cautious about the underlying strength of demand and are hesitant to fully ramp up hiring activity. With continuing high gasoline prices, the increase in payroll taxes at the beginning of the year and the onset of sequestration in March, consumer confidence remains under pressure and many households remain uncertain about the future as domestic fiscal uncertainties continued to play a role in diminishing sentiment and influencing interest rates and spreads. Serious threats to economic growth remain, including the sustainability of a housing market recovery, high energy costs, and elevated unemployment levels. Federal Reserve policy makers previously announced that they do not expect to increase short-term rates until the unemployment rate falls below 6.5 percent which according to the Federal Reserve's economic projections, the Federal funds rate will be kept near zero into 2015. The prolonged period of low Federal funds rates continues to put pressure on spreads earned on our deposit base. Housing markets in general continued the rebound which began in the second half of 2012 with overall home prices moving higher as demand increased and the supply of homes for sale declined. However, the sharp decline in the distressed share of home sales experienced in 2012 is unlikely to continue in 2013 as the impact of servicers resuming foreclosure activities and the listing of the underlying properties for sale are expected to slow down price gains.

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

Due to the significant slow-down in foreclosure processing which began in the second half of 2008, and in some instances the prior cessation of all foreclosure processing by numerous loan servicers in late 2010, there has been a reduction in the number of properties being marketed following foreclosure. This reduction has contributed to an increase in demand for properties currently on the market resulting in a general improvement in home prices in recent months but has also resulted in a larger number of vacant properties still pending foreclosure in certain communities. As servicers increase foreclosure activities and market properties in large numbers, an over-supply of housing inventory could occur creating downward pressure on property values, slowing any future home price improvement.

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

Performance, Developments and Trends Income from continuing operations was $183 million during the three months ended March 31, 2013 compared to $80 million during the three months ended March 31, 2012. Income from continuing operations before income tax was $287 million during the three months ended March 31, 2013 compared to income of $98 million during the three months ended March 31, 2012 driven by higher other revenue and lower operating expenses, partially offset by lower net interest income and a higher provision for credit losses. Our results in both periods were impacted by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option which distorts comparability of the underlying performance trends of our business. The following table summarizes the impact of this item on our income from continuing operations before income tax for all periods presented:

Three Months Ended March 31,	2013		2012
	(in millions)
Income from continuing operations before income tax, as reported...............................................................	$	287	$	98
Fair value movement on own fair option debt attributable to credit spread..............................................	42		221
Underlying income from continuing operations before income tax ⁽¹⁾................................................. ...........	$	329	$	319

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

Excluding the impact of the item in the table above, our underlying income from continuing operations before tax for the three months ended March 31, 2013 increased $10 million compared to the prior year period as lower operating expenses and higher other revenue were partially offset by lower net interest income and a higher provision for credit losses. Income from continuing operations in 2013 reflects the absence of operating results from the sale of our non-strategic retail branches to First Niagara in 2012.

During the three months ended March 31, 2013, we continued to reduce legacy and other risk positions as opportunities arose, including the sale of $475 million of leveraged acquisition finance loans previously held for sale. A summary of the significant valuation adjustments associated with these market conditions that impacted revenue for the three months ended March 31, 2013 and 2012 is presented in the following table:

Three Months Ended March 31,	2013		2012
	(in millions)
Gains (Losses)
Insurance monoline structured credit products⁽¹⁾..............................................................................................	$	20	$	8
Other structured credit products⁽¹⁾.......................................................................................................................	14		41
Mortgage whole loans held for sale including whole loan purchase settlement (predominantly subprime)⁽²⁾...............................................................................................................................................................	2		(1		)
Leverage acquisition finance loans⁽³⁾...................................................................................................................	13		30
Total gains................................................................................................................................................................	$	49	$	78

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

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

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

Other revenues in both periods reflect the impact of changes in value of our own debt attributable to credit spread for which we elected fair value option as presented in the table above. Excluding the impact of this item, other revenue increased $46 million during the first quarter of 2013 due primarily to higher securities gains and higher mortgage banking revenue, partially offset by lower trading revenue, lower other fees and commissions and lower credit card fees. Securities gains were higher due to sales associated with a continued re-balancing of the portfolio for risk management purposes based on the low interest rate environment. The higher mortgage banking revenue was largely driven by improved MSR performance, higher gains on individual loan sales and lower provisions for mortgage repurchase exposures on previously sold loans. The lower trading revenue was driven by lower activity volume in global markets. Lower other fees and commissions and lower credit card fees reflect the impact of our branch sales to First Niagara in the second and third quarters of 2012 which in addition to deposits also included certain credit card loans. See "Results of Operations" for a more detailed discussion of other revenues.

Net interest income was $505 million during the three months ended March 31, 2013 compared to $587 million during the prior year quarter. The decrease reflects the impact of lower interest income on securities due to lower interest rates including the impact from the sale of securities, an increase in interest charges related to estimated tax exposures and higher interest expense on long-term debt, partially offset by lower interest expense on deposits reflecting the impact of our branch sales to First Niagara in 2012 and lower average rates paid. See "Results of Operations" for a more detailed discussion of net interest income.

Our provision for credit losses was $21 million during the three months ended March 31, 2013 compared to zero during the prior year quarter. In our consumer loan portfolio, the provision for credit losses declined, driven by a lower provision in our residential mortgage and credit card loan portfolios due to continued improvements in economic and credit conditions, including lower dollars of delinquency on accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates, partially offset by higher loss estimates in our home equity mortgage portfolio. In our commercial portfolio, our provision for credit losses was higher, driven largely by increased levels of reserves for risk factors primarily associated with expansion activities in the U.S. See "Results of Operations" for a more detailed discussion of our provision for credit losses.

Operating expenses totaled $789 million in the first quarter of 2013, a decrease of 8 percent compared to the year-ago quarter as lower salaries and benefits and lower expenses related to support services from affiliates were partially offset by higher other expenses due to a higher provision for off-balance sheet credit exposures. Compliance costs while remaining a significant component of our cost base in first quarter of 2013 declined, totaling $76 million compared to $97 million in the prior year quarter, as the prior year quarter reflects investment in BSA/AML process enhancements and infrastructure and, to a lesser extent, foreclosure remediation which did not occur at the same level in 2013. While we continue to focus attention on cost mitigation efforts in order to continue realization of optimal cost efficiencies, we believe compliance related costs have permanently increased to higher levels due to the remediation of regulatory consent agreements. See "Results of Operations" for a more detailed discussion of our operating expenses.

Our efficiency ratio from continuing operations was 71.9 percent during the three months ended March 31, 2013 compared to 89.7 percent during the year-ago quarter. Our efficiency ratio was impacted in both periods by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting. Excluding the impact of this item as discussed above, our efficiency ratio for the first quarter of 2013 improved to 69.3 percent compared to 72.9 percent in the prior year quarter as a decrease in operating expenses and an increase in other revenues were partially offset by a decrease in net interest income. While operating expenses declined in the first quarter of 2013 driven by the impact of our retail branch divestitures and cost mitigation efforts, they continue to reflect elevated levels of compliance costs.

Our effective tax rate was 36.2 percent for the three months ended March 31, 2013 compared to 18.4 percent in the prior year quarter. The effective tax rate for the three months ended March 31, 2013 was primarily impacted by an increase in state uncertain tax reserves, the utilization of low income housing tax credits and state income tax expense. The effective tax rate for the three months ended March 31, 2012 reflects the utilization of low income housing credits, a change in tax reserves, state taxes and the effect of a change in state tax rates used to value deferred taxes applied against a relatively low level of pre-tax income.

We continue to focus on cost optimization efforts to ensure realization of cost efficiencies. To date, we have identified and implemented various opportunities to reduce costs through organizational structure redesign, vendor spending, discretionary spending and other general efficiency initiatives. Additional cost reduction opportunities have been identified and are in the process of implementation. Workforce reductions, some of which relate to our retail branch divestitures, have resulted in total legal entity full-time equivalent employees being reduced by 32 percent since December 21, 2010. Workforce reductions are also occurring in certain non-compliance shared services functions, which we expect will result in additional reductions to future allocated costs for these functions. These efforts continue and, as a result, we may incur restructuring charges in future periods, the amount of which will depend upon the actions that ultimately are implemented.

On May 7, 2012, we announced that we had entered into a strategic relationship with PHH Mortgage to manage our mortgage processing and servicing operations. Under the terms of the agreement, PHH Mortgage will provide us with mortgage origination processing services as well as sub-servicing of our portfolio of owned and serviced mortgages totaling $48.3 billion as of March 31, 2013. We will continue to own both the mortgages on our balance sheet and the mortgage servicing rights associated with the serviced loans. We will sell our agency eligible originations to PHH Mortgage on a servicing released basis which will result in no new mortgage servicing rights being recognized going forward. As a result of this agreement, many of our mortgage servicing employees will be given the opportunity to transfer to PHH Mortgage. No significant one-time restructuring costs have been or are expected to be incurred as a result of this transaction. We plan to continue originating mortgages for our customers with particular emphasis on Premier relationships. The conversion of these operations is expected to be completed in the second quarter of 2013.

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

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

Three Months Ended March 31,	2013			2012
	(dollars are in millions)
Income from continuing operations............................................................................................................	$	183		$	80

Rate of return on average:
Total assets.................................................................................................................................................	.4			.2
Total common shareholder's equity........................................................................................................	4.1			1.5
Net interest margin.........................................................................................................................................	1.30			1.42
Efficiency ratio................................................................................................................................................	71.9			89.7
Commercial net charge-off ratio⁽¹⁾................................................................................................................	.55			.90
Consumer net charge-off ratio⁽¹⁾..................................................................................................................	.89			1.36

Balance Sheet Data:	March 31, 2013			December 31, 2012
Loans:
Construction and other real estate........................................................................................................	$	8,319		$	8,457
Business and corporate banking...........................................................................................................	12,725			12,608
Global banking.........................................................................................................................................	19,718			20,009
Other commercial loans...........................................................................................................................	2,877			3,076
Total commercial loans..............................................................................................................................	43,639			44,150
Residential mortgages, excluding home equity mortgages...............................................................	15,730			15,371
Home equity mortgages..........................................................................................................................	2,236			2,324
Credit card.................................................................................................................................................	749			815
Other consumer........................................................................................................................................	578			598
Total consumer loans................................................................................................................................	19,293			19,108
Total loans.......................................................................................................................................................	$	62,932		$	63,258
Loans held for sale.........................................................................................................................................	$	399		$	1,018

Allowance as a percent of loans⁽¹⁾...............................................................................................................	.90			1.02
Consumer two-months-and-over contractual delinquency.....................................................................	6.54			6.92
Loans to deposits ratio⁽²⁾..............................................................................................................................	71.02			71.35
Total shareholders' equity to total assets..................................................................................................	9.24		%	9.07		%
Total capital to risk weighted assets...........................................................................................................	18.11			19.52
Tier 1 capital to risk weighted assets..........................................................................................................	12.74			13.61
Tier 1 common equity to risk weighted assets...........................................................................................	10.91			11.63

⁽¹⁾Excludes loans held for sale.

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

Loans Loans, excluding loans held for sale, were $62.9 billion at March 31, 2013 compared to $63.3 billion at December 31, 2012. The decrease in loans as compared to December 31, 2012 was driven by a decrease in commercial loans of $511 million due to paydowns and managed reductions in certain exposures, which were partially offset by an increase of $265 million in affiliate loans and new business activity. Consumer loans increased, driven by higher levels of residential mortgage loans due largely to a reclassification of $276 million of Federal Housing Administration ("FHA") guaranteed loans purchased from the Government National Mortgage Association ("GNMA") which previously been recorded in other assets, and to a lesser extent, new originations targeted at our Premier customer relationships. We continue to sell a substantial portion of new mortgage loan originations to government sponsored enterprises. See "Balance Sheet Review" for a more detailed discussion of the changes in loan balances.

Credit Performance Our allowance for credit losses as a percentage of total loans decreased to .90 percent at March 31, 2013 as compared to 1.02 percent at December 31, 2012. The decrease in our allowance ratio reflects a lower allowance for credit losses in our commercial portfolio due to reductions in certain loan exposures including the charge-off of a single client relationship and continued improvements in economic conditions, as well as a lower allowance in our consumer portfolio due to improved credit quality including improved delinquency roll rates reflecting continued improvements in economic conditions. See "Credit Quality" for a more detailed discussion of this change.

Our consumer two-months-and-over contractual delinquency as a percentage of loans and loans held for sale ("delinquency ratio") decreased to 6.54 percent at March 31, 2013 as compared to 6.92 percent at December 31, 2012 largely due to lower levels of residential mortgage loan delinquency on accounts less than 180 days contractually delinquent due to improvements in credit quality including improved delinquency roll rates. See "Credit Quality" for a more detailed discussion of the increase in our delinquency ratios.

Net charge-offs as a percentage of average loans ("net charge-off ratio") decreased 41 basis points compared to the prior year quarter due largely to lower levels of residential mortgage loan charge-offs as well as lower charge-offs in our commercial portfolio. See "Credit Quality" for a more detailed discussion of our trends in net charge-off.

Funding and Capital Capital amounts and ratios are calculated in accordance with current banking regulations. Our Tier 1 capital ratio was 12.74 percent and 13.61 percent at March 31, 2013 and December 31, 2012, respectively. Our capital levels remain well above levels established by current banking regulations as "well capitalized".

Issuances of long-term debt during 2013 included $1.8 billion of medium term notes, of which $968 million was issued by HSBC Bank USA.

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

Three Months Ended March 31,	2013			2012
	(in millions)
Income from continuing operations before income tax from prior year.............................................	$	98		$	292
Increase (decrease) in income from continuing operations before income tax attributable to:
Balance sheet management activities excluding gains (losses) on security sales⁽¹⁾...................	(58		)	12
Trading revenue⁽²⁾..................................................................................................................................	(19		)	(35		)
Gains (losses) on security sales..........................................................................................................	101			(14		)
Loans held for sale⁽³⁾.............................................................................................................................	4			4
Residential mortgage banking related revenue⁽⁴⁾..............................................................................	21			51
Gain (loss) on own debt designated at fair value and related derivatives⁽⁵⁾.................................	212			(222		)
Loss on instruments designated at fair value and related derivatives, excluding own debt⁽⁵⁾..	(27		)	(11		)
Provision for credit losses⁽⁶⁾................................................................................................................	(21		)	(2		)
Interest expense on certain tax exposures⁽⁷⁾......................................................................................	(4		)	(11		)
Impairment of software development costs....................................................................................	-			78
All other activity⁽⁸⁾.................................................................................................................................	(20		)	(44		)
Income from continuing operations before income tax for current year............................................	$	287		$	98

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

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

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

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

⁽⁵⁾For additional discussion regarding fair value option on our own debt, see Note 12, "Fair Value Option," in the accompanying consolidated financial statements.

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

⁽⁷⁾For additional discussion on interest expense on certain tax exposures, see Note 13, "Income Taxes," in the accompanying consolidated financial statements.

⁽⁸⁾Represents other banking activities.

Basis of Reporting

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

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

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

Three Months Ended March 31,	2013			2012
	(in millions)
Net income - U.S. GAAP basis.............................................................................................................................	$	183		$	235
Adjustments, net of tax:
IFRS reclassification of fair value measured financial assets during 2008.................................................	(10		)	(31		)
Securities..............................................................................................................................................................	(3		)	(1		)
Derivatives...........................................................................................................................................................	1			-
Loan impairment..................................................................................................................................................	(7		)	(7		)
Property................................................................................................................................................................	(2		)	(3		)
Pension costs.......................................................................................................................................................	4			5
Transfer of credit card receivables to held for sale and subsequent sale..................................................	-			17
Other......................................................................................................................................................................	(14		)	4
Net income - IFRSs basis......................................................................................................................................	152			219
Tax expense - IFRSs basis.....................................................................................................................................	95			78
Profit before tax - IFRSs basis..............................................................................................................................	$	247		$	297

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

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

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

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

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

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

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

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

For loans collectively evaluated for impairment under U.S. GAAP, bank industry practice which we adopted in the fourth quarter of 2012 generally results in a loss emergence period for these loans using a roll rate migration analysis which results in 12 months of losses in our allowance for credit losses. Under IFRSs, we completed a review in the fourth quarter of 2012 which concluded that the estimated average period of time from current status to write-off for loans collectively evaluated for impairment using a roll rate migration analysis was 10 months (previously a period of 7 months was used) which was also adopted in the fourth quarter of 2012.

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

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

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

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

Balance Sheet Review

We utilize deposits and borrowings from various sources to provide liquidity, fund balance sheet growth, meet cash and capital needs, and fund investments in subsidiaries. Balance sheet totals at March 31, 2013 and increases (decreases) since December 31, 2012 are summarized in the table below:

			Increase (Decrease) From
			December 31, 2012
	March 31, 2013		Amount			%
	(dollars are in millions)
Period end assets:
Short-term investments...............................................................................................	$	24,658	$	6,871		38.6	%
Loans, net.....................................................................................................................	62,364		(247		)	(.4	)
Loans held for sale......................................................................................................	399		(619		)	(60.8	)
Trading assets..............................................................................................................	34,658		(1,337		)	(3.7	)
Securities.......................................................................................................................	60,892		(8,444		)	(12.2	)
Other assets..................................................................................................................	10,039		219			2.2
	$	193,010	$	(3,557	)	(1.8	)%
Funding sources:
Total deposits..............................................................................................................	$	117,049	$	(622	)	(.5	)%
Trading liabilities.........................................................................................................	19,488		(332		)	(1.7	)
Short-term borrowings................................................................................................	11,802		(3,131		)	(21.0	)
All other liabilities........................................................................................................	4,794		232			5.1
Long-term debt.............................................................................................................	22,039		294			1.4
Shareholders' equity...................................................................................................	17,838		2			-
	$	193,010	$	(3,557	)	(1.8	)%

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

Loans, Net Loan balances at March 31, 2013, and increases (decreases) since December 31, 2012 are summarized in the table below:

			Increase (Decrease) From
			December 31, 2012
	March 31, 2013		Amount			%
	(dollars are in millions)
Commercial loans:
Construction and other real estate...............................................................................	$	8,319	$	(138	)	(1.6	)%
Business and corporate banking..................................................................................	12,725		117			.9
Global banking⁽¹⁾...............................................................................................................	19,718		(291		)	(1.5	)
Other commercial loans..................................................................................................	2,877		(199		)	(6.5	)
Total commercial loans..................................................................................................	43,639		(511		)	(1.2	)
Consumer loans:
Residential mortgages, excluding home equity mortgages......................................	15,730		359			2.3
Home equity mortgages.................................................................................................	2,236		(88		)	(3.8	)
Total residential mortgages...........................................................................................	17,966		271			1.5
Credit Card.......................................................................................................................	749		(66		)	(8.1	)
Other consumer...............................................................................................................	578		(20		)	(3.3	)
Total consumer loans.....................................................................................................	19,293		185			1.0
Total loans...........................................................................................................................	62,932		(326		)	(.5	)
Allowance for credit losses...............................................................................................	568		(79		)	(12.2	)
Loans, net............................................................................................................................	$	62,364	$	(247	)	(.4	)%

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

Commercial loan balances decreased since December 31, 2012 driven by paydowns and managed reductions in certain exposures, which were partially offset by an increase of $265 million in affiliate loans and new business activity.

Residential mortgage loans increased since December 31, 2012 primarily due to a reclassification of $276 million in guaranteed loans purchased from GNMA which had previously been recorded in other assets and, to a lesser extent, originations targeted at our Premier customer relationships. Repayments on these purchased GNMA loans are predominantly insured by the FHA and as such, these loans have different risk characteristics from the rest of our consumer loan portfolio. As a result of balance sheet initiatives to manage interest rate risk and improve the structural liquidity of HSBC Bank USA, we continue to sell a substantial portion of our new residential loan originations through the secondary markets.

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

	Refreshed LTVs⁽¹⁾⁽²⁾ at March 31, 2013				Refreshed LTVs⁽¹⁾⁽²⁾ at December 31, 2012
	First Lien		Second Lien		First Lien		Second Lien
LTV < 80%.........................................................................................	81.0	%	59.9	%	75.8	%	62.3	%
80% < LTV < 90%.............................................................................	8.2	%	13.5	%	10.7	%	13.8	%
90% < LTV < 100%...........................................................................	5.2	%	11.0	%	6.4	%	10.2	%
LTV > 100%.......................................................................................	5.6	%	15.6	%	7.1	%	13.7	%
Average LTV for portfolio...............................................................	65.8	%	71.7	%	67.8	%	73.1	%

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

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

Credit card receivable balances, which represent our legacy HSBC Bank USA credit card portfolio, decreased from December 31, 2012, largely due to seasonal improvements in our collection activities during the first quarter as customers use their tax refunds to make payments.

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

Loans Held for Sale Loans held for sale at March 31, 2013 and increases (decreases) since December 31, 2012 are summarized in the following table.

			Increase (Decrease) From
			December 31, 2012
	March 31, 2013		Amount			%
	(dollars are in millions)
Total commercial loans.....................................................................................................	$	58	$	(423	)	(87.9	)%
Consumer loans:
Residential mortgages.............................................................................................	277		(195		)	(41.3	)
Other consumer........................................................................................................	64		(1		)	(1.5	)
Total consumer loans.................................................................................................	341		(196		)	(36.5	)
Total loans held for sale...................................................................................................	$	399	$	(619	)	(60.8	)%

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans are originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale. During the first quarter of 2013, we completed the sale of substantially all of our remaining leveraged acquisition finance syndicated loans which we had been holding since the financial crisis. Commercial loans held for sale under this program were $3 million and $465 million at March 31, 2013 and December 31, 2012, respectively, all of which are recorded at fair value as we have elected to designate these loans under fair value option. See Note 12, "Fair Value Option," in the accompanying consolidated financial statements for further information. Commercial loans held for sale also includes commercial real estate loans of $55 million and $16 million at March 31, 2013 and December 31, 2012, respectively, which are originated with the intent to sell to government sponsored enterprises.

Residential mortgage loans held for sale include first mortgage loans originated and held for sale primarily to various government sponsored enterprises. We retained the servicing rights in relation to the mortgages upon sale. Also included in residential mortgage loans held for sale are subprime residential mortgage loans of $51 million and $52 million at March 31, 2013 and December 31, 2012, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties.

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

Consumer loans held for sale are recorded at the lower of cost or fair value. The valuation adjustment on loans held for sale was $106 million and $114 million at March 31, 2013 and December 31, 2012, respectively.

Trading Assets and Liabilities Trading assets and liabilities balances at March 31, 2013, and increases (decreases) since December 31, 2012, are summarized in the following table.

			Increase (Decrease) From
			December 31, 2012
	March 31, 2013		Amount			%
	(dollars are in millions)
Trading assets:
Securities⁽¹⁾.......................................................................................................................	$	10,431	$	(2,728	)	(20.7	)%
Precious metals................................................................................................................	15,875		3,543			28.7	%
Derivatives⁽²⁾....................................................................................................................	8,352		(2,152		)	(20.5	)%
	$	34,658	$	(1,337	)	(3.7	)%
Trading liabilities:
Securities sold, not yet purchased...................................................................................	841		634			100+
Payables for precious metals.............................................................................................	6,186		419			7.3	%
Derivatives⁽³⁾........................................................................................................................	12,461		(1,385		)	(10.0	)%
	$	19,488	$	(332	)	(1.7	)%

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

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

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

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

Precious metals trading assets increased at March 31, 2013 compared to December 31, 2012 due primarily to an increase in our own inventory positions held as hedges for client activity and to a lesser extent due to an increase in unallocated metal balances held for customers. The higher payable for precious metals compared to December 31, 2012 was primarily due to an increase in unallocated customer balances.

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

Derivative assets and liabilities balances at March 31, 2013 decreased compared to December 31, 2012 mainly from market movements as valuations of interest rate, foreign exchange and credit derivatives all declined. The balances also reflect the continued decrease in credit derivative positions as a number of transaction unwinds and commutations reduced the outstanding market value as we continue to actively reduce the exposure in the legacy structured credit business.

Securities Securities include securities available-for-sale and securities held-to-maturity. Balances will fluctuate between periods depending upon our liquidity position at the time. The decline in balances since December 31, 2012 reflect the sale of $12.3 billion of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment. See Note 4, "Securities," in the accompanying consolidated financial statements for additional information.

Deposits Deposit balances by major depositor categories at March 31, 2013, and increases (decreases) since December 31, 2012, are summarized in the following table.

			Increase (Decrease) From
			December 31, 2012
	March 31, 2013		Amount			%
	(dollars are in millions)
Individuals, partnerships and corporations...............................................................	$	96,154	$	304		.3	%
Domestic and foreign banks.........................................................................................	19,203		(1,056		)	(5.2	)
U.S. government and states and political subdivisions...........................................	969		276			39.8
Foreign governments and official institutions..........................................................	723		(146		)	(16.8	)
Total deposits.................................................................................................................	$	117,049	$	(622	)	(.5	)%
Total core deposits⁽¹⁾.....................................................................................................	$	89,171	$	(910	)	(1.0	)%

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

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

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

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

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

Short-Term Borrowings Short-term borrowings at March 31, 2013 declined compared to December 31, 2012 as a result of decreased levels of securities sold under agreements to repurchase.

Long-Term Debt Long-term debt at March 31, 2013 increased as compared to December 31, 2012, primarily due to the impact of debt issuances which included $1.8 billion of medium-term notes, of which $968 million was issued by HSBC Bank USA.

Incremental issuances from the $40 billion HSBC Bank USA Global Bank Note Program totaled $968 million and $147 million during the three months ended March 31, 2013 and 2012, respectively. Total debt outstanding under this program was $5.0 billion and $4.8 billion at March 31, 2013 and December 31, 2012. Given the more than adequate liquidity of HSBC Bank USA, we do not anticipate the Global Bank Note Program being heavily used in the future as deposits will continue to be the primary funding source for HSBC Bank USA.

Incremental long-term debt issuances from our shelf registration statement with the Securities and Exchange Commission totaled $900 million and $3.3 billion during the three months ended March 31, 2013 and 2012, respectively. Total long-term debt outstanding under this shelf was $10.3 billion and $10.1 billion at March 31, 2013 and December 31, 2012, respectively.

Borrowings from the Federal Home Loan Bank of New York ("FHLB") totaled $1.0 billion at March 31, 2013 and December 31, 2012. At March 31, 2013, we had the ability to access further borrowings of up to $4.4 billion based on the amount pledged as collateral with the FHLB.

Residential Real Estate Owned

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

	Three Months Ended
	March 31, 2013		December 31, 2012		September 30, 2012		June 30, 2012		March 31, 2012
Number of REO properties at end of period..............	240		221		203		188		201
Number of properties added to REO inventory in the period.......................................................................	119		96		87		88		106
Average (gain) loss on sale of REO properties⁽¹⁾.....	6.4	%	1.6	%	2.1	%	8.0	%	2.7	%
Average total loss on foreclosed properties⁽²⁾.........	47.8	%	45.4	%	46.8	%	48.7	%	55.7	%
Average time to sell REO properties (in days).........	280		285		296		273		362

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

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

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

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

The number of REO properties at March 31, 2013 increased as compared to December 31, 2012 as the volume of properties added to REO inventory is beginning to increase as we work through the backlog in foreclosure activities driven by the temporary suspension of foreclosures as discussed above. We have resumed processing suspended foreclosure actions in substantially all states and have referred the majority of the backlog of loans for foreclosure. We have also begun initiating new foreclosure activities in substantially all states.

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

Results of Operations

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

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

In the following table which summarizes the significant components of net interest income, interest expense includes $40 million in the three months ended March 31, 2012 that has been allocated to our discontinued operations in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by these transactions.

Three Months Ended March 31,	2013		2012
Yield on total earning assets.................................................................................................................................	1.90	%	2.16	%
Expense on interest bearing liabilities..................................................................................................................	.81		.87
Interest rate spread.................................................................................................................................................	1.09		1.29
Benefit from net non-interest paying funds⁽¹⁾.....................................................................................................	.21		.13
Net interest margin..................................................................................................................................................	1.30	%	1.42	%

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

Significant trends affecting the comparability of the three months ended March 31, 2013 and 2012 net interest income and interest rate spread are summarized in the following table. Net interest income in the table is presented on a taxable equivalent basis.

Three Months Ended March 31, 2013	Amount			Interest Rate Spread
	(dollars are in millions)
Net interest income/interest rate spread from prior year.............................................................................	$	550		1.29	%
Increase (decrease) in net interest income associated with:
Trading related activities...........................................................................................................................	(6		)
Balance sheet management activities⁽¹⁾..................................................................................................	(29		)
Commercial loans........................................................................................................................................	74
Deposits.......................................................................................................................................................	11
Interest on estimated tax exposures........................................................................................................	(4		)
Other activity..............................................................................................................................................	(86		)
Net interest income/interest rate spread for current year.....................................................................	$	510		1.09	%

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

Trading related activities Net interest income for trading related activities decreased during the first quarter of 2013 primarily due to lower average balances as well as lower rates earned on interest earning trading assets.

Balance sheet management activities Lower net interest income from balance sheet management activities during the first quarter of 2013 reflects the impact of the sale of certain securities for risk management purposes and the impact of a lower interest rate environment.

Commercial loans Net interest income on commercial loans increased during the first quarter of 2013 primarily due to higher average loan balances due to new business activity as well as lower levels of nonperforming loans which was partially offset by a lower yield on loans.

Deposits Higher net interest income during the first quarter of 2013 reflects the impact of lower average balances on interest bearing deposits, as well as improved spreads in the Retail Banking and Wealth Management ("RBWM") and Commercial Banking ("CMB") business segments.

Interest on estimated tax exposures Net interest income during the first quarter of 2013 reflects the impact of higher interest expense associated with tax reserves on estimated exposures.

Other activity Net interest income on other activity was higher during the first quarter of 2013, largely driven by lower unallocated funding costs.

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

							Increase (Decrease)
Three Months Ended March 31,	2013			2012			Amount			%
	(in millions)
Commercial:
Construction and other real estate.................................................................................	$	9		$	(20	)	$	29		100+
Business and corporate banking....................................................................................	2			6			(4		)	(66.7	)
Global banking..................................................................................................................	(1		)	(22		)	21			95.5
Other commercial..............................................................................................................	-			(2		)	2			100.0
Total commercial...............................................................................................................	$	10		$	(38	)	$	48		100+
Consumer:
Residential mortgages, excluding home equity mortgages........................................	(3		)	15			(18		)	(100+)
Home equity mortgages...................................................................................................	17			8			9			100+
Credit card receivables.....................................................................................................	(2		)	11			(13		)	(100+)
Other consumer.................................................................................................................	(1		)	4			(5		)	(100+)
Total consumer.................................................................................................................	11			38			(27		)	(71.1	)
Total provision for credit losses........................................................................................	$	21		$	-		$	21		100.0	%

Our provision for credit losses increased $21 million during the first quarter of 2013 driven by a higher provision for credit losses in our commercial loan portfolio partially offset by a lower credit loss provision in our consumer loan portfolio. Our provision as a percentage of average receivables was .03 percent during the three months ended March 31, 2013. During the first quarter of 2013, we decreased our credit loss reserves as the provision for credit losses was lower than net charge-offs by $79 million.

In our commercial portfolio, the provision for credit losses was higher in first quarter of 2013 driven largely by increased levels of reserves for risk factors primarily associated with expansion activities in the U.S. In addition, we experienced continued improvements in economic and credit conditions in both periods including lower nonperforming loans and criticized asset levels, reductions in higher risk rated loan balances and stabilization in credit downgrades, including managed reductions in certain exposures and improvements in the financial circumstances of certain customer relationships which resulted in a higher overall release in our credit loss reserves in the year-ago period.

The provision for credit losses on residential mortgages including home equity mortgages decreased $9 million during the three months ended March 31, 2013 as compared the prior year quarter driven by continued improvements in economic and credit conditions including lower dollars of delinquency on reservable accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates, partially offset by higher charge-offs in our home equity mortgage portfolio due to an increased volume of loans where we have decided not to pursue foreclosure.

The provision for credit losses associated with credit card receivables decreased $13 million during the three months ended March 31, 2013 compared the prior year quarter reflecting improved economic conditions, including lower dollars of delinquency, improvements in loan delinquency roll rates and lower receivable levels.

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

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

							Increase (Decrease)
Three Months Ended March 31,	2013			2012			Amount			%
	(in millions)
Credit card fees................................................................................................................	$	13		$	30		$	(17	)	(56.7	)%
Other fees and commissions..........................................................................................	170			194			(24		)	(12.4	)
Trust income....................................................................................................................	32			25			7			28.0
Trading revenue..............................................................................................................	164			198			(34		)	(17.2	)
Other securities gains, net.............................................................................................	131			30			101			100+
HSBC affiliate income:
Fees and commissions.............................................................................................	42			47			(5		)	(10.6	)
Other affiliate income...............................................................................................	12			9			3			33.3
Total HSBC affiliate income....................................................................................	54			56			(2		)	(3.6	)
Residential mortgage banking revenue⁽¹⁾....................................................................	46			25			21			84.0
Loss on instruments designated at fair value and related derivatives....................	(27		)	(212		)	185			87.3
Other income:
Valuation of loans held for sale..............................................................................	3			(1		)	4			N/A
Insurance...................................................................................................................	1			2			(1		)	(50.0	)
Earnings from equity investments.........................................................................	1			2			(1		)	(50.0	)
Miscellaneous income.............................................................................................	4			18			(14		)	(77.8	)
Total other income....................................................................................................	9			21			(12		)	(57.1	)
Total other revenues.......................................................................................................	$	592		$	367		$	225		61.3	%

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

Credit card fees Credit card fees declined during the first quarter of 2013 largely due to lower outstanding balances driven by the sale of a portion of the portfolio as part of the sale of 195 retail branches in 2012 as well as a trend towards lower late fees due to improved customer behavior.

Other fees and commissions Other fee-based income decreased during the three month period ended March 31, 2013 driven by a decrease in account service related fees primarily due to the impact of the sale of 195 retail branches as discussed above and a decline in credit facility related fees primarily due to a decrease in syndication fees. The components of other fees and commissions are summarized in the following table.

					Increase (Decrease)
Three Months Ended March 31,	2013		2012		Amount			%
	(in millions)
Account services........................................................................................................	$	69	$	82	(13		)	(15.9	)
Credit facilities.............................................................................................................	52		65		(13		)	(20.0	)
Custodial fees..............................................................................................................	18		19		(1		)	(5.3	)
Other.............................................................................................................................	31		28		3			10.7
Total other fees and commissions..................................................................................	$	170	$	194	$	(24	)	(12.4	)%

Trust income Trust income increased during the three month period ended March 31, 2013 due to an increase in fee income associated with our management of fixed income assets, partially offset by reduced fee income associated with the continued decline in money market assets under management.

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

							Increase (Decrease)
Three Months Ended March 31,	2013			2012			Amount			%
	(in millions)
Trading revenue..............................................................................................................	$	164		$	198		$	(34	)	(17.2	)%
Net interest income.........................................................................................................	(10		)	(6		)	(4		)	(66.7	)
Trading related revenue.................................................................................................	$	154		$	192		$	(38	)	(19.8	)%
Business:
Derivatives⁽¹⁾.............................................................................................................	$	69		$	65		$	4		6.2	%
Balance sheet management.....................................................................................	(3		)	11			(14		)	(100+)
Foreign exchange......................................................................................................	65			71			(6		)	(8.5	)
Precious metals.........................................................................................................	26			32			(6		)	(18.8	)
Global banking..........................................................................................................	-			3			(3		)	(100.0	)
Other trading.............................................................................................................	(3		)	10			(13		)	(100+)
Trading related revenue.................................................................................................	$	154		$	192		$	(38	)	(19.8	)%

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

Trading revenue decreased during the three month period ended March 31, 2013 as a result of lower revenue from economic hedges employed by balance sheet management to manage interest rate risk as well as lower foreign exchange revenue due to reduced trading volumes and lower revenue from other trading activities. These decreases were partially offset by higher revenue from derivatives which reflected a change in estimation methodology with respect to credit valuation adjustments and debit valuation adjustments.

Trading revenue related to derivatives products increased during the three month period ended March 31, 2013, impacted by a change in credit risk adjustment estimates. During the fourth quarter of 2012, we changed our estimate of credit valuation adjustments on derivative asset and debit valuation 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. Debit valuation adjustments on derivative contracts were not part of the estimate process used in the year ago period, and these adjustments increased revenue by $22 million in the first quarter of 2013 primarily related to widening of credit spreads as concerns around the European sovereign debt crisis increased towards the end of the first quarter of 2013. Partly offsetting this increase was a reduction in new deal activity and unfavorable price variation in emerging market related derivative products.

Trading revenue related to balance sheet management activities decreased during the three month period ended March 31, 2013 primarily due to lower revenue from economic hedge positions used to manage interest rate risk.

Foreign exchange trading revenue decreased during the three month period ended March 31, 2013 from lower volumes and reduced margins due to tightening spreads.

Precious metals trading revenues decreased during the three month period ended March 31, 2013 as a result of lower metals price volatility and a decline in trading volumes.

Other trading revenue decreased during the three month period ended March 31, 2013 from movements in interest rate curves used to value certain instruments and valuation reserve releases.

Other securities gains, net We maintain various securities portfolios as part of our balance sheet diversification and risk management strategies. In the first quarter of 2013, we sold $12.3 billion of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment and recognized gains of $124 million and losses of $1 million, which is included as a component of other security gains, net above. In the first quarter of 2012, we sold $4.4 billion of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a strategy to adjust portfolio risk duration as well as to reduce risk-weighted asset levels and recognized gains of $70 million and losses of $40 million.

HSBC affiliate income Affiliate income remained relatively flat in the first quarter of 2013.

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

							Increase (Decrease)
Three Months Ended March 31,	2013			2012			Amount			%
	(in millions)
Net interest income.........................................................................................................	$	51		$	51		$	-		-	%
Servicing related income:
Servicing fee income................................................................................................	21			25			(4		)	(16.0	)
Changes in fair value of MSRs due to:..................................................................
Changes in valuation, including inputs or assumptions...............................	26			16			10			62.5
Realization of cash flows....................................................................................	(10		)	(16		)	6			37.5
Trading - Derivative instruments used to offset changes in value of MSRs.....................................................................................................................	(7		)	(12		)	5			41.7
Total servicing related income................................................................................	30			13			17			100+
Originations and sales related income:
Gains on sales of residential mortgages................................................................	24			18			6			33.3
Provision for repurchase obligations....................................................................	(13		)	(21		)	8			38.1
Trading and hedging activity.................................................................................	-			7			(7		)	(100.0	)
Total originations and sales related income.........................................................	11			4			7			100+
Other mortgage income..................................................................................................	5			8			(3		)	(37.5	)
Total residential mortgage banking revenue included in other revenues..............	46			25			21			84.0
Total residential mortgage banking related revenue..................................................	$	97		$	76		$	21		27.6	%

Net interest income in the first quarter of 2013 was flat compared to the year-ago period as lower residential mortgage average outstanding balances primarily as a result of the sale of branches to First Niagara in 2012 and continued higher portfolio prepayments were offset by widening interest spreads largely the result of lower portfolio funding costs, predominately on adjustable rate mortgages. Consistent with our Premier strategy, additions to our residential mortgage portfolio are primarily to our Premier customers, while sales of loans consist primarily of conforming non-premier loans sold to government sponsored enterprises.

Total servicing related income increased in the first quarter of 2013 driven by improved net hedged MSR performance partially offset by lower net servicing fees driven by a lower serviced loan portfolio as a result of prepayments in excess of new additions to the serviced portfolio. Changes in MSR valuation are driven by updated market based assumptions such as interest rates, expected prepayments, primary-secondary spreads and cost of servicing. Consequently, as a result of these updated assumptions, the MSR asset fair value increased in the first quarter of 2013.

Originations and sales related income improved in the first quarter of 2013 as increased gains on individual loan sales and lower loss provisions for loan repurchase obligations associated with loans previously sold more than offset a lower a decline in trading and hedging activity. During the three months ended March 31, 2013, we recorded a charge of $13 million due to an increase in our estimated exposure associated with repurchase obligations on loans previously sold compared to a charge of $21 million in the year-ago quarter.

Loss on instruments designated at fair value and related derivatives We have elected to apply fair value option accounting to commercial leveraged acquisition finance loans, unfunded commitments, certain own fixed-rate debt issuances and all structured notes and structured deposits issued after January 1, 2006 that contain embedded derivatives. We also use derivatives to economically hedge the interest rate risk associated with certain financial instruments for which fair value option has been elected. See Note 12, "Fair Value Option," in the accompanying consolidated financial statements for additional information including a breakout of these amounts by individual component.

Valuation of loans held for sale Valuation adjustments on loans held for sale improved the first quarter of 2013 due to lower average balances and reduced volatility. Valuations on loans held for sale relate primarily to residential mortgage loans purchased from third parties and HSBC affiliates with the intent of securitization or sale. Included in this portfolio are subprime residential mortgage loans with a fair value of $51 million and $52 million as of March 31, 2013 and December 31, 2012, respectively. Loans held for sale are recorded at the lower of their aggregate cost or fair value, with adjustments to fair value being recorded as a valuation allowance. Valuations on residential mortgage loans held for sale that we originate are recorded as a component of residential mortgage banking revenue in the consolidated statement of income.

Other income Other income, excluding the valuation of loans held for sale as discussed above, decreased during the first quarter of 2013 driven by lower miscellaneous income associated with fair value hedge ineffectiveness.

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

							Increase (Decrease)
Three Months Ended March 31,	2013			2012			Amount			%
	(dollars are in millions)
Salary and employee benefits........................................................................................	$	252		$	280		(28		)	(10.0	)
Occupancy expense, net................................................................................................	59			59			-			-
Support services from HSBC affiliates:
Fees paid to HSBC Finance for loan servicing and other administrative support.......................................................................................................................	4			10			(6		)	(60.0	)
Fees paid to HMUS..................................................................................................	52			73			(21		)	(28.8	)
Fees paid to HTSU...................................................................................................	233			234			(1		)	(.4	)
Fees paid to other HSBC affiliates.........................................................................	35			51			(16		)	(31.4	)
Total support services from HSBC affiliates........................................................	324			368			(44		)	(12.0	)
Other expenses:
Equipment and software..........................................................................................	15			11			4			36.4
Marketing...................................................................................................................	10			14			(4		)	(28.6	)
Outside services.......................................................................................................	22			20			2			10.0
Professional fees.......................................................................................................	25			30			(5		)	(16.7	)
Postage, printing and office supplies....................................................................	2			5			(3		)	(60.0	)
Off-balance sheet credit reserves...........................................................................	4			(8		)	12			100+
FDIC assessment fee................................................................................................	22			28			(6		)	(21.4	)
Miscellaneous...........................................................................................................	54			49			5			10.2
Total other expenses................................................................................................	154			149			5			3.4
Total operating expenses...............................................................................................	$	789		$	856		$	(67	)	(7.8	)%
Personnel - average number..........................................................................................	6,837			8,972
Efficiency ratio.................................................................................................................	71.9		%	89.7		%

Salaries and employee benefits Salaries and employee benefits expense decreased during the first quarter of 2013 driven by the impact of the sale of 195 non-strategic retail branches completed in 2012 and continued cost management efforts, partially offset by higher salaries expense relating to expansion activities associated with certain businesses.

Occupancy expense, net Occupancy expense remained flat during the first quarter of 2013.

Support services from HSBC affiliates includes technology and certain centralized support services, including human resources, corporate affairs and other shared services, legal, compliance, tax and finance charged to us by HTSU. Support services from HSBC affiliates also includes services charged to us by an HSBC affiliate located outside of the United States which provides operational support to our businesses, including among other areas, customer service, systems, risk management, collection and accounting functions as well as servicing fees paid to HSBC Finance for servicing nonconforming residential mortgage loans and, prior to May 1, 2012, certain credit card receivables. Lower support services from HSBC affiliates during the first quarter of 2013 reflects lower fees paid to HTSU due to workforce reductions in certain shared services functions which resulted in lower allocated costs for these functions while compliance costs remained flat, lower fees paid to HMUS largely related to lower compliance costs as the prior year quarter reflects investment in AML process enhancements and infrastructure which did not occur at the same level in 2013 and lower fees paid to HSBC Finance, who no longer services our credit card portfolio. Compliance costs reflected in support services from affiliates totaled $67 million during the first quarter of 2013 compared to $79 million during the first quarter of 2012, respectively.

Marketing expenses Lower marketing and promotional expenses in the first quarter of 2013 resulted from continued optimization of marketing spend as a result of general cost saving initiatives.

Other expenses Other expenses (excluding marketing expenses) increased during the first quarter of 2013 primarily due to higher loss estimates associated with off-balance credit exposures partially offset by lower FDIC assessment fees and lower professional fees associated with compliance.

Efficiency ratio Our efficiency ratio from continuing operations was 71.9 percent during the first quarter of 2013 compared to 89.7 percent during the first quarter of 2012. Our efficiency ratio was impacted in both periods by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting. Excluding the impact of this item, our efficiency ratio for the first quarter of 2013 improved to 69.3 percent compared to 72.9 percent during the first quarter of 2012 due to lower operating expenses and higher other revenues, partially offset by lower net interest income. While operating expenses declined during the first quarter of 2013, driven by the impact of our retail branch divestitures and cost mitigation efforts, they continue to reflect elevated levels of compliance costs.

Segment Results - IFRS Basis

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

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

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

We report financial information to our parent, HSBC, in accordance with International Financial Reporting Standards ("IFRSs"). As a result, our segment results are presented on an IFRSs basis (a non-U.S. GAAP financial measure) as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources such as employees are made almost exclusively on an IFRSs basis. However, we continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP basis. The significant differences between U.S. GAAP and IFRSs as they impact our results are summarized in Note 17, "Business Segments," in the accompanying consolidated financial statements and under the caption "Basis of Reporting" in the MD&A.

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

Consistent with our strategy, additions to our residential mortgage portfolio are primarily to our Premier customers, while sales of loans consist primarily of conforming loans sold to GSEs. In addition to normal sales activity, at times we have historically sold prime adjustable and fixed rate mortgage loan portfolios to third parties. We retained the servicing rights in relation to the mortgages upon sale.

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

							Increase (Decrease)
Three Months Ended March 31,	2013			2012			Amount			%
	(in millions)
Net interest income............................................................................................................	$	215		$	247		$	(32	)	(13.0	)%
Other operating income.....................................................................................................	107			97			10			10.3
Total operating income......................................................................................................	322			344			(22		)	(6.4	)
Loan impairment charges..................................................................................................	32			41			(9		)	(22.0	)
	290			303			(13		)	(4.3	)
Operating expenses............................................................................................................	291			321			(30		)	(9.3	)
Loss before tax....................................................................................................................	$	(1	)	$	(18	)	$	17		94.4	%

Our RBWM segment reported a lower loss before tax during the first quarter of 2013, reflecting higher other operating income, lower loan impairment charges and lower operating expenses, partially offset by lower net interest income.

Net interest income was lower during the first quarter of 2013 driven by lower deposit levels as a result of the branch sale to First Niagara partially offset by margin improvements due to active pricing of the deposit base especially in the non-premier segments. Net interest income related to consumer loans was lower primarily as a result of the branch sale which was partially offset by higher net interest income related to residential mortgages from discounted collateral values on delinquent mortgage loans and widening spreads from lower funding costs. Residential mortgage average balances were lower than the year-ago period due to the impact of the branch sales partially offset by an increase in residential mortgage loans to our Premier customers.

Other operating income increased during the first quarter of 2013 driven by lower provisions for mortgage loan repurchase obligations associated with previously sold loans and improved net hedged mortgage servicing rights results.

Loan impairment charges decreased during the first quarter of 2013 driven by continued improvements in economic and credit conditions including lower delinquency levels on accounts less than 180 days contractually delinquent and improvements in delinquency roll rates.

Operating expenses during the first quarter of 2013 was lower primarily due to the sale of the 195 branches to First Niagara as well as a decrease in expenses in our retail banking business driven by several cost reduction initiatives primarily optimizing staffing in the branch network and administrative areas as well as reduced marketing expenditures. Partially offsetting these improvements was the impact of a reduction in the amount of branch costs allocated to Commercial Banking based upon an updated cost study.

Commercial Banking ("CMB") CMB's business strategy is to be the leading international trade and business bank in the U.S. CMB strives to execute this vision and strategy in the U.S. by focusing on key markets with high concentration of international connectivity. Our Commercial Banking segment serves the markets through three client groups, notably Corporate Banking, Business Banking and Commercial Real Estate which allows us to align our resources in order to efficiently deliver suitable products and services based on the client's needs and abilities. Through its commercial centers and our retail branch network, CMB provides customers with the products and services needed to grow their businesses internationally, and deliver those through our relationship managers who operate within a robust customer focused compliance and risk culture, and collaborate across HSBC to capture a larger percentage of a relationship, along with our on-line banking channel HSBCnet. In first quarter of 2013, our continued focus on expanding our core proposition and proactively targeting companies with international banking requirements led to an increase in the number of relationship managers and product partners enabling us to gain a larger presence in key growth markets, including the West Coast, Southeast and Midwest.

During the first quarter of 2013, both an increase in demand for loans as well as new loan originations have resulted in a 13 percent increase in average loans outstanding to Corporate Banking customers since March 31, 2012. The Commercial Real Estate group is focusing on selective business opportunities in markets with strong portfolio expertise, which resulted in a 13 percent increase in average outstanding loans for this portfolio since March 31, 2012. Total average loans increased 11 percent across all CMB business lines as compared to March 31, 2012. Excluding the impact of the branch sale, average customer deposit balances across all CMB business lines increased 1 percent since March 31, 2012.

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

						Increase (Decrease)
Three Months Ended March 31,	2013		2012			Amount			%
	(in millions)
Net interest income............................................................................................................	$	170	$	170		$	-		-	%
Other operating income.....................................................................................................	65		68			(3		)	(4.4	)
Total operating income......................................................................................................	235		238			(3		)	(1.3	)
Loan impairment charges (recoveries)............................................................................	14		(17		)	31			100+
	221		255			(34		)	(13.3	)
Operating expenses............................................................................................................	162		164			(2		)	(1.2	)
Profit before tax...................................................................................................................	$	59	$	91		$	(32	)	(35.2	)%

Our CMB segment reported a decrease in profit before tax of 35 percent during the first quarter of 2013 as higher loan impairment charges (recoveries) and lower other operating income were partially offset by lower operating expenses. Higher loan impairment charges reflect a charge in the current year period compared to a release in the prior year period.

Net interest income during the first quarter of 2013 was flat as lower business banking revenue due to the branch sale was offset by the favorable impact of higher loan balances in expansion markets.

Other operating income was lower during the first quarter of 2013 due to lower interchange and deposit service fees primarily due to the branch sale.

Loan impairment charges were higher during the first quarter of 2013 compared to the year-ago period due to higher allowances for risk factors associated primarily with expansion activities.

Operating expenses decreased slightly during the first quarter of 2013 as additional expenses relating to staffing increases in growth markets as well as higher compliance and technology infrastructure costs were more than offset by lower branch network charges, including a reduction in the amount of branch costs allocated from RBWM based upon an updated cost study.

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

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

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

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

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

We continue to proactively target U.S. companies with international banking requirements and foreign companies with banking needs in the Americas. Furthermore, we have seen higher average loan balances as well as growth in revenue from the cross-sale of our products to CMB and RBWM customers consistent with our global strategy of cross-sale to other global businesses. Global Banking and Markets segment results during the first quarter of 2013 benefited from more stable U.S. financial market conditions, which reflected continued low interest rates and generally less volatile credit spreads and foreign exchange prices. This environment led to steady performance in rates and core credit products. Balance sheet management revenue increased from higher gains from the sale of securities, while other global markets performance improved due to a debit value adjustment gain related to derivative contracts to reflect within fair value changes in our credit risk. Our risk management efforts to improve the credit quality of our corporate lending relationships, as well as increased liquidity costs on unused commitments, has resulted in a slight tightening of average spreads, which was more than offset by higher revenue from growth in loan balances. Partially offsetting these revenue gains were reductions in foreign exchange and transaction services.

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

						Increase (Decrease)
Three Months Ended March 31,	2013		2012			Amount			%
	(in millions)
Net interest income............................................................................................................	$	109	$	143		$	(34	)	(23.8	)%
Other operating income.....................................................................................................	382		326			56			17.2
Total operating income......................................................................................................	491		469			22			4.7
Loan impairment charges (recoveries)............................................................................	3		(31		)	34			100+
	488		500			(12		)	(2.4	)
Operating expenses............................................................................................................	230		259			(29		)	(11.2	)
Profit before tax...................................................................................................................	$	258	$	241		$	17		7.1	%

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

					Increase (Decrease)
Three Months Ended March 31,	2013		2012		Amount			%
	(in millions)
Foreign exchange and metals.......................................................................................	$	94	$	126	$	(32	)	(25.4	)%
Credit⁽¹⁾............................................................................................................................	28		24		4			16.7
Rates................................................................................................................................	45		43		2			4.7
Equities............................................................................................................................	3		5		(2		)	(40.0	)
Other Global Markets....................................................................................................	16		9		7			77.8
Total Global Markets...........................................................................................................	186		207		(21		)	(10.1	)
Financing........................................................................................................................	46		32		14			43.8
Payments and cash management................................................................................	78		83		(5		)	(6.0	)
Other transaction services...........................................................................................	16		29		(13		)	(44.8	)
Total Global Banking...........................................................................................................	140		144		(4		)	(2.8	)
Balance Sheet Management⁽²⁾............................................................................................	165		118		47			39.8
Total operating income........................................................................................................	$	491	$	469	$	22		4.7	%

⁽¹⁾Credit includes $28 million and $24 million in the three months ended March 31, 2013 and 2012, respectively, of revenue related to valuation adjustments on structured credit products which we no longer offer.

⁽²⁾Includes gains on the sale of securities of $131 million and $25 million in the three months ended March 31, 2013 and 2012, respectively.

Our GBM segment reported a higher profit before tax during the first quarter of 2013 driven by higher other operating income and lower operating expenses partially offset by lower net interest income and higher loan impairment charges (recoveries).

Net interest income decreased during the first quarter of 2013 due to lower rates on investment balances including the impact of security sales and lower corporate loan balances.

Other operating income increased during the first quarter of 2013 due to an increase in gains on the sale of securities in Balance Sheet Management, increased financing revenue related to loan activities and gains from debit value adjustments on derivative contracts. These improvements were partially offset by lower revenue from foreign exchange and metals driven by a reduction in trading volumes and price volatility, lower performance of economic hedges employed by Balance Sheet Management to manage interest rate risk and a decline in other transaction services revenue resulting from the transfer of our fund services business to an affiliate entity.

Other operating income reflected gains on structured credit products of $30 million during the first quarter of 2013 compared to gains of $32 million during the first quarter of 2012. Included in structured credit products were exposures to monoline insurance companies that resulted in gains of $20 million during the first quarter of 2013 compared to gains of $8 million during the first quarter of 2012. Valuation losses of $1 million during the first quarter of 2013 were recorded against the fair values of sub-prime residential mortgage loans held for sale compared to valuation losses of $2 million during the first quarter of 2012.

Loan impairment charges increased during the first quarter of 2013 compared to the year-ago period due to a lower level of recoveries.

Operating expenses decreased during the first quarter of 2013 from reduced staff costs due to lower headcount and lower compliance costs associated with our AML/BSA remediation activities.

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

During the first quarter of 2013, we continued to dedicate resources to strengthen product and service leadership in the wealth management market. Areas of focus are banking and cash management, investment advice including discretionary portfolio management, investment and structured products, residential mortgages, as well as wealth planning for trusts and estates. Also in the first quarter of 2013, our compliance and risk framework was strengthened by the establishment of a Global Private Banking Global Standards Committee and a revised risk appetite framework. Client deposit levels increased $100 million or 1 percent compared to March 31, 2012 from domestic and international market customers. Total loans increased 11 percent compared to prior year primarily in the residential mortgage portfolio. Overall period end client assets were at the same level of March 2012 and $1.1 billion higher compared to December 31, 2012 due to client driven increases in large deposits and various PB wealth management and investment products. Total operating income was slightly lower due to lower net interest margins in lending and deposits and lower management fees, partially offset by improved loans and deposit balances. Higher impairment charges are due to lower levels of recoveries.

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

Three Months Ended March 31,	2013		2012
	(in billions)
Client assets at beginning of the period.......................................................................................................	$	46.5	$	47.7
Net new money.............................................................................................................................................	1.1		-
Client assets at end of period.........................................................................................................................	$	47.6	$	47.7

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

						Increase (Decrease)
Three Months Ended March 31,	2013		2012			Amount			%
	(in millions)
Net interest income............................................................................................................	$	45	$	45		$	-		-	%
Other operating income.....................................................................................................	28		29			(1		)	(3.4	)
Total operating income......................................................................................................	73		74			(1		)	(1.4	)
Loan impairment charges (recoveries)............................................................................	1		(2		)	3			100+
	72		76			(4		)	(5.3	)
Operating expenses............................................................................................................	60		58			2			3.4
Profit (loss) before tax........................................................................................................	$	12	$	18		$	(6	)	(33.3	)%

Our PB segment reported lower profit before tax during the first quarter of 2013 primarily driven by higher loan impairment charges (recoveries), higher operating expenses and lower other operating income.

Net interest income was flat in the first quarter of 2013 compared to the year-ago period as improved volumes in banking and lending were offset by lower net interest spreads.

Other operating income was lower during the first quarter of 2013 reflecting lower fees on managed and structured investment products as well as funds fees.

Loan impairment charges increased during the first quarter of 2013 compared to the year-ago period due to a lower level of recoveries.

Operating expenses increased during the first quarter of 2013 due to higher risk and compliance costs.

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

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

							Increase (Decrease)
Three Months Ended March 31,	2013			2012			Amount			%
	(in millions)
Net interest expense...........................................................................................................	$	(14	)	$	(11	)	$	(3	)	(27.3	)%
Gain (loss) on own debt designated at fair value and related derivatives.................	(41		)	(252		)	211			83.7
Other operating income (loss)..........................................................................................	16			17			(1		)	(5.9	)
Total operating income (loss)...........................................................................................	(39		)	(246		)	207			84.1
Loan impairment charges..................................................................................................	-			-			-			-
	(39		)	(246		)	207			84.1
Operating expenses............................................................................................................	42			40			2			5.0
Profit (loss) before tax........................................................................................................	$	(81	)	$	(286	)	$	205		71.7	%

Profit (loss) before tax increased $205 million during the first quarter of 2013 driven by credit and interest rate related changes in the fair value of certain of our own debt for which fair value option was elected. Net interest expense was lower during the first quarter of 2013 due to an increase in interest expense associated with changes in estimated tax exposures.

Reconciliation of Segment Results As previously discussed, segment results are reported on an IFRS Basis. See Note 17, "Business Segments," in the accompanying consolidated financial statements for a discussion of the differences between IFRSs and U.S. GAAP. For segment reporting purposes, intersegment transactions have not been eliminated. We generally account for transactions between segments as if they were with third parties. Also see Note 17, "Business Segments," in the accompanying consolidated financial statements for a reconciliation of our IFRS Basis segment results to U.S. GAAP consolidated totals.

Credit Quality

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

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

Our credit grades for commercial loans align with U.S. regulatory risk ratings and are mapped to our probability of default master scale. These probability of default estimates are validated on an annual basis using back-testing of actual default rates and benchmarking of the internal ratings with external rating agency data like Standard and Poor's ratings and default rates. Substantially all appraisals in connection with commercial real estate loans are ordered by the independent real estate appraisal unit at HSBC. The appraisal must be reviewed and accepted by this unit. For loans greater than $250,000, an appraisal is generally ordered when the loan is classified as Substandard as defined by the Office of the Comptroller of the Currency (the "OCC"). On average, it takes approximately four weeks from the time the appraisal is ordered until it is completed and the values accepted by HSBC's independent appraisal review unit. Subsequent provisions or charge-offs are completed shortly thereafter, generally within the quarter in which the appraisal is received.

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

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

For pools of homogeneous consumer loans which do not qualify as troubled debt restructures, probable losses are estimated using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge-off based upon recent historical performance experience of other loans in our portfolio. This migration analysis incorporates estimates of the period of time between a loss occurring and the confirming event of its charge-off. This analysis considers delinquency status, loss experience and severity and takes into account whether loans have filed for bankruptcy, have been re-aged or are subject to an external debt management plan, hardship, modification, extension or deferment. The allowance for credit losses on consumer receivables also takes into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default based on historical and recent trends which are updated monthly based on a rolling average of several months' data using the most recently available information and is typically in the range of 25-35 percent for first lien mortgage loans and 80-100 percent for second lien home equity loans. At March 31, 2013, approximately 1 percent of our second lien mortgages where the first lien mortgage is held or serviced by us and has a delinquency status of 90 days or more delinquent, were less than 90 days delinquent and not considered to be a troubled debt restructure or already recorded at fair value less costs to sell.

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

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

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

	March 31, 2013			December 31, 2012
	(dollars are in millions)
Allowance for credit losses..............................................................................................................................	$	568		$	647
Ratio of Allowance for credit losses to:
Loans:⁽¹⁾
Commercial..........................................................................................................................................................	.62		%	.72		%
Consumer:
Residential mortgages, excluding home equity mortgages...................................................................	1.22		%	1.37		%
Home equity mortgages..............................................................................................................................	2.24		%	1.94		%
Credit card receivables................................................................................................................................	5.61		%	6.75		%
Other consumer loans.................................................................................................................................	2.60		%	3.34		%
Total consumer loans..................................................................................................................................	1.55		%	1.73		%
Total.....................................................................................................................................................................	.90		%	1.02		%
Net charge-offs⁽¹⁾:
Commercial....................................................................................................................................................	114.47		%	220.14		%
Consumer......................................................................................................................................................	175.88			134.69
Total.....................................................................................................................................................................	140.25		%	166.32		%
Nonperforming loans⁽¹⁾:
Commercial....................................................................................................................................................	81.02		%	63.40		%
Consumer......................................................................................................................................................	26.23			28.16
Total.....................................................................................................................................................................	38.59		%	38.70		%

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

Changes in the allowance for credit losses by general loan categories for the three months ended March 31, 2013 and 2012 are summarized in the following table:

	Commercial												Consumer
	Construction and Other Real Estate			Business and Corporate Banking			Global Banking			Other Comm'l			Residential Mortgage, Excl Home Equity Mortgages			Home Equity Mortgages			Credit Card			Other Consumer			Total
	(in millions)
Three Months Ended March 31, 2013:
Allowance for credit losses - beginning of period............................................	$	162		$	97		$	41		$	17		$	210		$	45		$	55		$	20		$	647
Provision charged to income..............	9			2			(1		)	-			(3		)	17			(2		)	(1		)	21
Charge offs.....................................	(58		)	(6		)	-			-			(16		)	(12		)	(12		)	(6		)	(110		)
Recoveries......................................	3			3			-			-			1			-			1			2			10
Net charge offs...................................	(55		)	(3		)	-			-			(15		)	(12		)	(11		)	(4		)	(100		)
Allowance for credit losses - end of period.................................................	$	116		$	96		$	40		$	17		$	192		$	50		$	42		$	15		$	568

Three Months Ended March 31, 2012:
Allowance for credit losses - beginning of period............................................	$	212		$	78		$	131		$	21		$	192		$	52		$	39		$	18		$	743
Provision charged to income..............	(20		)	6			(22		)	(2		)	15			8			11			4			-
Charge offs.....................................	(1		)	(10		)	(84		)	-			(26		)	(17		)	(17		)	(7		)	(162		)
Recoveries......................................	14			2			-			1			1			-			2			2			22
Net charge offs...................................	13			(8		)	(84		)	1			(25		)	(17		)	(15		)	(5		)	(140		)
Allowance for credit losses - end of period.................................................	$	205		$	76		$	25		$	20		$	182		$	43		$	35		$	17		$	603

The allowance for credit losses at March 31, 2013 decreased $79 million, or 12 percent as compared to December 31, 2012, due to lower loss estimates in both our commercial and consumer loan portfolios. Our commercial allowance for credit losses declined $48 million in the quarter ended March 31, 2013 due to reductions in certain loan exposures including the charge-off of a single client relationship which led to lower levels of non-performing loans and criticized assets. These reductions were partially offset by higher allowances for risk factors associated primarily with expansion activities in the U.S. Our consumer allowance for credit losses declined $31 million in the first three months of 2013, driven primarily by lower loss estimates in our residential mortgage loan portfolio due to continued improvements in credit quality including lower delinquency levels on accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates. Our residential mortgage loan allowance for credit losses in both periods reflects consideration of certain risk factors relating to trends such as recent portfolio performance as compared to average roll rates and economic uncertainty, including housing market trends and foreclosure timeframes. Also contributing to the decrease was lower loss estimates in our credit card portfolio due to improvements in credit quality including improved loan delinquency roll rates. Reserve levels for all consumer loan categories however continue to be impacted by the slow pace of the economic recovery in the U.S. economy, including elevated unemployment rates and, as it relates to residential mortgage loans, a housing market which is slow to recover.

The allowance for credit losses as a percentage of total loans at March 31, 2013 decreased compared to December 31, 2012 for the reasons discussed above.

The allowance for credit losses as a percentage of net charge-offs decreased in the first quarter of 2013 driven by increased charge-off in our commercial loan portfolio associated with a single commercial real estate relationship, which was fully reserved for, while the commercial allowance for credit losses declined. This was partially offset by an increase in the allowance for credit losses as a percentage of net charge-offs for consumer loans as the decrease in consumer charge-offs outpaced the decrease in the allowance.

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

	Amount		% of Loans to Total Loans⁽¹⁾		Amount		% of Loans to Total Loans⁽¹⁾
	March 31, 2013				December 31, 2012
	(dollars are in millions)
Commercial⁽²⁾................................................................................................................	$	269	69.3	%	$	326	69.8	%
Consumer:
Residential mortgages, excluding home equity mortgages............................	192		25.0		182		24.3
Home equity mortgages.......................................................................................	50		3.6		43		3.7
Credit card receivables.........................................................................................	42		1.2		35		1.3
Other consumer.....................................................................................................	15		.9		17		0.9
Total consumer.....................................................................................................	299		30.7		277		30.2
Total..............................................................................................................................	$	568	100.0	%	$	603	100.0	%

⁽¹⁾Excluding loans held for sale.

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

⁽³⁾

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

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

Reserves for Off-Balance Sheet Credit Risk We also maintain a separate reserve for credit risk associated with certain off-balance sheet exposures, including letters of credit, unused commitments to extend credit and financial guarantees. This reserve, included in other liabilities, was $145 million and $139 million at March 31, 2013 and December 31, 2012, respectively. The related provision is recorded as a component of other expense within operating expenses. The increase in off-balance sheet reserves March 31, 2013 as compared to December 31, 2013 reflects new customer activity and higher estimated exposures on certain facilities. Off-balance sheet exposures are summarized under the caption "Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations" in this MD&A.

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

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

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

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

⁽³⁾

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

Compared to December 31, 2012 our two-months-and-over contractual delinquency ratio ("delinquency ratio") decreased 35 basis points driven by lower delinquency levels in both our commercial and consumer loan portfolios. Compared to December 31, 2012, our commercial two-months-and-over contractual delinquency ratio decreased 39 basis points due to improved credit quality including reductions in certain exposures and the resolution of certain matured loans which were in the process of refinancing or pay down at year-end. Our consumer loan two-month-and-over contractual delinquency ratio at March 31, 2013 decreased 38 basis points from December 31, 2012 primarily due to lower levels of residential mortgage loan delinquency on accounts less than 180 days contractually delinquent due to improvements in credit quality including improved delinquency roll rates. Residential mortgage loan delinquency levels continue to be impacted by an elongated foreclosure process which has resulted in loans which would otherwise have been foreclosed and transferred to REO remaining in loan account. Overall consumer loan delinquency levels also continue to be impacted by elevated unemployment levels and, as it relates to residential mortgages, a housing market which is slow to recover.

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

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

	March 31, 2013			December 31, 2012			March 31, 2012
	(dollars are in millions)
Net Charge-off Dollars:
Commercial:
Construction and other real estate..................................................................................	$	55		$	22		$	(13	)
Business and corporate banking.....................................................................................	3			4			8
Global banking....................................................................................................................	-			20			84
Other commercial................................................................................................................	-			-			(1		)
Total commercial.....................................................................................................................	58			46			78
Consumer:
Residential mortgages, excluding home equity mortgages..........................................	15			32			25
Home equity mortgages....................................................................................................	12			14			17
Total residential mortgages..............................................................................................	27			46			42
Credit card receivables......................................................................................................	11			11			15
Other consumer..................................................................................................................	4			7			5
Total consumer.......................................................................................................................	42			64			62
Total.........................................................................................................................................	$	100		$	110		$	140
Net Charge-off Ratio:............................................................................................................
Commercial:
Construction and other real estate..................................................................................	2.62		%	1.05		%	(.67		)%
Business and corporate banking.....................................................................................	.13			.13			.30
Global banking....................................................................................................................	-			.41			2.49
Other commercial................................................................................................................	-			-			(.13		)
Total commercial.....................................................................................................................	.55			.42			.90
Consumer:
Residential mortgages, excluding home equity mortgages..........................................	.40			.83			.71
Home equity mortgages....................................................................................................	2.15			2.38			2.69
Total residential mortgages..............................................................................................	.62			1.04			1.01
Credit card receivables......................................................................................................	5.84			5.54			7.47
Other consumer..................................................................................................................	2.71			4.61			2.81
Total consumer.......................................................................................................................	.89			1.34			1.36
Total.........................................................................................................................................	.65		%	.70		%	1.06		%

Our net charge-off ratio as a percentage of average loans decreased 5 basis points for the quarter ended March 31, 2013 compared to the quarter ended December 31, 2012, due to lower levels of consumer loan charge-offs primarily due to lower residential mortgage charge-off partially offset by higher commercial loan charge-offs, largely relating to a single client relationship. The lower residential mortgage charge-off levels reflect the impact of improved credit quality including the impact of lower levels of delinquency on accounts less than 180 days delinquent experienced in prior quarters.

Compared to the year-ago quarter, our charge off ratio decreased 41 basis points, driven by lower charge-offs in our residential mortgage loan portfolio as discussed above and, to a lesser extent, lower charge-off levels in our commercial portfolio as the prior year quarter reflects the impact of higher charge-offs in global banking which involved three specific client relationships.

Nonperforming Assets Nonperforming assets are summarized in the following table.

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

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

⁽²⁾Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.

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

Nonaccrual loans at March 31, 2013 declined as compared to December 31, 2012 due to lower levels of commercial non-accrual loans and, to a lesser extent, lower levels of consumer non-accrual loans. Commercial non-accrual loans decreased due to credit risk rating upgrades outpacing credit risk rating downgrades, managed reductions in certain exposures, as well as payments and charge-offs within our portfolio. The decrease in consumer nonaccrual loans was driven by lower nonaccrual residential mortgage loans reflecting improved credit quality as previously discussed. Residential mortgage loan nonaccrual levels however continue to be impacted by an elongated foreclosure process as previously discussed. Accruing loans past due 90 days or more decreased since December 31, 2012 driven by lower commercial loan balances due to the resolution of certain loans which were refinanced in early 2013 at market rates.

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

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

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

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

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

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

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

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

Criticized loans are summarized in the following table.

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

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

Geographic Concentrations Regional exposure at March 31, 2013 for certain loan portfolios is summarized in the following table.

	Commercial Construction and Other Real Estate Loans		Residential Mortgage Loans		Credit Card Receivables
New York State...................................................................................................	40.6	%	34.1	%	56.9	%
North Central United States..............................................................................	4.7		6.4		3.7
North Eastern United States.............................................................................	10.2		9.3		12.1
Southern United States.....................................................................................	23.0		15.9		13.9
Western United States......................................................................................	21.5		34.0		11.1
Others...................................................................................................................	-		.3		2.3
Total.....................................................................................................................	100.0	%	100.0	%	100.0	%

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

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

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

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

• current market events or trends;

• country risk;

• maturity and liquidity of contracts;

• credit worthiness of the counterparties in the transaction;

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

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

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

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

	March 31, 2013		December 31, 2012
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure	$	42,504	$	41,248
Less: collateral held against exposure	6,087		7,530
Net credit risk exposure	$	36,417	$	33,718

Liquidity and Capital Resources

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

During the first quarter of 2013, marketplace liquidity continued to remain available for most sources of funding except mortgage securitization although credit spreads continue to be impacted by the European sovereign debt crisis and concerns regarding government spending and the budget deficit continue to impact interest rates. The prolonged period of low Federal funds rates continues to put pressure on spreads earned on our deposit base.

Interest Bearing Deposits with Banks totaled $17.1 billion and $13.3 billion at March 31, 2013 and December 31, 2012, respectively. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Securities Purchased under Agreements to Resell totaled $6.4 billion and $3.1 billion at March 31, 2013 and December 31, 2012, respectively. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Short-Term Borrowings totaled $11.8 billion and $14.9 billion at March 31, 2013 and December 31, 2012, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on short-term borrowing trends.

In April 2012, we established a third party back-up line of credit totaling $1.9 billion to replace the unused line of credit with HSBC France and support issuances of commercial paper. In January 2013, the third party back-up line of credit commitment was reduced to zero.

Deposits totaled $117.0 billion and $117.7 billion at March 31, 2013 and December 31, 2012, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on deposit trends.

Long-Term Debt increased to $22.0 billion at March 31, 2013 from $21.7 billion at December 31, 2012. The following table summarizes issuances and retirements of long-term debt during the three months ended March 31, 2013 and 2012:

Three Months Ended March 31,	2013			2012
	(in millions)
Long-term debt issued............................................................................................................................................	$	1,965		$	3,436
Long-term debt retired............................................................................................................................................	(1,707		)	(848		)
Net long-term debt issued......................................................................................................................................	$	258		$	2,588

Issuances of long-term debt during the first quarter of 2013 included $1.8 billion of medium term notes, of which $968 million was issued by HSBC Bank USA.

Under our shelf registration statement on file with the Securities and Exchange Commission, we may issue debt securities or preferred stock. The shelf has no dollar limit, but the amount of debt outstanding is limited by the authority granted by the Board of Directors. At March 31, 2013, we were authorized to issue up to $21 billion, of which $10.7 billion was available. HSBC Bank USA also has a $40 billion Global Bank Note Program of which $16 billion was available at March 31, 2013.

As a member of the New York Federal Home Loan Bank ("FHLB"), we have a secured borrowing facility which is collateralized by real estate loans and investment securities. At March 31, 2013 and December 31, 2012, long-term debt included $1.0 billion under this facility. The facility also allows access to further borrowings of up to $4.4 billion based upon the amount pledged as collateral with the FHLB.

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

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

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

	March 31, 2013		December 31, 2012
Tier 1 capital to risk weighted assets........................................................................................................	12.74	%	13.61	%
Tier 1 common equity to risk weighted assets........................................................................................	10.91		11.63
Total capital to risk weighted assets.........................................................................................................	18.11		19.52
Tier 1 capital to average assets..................................................................................................................	8.00		7.70
Total equity to total assets.........................................................................................................................	9.24		9.07

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

HSBC North America is required to implement Basel II provisions in accordance with current regulatory timelines. While HSBC USA will not report separately under the new rules, HSBC Bank USA will report under the new rules on a stand-alone basis. Adoption of Basel II requires the approval of U.S. regulators and encompasses enhancements to a number of risk policies, processes and systems to align HSBC Bank USA with the Basel II final rule requirements. We are uncertain as to when we will receive approval to adopt Basel II from the Federal Reserve Board, our primary regulator. We have integrated Basel II metrics into our management reporting and decision making process. As a result of Dodd-Frank, a banking organization that has formally implemented Basel II must calculate its capital requirements under Basel I and Basel II, compare the two results, and then use the lower of such ratios for purposes of determining compliance with its minimum Tier 1 capital and total risk-based capital requirements. In June 2012, the U.S. regulators issued three joint Notices of Proposed Rulemaking which would both implement many of the capital provisions of Basel III for U.S. banking institutions and substantially revise the U.S. banking regulators' Basel I risk-based guidelines to make them more risk sensitive. As proposed, the new risk-weight categories will not become effective until January 1, 2015. As a result of a large number of detailed comments received on the Notices of Proposed Rulemaking, the U.S. regulators announced that the new capital proposal would not take effect on January 1, 2013, as proposed. However, the Federal Reserve stated in its capital plan guidance that it expects bank holding companies subject to the guidance (including HSBC North America) to achieve, readily and without difficulty, the ratios required by the Basel III framework as it would come into effect in the United States. In this regard, the Federal Reserve stated that bank holding companies that meet the minimum ratio requirement during the Basel III transition period but remain below the 7 percent Tier 1 common equity target (minimum plus capital conservation buffer) will be expected to maintain prudent earnings retention policies with a view to meeting the conservation buffer under the time-frame described in the Basel III NPR.

In August 2012, U.S. regulators published a Final Rule in the Federal Register (known in the industry as Basel 2.5), that would change the US regulatory market risk capital rules to better capture positions for which the market risk capital rules are appropriate, reduce procyclicality, enhance the sensitivity to risks that are not adequately captured under current methodologies and increase transparency through enhanced disclosures. This final rule became effective January 1, 2013. This change is reflected in our March 31, 2013 Basel I risk-weighted asset levels.

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

We and HSBC Bank USA are required to meet minimum capital requirements by our principal regulators. Risk-based capital amounts and ratios are presented in Note 18, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements.

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

	Actual January 1 through March 31, 2013		Estimated April 1 through December 31, 2013		Estimated Full Year 2013
	(in billions)
Funding needs:
Net loan growth.....................................................................................................................	$	1	$	5	$	6
Long-term debt maturities....................................................................................................	2		1		3
Total funding needs.................................................................................................................	$	3	$	6	$	9
Funding sources:
Net change in short-term investments...............................................................................	$	1	$	-	$	1
Long-term debt issuance.....................................................................................................	2		6		8
Total funding sources..............................................................................................................	$	3	$	6	$	9

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

We will continue to sell a substantial portion of new mortgage loan originations to government sponsored enterprises and private investors.

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

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

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

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

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

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

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

	Balance at March 31, 2013
	One Year or Less		Over One through Five Years		Over Five Years		Total		Balance at December 31, 2012
	(in billions)
Standby letters of credit, net of participations⁽¹⁾........................	$	5.3	$	2.8	$	-	$	8.1	$	8.4
Commercial letters of credit............................................................	.9		.1		-		1.0		1.0
Credit derivatives⁽²⁾.........................................................................	58.0		152.6		18.6		229.2		237.5
Other commitments to extend credit:
Commercial....................................................................................	14.4		41.3		4.0		59.7		57.7
Consumer......................................................................................	6.9		-		-		6.9		7.0
Total...................................................................................................	$	85.5	$	196.8	$	22.6	$	304.9	$	311.6

⁽¹⁾Includes $840 million and $808 million issued for the benefit of HSBC affiliates at March 31, 2013 and December 31, 2012, respectively.

⁽²⁾Includes $42.4 billion and $44.2 billion issued for the benefit of HSBC affiliates at March 31, 2013 and December 31, 2012, respectively.

Other Commitments to Extend Credit Other commitments to extend credit include arrangements whereby we are contractually obligated to extend credit in the form of loans, participations in loans, lease financing receivables, or similar transactions. Consumer commitments are comprised of certain unused MasterCard/Visa credit card lines and commitments to extend credit secured by residential properties. We have the right to change or terminate any terms or conditions of a customer's credit card or home equity line of credit account, for cause, upon notification to the customer. Commercial commitments comprise primarily those related to secured and unsecured loans and lines of credit and certain asset purchase commitments. In connection with our commercial lending activities, we provide liquidity support to a number of multi-seller and single-seller asset backed commercial paper conduits ("ABCP conduits") sponsored by affiliates and third parties. See Note 19, "Variable Interest Entities," in the accompanying the consolidated financial statements for additional information regarding these ABCP conduits and our variable interests in them.

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

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

The tables below present information on our liquidity facilities with ABCP conduits at March 31, 2013. The maximum exposure to loss presented in the first table represents the maximum contractual amount of loans and asset purchases we could be required to make under the liquidity agreements. This amount does not reflect the funding limits discussed above and also assumes that we suffer a total loss on all amounts advanced and all assets purchased from the ABCP conduits. As such, we believe that this measure significantly overstates our expected loss exposure.

			Conduit Assets⁽¹⁾			Conduit Funding⁽¹⁾
Conduit Type	Maximum Exposure to Loss		Total Assets		Weighted Average Life (Months)	Commercial Paper		Weighted Average Life (Days)
	(dollars are in millions)
HSBC affiliate sponsored (multi-seller)...................................	$	2,155	$	1,420	9	$	1,420	18
Third-party sponsored:
Single-seller.............................................................................	299		5,952		42	5,732		60
Total.............................................................................................	$	2,454	$	7,372		$	7,152

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

	Average Asset Mix		Average Credit Quality⁽¹⁾
Asset Class	Average Asset Mix		AAA		AA+/AA		A		A-		BB/BB-
Multi-seller conduits
Debt securities backed by:
Auto loans and leases.........................................	24	%	34	%	-	%	-	%	-	%	-	%
Trade receivables..................................................	16		-		100		24		-		-
Credit card receivables.........................................	15		-		-		76		-		-
Equipment loans...................................................	45		66		-		-		-		-
	100	%	100	%	100	%	100	%	-	%	-	%

⁽¹⁾Credit quality is based on Standard and Poor's ratings at March 31, 2013 except for loans and trade receivables held by single-seller conduits, which are based on our internal ratings. For the single-seller conduits, external ratings are not available; however, our internal credit ratings were developed using similar methodologies and rating scales equivalent to the external credit ratings.

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

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

The preceding tables do not include information on liquidity facilities that we previously provided to certain Canadian multi-seller ABCP conduits that have been subject to restructuring agreements. As a result of specific difficulties in the Canadian asset-backed commercial paper markets, we entered into various agreements during 2007 modifying obligations with respect to these facilities. Under one of these agreements, known as the Montreal Accord, a restructuring proposal to convert outstanding commercial paper into longer term securities was approved by ABCP noteholders and endorsed by the Canadian justice system in 2008. The restructuring plan was formally executed during the first quarter of 2009. As part of the enhanced collateral pool established for the restructuring, we have provided a $401 million Margin Funding Facility to new Master Conduit Vehicles, which is currently undrawn. HSBC Bank USA derivatives transactions with the previous conduit vehicles have been restructured and assigned to the new Master Conduit Vehicles. Under the restructuring, additional collateral was provided to us to mitigate our derivatives exposures. All of our derivative positions with the Master Conduit Vehicles have subsequently been terminated.

Also in Canada but separately from the Montreal Accord, as part of an ABCP conduit restructuring executed in 2008, we agreed to hold long-term securities of CAD $300 million and provide a CAD $100 million credit facility. As of March 31, 2013 this credit facility was undrawn and approximately $295 million of long-term securities were held. As of December 31, 2012 this credit facility was undrawn and approximately $301 million of long-term securities were held.

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

Fair Value

Fair value measurement accounting principles require a reporting entity to take into consideration its own credit risk in determining the fair value of financial liabilities. The incorporation of our own credit risk accounted for a decrease of $9 million in the fair value of financial liabilities during the first quarter of 2013 compared to a decrease of $188 million during the prior year quarter.

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

Control Over Valuation Process and Procedures We have established a control framework which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. See Note 21, "Fair Value Measurements" for further details on our valuation control framework.

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

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

• the level of bid-ask spreads;

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

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

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

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

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

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

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

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

Level 3 inputs are unobservable estimates that management expects market participants would use to determine the fair value of the asset or liability. That is, Level 3 inputs incorporate market participants' assumptions about risk and the risk premium required by market participants in order to bear that risk. We develop Level 3 inputs based on the best information available in the circumstances. As of March 31, 2013 and December 31, 2012, our Level 3 instruments included the following: collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs") for which there is a lack of pricing transparency due to market illiquidity, certain structured deposits as well as certain structured credit and structured equity derivatives where significant inputs (e.g., volatility or default correlations) are not observable, credit default swaps with certain monoline insurers where the deterioration in the creditworthiness of the counterparty has resulted in significant adjustments to fair value, U.S. subprime mortgage loans and subprime related asset-backed securities, mortgage servicing rights, and derivatives referenced to illiquid assets of less desirable credit quality. See Note 21, "Fair Value Measurements" in the accompanying consolidated financial statements for additional information on Level 3 inputs.

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

Material Transfers Between Level 1 and Level 2 Measurements During the three months ended March 31, 2013 and 2012, there were no transfers between Level 1 and Level 2 measurements.

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

	March 31, 2013			December 31, 2012
	(dollars are in millions)
Level 3 assets⁽¹⁾⁽²⁾.............................................................................................................................................	$	4,154		$	4,701
Total assets measured at fair value⁽³⁾............................................................................................................	173,916			189,449
Level 3 liabilities................................................................................................................................................	4,276			3,854
Total liabilities measured at fair value⁽¹⁾........................................................................................................	110,547			116,728
Level 3 assets as a percent of total assets measured at fair value............................................................	2.4		%	2.5		%
Level 3 liabilities as a percent of total liabilities measured at fair value...................................................	3.9		%	3.3		%

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

⁽²⁾Includes $4.0 billion of recurring Level 3 assets and $191 million of non-recurring Level 3 assets at March 31, 2013. Includes $4.5 billion of recurring Level 3 assets and $222 million of non-recurring Level 3 assets at December 31, 2012.

⁽³⁾Includes $173.7 billion of assets measured on a recurring basis and $227 million of assets measured on a non-recurring basis at March 31, 2013. Includes $189.2 billion of assets measured on a recurring basis and $256 million of assets measured on a non-recurring basis at December 31, 2012.

Material Changes in Fair Value for Level 3 Assets and Liabilities

Derivative Assets and Counterparty Credit Risk We have entered into credit default swaps with monoline insurers to hedge our credit exposure in certain asset-backed securities and synthetic CDOs. We made $20 million and $8 million positive credit risk adjustments to the fair value of our credit default swap contracts during the three months ended March 31, 2013 and 2012, respectively, which is reflected in trading revenue. We have recorded a cumulative credit adjustment reserve of $116 million and $136 million against our monoline exposure at March 31, 2013 and December 31, 2012, respectively. The fair value of our monoline exposure net of cumulative credit adjustment reserves equaled $463 million and $534 million at March 31, 2013 and December 31, 2012, respectively. The decrease in the first quarter of 2013 reflects both reductions in our outstanding positions and improvements in exposure estimates.

Loans As of March 31, 2013 and December 31, 2012, we have classified $51 million and $52 million, respectively, of mortgage whole loans held for sale as a non-recurring Level 3 financial asset. These mortgage loans are accounted for on a lower of amortized cost or fair value basis. Based on our assessment, we recorded gain of $2 million and loss of $1 million during the first quarter of 2013 and 2012, respectively. The changes in fair value are recorded as other revenues in the consolidated statement of income.

Material Additions to and Transfers Into (Out of) Level 3 Measurements During the first quarter of 2013, we transferred $46 million of credit derivatives from Level 2 to Level 3 as result of including specific fair value adjustments related to certain credit default swaps. We transferred $85 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 to maturity and there is more observability in short term volatility.

During the first quarter of 2012, we transferred $161 million of deposits in domestic offices, which we have elected to carry at fair value which, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility.

See Note 21, "Fair Value Measurements," in the accompanying consolidated financial statements for information on additions to and transfers into (out of) Level 3 measurements during the three months March 31, 2013 and 2012 as well as for further details including the classification hierarchy associated with assets and liabilities measured at fair value.

Credit Quality of Assets Underlying Asset-backed Securities The following tables summarize the types and credit quality of the assets underlying our asset-backed securities as well as certain collateralized debt obligations and collateralized loan obligations held as of March 31, 2013:

Asset-backed securities backed by consumer finance collateral:

Credit Quality of Collateral:

				Commercial Mortgages				Prime				Alt-A				Subprime
Year of Issuance:		Total		Prior to 2006		2006 to Present		Prior to 2006		2006 to Present		Prior to 2006		2006 to Present		Prior to 2006		2006 to Present
		(in millions)
Rating of securities:⁽¹⁾	Collateral type:
AAA	Residential mortgages..	$	280	$	52	$	133	$	-	$	-	$	88	$	-	$	7	$	-
AA	Residential mortgages..	9		-		-		-		-		9		-		-		-
A	Residential mortgages..	91		-		-		-		-		30		-		-		61
	Home equity loans......	111		-		-		-		-		-		111		-		-
	Total A.......................	202		-		-		-		-		30		111		-		61
BBB	Residential mortgages..	2		-		-		-		-		2		-		-		-
	Other..........................	85		-		-		-		-		85		-		-		-
	Total BBB..................	87		-		-		-		-		87		-		-		-
B	Home equity loans......	79		-		-		-		-		-		79		-		-
CCC	Home equity loans......	65		-		-		-		-		-		65		-		-
	Residential mortgages..	3		-		-		-		-		-		-		-		3
	Total CCC..................	68		-		-		-		-		-		65		-		3
Unrated	Residential mortgages..	1		-		-		-		-		1		-		-		-
		$	726	$	52	$	133	$	-	$	-	$	215	$	255	$	7	$	64

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

Credit quality of collateral:		Total		A or Higher		BBB		BB/B		CCC		Unrated
		(in millions)
Rating of securities:⁽¹⁾	Collateral type:
	Corporate loans......................	$	303	$	-	$	-	$	303	$	-	$	-
	Trust preferred........................	178		-		178		-		-		-
	Others......................................	64		64		-		-		-		-
		$	545	$	64	$	178	$	303	$	-	$	-
	Total asset-backed securities..................................................	$	1,271

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

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

The unobservable input parameters selected are subject to the internal valuation control processes and procedures. When we perform a test of all the significant input parameters to the extreme values within the range at the same time, it could result in an increase of the overall fair value measurement of approximately $79 million or a decrease of the overall fair value measurement of approximately $89 million as of March 31, 2013. The effect of changes in significant unobservable input parameters are primarily driven by mortgage servicing rights, certain asset-backed securities including CDOs, and the uncertainty in determining the fair value of credit derivatives executed against monoline insurers.

Risk Management

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• loan portfolios;

• investment portfolios;

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

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

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

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

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

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

• current market events or trends;

• country risk;

• maturity and liquidity of contracts;

• credit worthiness of the counterparties in the transaction;

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

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

	March 31, 2013		December 31, 2012
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure..................................................................................................................................	$	42,504	$	41,248
Less: collateral held against exposure.............................................................................................................	6,087		7,530
Net credit risk exposure.....................................................................................................................................	$	36,417	$	33,718

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

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

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

Our ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit ratings agencies. At March 31, 2013, we and HSBC Bank USA maintained the following long and short-term debt ratings:

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

(1) Dominion Bond Rating Service.

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

As of March 31, 2013, there were no pending actions in terms of changes to ratings on the debt of HSBC USA Inc. or HSBC Bank USA from any of the rating agencies.

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

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

	March 31, 2013		December 31, 2012
	(in millions)
Institutional PVBP movement limit...............................................................................................................	$	8.0	$	8.0
PVBP position at period end..........................................................................................................................	3.6		1.7

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

	March 31, 2013		December 31, 2012
	(values as a percentage)
Institutional economic value of equity limit...................................................................................................	+/-15		+/-15
Projected change in value (reflects projected rate movements on January 1):
Change resulting from an immediate 200 basis point increase in interest rates....................................	4		1
Change resulting from an immediate 200 basis point decrease in interest rates...................................	(13	)	(10	)

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

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

	March 31, 2013					December 31, 2012
	Amount			%		Amount			%
	(dollars are in millions)
Projected change in net interest income (reflects projected rate movements on January 1):
Institutional base earnings movement limit.............................................................				(10	)				(10	)
Change resulting from a gradual 100 basis point increase in the yield curve.....	$	80		4		$	107		5
Change resulting from a gradual 100 basis point decrease in the yield curve....	(200		)	(10	)	(155		)	(8	)
Change resulting from a gradual 200 basis point increase in the yield curve.....	100			5		128			6
Change resulting from a gradual 200 basis point decrease in the yield curve....	(279		)	(13	)	(210		)	(10	)
Other significant scenarios monitored (reflects projected rate movements on January 1):
Change resulting from an immediate 100 basis point increase in the yield curve..............................................................................................................................	142			7		182			9
Change resulting from an immediate 100 basis point decrease in the yield curve..............................................................................................................................	(283		)	(13	)	(200		)	(10	)
Change resulting from an immediate 200 basis point increase in the yield curve..............................................................................................................................	147			7		158			8
Change resulting from an immediate 200 basis point decrease in the yield curve..............................................................................................................................	(327		)	(16	)	(234		)	(12	)

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

Capital Risk/Sensitivity of Other Comprehensive Income Large movements of interest rates could directly affect some reported capital balances and ratios. The mark-to-market valuation of available-for-sale securities is credited on a tax effective basis to accumulated other comprehensive income. Although this valuation mark is excluded from Tier 1 and Tier 2 capital ratios, it is included in two important accounting based capital ratios: the tangible common equity to tangible assets and the tangible common equity to risk weighted assets. As of March 31, 2013, we had an available-for-sale securities portfolio of approximately $59.5 billion with a positive mark-to-market of $1.4 billion included in tangible common equity of $13.3 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $215 million to a net gain of $1.2 billion with the following results on our tangible capital ratios. As of December 31, 2012, we had an available-for-sale securities portfolio of approximately $67.7 billion with a positive mark-to-market of $1.7 billion included in tangible common equity of $13.2 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $238 million to a net gain of $1.4 billion with the following results on our tangible capital ratios

	March 31, 2013				December 31, 2012
	Actual		Proforma⁽¹⁾		Actual		Proforma⁽¹⁾
Tangible common equity to tangible assets..................................................	6.98	%	6.92	%	6.79	%	6.72	%
Tangible common equity to risk weighted assets.........................................	11.53		11.42		12.39		12.26

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

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

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

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

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

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

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

The following table summarizes trading VAR for the three months ended March 31, 2013:

	March 31, 2013		Three Months Ended March 31, 2013						December 31, 2012
	March 31, 2013		Minimum		Maximum		Average		December 31, 2012
	(in millions)
Total trading.....................................................................	$	8	$	6	$	13	$	9	$	8
Foreign exchange............................................................	4		4		9		6		5
Interest rate directional and credit spread...................	10		7		15		10		6

The following table summarizes the frequency distribution of daily market risk-related revenues for trading activities during the three months ended March 31, 2013. Market risk-related trading revenues include realized and unrealized gains (losses) related to trading activities, but exclude the related net interest income. Analysis of the gain (loss) data for the three months ended March 31, 2013 shows that the largest daily gain was $5 million and the largest daily loss was $4 million.

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

Below

$(5)

to $0

to $5

to $10

Over

$10

(dollars are in millions)

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

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

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

The following table summarizes non-trading VAR for the three months ended March 31, 2013, assuming a 99 percent confidence level for a two-year observation period and a one-day "holding period."

	March 31, 2013		Three Months Ended March 31, 2013						December 31, 2012
	March 31, 2013		Minimum		Maximum		Average		December 31, 2012
	(in millions)
Total Accrual VAR..........................................................	$	78	$	78	$	95	$	88	$	92

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

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

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

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

	March 31, 2013			December 31, 2012
	(in millions)
Projected change in net market value of hedged MSRs portfolio (reflects projected rate movements on April 1 and January 1):
Value of hedged MSRs portfolio...............................................................................................................	$	190		$	168
Change resulting from an immediate 50 basis point decrease in the yield curve:
Change limit (no worse than)................................................................................................................	(20		)	(20		)
Calculated change in net market value................................................................................................	4			4
Change resulting from an immediate 50 basis point increase in the yield curve:
Change limit (no worse than)................................................................................................................	(8		)	(8		)
Calculated change in net market value................................................................................................	6			8
Change resulting from an immediate 100 basis point increase in the yield curve:
Change limit (no worse than)................................................................................................................	(12		)	(12		)
Calculated change in net market value................................................................................................	12			28

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

The following table summarized the frequency distribution of the weekly economic value of the MSR asset during the three months ended March 31, 2013. This includes the change in the market value of the MSR asset net of changes in the market value of the underlying hedging positions used to hedge the asset. The changes in economic value are adjusted for changes in MSR valuation assumptions that were made during the course of the year.

Ranges of mortgage economic value from market risk-related activities

Below

$(2)

to $0

to $2

to $4

Over

(dollars are in millions)

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

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

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

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

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

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

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

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

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

CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES

The following table shows the quarter-to-date average daily balances of the principal components of assets, liabilities and shareholders' equity together with their respective interest amounts and rates earned or paid, presented on a taxable equivalent basis. Net interest margin is calculated by dividing net interest income by the average interest earning assets from which interest income is earned. The calculation of net interest margin includes interest expense of $40 million for the three months ended March 31, 2012, which has been allocated to our discontinued operations. This allocation of interest expense to our discontinued operations was in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by these transactions.

Three Months Ended March 31,	2013							2012
	Balance			Interest		Rate⁽¹⁾		Balance			Interest		Rate⁽¹⁾
	(dollars are in millions)
Assets
Interest bearing deposits with banks....................................	$	17,383		$	11	.26	%	$	22,804		$	16	.29	%
Federal funds sold and securities purchased under resale agreements.................................................................................	1,910			3		.50		3,286			10		1.19
Trading assets...........................................................................	11,463			24		.83		13,387			33		.99
Securities....................................................................................	62,445			233		1.52		56,562			309		2.20
Loans:
Commercial.............................................................................	43,311			273		2.56		35,988			244		2.72
Consumer:
Residential mortgages....................................................	15,758			146		3.76		15,342			150		3.93
HELOCs and home equity mortgages..........................	2,278			19		3.33		3,380			29		3.46
Credit cards......................................................................	771			18		9.25		1,202			23		8.19
Auto finance....................................................................	-			-		-		-			-		-
Other consumer...............................................................	655			8		5.39		934			16		7.06
Total consumer.....................................................................	19,462			191		3.99		20,858			218		4.24
Total loans.............................................................................	62,773			464		3.00		56,846			462		3.28
Other...........................................................................................	3,223			10		1.37		3,885			11		1.17
Total earning assets.................................................................	159,197			$	745	1.90	%	156,770			$	841	2.16	%
Allowance for credit losses.....................................................	(633		)					(727		)
Cash and due from banks........................................................	1,126							1,595
Other assets...............................................................................	28,760							29,888
Assets of discontinued operations.......................................	-							20,410
Total assets...............................................................................	$	188,450						$	207,936
Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits..................................................................	$	44,563		$	19	.18	%	$	58,583		$	59	.41	%
Other time deposits..............................................................	21,048			21		.40		14,880			35		.93
Deposits in foreign offices:
Foreign banks deposits.......................................................	7,685			1		.07		8,165			1		.07
Other interest bearing deposits..........................................	6,080			2		.11		15,661			4		.11
Deposits held for sale..............................................................	-			-		-		15,091			10		.25
Total interest bearing deposits...............................................	79,376			43		.22		112,380			109		.45
Short-term borrowings.............................................................	16,193			9		.22		17,725			9		.19
Long-term debt..........................................................................	22,075			167		3.07		18,089			161		3.59
Total interest bearing deposits and debt..............................	117,644			219				148,194			279
Other...........................................................................................	494			16		12.69		422			12		11.14
Total interest bearing liabilities..............................................	118,138			235		.81		148,616			291		.88
Net interest income/Interest rate spread...............................				$	510	1.09	%				$	550	1.29	%
Noninterest bearing deposits.................................................	31,115							20,312
Other liabilities..........................................................................	21,381							19,428
Liabilities of discontinued operations...................................	-							934
Total shareholders' equity......................................................	17,816							18,646
Total liabilities and shareholders' equity..........................	$	188,450						$	207,936
Net interest margin on average earning assets....................						1.30	%						1.42	%
Net interest income to average total assets..........................						1.10	%						1.18	%

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

The total weighted average rate earned on earning assets is interest and fee earnings divided by daily average amounts of total interest earning assets, including the daily average amount on nonperforming loans. Loan interest for the three months ended March 31, 2013 and 2012 included fees of $24 million and $15 million, respectively.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

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

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

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

PART II

Item 1. Legal Proceedings.

See "Litigation and Regulatory Matters" in Note 22, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements beginning on page for our legal proceedings disclosure, which is incorporated herein by reference.

Item 5. Other Information.

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

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

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

HSBC has 15 loans outstanding to an Iranian petrochemical and energy company. These loans are supported by the official Export Credit Agencies of the following countries: the United Kingdom, France, Germany, Spain, The Netherlands, South Korea and Japan. HSBC continues to seek repayments from the company under the existing loans in accordance with the original maturity profiles. All repayments made by the Iranian company have received a license or an authorization from relevant authorities. Repayments have been received under a number of the loans during the first quarter of 2013.

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

In 2002, HSBC provided a loan to Bank Tejarat with a guarantee from the Government of Iran to fund the construction of a petrochemical plant undertaken by a U.K. contractor. This loan was supported by the U.K. Export Credit Agency. While the loan remains in existence and has been licensed by the relevant European government, no repayments have been received during the first quarter of 2013 from Bank Tejarat, but claims have been settled by the U.K. Export Credit Agency in respect to overdue payments.

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

Estimated gross revenue to HSBC generated by these loans in repayment for the first quarter of 2013, which includes interest and fees, was $563,000. Estimated net profit for HSBC during the first quarter of 2013 was $225,000. While HSBC intends to continue to seek repayment, it does not intend to extend any new loans.

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

HSBC worked with relevant regulatory authorities to obtain licenses where required and ensure compliance with laws and regulations while seeking to cancel the guarantees and counter indemnities. Several were cancelled during the first quarter of 2013, and 21 remain outstanding.

Estimated gross revenue to HSBC for the first quarter of 2013, which includes fees and/or commissions, was $7,000. HSBC does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure. HSBC is seeking to cancel all relevant guarantees and does not intend to provide any new guarantees involving Iran.

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

While HSBC has attempted to restrict or terminate its role as paying or collecting bank, some check transactions with U.S.-sanctioned Iranian financial institutions have been settled. HSBC's ability to effectively terminate or implement check-clearing restrictions is dependent on the relevant central banks permitting it to do so unilaterally. Where permitted, HSBC has terminated the activity altogether, implementing both automated and manual controls.

There was no measurable gross revenue or net profit generated by this activity in the first quarter of 2013.

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

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

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

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

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

Iranian embassy-related activity HSBC maintains a bank account in London for the Iranian embassy in London, which is used to support Iranian students studying in the U.K. HSBC has notified the client that this account will be closed. There has been minimal account activity in the first quarter of 2013.

2013 Activity related to U.S. Executive Order 13224 In the first quarter of 2013, HSBC maintained two personal accounts and one business account in the U.K. for two individuals sanctioned by the U.S. under Executive Order 13224. Both of these individuals were delisted by the U.K. and the U.N. Security Council in 2012, the relevant accounts were frozen prior to delisting. The customers were notified in the first quarter of 2013 that the accounts are being closed.

HSBC maintained a frozen personal account for an individual sanctioned under Executive Order 13224, and by the U.K. and the U.N. Security Council. Activity on this account in the first quarter of 2013 was permitted by a license issued by the U.K.

There was no measurable gross revenue or net profits generated to HSBC in the first quarter of 2013.

HSBC also 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 HSBC recognized in the first quarter of 2013 for this activity.

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

Item 6. Exhibits.

Exhibits included in this Report:

12	Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.

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

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

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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in eXentsible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income for the three months ended March 31, 2013 and 2012, (ii) the Consolidated Statement of Comprehensive Income for the three months ended March 31, 2013 and 2012, (iii) the Consolidated Balance Sheet as of March 31, 2013 and December 31. 2012, (iv) the Consolidated Statement of Changes in Shareholders' Equity for the three months ended March 31, 2013 and 2012, (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 2013 and 2012, 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.

Index

Assets:	Equity:
by business segment	consolidated statement of changes
consolidated average balances	ratios
fair value measurements	Equity securities available-for-sale
nonperforming	Estimates and assumptions
trading	Eurozone exposures
Asset-backed commercial paper conduits	Executive overview
Asset-backed securities	Fair value measurements:
Balance sheet:	assets and liabilities recorded at fair value on a recurring basis
consolidated	assets and liabilities recorded at fair value on a non-recurring basis
consolidated average balances	control over valuation process
review	financial instruments
Basel II	hierarchy
Basel III	transfers into/out of level one and two
Basis of reporting	transfers into/out of level two and three
Business:	valuation techniques
consolidated performance review	Fiduciary risk
Capital:	Financial assets:
2013 funding strategy	designated at fair value
common equity movements	reclassification under IFRSs
consolidated statement of changes	Financial highlights metrics
regulatory capital	Financial liabilities:
selected capital ratios	designated at fair value
Cash flow (consolidated)	fair value of financial liabilities
Cautionary statement regarding forward-looking statements	Forward looking statements
Collateral - pledged assets	Funding
Collateralized debt obligations	Gain on instruments designated at fair value and related derivatives
Commercial banking segment results (IFRSs)	Gains (losses) from securities
Compliance risk	Global Banking and Markets
Controls and procedures	Geographic concentration of receivables
Credit card fees	Goodwill
Credit quality	Guarantee arrangements
Credit risk:	Impairment:
adjustment	available-for-sale securities
component of fair value option	credit losses
concentration	nonperforming loans
exposure	impaired loans
management	Income (loss) from financial instruments designated at fair value, net
related contingent features	Income tax expenses
related arrangements	Intangible assets
Current environment	Interest rate risk
Deferred tax assets	Internal control
Deposits	Key performance indicators
Derivatives:	Legal proceedings
cash flow hedges	Leveraged finance transactions
fair value hedges	Liabilities:
notional value	commitments, lines of credit
trading and other	deposits
Discontinued operations	financial liabilities designated at fair value


long-term debt	financial
short-term borrowings	loans-to-deposits
trading	Residential real estate owned
Liquidity and capital resources	Reconciliation of U.S. GAAP results to IFRSs
Liquidity risk	Refreshed loan-to-value
Litigation and regulatory matters	Regulation
Loans:	Related party transactions
by category	Reputational risk
by charge-off (net)	Results of operations
by delinquency	Retail banking and wealth management segment results (IFRSs)
criticized assets	Risk elements in the loan portfolio
geographic concentration	Risk management:
held for sale	credit
impaired	compliance
nonperforming	fiduciary
overall review	interest rate
purchases from HSBC Finance	liquidity
risk concentration	market
troubled debt restructures	operational
Loan impairment charges - see Provision for credit losses	reputational
Loan-to-deposits ratio	strategic
Market risk	Securities:
Market turmoil:	fair value
exposures	impairment
impact on liquidity risk	maturity analysis
Monoline insurers	Segment results - IFRSs basis:
Mortgage lending products	retail banking and wealth management
Mortgage servicing rights	commercial banking
Net interest income	global banking and markets
New accounting pronouncements	private banking
Off balance sheet arrangements	other
Operating expenses	overall summary
Operational risk	Selected financial data
Other revenue	Sensitivity:
Other segment results (IFRSs)	projected net interest income
Pension and other postretirement benefits	Statement of changes in shareholders' equity
Performance, developments and trends	Statement of changes in comprehensive income
Pledged assets	Statement of income
Private banking segment results (IFRSs)	Strategic risk
Profit (loss) before tax:	Stress testing
by segment - IFRSs	Table of contents
consolidated	Tax expense
Provision for credit losses	Trading:
Ratios:	assets
capital	derivatives
charge-off (net)	liabilities
credit loss reserve related	portfolios
delinquency	Trading revenue (net)
earnings to fixed charges - Exhibit 12	Troubled debt restructures
efficiency	Value at risk
	Variable interest entities

Signatures

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

Date: May 7, 2013

HSBC USA Inc.

(Registrant)

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

Exhibit Index

12	Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.
31	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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)

EXHIBIT 12

HSBC USA INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND

EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

	Three Months Ended March 31,
	2013		2012
	(dollars are in millions)
Ratios excluding interest on deposits:
Income from continuing operations	$	183	$	80
Income tax expense	104		18
Less: Undistributed equity earnings	-		-
Fixed charges:
Interest on:
Borrowed funds	9		9
Long-term debt	167		154
Others	16		12
One third of rents, net of income from subleases	9		8
Total fixed charges, excluding interest on deposits	201		183
Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings	488		281
Ratio of earnings to fixed charges	2.43		1.54
Total preferred stock dividend factor⁽¹⁾	$	25	$	25
Fixed charges, including the preferred stock dividend factor	$	226	$	208
Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends	2.16		1.35
Ratios including interest on deposits:
Total fixed charges, excluding interest on deposits	$	201	$	183
Add: Interest on deposits	43		76
Total fixed charges, including interest on deposits	$	244	$	259
Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings	$	488	$	281
Add: Interest on deposits	43		76
Total	$	531	$	357
Ratio of earnings to fixed charges	2.18		1.38
Fixed charges, including the preferred stock dividend factor	$	226	$	208
Add: Interest on deposits	43		76
Fixed charges, including the preferred stock dividend factor and interest on deposits	$	269	$	284
Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends	1.97		1.26

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

EXHIBIT 31

Certification of Chief Executive Officer and Chief Financial Officer

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

Certification of Chief Executive Officer

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

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

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

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

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

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

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

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

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

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

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

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

Date: May 7, 2013

/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

Certification of Chief Financial Officer

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

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

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: May 7, 2013

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

EXHIBIT 32

Certification of Chief Executive Officer and Chief Financial Officer

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

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

Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted in connection with the HSBC USA Inc. (the "Company") quarterly report on Form 10-Q for the period ending March 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: May 7, 2013

/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

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

Section 906 of the Sarbanes-Oxley Act of 2002

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

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

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

Date: May 7, 2013

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

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

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

This information is provided by RNS

The company news service from the London Stock Exchange

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