HSBC USA Inc Form 10-Q - Part 1

RNS Number : 7519I

HSBC Holdings PLC

30 July 2012

 



UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q 

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

¨       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)

[phone]

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  x  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  x  No  ¨ 

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	x	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  x 

As of July 27, 2012, there were 712 shares of the registrant's common stock outstanding, all of which are owned by HSBC North America Inc.

HSBC USA Inc.

FORM 10-Q

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 Shareholders' Equity.....................................................................................
	Consolidated Statement of Cash Flows..........................................................................................................................
	Notes to 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 - IFRSs Basis......................................................................................................................................
	Credit Quality......................................................................................................................................................................
	Liquidity and Capital Resources......................................................................................................................................
	Off-Balance Sheet Arrangements.....................................................................................................................................
	Fair Value.............................................................................................................................................................................
	Risk Management...............................................................................................................................................................
	Average Balances and Interest Rates.............................................................................................................................
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.........................................................................................
Item 4.	Controls and Procedures........................................................................................................................................................
Part II
Item 1.	Legal Proceedings....................................................................................................................................................................
Item 1A.	Risk Factors..............................................................................................................................................................................
Item 6.	Exhibits......................................................................................................................................................................................
Index...................................................................................................................................................................................................................
Signature............................................................................................................................................................................................................

HSBC USA Inc.

PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Three Months Ended June  30,		Six Months Ended June 30,
	2012	2011	2012	2011
	(in millions)
Interest income:
Loans.........................................................................................................................................................................................................................	$          456	$           441	$          919	$           890
Securities..................................................................................................................................................................................................................	280	304	585	623
Trading assets.........................................................................................................................................................................................................	26	53	59	104
Short-term investments..........................................................................................................................................................................................	33	38	59	69
Other..........................................................................................................................................................................................................................	10	10	21	22
Total interest income..................................................................................................................................................................................................	805	846	1,643	1,708
Interest expense:
Deposits....................................................................................................................................................................................................................	85	65	161	132
Short-term borrowings............................................................................................................................................................................................	6	8	15	21
Long-term debt........................................................................................................................................................................................................	178	147	332	298
Other..........................................................................................................................................................................................................................	1	83	13	84
Total interest expense.................................................................................................................................................................................................	270	303	521	535
Net interest income.......................................................................................................................................................................................................	535	543	1,122	1,173
Provision for credit losses...........................................................................................................................................................................................	89	95	89	93
Net interest income after provision for credit losses............................................................................................................................................	446	448	1,033	1,080
Other revenues:
Credit card fees........................................................................................................................................................................................................	22	32	52	64
Other fees and commissions..................................................................................................................................................................................	169	183	363	383
Trust income............................................................................................................................................................................................................	25	29	50	57
Trading revenue......................................................................................................................................................................................................	84	126	282	350
Other securities gains, net.....................................................................................................................................................................................	65	12	95	56
Servicing and other fees from HSBC affiliates....................................................................................................................................................	46	56	102	102
Residential mortgage banking revenue................................................................................................................................................................	2	49	27	14
Gain (loss) on instruments designated at fair value and related derivatives.................................................................................................	141	40	(71                  )	61
Gain on sale of branches........................................................................................................................................................................................	330	-	330	-
Other income (loss).................................................................................................................................................................................................	(21                  )	5	-	36
Total other revenues...................................................................................................................................................................................................	863	532	1,230	1,123
Operating expenses:
Salaries and employee benefits.............................................................................................................................................................................	246	293	526	586
Support services from HSBC affiliates.................................................................................................................................................................	370	364	738	680
Occupancy expense, net........................................................................................................................................................................................	57	68	116	136
Expense accrual related to certain regulatory matters (Note 21)......................................................................................................................	700	-	700	-
Other expenses........................................................................................................................................................................................................	178	165	327	419
Total operating expenses...........................................................................................................................................................................................	1,551	890	2,407	1,821
Income (loss) from continuing operations before income tax expense................................................................................................................	(242                  )	90	(144                  )	382
Income tax expense.......................................................................................................................................................................................................	351	134	369	121
Income (loss) from continuing operations.............................................................................................................................................................	(593                  )	(44                  )	(513                  )	261
Discontinued Operations (Note 2):
Income from discontinued operations before income tax expense.......................................................................................................................	74	196	315	464
Income tax expense.......................................................................................................................................................................................................	26	70	112	164
Income from discontinued operations....................................................................................................................................................................	48	126	203	300
Net income (loss)..........................................................................................................................................................................................................	$         (545                  )	$             82	$         (310                  )	$           561

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

HSBC USA Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Net income (loss)................................................................................................................................................................................	$       (545                 )	$            82	$       (310                 )	$          561
Net change in unrealized gains (losses), net of tax as applicable on:
Securities available-for-sale, not other-than-temporarily impaired...................................................................................	248	290	121	142
Other-than-temporary impaired debt securities available-for-sale(1).................................................................................	-	-	-	1
Other-than-temporary impaired debt securities held-to-maturity(1)...................................................................................	-	-	-	11
Adjustment to reverse other-than-temporary impairment on securities held-to-maturity due to deconsolidation of a variable interest entity................................................................................................................................................	-	-	-	142
Derivatives designated as cash flow hedges.......................................................................................................................	(37                 )	(14                 )	-	(17                 )
Unrecognized actuarial gains, transition obligation and prior service costs relating to pension and postretirement benefits, net of tax....................................................................................................................................................................	-	1	1	2
Other comprehensive income, net of tax.......................................................................................................................................	211	277	122	281
Comprehensive income (loss)..........................................................................................................................................................	$       (334                 )	$          359	$       (188                 )	$          842

⁽¹⁾  During the three and six months ended June 30, 2012 and 2011, there were no other-than-temporary impairment ("OTTI") losses on securities recognized in other revenues and no OTTI losses in the non-credit component on securities were recognized in accumulated other comprehensive income.

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

HSBC USA Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	June 30, 2012	December 31, 2011
	(in millions)
Assets(1)
Cash and due from banks.....................................................................................................................................................................................................	$        1,528	$               1,616
Interest bearing deposits with banks.......................................................................................................................................................................................	18,809	25,454
Federal funds sold and securities purchased under agreements to resell..........................................................................................................................................	13,666	3,109
Trading assets...................................................................................................................................................................................................................	35,778	38,800
Securities available-for-sale...................................................................................................................................................................................................	60,503	53,281
Securities held-to-maturity (fair value of $2.1 billion and $2.3 billion at June 30, 2012 and December 31, 2011, respectively)...............................................................	1,844	2,035
Loans...............................................................................................................................................................................................................................	56,064	51,867
Less - allowance for credit losses..........................................................................................................................................................................................	619	743
Loans, net...................................................................................................................................................................................................................	55,445	51,124
Loans held for sale (includes $411 million and $377 million designated under fair value option at June 30, 2012 and December 31, 2011, respectively).............................	1,982	3,670
Properties and equipment, net...............................................................................................................................................................................................	292	458
Intangible assets, net...........................................................................................................................................................................................................	268	242
Goodwill..........................................................................................................................................................................................................................	2,228	2,228
Other assets.......................................................................................................................................................................................................................	7,967	6,369
Other branch related assets held for sale..................................................................................................................................................................................	117	440
Assets of discontinued operations..........................................................................................................................................................................................	-	21,454
Total assets......................................................................................................................................................................................................................	$     200,427	$            210,280
Liabilities(1)
Debt:
Deposits in domestic offices:
Noninterest bearing..................................................................................................................................................................................................	$      30,480	$              20,592
Interest bearing (includes $9.9 billion and $9.8 billion designated under fair value option at June 30, 2012 and December 31, 2011, respectively)..........................	65,955	73,474
Deposits in foreign offices:
Noninterest bearing..................................................................................................................................................................................................	1,607	1,912
Interest bearing........................................................................................................................................................................................................	21,552	28,607
Deposits held for sale.....................................................................................................................................................................................................	3,633	15,144
Total deposits..............................................................................................................................................................................................................	123,227	139,729
Short-term borrowings...................................................................................................................................................................................................	10,731	16,009
Long-term debt (includes $6.8 billion and $5.0 billion designated under fair value option at June 30, 2012 and December 31, 2011, respectively)...............................	20,014	16,709
Total debt.........................................................................................................................................................................................................................	153,972	172,447
Trading liabilities..............................................................................................................................................................................................................	20,220	14,186
Interest, taxes and other liabilities.........................................................................................................................................................................................	7,754	4,223
Other branch related liabilities held for sale.............................................................................................................................................................................	2	11
Liabilities of discontinued operations.....................................................................................................................................................................................	226	911
Total liabilities.................................................................................................................................................................................................................	182,174	191,778
Shareholders' equity
Preferred stock...................................................................................................................................................................................................................	1,565	1,565
Common shareholder's equity:
Common stock ($5 par; 150,000,000 shares authorized; 712 shares issued and outstanding at June 30, 2012 and December 31, 2011)............................................................................................................................................................................................	-	-
Additional paid-in capital..........................................................................................................................................................................................	13,790	13,814
Retained earnings....................................................................................................................................................................................................	2,134	2,481
Accumulated other comprehensive income....................................................................................................................................................................	764	642
Total common shareholder's equity.......................................................................................................................................................................................	16,688	16,937
Total shareholders' equity..................................................................................................................................................................................................	18,253	18,502
Total liabilities and shareholders' equity..............................................................................................................................................................................	$     200,427	$            210,280

⁽¹⁾  The following table summarizes assets and liabilities related to variable interest entities ("VIEs") as of June 30, 2012 and December 31, 2011 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation.

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

HSBC USA Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED) (Continued)

	June 30, 2012	December 31, 2011
	(in millions)
Assets
Interest bearing deposits with banks...............................................................................................................................................................................	$          110	$                  108
Other assets...............................................................................................................................................................................................................	535	520
Assets of discontinued operations..................................................................................................................................................................................	44	-
Total assets...............................................................................................................................................................................................................	$          689	$                  628
Liabilities
Long-term debt..........................................................................................................................................................................................................	$            55	$                    55
Interest, taxes and other liabilities.................................................................................................................................................................................	195	166
Liabilities of discontinued operations.............................................................................................................................................................................	273	541
Total liabilities..........................................................................................................................................................................................................	$          523	$                  762

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

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

Six Months Ended June 30,	2012	2011
	(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.........................................................................................................................................................	13,814	13,785
Capital contributions from parent.....................................................................................................................................................	-	21
Employee benefit plans and other....................................................................................................................................................	(24                 )	-
Balance at end of period.....................................................................................................................................................................	13,790	13,806
Retained earnings
Balance at beginning of period.........................................................................................................................................................	2,481	1,536
Net income (loss).................................................................................................................................................................................	(310                 )	561
Cash dividends declared on preferred stock...................................................................................................................................	(37                 )	(36                 )
Balance at end of period.....................................................................................................................................................................	2,134	2,061
Accumulated other comprehensive income (loss)
Balance at beginning of period.........................................................................................................................................................	642	(153                 )
Other comprehensive income, net of tax..........................................................................................................................................	122	281
Balance at end of period.....................................................................................................................................................................	764	128
Total common shareholders' equity...............................................................................................................................................	16,688	15,995
Total shareholders' equity...............................................................................................................................................................	$   18,253	$     17,560

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

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30,	2012	2011
	(in millions)
Cash flows from operating activities
Net income (loss).................................................................................................................................................................................................	$         (310                  )	$            561
Income from discontinued operations..............................................................................................................................................................	203	300
Income (loss) from continuing operations.......................................................................................................................................................	(513                  )	261
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................................................................................................................................	108	154
Gain on sale of branches...............................................................................................................................................................................	(330                  )	-
Expense accrual related to certain regulatory matters...............................................................................................................................	700	-
Impairment of internally developed software.............................................................................................................................................	-	94
Provision for credit losses.............................................................................................................................................................................	89	93
Realized gains on securities available-for-sale...........................................................................................................................................	(95                  )	(56                  )
Net change in other assets and liabilities...................................................................................................................................................	548	833
Change in loans held for sale:
Originations of loans................................................................................................................................................................................	(1,702                  )	(1,626                  )
Sales and collection of loans held for sale............................................................................................................................................	1,756	2,432
Net change in trading assets and liabilities................................................................................................................................................	9,044	688
Lower of cost or fair value adjustments on loans held for sale...............................................................................................................	18	30
Mark-to-market (gains) losses on financial instruments designated at fair value and related derivatives..................................................................................................................................................................................................	71	(58                  )
Net change in fair value of derivatives and hedged items.......................................................................................................................	320	(226                  )
Cash provided by operating activities - continuing operations..................................................................................................................	10,014	2,619
Cash provided by operating activities - discontinued operations..............................................................................................................	614	998
Net cash provided by operating activities.......................................................................................................................................................	10,628	3,617
Cash flows from investing activities
Net change in interest bearing deposits with banks......................................................................................................................................	6,645	(22,333                  )
Net change in federal funds sold and securities purchased under agreements to resell..........................................................................	(10,557                  )	3,943
Securities available-for-sale:
Purchases of securities available-for-sale...................................................................................................................................................	(21,755                  )	(14,033                  )
Proceeds from sales of securities available-for-sale..................................................................................................................................	7,049	13,582
Proceeds from maturities of securities available-for-sale.........................................................................................................................	7,256	1,725
Securities held-to-maturity:
Proceeds from maturities of securities held-to-maturity...........................................................................................................................	191	415
Change in loans:
Originations, net of collections....................................................................................................................................................................	(4,464                  )	(1,811                  )
Loans sold to third parties............................................................................................................................................................................	53	196
Net cash used for acquisitions of properties and equipment.......................................................................................................................	(2                  )	(3                  )
Net outflows related to the sale of branches...................................................................................................................................................	(7,768                  )	-
Other, net...............................................................................................................................................................................................................	(66                  )	(60                  )
Cash used in investing activities - continuing operations...........................................................................................................................	(23,418                  )	(18,379                  )
Cash provided by investing activities - discontinued operations..............................................................................................................	21,186	1,654
Net cash used in investing activities................................................................................................................................................................	(2,232                  )	(16,725                  )

HSBC USA Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Continued)

Six Months Ended June 30,	2012	2011
	(in millions)
Cash flows from financing activities
Net change in deposits...........................................................................................................................................................................	(6,384                )	9,851
Debt:
Net change in short-term borrowings.............................................................................................................................................	(5,278                )	1,103
Issuance of long-term debt...............................................................................................................................................................	4,739	4,469
Repayment of long-term debt...........................................................................................................................................................	(1,457                )	(2,267                 )
Repayment of debt issued related to the sale and leaseback of 452 Fifth Avenue property.................................................	(8                )	(15                 )
Other decreases in capital surplus........................................................................................................................................................	(24                )	-
Dividends paid.........................................................................................................................................................................................	(37                )	(36                 )
Cash provided by (used in) financing activities - continuing operations.....................................................................................	(8,449                )	13,105
Cash used in financing activities - discontinued operations..........................................................................................................	(35                )	(147                 )
Net cash provided by (used in) financing activities...............................................................................................................	(8,484                )	12,958
Net change in cash and due from banks..............................................................................................................................................	(88                )	(150                 )
Cash and due from banks at beginning of period(1)............................................................................................................................	1,616	1,693
Cash and due from banks at end of period.......................................................................................................................................	$     1,528	$       1,543
Supplemental disclosure of non-cash flow investing activities
Trading securities pending settlement.................................................................................................................................................	$         (12                )	$         (289                 )

⁽¹⁾  Cash at beginning of period includes $117 million for discontinued operations as of January 1, 2011.

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

HSBC USA Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1.    Organization and Basis of Presentation

HSBC USA Inc. 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"). 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 Inc. and its subsidiaries may also be referred to in this Form 10-Q 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, 2011 (the "2011 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. We recorded lower of amortized cost or fair value adjustments totaling $1.0 billion on these receivables since being classified as held for sale as a component of Assets of discontinued operations on our balance sheet during the third quarter of 2011, of which $107 million and $440 million was recorded in the three and six months ended June 30, 2012, respectively, and is reflected in net interest income and other revenues in the table below. This fair value adjustment was largely offset by held for sale accounting adjustments in which loan impairment charges and premium amortization are no longer recorded. The total final cash consideration allocated to us based upon April 30, 2012 balances 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 are included as part of the sale to First Niagara Bank, N.A. and HSBC Bank USA will continue to offer credit cards to HSBC Bank USA's customers. No significant one-time closure costs have been 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 will be 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 receivables being sold as discontinued operations and have included these receivables in Assets of discontinued operations on our balance sheet for all periods presented.

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

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Net interest income and other revenues(1)(2)..........................................................................................	$         129	$          558	$         541	$       1,106
Income from discontinued operations before income tax..................................................................	74	195	315	465

⁽¹⁾  Interest expense 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.

⁽²⁾   Included in other revenues for the three and six months ended June 30, 2012 was a $107 million and $440 million, respectively, lower of amortized cost or fair value adjustment.

The following summarizes the assets and liabilities of our discontinued credit card operations at June 30, 2012 and December 31, 2011 which are reported as a component of Assets of discontinued operations and Liabilities of discontinued operations in our consolidated balance sheet.

	June 30, 2012	December 31, 2011
	(in millions)
Loans, net(1) ...................................................................................................................................................................................................	$             -	$            21,185
Other assets...................................................................................................................................................................................................	-	269
Assets of discontinued operations...........................................................................................................................................................	$             -	$            21,454
Deposits in domestic offices - noninterest bearing................................................................................................................................	$             -	$                   35
Other liabilities..............................................................................................................................................................................................	226	876
Liabilities of discontinued operations.......................................................................................................................................................	$       226	$                 911

⁽¹⁾  At December 31, 2011, the receivables are carried at the lower of amortized cost or fair value.

HSBC USA Inc.

Banknotes Business  In June 2010, we decided that the wholesale banknotes business ("Banknotes Business") within our Global Banking and Markets segment did not fit with our core strategy in the U.S. and, therefore, made the decision to exit this business. This business, which was managed out of the United States with operations in key locations worldwide, arranged for the physical distribution of banknotes globally to central banks, large commercial banks and currency exchanges. As a result of this decision, we recorded closure costs of $14 million during 2010, primarily relating to termination and other employee benefits.

As part of the decision to exit the Banknotes Business, in October 2010 we sold the assets of our Asian banknotes operations ("Asian Banknotes Operations") to an unaffiliated third party for total consideration of approximately $11 million in cash. As a result, during the third quarter of 2010 we classified the assets of the Asian Banknotes Operations of $23 million, including an allocation of goodwill of $21 million, as held for sale. Because the carrying amount of the assets being sold exceeded the agreed-upon sales price, we recorded a lower of amortized cost or fair value adjustment of $12 million in the third quarter of 2010. As the exit of our Banknotes Business, including the sale of our Asian Banknotes Operations, was substantially completed in the fourth quarter of 2010, we began to report the results of our Banknotes Business as discontinued operations at that time.

The exit of our Banknotes Business was completed in the second quarter of 2011 with the sale of our European Banknotes Business to HSBC Bank plc. The table below summarizes the operating results of our Banknotes Business for the periods presented.

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Net interest income and other revenues...................................................................................................	$              -	$              3	$            -	$          19
Income (loss) from discontinued operations before income tax (benefit) expense............................	-	1	-	(1              )

At June 30, 2012 and December 31, 2011 there were no remaining assets and liabilities of our Banknotes Business reported as assets of discontinued operations and liabilities of discontinued operations in our consolidated balance sheet.

3.    Branch Assets and Liabilities Held for Sale

On July 31, 2011, we announced that we had reached an agreement with First Niagara Bank, N.A. ("First Niagara") to sell 195 non-strategic retail branches, including certain loans, deposits and related branch premises, primarily located in upstate New York. The agreement includes the transfer of certain deposits and loans, as well as related branch premises, for a premium of 6.67 percent of the deposits, subject to certain agreed-upon adjustments. On May 18, 2012, we completed the sale of 138 branches to First Niagara and recognized an after-tax gain, net of allocated non-deductible goodwill, of $71 million. Since the premium received of $886 million was calculated based on the total amount of outstanding deposit balances for all branches being sold, a pro-rata portion of the premium related to the deposit balances associated with the branches that were not sold in the amount of $209 million was deferred as unearned revenue and will be recognized in future periods as the remaining branches and related deposit amounts are sold. Included in the sale of the 138 non-strategic retail branches were approximately $10.3 billion in deposits and $1.6 billion in loans. Branch premises were sold for fair value and loans and other transferred assets were sold at their book values.

We subsequently completed the sale of an additional 53 branches during July 2012 and expect to recognize an additional after-tax gain, net of allocated non-deductible goodwill, of approximately $26 million in the third quarter. We currently anticipate we will complete the sale of the remaining 4 non-strategic retail branches during August 2012 which will not have a significant financial impact on our operations. 

The following summarizes the assets and liabilities classified as held for sale at June 30, 2012 and December 31, 2011 in our consolidated balance sheet related to the announced agreement to sell certain retail branches.

	June 30, 2012	December 31, 2011
	(in millions)
Loans held for sale(1).........................................................................................................................................................	$        531	$              2,495
Other branch assets held for sale:
Properties and equipment, net .................................................................................................................................	14	42
Other assets ................................................................................................................................................................	9	-
Goodwill allocated to retail branch disposal group ..............................................................................................	94	398
Total other branch assets held for sale.........................................................................................................................	117	440
Total branch assets held for sale...................................................................................................................................	$        648	$              2,935
Deposits held for sale......................................................................................................................................................	$    3,633	$            15,144
Other branch liabilities held for sale..............................................................................................................................	2	11
Total branch liabilities held for sale...............................................................................................................................	$    3,635	$            15,155

⁽¹⁾  Loans held for sale includes $115 million of commercial loans, $279 million of residential mortgages, $94 million of credit card loans and $43 million in other consumer loans at June 30, 2012. Loans held for sale includes $521 million of commercial loans, $1.4 billion of residential mortgages, $416 million of credit card loans and $161 million in other consumer loans at December 31, 2011.

4.    Trading Assets and Liabilities

Trading assets and liabilities are summarized in the following table.

	June 30, 2012	December 31, 2011
	(in millions)
Trading assets:
U.S. Treasury.............................................................................................................................................................	$      1,931	$                 259
U.S. Government agency issued or guaranteed...................................................................................................	216	14
U.S. Government sponsored enterprises(1).............................................................................................................	-	24
Asset-backed securities...........................................................................................................................................	1,027	1,032
Corporate and foreign bonds(2)................................................................................................................................	8,299	11,577
Other securities..........................................................................................................................................................	36	40
Precious metals..........................................................................................................................................................	14,459	17,082
Fair value of derivatives...........................................................................................................................................	9,810	8,772
	$    35,778	$            38,800
Trading liabilities:
Securities sold, not yet purchased.........................................................................................................................	$         316	$                 343
Payables for precious metals...................................................................................................................................	6,958	6,999
Fair value of derivatives...........................................................................................................................................	12,946	6,844
	$    20,220	$            14,186

⁽¹⁾  Includes mortgage-backed securities of $10 million issued or guaranteed by the Federal National Mortgage Association ("FNMA") and $14 million issued or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") at December 31, 2011. There were no mortgage-back securities issued or guaranteed by FNMA and FHLMC at June 30, 2012.

⁽²⁾   There were no foreign bonds issued by the governments of Greece, Ireland, Italy, Portugal or Spain at either June 30, 2012 or December 31, 2011.

At June 30, 2012 and December 31, 2011, the fair value of derivatives included in trading assets has been reduced by $6.2 billion and $4.8 billion, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

At June 30, 2012 and December 31, 2011, the fair value of derivatives included in trading liabilities has been reduced by $2.5 billion and $6.3 billion, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

5.    Securities

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

June 30, 2012	Amortized Cost	Unrealized Gains	Unrealized Losses	Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury.....................................................................................................................................................................................................	$     27,886	$         517	$           (50                  )	$   28,353
U.S. Government sponsored enterprises:(1)
Mortgage-backed securities......................................................................................................................................................................	37	1	-	38
Direct agency obligations..........................................................................................................................................................................	3,127	387	(1                  )	3,513
U.S. Government agency issued or guaranteed:
Mortgage-backed securities......................................................................................................................................................................	14,774	755	-	15,529
Collateralized mortgage obligations..........................................................................................................................................................	4,499	170	(1                  )	4,668
Direct agency obligations..........................................................................................................................................................................	1	-	-	1
Obligations of U.S. states and political subdivisions.................................................................................................................................	646	35	-	681
Asset backed securities collateralized by:
Residential mortgages.................................................................................................................................................................................	5	-	-	5
Commercial mortgages................................................................................................................................................................................	299	7	(1                  )	305
Home equity.................................................................................................................................................................................................	338	-	(87                  )	251
Student loans...............................................................................................................................................................................................	10	-	(1                  )	9
Other..............................................................................................................................................................................................................	102	-	(17                  )	85
Corporate and other domestic debt securities(2)...........................................................................................................................................	40	2	-	42
Foreign debt securities(2)(5)................................................................................................................................................................................	6,869	31	(70                  )	6,830
Equity securities(3).............................................................................................................................................................................................	171	22	-	193
Total available-for-sale securities........................................................................................................................................................................	$     58,804	$     1,927	$        (228                  )	$   60,503
Securities held-to-maturity:
U.S. Government sponsored enterprises:(4)
Mortgage-backed securities......................................................................................................................................................................	$       1,290	$         168	$               -	$      1,458
U.S. Government agency issued or guaranteed:
Mortgage-backed securities......................................................................................................................................................................	72	13	-	85
Collateralized mortgage obligations..........................................................................................................................................................	289	43	-	332
Obligations of U.S. states and political subdivisions.................................................................................................................................	47	3	-	50
Asset backed securities collateralized by residential mortgages..............................................................................................................	146	10	(1                  )	155
Total held-to-maturity securities..........................................................................................................................................................................	$       1,844	$         237	$             (1                  )	$      2,080

HSBC USA Inc.

December 31, 2011	Amortized Cost	Unrealized Gains	Unrealized Losses	Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury.....................................................................................................................................................................................................	$       18,199	$             498	$           (121                   )	$     18,576
U.S. Government sponsored enterprises:(1)
Mortgage-backed securities......................................................................................................................................................................	40	1	-	41
Direct agency obligations..........................................................................................................................................................................	2,501	352	-	2,853
U.S. Government agency issued or guaranteed:
Mortgage-backed securities......................................................................................................................................................................	15,357	728	(3                   )	16,082
Collateralized mortgage obligations..........................................................................................................................................................	6,881	177	(3                   )	7,055
Direct agency obligations..........................................................................................................................................................................	2	-	-	2
Obligations of U.S. states and political subdivisions.................................................................................................................................	566	35	(1                   )	600
Asset backed securities collateralized by:
Residential mortgages.................................................................................................................................................................................	6	-	(1                   )	5
Commercial mortgages................................................................................................................................................................................	444	9	(2                   )	451
Home equity.................................................................................................................................................................................................	369	-	(99                   )	270
Student loans...............................................................................................................................................................................................	13	-	(1                   )	12
Other..............................................................................................................................................................................................................	102	-	(22                   )	80
Corporate and other domestic debt securities(2)...........................................................................................................................................	541	3	-	544
Foreign debt securities(2)(5)................................................................................................................................................................................	6,640	27	(97                   )	6,570
Equity securities(3).............................................................................................................................................................................................	130	10	-	140
Total available-for-sale securities........................................................................................................................................................................	$       51,791	$          1,840	$           (350                   )	$     53,281
Securities held-to-maturity:
U.S. Government sponsored enterprises:(4)
Mortgage-backed securities......................................................................................................................................................................	$         1,421	$             195	$                 -	$       1,616
U.S. Government agency issued or guaranteed:
Mortgage-backed securities......................................................................................................................................................................	79	13	-	92
Collateralized mortgage obligations..........................................................................................................................................................	308	44	-	352
Obligations of U.S. states and political subdivisions.................................................................................................................................	61	3	-	64
Asset backed securities collateralized by residential mortgages..............................................................................................................	166	9	(1                   )	174
Total held-to-maturity securities..........................................................................................................................................................................	$         2,035	$             264	$               (1                   )	$       2,298

⁽¹⁾  Includes securities at amortized cost of $23 million and $27 million issued or guaranteed by the FNMA at June 30, 2012 and December 31, 2011, respectively, and $14 million and $13 million issued or guaranteed by FHLMC at June 30, 2012 and December 31, 2011, respectively.

⁽²⁾   At June 30, 2012, other domestic debt securities included $16 million of securities at amortized cost fully backed by the Federal Deposit Insurance Corporation ("FDIC") and foreign debt securities consisted of $2.4 billion of securities fully backed by foreign governments. At December 31, 2011, other domestic debt securities included $516 million of securities at amortized cost fully backed by the FDIC and foreign debt securities consisted of $2.7 billion of securities fully backed by foreign governments.

⁽³⁾  Includes preferred equity securities at amortized cost issued by FNMA of $2 million at June 30, 2012 and December 31, 2011. Balances at June 30, 2012 and December 31, 2011 reflect cumulative other-than-temporary impairment charges of $173 million.

⁽⁴⁾   Includes securities at amortized cost of $554 million and $591 million issued or guaranteed by FNMA at June 30, 2012 and December 31, 2011, respectively, and $736 million and $830 million issued and guaranteed by FHLMC at June 30, 2012 and December 31, 2011, respectively.

⁽⁵⁾  There were no foreign debt securities issued by the governments of Greece, Ireland, Italy, Portugal or Spain at either June 30, 2012 or December 31, 2011.

HSBC USA Inc.

A summary of gross unrealized losses and related fair values as of June 30, 2012 and December 31, 2011, classified as to the length of time the losses have existed as follows:

	One Year or Less			Greater Than One Year
June 30, 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..............................................................................................................................................................................................	15	$           (11                  )	$          16,433	8	$           (39                  )	$               648
U.S. Government sponsored enterprises................................................................................................................................................	7	(1                  )	252	16	-	8
U.S. Government agency issued or guaranteed....................................................................................................................................	11	(1                  )	1,231	1	-	2
Obligations of U.S. states and political subdivisions..........................................................................................................................	7	-	118	1	-	7
Asset backed securities............................................................................................................................................................................	6	(1                  )	74	20	(105                  )	359
Foreign debt securities..............................................................................................................................................................................	6	(30                  )	1,969	6	(40                  )	2,032
Equity securities.........................................................................................................................................................................................	-	-	-	1	-	-
Securities available-for-sale...........................................................................................................................................................................	52	$           (44                  )	$          20,077	53	$        (184                  )	$            3,056
Securities held-to-maturity:
U.S. Government sponsored enterprises................................................................................................................................................	13	$                -	$                     -	54	$               -	$                     -
U.S. Government agency issued or guaranteed....................................................................................................................................	35	-	-	1,014	-	3
Obligations of U.S. states and political subdivisions..........................................................................................................................	2	-	-	2	-	1
Asset backed securities............................................................................................................................................................................	1	-	4	2	(1                  )	6
Securities held-to-maturity.......................................................................................................................................................................	51	$                -	$                    4	1,072	$             (1                  )	$                  10

HSBC USA Inc.

	One Year or Less			Greater Than One Year
December 31, 2011	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..............................................................................................................................................................................................	5	$               (1                   )	$              4,978	12	$           (120                   )	$              2,592
U.S. Government sponsored enterprises................................................................................................................................................	6	-	8	15	-	9
U.S. Government agency issued or guaranteed....................................................................................................................................	14	(6                   )	833	2	-	4
Obligations of U.S. states and political subdivisions..........................................................................................................................	3	(1                   )	20	3	-	25
Asset backed securities............................................................................................................................................................................	2	-	45	22	(125                   )	387
Foreign debt securities..............................................................................................................................................................................	15	(97                   )	4,223	-	-	-
Securities available-for-sale...........................................................................................................................................................................	45	$           (105                   )	$            10,107	54	$           (245                   )	$              3,017
Securities held-to-maturity:
U.S. Government sponsored enterprises................................................................................................................................................	47	$                 -	$                     -	11	$                 -	$                     -
U.S. Government agency issued or guaranteed....................................................................................................................................	629	-	2	463	-	1
Obligations of U.S. states and political subdivisions..........................................................................................................................	2	-	-	4	-	2
Asset backed securities............................................................................................................................................................................	-	-	-	4	(1                   )	14
Securities held-to-maturity.............................................................................................................................................................................	678	$                 -	$                     2	482	$               (1                   )	$                   17

Net unrealized gains increased within the available-for-sale portfolio in the first six months of 2012 largely due to a decrease in interest rates on U.S. Treasury securities since December 31, 2011. We have reviewed the securities for which there is an unrealized loss in accordance with our accounting policies for other-than-temporary impairment. During the three and six months ended June 30, 2012 and 2011, 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. Changes in the non-credit portion during 2011 represented a reversal of a portion of previously recorded impairment losses that were recognized in other comprehensive income.

We do not consider any securities to be other-than-temporarily impaired at June 30, 2012 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, 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.

HSBC USA Inc.

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 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 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 86 percent and 84 percent of total available-for-sale and held-to-maturity securities as of June 30, 2012 and December 31, 2011, respectively, our assessment for credit loss was concentrated on private label asset-backed 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 weakness in the U.S. housing markets with high levels of delinquency and foreclosure;

• A lack of 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 remains high despite recent improvement and although consumer confidence is improving, it remains low 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 and six months ended June 30, 2012 and 2011, there were no other-than-temporary impairment losses recognized related to credit loss. At June 30, 2012 and 2011, there were no remaining non-credit component unrealized loss amounts recognized.

The following table summarizes the roll-forward of credit losses on debt securities that were other-than-temporarily impaired which were recognized in income:

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Credit losses at the beginning of the period.....................................................................................	$               -	$              1	$            -	$          36
Reduction of credit losses previously recognized on sold securities...........................................	-	-	-	(4 )
Reduction of credit losses previously recognized on held to maturity securities due to deconsolidation of VIE....................................................................................................................	-	-	-	(31 )
Ending balance of credit losses on debt securities held for which a portion of an other-than-temporary impairment may have been recognized in other comprehensive income (loss)...	$               -	$              1	$            -	$            1

At June 30, 2012, we held 35 individual asset-backed securities in the available-for-sale portfolio, of which 9 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $336 million of the total aggregate fair value of asset-backed securities of $655 million at June 30, 2012. The gross unrealized losses on these securities were $104 million at June 30, 2012. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of June 30, 2012 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 $108 million. No security wrapped by a below investment grade monoline insurance company was deemed to be other-than-temporarily impaired at June 30, 2012.

At December 31, 2011, we held 45 individual asset-backed securities in the available-for-sale portfolio, of which 9 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $349 million of the total aggregate fair value of asset-backed securities of $818 million at December 31, 2011. The gross unrealized losses on these securities were $121 million at December 31, 2011. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of December 31, 2011 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 $114 million. One security wrapped by a below investment grade monoline insurance company with an aggregate fair value of less than $1 million was deemed to be other-than-temporarily impaired at December 31, 2011.

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. 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.

	Gross Realized Gains	Gross Realized (Losses)	Net Realized Gains
	(in millions)
Three months ended June 30, 2012:
Securities available-for-sale.............................................................................................................................................	$      132	$       (67              )	$        65
Three months ended June 30, 2011:
Securities available-for-sale.............................................................................................................................................	$         57	$        (45              )	$         12
Six months ended June 30, 2012:
Securities available-for-sale.............................................................................................................................................	$      201	$     (106              )	$        95
Six months ended June 30, 2011:
Securities available-for-sale.............................................................................................................................................	$       139	$        (83              )	$         56

HSBC USA Inc.

The amortized cost and fair values of securities available-for-sale and securities held-to-maturity at June 30, 2012, 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 June 30, 2012, together with the approximate 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 June 30, 2012.

	Within One Year		After One But Within Five Years		After Five But Within Ten Years		After Ten Years
As of June 30, 2012	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield
	(dollars are in millions)
Available-for-sale:
U.S. Treasury............................................	$         505	.20 %	$      22,266	.56 %	$      1,928	3.17 %	$        3,187	3.25 %
U.S. Government sponsored enterprises...........................................	-	-	155	2.32	2,353	3.65	656	3.58
U.S. Government agency issued or guaranteed...........................................	-	-	6	4.61	74	1.93	19,194	3.38
Obligations of U.S. states and political subdivisions........................................	-	-	31	4.20	291	4.24	324	3.92
Asset backed securities..........................	-	-	1	1.41	22	.66	731	3.13
Other domestic debt securities..............	16	.71	-		-	-	24	3.90
Foreign debt securities............................	1,274	2.84	5,595	1.90	-	-	-	-
Total amortized cost......................................	$      1,795	2.08 %	$      28,054	.84 %	$      4,668	3.45 %	$      24,116	3.37 %
Total fair value...............................................	$      1,796		$      28,067		$      5,262		$      25,185
Held-to-maturity:
U.S. Government sponsored enterprises...........................................	$              -	- %	$             10	6.12 %	$             1	9.36 %	$        1,279	5.83 %
U.S. Government agency issued or guaranteed...........................................	-	-	1	8.85	4	9.18	356	6.19
Obligations of U.S. states and political subdivisions........................................	4	5.73	16	3.64	10	2.80	17	3.82
Asset backed securities..........................	-		-	-	-		146
Total amortized cost......................................	$             4	5.73 %	$             27	4.80 %	$           15	4.81 %	$        1,798	5.78 %
Total fair value...............................................	$             4		$             29		$           15		$        2,032

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 June 30, 2012. Investments in Federal Home Loan Bank ("FHLB") stock and Federal Reserve Bank ("FRB") stock of $133 million and $483 million, respectively, were included in other assets at December 31, 2011.

HSBC USA Inc.

6.    Loans

Loans consisted of the following:

	June 30, 2012	December 31, 2011
	(in millions)
Commercial loans:
Construction and other real estate.............................................................................................................................................................	$      7,977	$              7,860
Business banking and middle markets enterprises..................................................................................................................................	11,256	10,225
Global banking(1)............................................................................................................................................................................................	15,042	12,658
Other commercial...........................................................................................................................................................................................	3,142	2,906
Total commercial...........................................................................................................................................................................................	37,417	33,649
Consumer loans:
Home equity mortgages...............................................................................................................................................................................	2,455	2,563
Other residential mortgages........................................................................................................................................................................	14,758	14,113
Credit cards....................................................................................................................................................................................................	783	828
Other consumer.............................................................................................................................................................................................	651	714
Total consumer..............................................................................................................................................................................................	18,647	18,218
Total loans...........................................................................................................................................................................................................	$   56,064	$            51,867

⁽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 $36 million and $48 million at June 30, 2012 and December 31, 2011, respectively.

At June 30, 2012 and December 31, 2011, we had net unamortized premium on our loans of $26 million and $28 million, respectively. We amortized net premiums of $9 million and $18 million on our loans for the three and six months ended June 30, 2012, respectively, compared to $15 million and $30 million on our loans for the three and six months ended June 30, 2011.

HSBC USA Inc.

Age Analysis of Past Due Loans  The following table summarizes the past due status of our loans at June 30, 2012 and December 31, 2011. 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 June 30, 2012	1 - 29 days	30 - 89 days	90+ days	Total Past Due	Current	Total Loans
	(in millions)
Commercial loans:
Construction and other real estate.............................................................................................................................................................	$           100	$               38	$        114	$                 252	$      7,725	$          7,977
Business banking and middle market enterprises....................................................................................................................................	496	37	51	584	10,672	11,256
Global banking...............................................................................................................................................................................................	110	-	8	118	14,924	15,042
Other commercial...........................................................................................................................................................................................	554	17	26	597	2,545	3,142
Total commercial...........................................................................................................................................................................................	1,260	92	199	1,551	35,866	37,417
Consumer loans:
HELOC and home equity mortgages..........................................................................................................................................................	145	40	77	262	2,193	2,455
Other residential mortgages........................................................................................................................................................................	100	465	844	1,409	13,349	14,758
Credit cards....................................................................................................................................................................................................	31	15	17	63	720	783
Other consumer.............................................................................................................................................................................................	10	5	31	46	605	651
Total consumer..............................................................................................................................................................................................	286	525	969	1,780	16,867	18,647
Total loans...........................................................................................................................................................................................................	$       1,546	$             617	$     1,168	$              3,331	$   52,733	$       56,064

	Days Past Due
At December 31, 2011	1 - 29 days	30 - 89 days	90+ days	Total Past Due	Current	Total Loans
	(in millions)
Commercial loans:
Construction and other real estate.............................................................................................................................................................	$              72	$                31	$         231	$                  334	$       7,526	$           7,860
Business banking and middle market enterprises....................................................................................................................................	615	58	71	744	9,481	10,225
Global banking...............................................................................................................................................................................................	898	34	74	1,006	11,652	12,658
Other commercial...........................................................................................................................................................................................	350	84	21	455	2,451	2,906
Total commercial...........................................................................................................................................................................................	1,935	207	397	2,539	31,110	33,649
Consumer loans:
HELOC and home equity mortgages..........................................................................................................................................................	181	54	89	324	2,239	2,563
Other residential mortgages........................................................................................................................................................................	109	526	815	1,450	12,663	14,113
Credit cards....................................................................................................................................................................................................	37	20	20	77	751	828
Other consumer.............................................................................................................................................................................................	11	6	35	52	662	714
Total consumer..............................................................................................................................................................................................	338	606	959	1,903	16,315	18,218
Total loans...........................................................................................................................................................................................................	$         2,273	$              813	$      1,356	$               4,442	$     47,425	51,867

Nonaccrual Loans  Nonaccrual loans totaled $1.6 billion and $1.8 billion at June 30, 2012 and December 31, 2011, respectively. Interest income that would have been recorded if such nonaccrual loans had been current and in accordance with contractual terms was approximately $26 million and $55 million for the three and six months ended June 30, 2012, respectively, compared to $32 million and $59 million for the three and six months ended June 30, 2011, respectively. Interest income (expense) that was included in finance and other interest income on these loans was $2 million and less than $1 million for the three and six months ended June 30, 2012, respectively, compared to $8 million and $9 million for the three and six months ended June 30, 2011, respectively. For an analysis of reserves for credit losses, see Note 7, "Allowance for Credit Losses".

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

	June 30, 2012	December 31, 2011
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans...............................................................................................................................................................	$       101	$                 103
Other real estate.....................................................................................................................................................................................	374	512
Business banking and middle markets enterprises................................................................................................................................	46	58
Global banking............................................................................................................................................................................................	114	137
Other commercial........................................................................................................................................................................................	19	15
Total commercial..............................................................................................................................................................................................	654	825
Consumer:
Residential mortgages, excluding home equity mortgages..................................................................................................................	844	815
Home equity mortgages.............................................................................................................................................................................	77	89
Total residential mortgages(1)...............................................................................................................................................................	921	904
Other consumer loans................................................................................................................................................................................	5	8
Total consumer loans.................................................................................................................................................................................	926	912
Nonaccrual loans held for sale.................................................................................................................................................................	65	91
Total nonaccruing loans...........................................................................................................................................................................................	1,645	1,828
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans...............................................................................................................................................................	-	-
Other real estate.....................................................................................................................................................................................	-	1
Business banking and middle market enterprises..................................................................................................................................	2	11
Global banking............................................................................................................................................................................................	-	-
Other commercial........................................................................................................................................................................................	1	2
Total commercial.........................................................................................................................................................................................	3	14
Consumer:
Credit card receivables...............................................................................................................................................................................	17	20
Other consumer...........................................................................................................................................................................................	26	27
Total consumer loans.................................................................................................................................................................................	43	47
Total accruing loans contractually past due 90 days or more...........................................................................................................................	46	61
Total nonperforming loans.......................................................................................................................................................................................	$    1,691	$              1,889

⁽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.

HSBC USA Inc.

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 to 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.

The following table presents information about receivables which were modified during the three and six months ended June 30, 2012 and as a result of this action became classified as TDR Loans.

	Three Months Ended June 30, 2012	Six Months Ended June 30, 2012
	(in millions)
Commercial loans:
Construction and other real estate....................................................................................................................................................................	$                                -	$                         70
Business banking and middle market enterprises...........................................................................................................................................	-	22
Global banking.....................................................................................................................................................................................................	-	-
Other commercial.................................................................................................................................................................................................	-	-
Total commercial..................................................................................................................................................................................................	-	92
Consumer loans:
Residential mortgages.........................................................................................................................................................................................	52	108
Credit cards...........................................................................................................................................................................................................	-	-
Total consumer....................................................................................................................................................................................................	52	108
Total............................................................................................................................................................................................................................	$                             52	$                       200

HSBC USA Inc.

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

	June 30, 2012	December 31, 2011
	(in millions)
TDR Loans(1)(2):
Commercial loans:
Construction and other real estate.............................................................................................................................................................	$       353	$                 342
Business banking and middle market enterprises....................................................................................................................................	86	94
Global banking...............................................................................................................................................................................................	-	-
Other commercial...........................................................................................................................................................................................	34	37
Total commercial...........................................................................................................................................................................................	473	473
Consumer loans:
Residential mortgages..................................................................................................................................................................................	677	608
Credit cards....................................................................................................................................................................................................	18	21
Total consumer..............................................................................................................................................................................................	695	629
Total TDR Loans(3):..................................................................................................................................................................................................	$    1,168	$              1,102

	June 30, 2012	December 31, 2011
	(in millions)
Allowance for credit losses on TDR Loans(4):
Commercial loans:
Construction and other real estate.............................................................................................................................................................	$          26	$                   17
Business banking and middle market enterprises....................................................................................................................................	3	3
Global banking...............................................................................................................................................................................................	-	-
Other commercial...........................................................................................................................................................................................	-	-
Total commercial...........................................................................................................................................................................................	29	20
Consumer loans:
Residential mortgages..................................................................................................................................................................................	97	94
Credit cards....................................................................................................................................................................................................	6	7
Total consumer..............................................................................................................................................................................................	103	101
Total Allowance for credit losses on TDR Loans..............................................................................................................................................	$       132	$                 121

⁽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 $434 million and $614 million at June 30, 2012 and December 31, 2011, 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:

	June 30, 2012	December 31, 2011
	(in millions)
Commercial loans:
Construction and other real estate..................................................................................................................................................................................	$            374	$                    393
Business banking and middle market enterprises..............................................................................................................................................................	135	147
Global banking..........................................................................................................................................................................................................	-	-
Other commercial.......................................................................................................................................................................................................	37	40
Total commercial............................................................................................................................................................................................................	546	580
Consumer loans:
Residential mortgages.................................................................................................................................................................................................	770	682
Credit cards...............................................................................................................................................................................................................	18	20
Total consumer...............................................................................................................................................................................................................	788	702
Total..................................................................................................................................................................................................................................	$         1,334	$                 1,282

⁽³⁾  Includes balances of $377 million and $331 million at June 30, 2012 and December 31, 2011, respectively, which are classified as nonaccrual loans.

(4)  Included in the allowance for credit losses.

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

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Average balance of TDR Loans:
Commercial loans:
Construction and other real estate.............................................................................................................................................................	$             360	$          357	$         358	$          373
Business banking and middle market enterprises....................................................................................................................................	96	84	98	87
Large corporate.............................................................................................................................................................................................	-	-	-	-
Other commercial...........................................................................................................................................................................................	35	50	36	49
Total commercial...........................................................................................................................................................................................	491	491	492	509
Consumer loans:
Residential mortgages..................................................................................................................................................................................	669	477	653	456
Credit cards....................................................................................................................................................................................................	18	24	19	25
Total consumer..............................................................................................................................................................................................	687	501	672	481
Total average balance of TDR Loans...................................................................................................................................................................	$          1,178	$          992	$      1,164	$          990
Interest income recognized on TDR Loans:
Commercial loans:
Construction and other real estate.............................................................................................................................................................	$                  2	$              2	$              4	$              3
Business banking and middle market enterprises....................................................................................................................................	-	-	-	-
Large corporate.............................................................................................................................................................................................	-	-	-	-
Other commercial...........................................................................................................................................................................................	2	1	3	3
Total commercial...........................................................................................................................................................................................	4	3	7	6
Consumer loans:
Residential mortgages..................................................................................................................................................................................	7	5	13	8
Credit cards....................................................................................................................................................................................................	-	-	-	1
Total consumer..............................................................................................................................................................................................	7	5	13	9
Total interest income recognized on TDR Loans...............................................................................................................................................	$                11	$              8	$           20	$            15

HSBC USA Inc.

The following table presents commercial loans which were classified as TDR Loans during the previous 12 months which became 90 days or greater contractually delinquent (for consumer loans 60 days or greater contractually delinquent) during the three and six months ended June 30, 2012:

	Three Months Ended June 30, 2012	Six Months Ended June 30, 2012
	(in millions)
Commercial loans:
Construction and other real estate....................................................................................................................................................................	$                                -	$                            -
Business banking and middle market enterprises...........................................................................................................................................	-	-
Global banking.....................................................................................................................................................................................................	-	-
Other commercial.................................................................................................................................................................................................	-	-
Total commercial..................................................................................................................................................................................................	-	-
Consumer loans:
Residential mortgages.........................................................................................................................................................................................	7	13
Credit cards...........................................................................................................................................................................................................	-	-
Total consumer....................................................................................................................................................................................................	7	13
Total............................................................................................................................................................................................................................	$                               7	$                         13

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)	Impairment Reserve
	(in millions)
At June 30, 2012:
Construction and other real estate.........................................................................................................................................................................	$               267	$             324	$                  591	$             111
Business banking and middle market enterprises................................................................................................................................................	55	60	115	7
Global banking...........................................................................................................................................................................................................	96	18	114	13
Other commercial.......................................................................................................................................................................................................	3	84	87	1
Total............................................................................................................................................................................................................................	$               421	$             486	$                  907	$             132
At December 31, 2011:
Construction and other real estate.........................................................................................................................................................................	$                391	$              342	$                   733	$              114
Business banking and middle market enterprises................................................................................................................................................	68	59	127	12
Global banking...........................................................................................................................................................................................................	137	-	137	90
Other commercial.......................................................................................................................................................................................................	1	89	90	-
Total............................................................................................................................................................................................................................	$                597	$              490	$                1,087	$              216

⁽¹⁾   Includes impaired commercial loans which are also considered TDR Loans as follows:

	June 30, 2012	December 31, 2011
	(in millions)
Construction and other real estate...........................................................................................................................................................................................	$            353	$                    342
Business banking and middle market enterprises.......................................................................................................................................................................	86	94
Global banking...................................................................................................................................................................................................................	-	-
Other commercial................................................................................................................................................................................................................	34	37
Total................................................................................................................................................................................................................................	$            473	$                    473

⁽²⁾  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, any premiums or discounts and any principal write-downs. The unpaid principal balance of impaired commercial loans included in the table above are as follows:

	June 30, 2012	December 31, 2011
	(in millions)
Construction and other real estate...........................................................................................................................................................................................	$            613	$                    784
Business banking and middle market enterprises.......................................................................................................................................................................	164	180
Global banking...................................................................................................................................................................................................................	114	137
Other commercial................................................................................................................................................................................................................	90	93
Total................................................................................................................................................................................................................................	$            981	$                 1,194

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

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Average balance of impaired commercial loans:
Construction and other real estate......................................................................................................................................................	$          624	$        759	$       660	$        757
Business banking and middle market enterprises.............................................................................................................................	127	161	127	158
Large corporate.......................................................................................................................................................................................	66	74	90	84
Other commercial....................................................................................................................................................................................	88	103	89	107
Total average balance of impaired commercial loans........................................................................................................................	$          905	$     1,097	$       966	$     1,106
Interest income recognized on impaired commercial loans:
Construction and other real estate......................................................................................................................................................	$               1	$            2	$           3	$            3
Business banking and middle market enterprises.............................................................................................................................	1	1	2	2
Large corporate.......................................................................................................................................................................................	-	-	-	-
Other commercial....................................................................................................................................................................................	1	-	1	1
Total interest income recognized on impaired commercial loans....................................................................................................	$               3	$            3	$           6	$            6

HSBC USA Inc.

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 June 30, 2012:
Construction and other real estate..........................................................................................................................................................	$                   805	$              969	$        132	$   1,906
Business banking and middle market enterprises.................................................................................................................................	447	155	8	610
Global banking...........................................................................................................................................................................................	64	97	96	257
Other commercial.......................................................................................................................................................................................	46	74	1	121
Total commercial...................................................................................................................................................................................	$                1,362	$           1,295	$        237	$   2,894
At December 31, 2011:
Construction and other real estate..........................................................................................................................................................	$                  1,009	$                990	$         186	$     2,185
Business banking and middle market enterprises.................................................................................................................................	445	241	12	698
Global banking...........................................................................................................................................................................................	45	397	109	551
Other commercial.......................................................................................................................................................................................	99	131	-	230
Total commercial...................................................................................................................................................................................	$                  1,598	$             1,759	$         307	$     3,664

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 June 30, 2012:
Construction and other real estate..........................................................................................................................................................	$         7,502	$            475	$                                -	$      7,977
Business banking and middle market enterprise...................................................................................................................................	11,208	46	2	11,256
Global banking...........................................................................................................................................................................................	14,928	114	-	15,042
Other commercial.......................................................................................................................................................................................	3,122	19	1	3,142
Total commercial...................................................................................................................................................................................	$      36,760	$            654	$                               3	$   37,417
At December 31, 2011:
Construction and other real estate..........................................................................................................................................................	$          7,244	$             615	$                                1	$       7,860
Business banking and middle market enterprise...................................................................................................................................	10,156	58	11	10,225
Global banking...........................................................................................................................................................................................	12,521	137	-	12,658
Other commercial.......................................................................................................................................................................................	2,889	15	2	2,906
Total commercial...................................................................................................................................................................................	$        32,810	$             825	$                              14	$     33,649

HSBC USA Inc.

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

	Investment Grade(1)	Non-Investment Grade	Total
	(in millions)
At June 30, 2012:
Construction and other real estate..........................................................................................................................................................	$                      3,343	$                          4,634	$      7,977
Business banking and middle market enterprises.................................................................................................................................	5,608	5,648	11,256
Global banking...........................................................................................................................................................................................	13,333	1,709	15,042
Other commercial.......................................................................................................................................................................................	1,212	1,930	3,142
Total commercial...................................................................................................................................................................................	$                   23,496	$                        13,921	$   37,417
At December 31, 2011:
Construction and other real estate..........................................................................................................................................................	$                       3,133	$                            4,727	$       7,860
Business banking and middle market enterprises.................................................................................................................................	4,612	5,613	10,225
Global banking...........................................................................................................................................................................................	9,712	2,946	12,658
Other commercial.......................................................................................................................................................................................	843	2,063	2,906
Total commercial...................................................................................................................................................................................	$                     18,300	$                          15,349	$     33,649

⁽¹⁾  Investment grade includes commercial loans with borrowers that have 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 monitored 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:

	June 30, 2012		December 31, 2011
	Dollars of Delinquency	Delinquency Ratio	Dollars of Delinquency	Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgage, excluding home equity mortgages(1).............................................................................................................	$          1,107	7.16               %	$            1,101	7.19                   %
Home equity mortgages........................................................................................................................................................................	62	2.33	99	2.89
Total residential mortgages..................................................................................................................................................................	1,169	6.45	1,200	6.41
Credit card receivables..........................................................................................................................................................................	23	2.62	28	2.25
Other consumer......................................................................................................................................................................................	28	3.68	30	3.17
Total consumer............................................................................................................................................................................................	$          1,220	6.18               %	$            1,258	6.01                   %

⁽¹⁾  At June 30, 2012 and December 31, 2011, residential mortgage loan delinquency includes $938 million and $803 million, respectively, of loans that are carried at the lower of amortized cost or fair value less cost to sell.

HSBC USA Inc.

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 June 30, 2012:
Consumer:
Residential mortgage, excluding home equity mortgages...............................................................................................................	$      13,914	$             844	$                                -	$   14,758
Home equity mortgages........................................................................................................................................................................	2,378	77	-	2,455
Total residential mortgages.............................................................................................................................................................	16,292	921	-	17,213
Credit card receivables..........................................................................................................................................................................	766	-	17	783
Other consumer......................................................................................................................................................................................	620	5	26	651
Total consumer............................................................................................................................................................................................	$      17,678	$             926	$                             43	$   18,647
At December 31, 2011:
Consumer:
Residential mortgage, excluding home equity mortgages...............................................................................................................	$        13,298	$               815	$                                -	$     14,113
Home equity mortgages........................................................................................................................................................................	2,474	89	-	2,563
Total residential mortgages.............................................................................................................................................................	15,772	904	-	16,676
Credit card receivables..........................................................................................................................................................................	808	-	20	828
Other consumer......................................................................................................................................................................................	679	8	27	714
Total consumer............................................................................................................................................................................................	$        17,259	$               912	$                              47	$     18,218

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

Concentrations of Credit 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.

HSBC USA Inc.

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 June 30, 2012 and December 31, 2011, respectively. Loans may appear in more than one category.

	June 30, 2012	December 31, 2011
	(in billions)
Residential mortgage loans with high LTV and no mortgage insurance(1)..........................................................................................	$         1.0	$                  1.1
Interest-only residential mortgage loans.................................................................................................................................................	4.0	3.9
ARM loans(2).................................................................................................................................................................................................	10.0	9.9

⁽¹⁾  Residential mortgage loans with high LTV and no mortgage insurance includes both fixed rate and adjustable rate mortgages. Excludes $61 million and $68 million of sub-prime residential mortgage loans held for sale at June 30, 2012 and December 31, 2011, respectively.

⁽²⁾   ARM loan balances above exclude $26 million and $28 million of sub-prime residential mortgage loans held for sale at June 30, 2012 and December 31, 2011, respectively. During the remainder of 2012 and during 2013, approximately $104 million and $350 million, respectively, of these 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 closed end first lien loans held for sale of $0.9 billion and $2.0 billion at June 30, 2012 and December 31, 2011, respectively.

	June 30, 2012	December 31, 2011
	(in millions)
Closed end:
First lien.................................................................................................................................................................................................................	$   14,758	$            14,113
Second lien...........................................................................................................................................................................................................	210	237
Revolving:
Second lien...........................................................................................................................................................................................................	2,245	2,326
Total............................................................................................................................................................................................................................	$   17,213	$            16,676

7.    Allowance for Credit Losses

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

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Balance at beginning of period.....................................................................................................................................................................	$         603	$          771	$         743	$          852
Provision for credit losses.............................................................................................................................................................................	89	95	89	93
Charge-offs......................................................................................................................................................................................................	(91                 )	(133                 )	(253                 )	(225                 )
Recoveries.......................................................................................................................................................................................................	18	14	40	27
Balance at end of period................................................................................................................................................................................	$         619	$          747	$         619	$          747

HSBC USA Inc.

The following table summarizes the changes in the allowance for credit losses by product and the related loan balance by product during the three and six months ended June 30, 2012 and 2011:

	Commercial				Consumer
	Construction and Other Real Estate	Business Banking and Middle Market Enterprises	Global banking	Other Comm'l	Residential Mortgage, Excl Home Equity Mortgages	Home Equity Mortgages	Credit Card	Other Consumer	Total
	(in millions)
Three Months Ended June 30, 2012:
Allowance for credit losses - beginning of period............................................................	$                      205	$                     76	$             25	$             20	$                  182	$                   43	$         35	$                  17	$        603
Provision charged to income..........................	(5 )	15	19	(7 )	24	34	9	-	89
Charge offs....................................................	(2 )	(13 )	-	-	(23 )	(30 )	(16 )	(7 )	(91 )
Recoveries....................................................	-	2	-	5	5	-	3	3	18
Net charge offs.....................................................	(2 )	(11 )	-	5	(18 )	(30 )	(13 )	(4 )	(73 )
Allowance for credit losses - end of period............................................................	$                      198	$                     80	$             44	$             18	$                  188	$                   47	$         31	$                  13	$        619
Ending balance: collectively evaluated for impairment....................................................	$                        87	$                     73	$             31	$             17	$                    95	$                   43	$         25	$                  13	$        384
Ending balance: individually evaluated for impairment(1)..........................................	111	7	13	1	93	4	6	-	235
Total allowance for credit losses...................	$                      198	$                     80	$             44	$             18	$                  188	$                   47	$         31	$                  13	$        619
Loans:
Collectively evaluated for impairment.........	$                  7,386	$            11,141	$     14,928	$       3,055	$            13,243	$             2,441	$       765	$                651	$  53,610
Individually evaluated for impairment.........	591	115	114	87	660	14	18	-	1,599
Loans carried at the lower of amortized cost or fair value less cost to sell...........	-	-	-	-	855	-	-	-	855
Total loans...........................................................	$                  7,977	$            11,256	$     15,042	$       3,142	$            14,758	$             2,455	$       783	$                651	$  56,064
Three Months Ended June 30, 2011:
Allowance for credit losses - beginning of period............................................................	$                      217	$                  119	$           111	$             23	$                  161	$                   68	$         48	$                  24	$        771
Provision charged to income..........................	49	(8 )	(1 )	-	27	12	12	4	95
Charge offs....................................................	(39 )	(19 )	-	(2 )	(28 )	(18 )	(19 )	(8 )	(133 )
Recoveries....................................................	2	4	-	-	2	-	3	3	14
Net charge offs.....................................................	(37 )	(15 )	-	(2 )	(26 )	(18 )	(16 )	(5 )	(119 )
Allowance for credit losses - end of period............................................................	$                      229	$                     96	$           110	$             21	$                  162	$                   62	$         44	$                  23	$        747
Ending balance: collectively evaluated for impairment....................................................	$                      120	$                     79	$             39	$             17	$                    99	$                   58	$         37	$                  23	$        472
Ending balance: individually evaluated for impairment(1)..........................................	109	17	71	4	63	4	7	-	275
Total allowance for credit losses................	$                      229	$                     96	$           110	$             21	$                  162	$                   62	$         44	$                  23	$        747
Loans:
Collectively evaluated for impairment.........	$                  7,213	$               8,475	$     10,529	$       2,547	$            12,840	$             3,598	$   1,164	$                925	$  47,291
Individually evaluated for impairment.........	698	156	74	101	482	9	23	-	1,543
Loans carried at the lower of amortized cost or fair value less cost to sell...........	-	-	-	-	778	-	-	-	778
Total loans...........................................................	$                  7,911	$               8,631	10,603	$       2,648	$            14,100	$             3,607	$   1,187	$                925	$  49,612

HSBC USA Inc.

	Commercial				Consumer
	Construction and Other Real Estate	Business Banking and Middle Market Enterprises	Global banking	Other Comm'l	Residential Mortgage, Excl Home Equity Mortgages	Home Equity Mortgages	Credit Card	Other Consumer	Total
	(in millions)
Six Months Ended June 30, 2012:
Allowance for credit losses - beginning of period......................................................	$                      212	$                     78	$         131	$             21	$                  192	$                   52	$          39	$                  18	$     743
Provision charged to income........................	(25                              )	21	(3                 )	(9 )	39	42	20	4	89
Charge offs..................................................	(3                              )	(23                           )	(84                 )	-	(49                          )	(47                         )	(33                )	(14                        )	(253 )
Recoveries..................................................	14	4	-	6	6	-	5	5	40
Net charge offs...................................................	11	(19                           )	(84                 )	6	(43                          )	(47                         )	(28                )	(9                        )	(213 )
Allowance for credit losses - end of period..............................................	$                      198	$                     80	$           44	$             18	$                  188	$                   47	$          31	$                  13	$     619
Six Months Ended June 30, 2011:
Allowance for credit losses - beginning of period......................................................	$                      243	$                  132	$         116	$             32	$                  167	$                   77	$          58	$                  27	$     852
Provision charged to income........................	21	(9                           )	(6                 )	(10 )	46	23	20	8	93
Charge offs..................................................	(43                              )	(33                           )	-	(2 )	(54                          )	(38                         )	(40                )	(15                        )	(225 )
Recoveries..................................................	8	6	-	1	3	-	6	3	27
Net charge offs...................................................	(35                              )	(27                           )	-	(1 )	(51                          )	(38                         )	(34                )	(12                        )	(198 )
Allowance for credit losses - end of period..............................................	$                      229	$                     96	$         110	$             21	$                  162	$                   62	$          44	$                  23	$     747

⁽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.

8.    Loans Held for Sale

Loans held for sale consisted of the following:

	June 30, 2012	December 31, 2011
	(in millions)
Commercial loans..............................................................................................................................................................	$        875	$                 965
Consumer loans:
Residential mortgages................................................................................................................................................	903	2,058
Credit card receivables...............................................................................................................................................	94	416
Other consumer...........................................................................................................................................................	110	231
Total consumer.................................................................................................................................................................	1,107	2,705
Total loans held for sale..................................................................................................................................................	$    1,982	$              3,670

Included in loans held for sale at June 30, 2012 and December 31, 2011 are $531 million and $2.5 billion, respectively, of loans that are being sold as part of our agreement to sell certain branches to First Niagara. Included in this amount at June 30, 2012 are $115 million of commercial loans, $279 million of residential mortgages, $94 million of credit card receivables and $43 million of other consumer loans. Included in this amount at December 31, 2011 are $521 million of commercial loans, $1.4 billion of residential mortgages, $416 million of credit card receivables and $161 million of other consumer loans. Prior to sale, credit card, private label credit card and closed-end loans included in the sale to Capital One were reflected in Assets of discontinued operations on our balance sheet.

HSBC USA Inc.

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 June 30, 2012 and December 31, 2011. The fair value of commercial loans held for sale under this program was $411 million and $377 million at June 30, 2012 and December 31, 2011, 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," for additional information.

Commercial loans held for sale also includes commercial real estate loans of $313 million and $55 million at June 30, 2012 and December 31, 2011, respectively, which are originated with the intent to sell to government sponsored enterprises.

In addition to the residential mortgage loans being sold to First Niagara discussed above, residential mortgage loans held for sale include subprime residential mortgage loans with a fair value of $164 million and $181 million at June 30, 2012 and December 31, 2011, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties. Also included in residential mortgage loans held for sale are first mortgage loans originated and held for sale primarily to various government sponsored enterprises. 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 (loss). We retained the servicing rights in relation to the mortgages upon sale.

In addition to routine sales to government sponsored enterprises upon origination, we sold subprime residential mortgage loans with a carrying amount of $4 million and $129 million in the six months ended June 30, 2012 and 2011, respectively.

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. The cumulative fair value adjustment on loans held for sale was $228 million and $251 million at June 30, 2012 and December 31, 2011, 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. 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, were losses of $3 million and gains of $4 million during the three and six months ended June 30, 2012, respectively, compared to gains of $1 million and losses of $11 million during the three and six months ended June 30, 2011, respectively.

9.    Intangible Assets

Intangible assets consisted of the following:

	June 30, 2012	December 31, 2011
	(in millions)
Mortgage servicing rights......................................................................................................................................................................................	$       194	$                 227
Purchased credit card relationships......................................................................................................................................................................	63	-
Other...........................................................................................................................................................................................................................	11	15
Total other intangible assets, net..........................................................................................................................................................................	$       268	$                 242

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 more than adequately compensate the servicer for performing the servicing. 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.

HSBC USA Inc.

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, which are addressed in more detail in the 2011 Form 10-K.

Residential mortgage servicing rights  Residential MSRs are initially measured at fair value at the time that the related loans are sold and are re-measured at fair value at each reporting date. Changes in fair value of the 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:

	June 30, 2012	December 31, 2011
Annualized constant prepayment rate ("CPR")......................................................................................................................	23.0 %	21.4                     %
Constant discount rate...............................................................................................................................................................	11.2 %	11.3                     %
Weighted average life.................................................................................................................................................................	3.2 years	3.4 years

Residential MSRs activity is summarized in the following table:

	Three Months Ended   June 30,		Six Months Ended   June 30,
	2012	2011	2012	2011
	(in millions)
Fair value of MSRs:
Beginning balance.............................................................................................................................................................................	$       228	$          396	$      220	$        394
Additions related to loan sales........................................................................................................................................................	6	9	14	25
Changes in fair value due to:
Change in valuation inputs or assumptions used in the valuation models........................................................................	(31               )	(27                 )	(15              )	(22              )
Realization of cash flows.............................................................................................................................................................	(16               )	(15                 )	(32              )	(34              )
Ending balance........................................................................................................................................................................................	$       187	$          363	$      187	$        363

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

	June 30, 2012	December 31, 2011
	(in millions)
Outstanding principal balances at period end...........................................................................................................	$    35,095	$            37,839
Custodial balances maintained and included in noninterest bearing deposits at period end............................	$         827	$                 838

Servicing fees collected are included in residential mortgage banking revenue and totaled $22 million and $47 million during the three and six months ended June 30, 2012, respectively, compared to $28 million and $56 million during the three and six months ended June 30, 2011, respectively.

HSBC USA Inc.

Commercial Mortgage Servicing Rights  Commercial MSRs, which are accounted for using the lower of cost or fair value method, totaled $7 million and $7 million at June 30, 2012 and December 31, 2011.

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 is associated with the credit card receivables being sold to First Niagara and, as a result, have been included in Other branch related assets held for sale. The remaining $65 million is 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 $10 million and $12 million at June 30, 2012 and December 31, 2011, respectively, and customer lists in the amount of $1 million and $3 million at June 30, 2012 and December 31, 2011, respectively.

10.    Goodwill

Goodwill was $2.2 billion at June 30, 2012 and December 31, 2011, and includes accumulated impairment losses of $54 million. In 2011, $398 million of goodwill was allocated to the branch operations being sold to First Niagara and is classified within other branch assets held for sale. See Note 3, "Branch Assets and Liabilities Held for Sale," for further discussion.

11.    Derivative Financial Instruments

In the normal course of business, we enter into derivative contracts 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 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 under derivative accounting principles.

Accounting principles for qualifying hedges require detailed documentation that describes the relationship between the hedging instrument and the hedged item, including, but not limited to, the risk management objectives and hedging strategy and the methods to assess the effectiveness of the hedging relationship. 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 cash flows of the hedged item. We discontinue hedge accounting when we determine that a derivative is not expected to be highly effective going forward or has ceased to be highly effective as a hedge, the hedging instrument is terminated, or when the designation is removed by us.

HSBC USA Inc.

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

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, interest rate forward and futures contracts and foreign currency swaps to minimize the effect on earnings caused by interest rate and foreign currency volatility.

The changes in fair value of a derivative designated in a qualifying fair value hedge, along with the effective portion of the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. We recognized net losses of $30 million and $20 million during the three and six months ended June 30, 2012, respectively, compared to net losses of $11 million and $1 million during the three and six months ended June 30, 2011, respectively, 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 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 $6 million during the three and six months ended June 30, 2012, respectively. We amortized $3 million and $6 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships during the three and six months ended June 30, 2012, respectively, compared to $5 million and $28 million during the three and six months ended June 30, 2011, respectively. The total accumulated unamortized basis adjustment amounted to an increase in the carrying amount of our debt of $52 million and $53 million as of June 30, 2012 and December 31, 2011, respectively. Basis adjustments for active fair value hedges of available-for-sale securities decreased the carrying amount of the securities by $481 million and $187 million during the three and six months ended June 30, 2012, respectively, compared to an increase in carrying amount of $163 million and $128 million during the three and six months ended June 30, 2011, respectively. Total accumulated unamortized basis adjustments for active fair value hedges of available-for-sale securities amounted to an increase in carrying amount of $940 million and $1.1 billion as of June 30, 2012 and December 31, 2011, respectively.

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

	Derivative Assets(1)			Derivative Liabilities(1)
	Balance Sheet Location	Fair Value as of		Balance Sheet Location	Fair Value as of
		June 30, 2012	December 31, 2011		June 30, 2012	December 31, 2011
				(in millions)
Interest rate contracts..................................	Other assets	$            5	$                     4	Interest, taxes and other liabilities	$        983	$              1,134

⁽¹⁾  The derivative asset and derivative liabilities presented above may be eligible for netting. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

HSBC USA Inc.

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

	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended June 30,		Six Months Ended June 30,
		2012	2011	2012	2011
	(in millions)
Interest rate contracts...................................................................	Other income	$        (581 )	$         (369 )	$        (279 )	$         (324 )
Interest rate contracts...................................................................	Interest income	(52 )	(7 )	(111 )	(9 )
Total.................................................................................................		$        (633 )	$         (376 )	$        (390 )	$         (333 )

The following table presents information on gains and losses on 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		Gain (Loss) on Derivative		Gain (Loss) on Hedged Items
	Interest Income (Expense)	Other Income	Interest Income (Expense)	Other Income	Interest Income (Expense)	Other Income	Interest Income (Expense)	Other Income
	2012				2011
	(in millions)
Three Months Ended June 30,
Interest rate contracts/AFS securities...................................................................................................................................................................	$          (39                 )	$     (582              )	$         162	$      552	$           (13                 )	$      (370              )	$           187	$       367
Interest rate contracts/commercial loans...............................................................................................................................................................	-	-	-	-	(6                 )	-	-	(1              )
Interest rate contracts/subordinated debt............................................................................................................................................................	(13                 )	1	(15                 )	(1              )	12	1	(20                 )	(8              )
Total............................................................................................................................................................................................................................	$          (52                 )	$     (581              )	$         147	$      551	$             (7                 )	$      (369              )	$           167	$       358
Six Months Ended June 30,
Interest rate contracts/AFS securities...................................................................................................................................................................	$          (84                 )	$     (285              )	$         341	$      265	$           (22                 )	$      (318              )	$           319	$       320
Interest rate contracts/commercial loans...............................................................................................................................................................	-	-	-	-	(11                 )	1	-	(2              )
Interest rate contracts/subordinated debt............................................................................................................................................................	(27                 )	6	(30                 )	(6              )	24	(7              )	(38                 )	5
Total............................................................................................................................................................................................................................	$        (111                 )	$     (279              )	$         311	$      259	$             (9                 )	$      (324              )	$           281	$       323

Cash Flow Hedges  We own or issue floating rate financial instruments and enter into forecasted transactions that give rise to cash flow risk exposure. 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. We also hedge the variability in interest cash flows arising from on-line savings deposits and certain commercial loans.

Changes in fair value associated with the effective portion of a derivative instrument designated as a qualifying cash flow hedge are recognized initially in other comprehensive income (loss). When the cash flows for which the derivative is hedging occur and are recorded in income or expense, the associated gain or loss from the hedging derivative previously recorded in accumulated other comprehensive income (loss) is recognized in 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 the hedged forecasted transaction will not occur by the end of the of the specified periods forecasted at inception, at which time the cumulative gain or loss is released into earnings. As of June 30, 2012 and December 31, 2011, active cash flow hedge relationships extend or mature through July 2036. During the three and six months ended June 30, 2012, $4 million and $8 million, respectively, of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income (loss). During the next twelve months, we expect to amortize $15 million of remaining losses to earnings resulting from these terminated and/or re-designated cash flow hedges. During the three and six months ended June 30, 2011, $2 million and $5 million, respectively, of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income (loss). 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 qualifying as cash flow hedges and their location on the consolidated balance sheet.

	Derivative Assets(1)			Derivative Liabilities(1)
	Balance Sheet Location	Fair Value as of		Balance Sheet Location	Fair Value as of
		June 30, 2012	December 31, 2011		June 30, 2012	December 31, 2011
	(in millions)
Interest rate contracts.................................................................................................................................................................	Other assets	$       40	$                 29	Interest, taxes & other liabilities	$     261	$               248

⁽¹⁾  The derivative assets and derivative liabilities presented above may be eligible for netting. 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	Loss Reclassified From AOCI into Income (Effective Portion)		Location of Loss Recognized in Income on the Derivative (Ineffective Portion and Amount Excluded from	Loss Recognized in Income on the Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	2012	2011	Portion)	2012	2011	Effectiveness Testing)	2012	2011
	(in millions)
Three Months Ended June 30,
Interest rate contracts.................................................................................................................................................................	$  (68         )	$   (40         )	Other income	$    (4        )	$    (2        )	Other income	$       -	$        -
Six Months Ended June 30,
Interest rate contracts.................................................................................................................................................................	$  (10         )	$   (48         )	Other income	$    (8        )	$    (5        )	Other income	$       -	$        -

HSBC USA Inc.

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 June 30, 2012, 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 (loss). 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)
		Fair Value as of			Fair Value as of
	Balance Sheet Location	June 30, 2012	December 31, 2011	Balance Sheet Location	June 30, 2012	December 31, 2011
	(in millions)
Interest rate contracts..............................................................................................................................................................................................	Trading assets	$ 70,557	$          60,719	Trading liabilities	$ 70,631	$         61,280
Foreign exchange contracts....................................................................................................................................................................................	Trading assets	15,305	15,654	Trading liabilities	14,584	15,413
Equity contracts........................................................................................................................................................................................................	Trading assets	847	1,165	Trading liabilities	844	1,164
Precious Metals contracts.......................................................................................................................................................................................	Trading assets	965	1,842	Trading liabilities	847	1,248
Credit contracts.........................................................................................................................................................................................................	Trading assets	10,739	14,388	Trading liabilities	10,948	14,285
Other...........................................................................................................................................................................................................................	Trading assets	1	-	Trading liabilities	5	-
Total............................................................................................................................................................................................................................		$ 98,414	$          93,768		$ 97,859	$         93,390

⁽¹⁾  The derivative assets and derivative liabilities presented above may be eligible for netting. Balance sheet categories in the above table represent the location of the assets and liabilities absent the netting of the balances.

HSBC USA Inc.

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

	Derivative Assets(1)			Derivative Liabilities(1)
		Fair Value as of			Fair Value as of
	Balance Sheet Location	June 30, 2012	December 31, 2011	Balance Sheet Location	June 30, 2012	December 31, 2011
	(in millions)
Interest rate contracts..............................................................................................................................................................................................	Other assets	$  1,009	$               957	Interest, taxes and other liabilities	$     119	$               106
Foreign exchange contracts....................................................................................................................................................................................	Other assets	21	11	Interest, taxes and other liabilities	22	13
Equity contracts........................................................................................................................................................................................................	Other assets	369	51	Interest, taxes and other liabilities	218	87
Credit contracts.........................................................................................................................................................................................................	Other assets	1	2	Interest, taxes and other liabilities	6	8
Total............................................................................................................................................................................................................................		$  1,400	$            1,021		$     365	$               214

⁽¹⁾  The derivative assets 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 held for trading purposes and their locations on the statement of income.

	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended June 30,		Six Months Ended June 30,
		2012	2011	2012	2011
	(in millions)
Interest rate contracts..............................................................................................................................................................................................	Trading revenue	$         (21 )	$         (171 )	$        (11 )	$     (115             )
Interest rate contracts..............................................................................................................................................................................................	Residential mortgage banking revenue	38	32	21	(2             )
Foreign exchange contracts....................................................................................................................................................................................	Trading revenue	246	203	645	249
Equity contracts........................................................................................................................................................................................................	Trading revenue	42	2	60	3
Precious Metals contracts.......................................................................................................................................................................................	Trading revenue	16	(47 )	52	51
Credit contracts.........................................................................................................................................................................................................	Trading revenue	(450 )	102	(1,668 )	90
Other...........................................................................................................................................................................................................................	Trading revenue	19	(17 )	27	(4             )
Total............................................................................................................................................................................................................................		$       (110 )	$           104	$     (874 )	$       272

HSBC USA Inc.

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

	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended June 30,		Six Months Ended June 30,
		2012	2011	2012	2011
	(in millions)
Interest rate contracts..............................................................................................................................................................................................	Other income	$       195	$          146	$    105	$      135
Interest rate contracts..............................................................................................................................................................................................	Residential mortgage banking revenue	(2               )	1	5	(11             )
Foreign exchange contracts....................................................................................................................................................................................	Other income	36	6	50	(1             )
Equity contracts........................................................................................................................................................................................................	Other income	(118               )	89	246	192
Credit contracts.........................................................................................................................................................................................................	Other income	(1               )	(1                 )	(3            )	(3             )
Total............................................................................................................................................................................................................................		$       110	$          241	$    403	$      312

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 additional collateral to be posted with them. The amount of additional collateral required to be posted will depend on whether HSBC Bank USA is downgraded by one or more notches as well as 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 June 30, 2012, is $11.0 billion for which we have posted collateral of $11.0 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, 2011, is $10.3 billion for which we have posted collateral of $8.5 billion. Substantially all of the collateral posted is in the form of cash which is reflected in either interest bearing deposits with banks or other assets. See Note 20, "Guarantee Arrangements and Pledged Assets" for further details.

In the event of a credit downgrade, we 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	Aa3	A1	A2
	(in millions)
P-1...................................................................................................................................................................................................................................	$       -	$     59	$     261
P-2...................................................................................................................................................................................................................................	2	6	261

S&P	Long-Term Ratings
Short-Term Ratings	AA-	A+	A
	(in millions)
A-1+...............................................................................................................................................................................................................................	$       -	$          -	$       53
A-1.................................................................................................................................................................................................................................	48	101	303

HSBC USA Inc.

We would be required to post $54 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.

	June 30, 2012	December 31, 2011
	(in billions)
Interest rate:
Futures and forwards.............................................................................................................................................................................................	$       271.6	$              320.3
Swaps.......................................................................................................................................................................................................................	2,580.1	2,325.1
Options written.......................................................................................................................................................................................................	81.4	69.9
Options purchased.................................................................................................................................................................................................	81.2	67.3
	3,014.3	2,782.6
Foreign Exchange:
Swaps, futures and forwards................................................................................................................................................................................	791.2	725.0
Options written.......................................................................................................................................................................................................	42.5	39.7
Options purchased.................................................................................................................................................................................................	43.9	40.4
Spot...........................................................................................................................................................................................................................	84.0	60.1
	961.6	865.2
Commodities, equities and precious metals:
Swaps, futures and forwards................................................................................................................................................................................	47.2	50.2
Options written.......................................................................................................................................................................................................	7.0	8.2
Options purchased.................................................................................................................................................................................................	17.9	17.1
	72.1	75.5
Credit derivatives.........................................................................................................................................................................................................	571.0	657.3
Total...............................................................................................................................................................................................................................	$    4,619.0	$           4,380.6

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 certain commercial loans including 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. As of June 30, 2012, commercial leveraged acquisition finance loans held for sale and related unfunded commitments of $411 million carried at fair value had an aggregate unpaid principal balance of $448 million. As of December 31, 2011, commercial leveraged acquisition finance loans held for sale and related unfunded commitments of $377 million carried at fair value had an aggregate unpaid principal balance of $448 million.

HSBC USA Inc.

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 June 30, 2012 and December 31, 2011, 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 meeting the rigorous 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.

Fixed-rate debt accounted for under FVO at June 30, 2012 carried at a fair value of $1.8 billion and had an aggregate unpaid principal balance of $1.8 billion. Fixed-rate debt accounted for under FVO at December 31, 2011 carried at a fair value of $1.7 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 principles to all of our hybrid instruments, inclusive of structured notes and structured deposits, issued after January 1, 2006. As of June 30, 2012, interest bearing deposits in domestic offices included $9.9 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $9.7 billion. As of December 31, 2011, interest bearing deposits in domestic offices included $9.8 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $9.6 billion. Long-term debt at June 30, 2012 included structured notes of $5.0 billion accounted for under FVO which had an unpaid principal balance of $4.9 billion. Long-term debt at December 31, 2011 included structured notes of $3.4 billion accounted for under FVO which had an unpaid principal balance of $3.5 billion. Interest on this debt is recorded as interest expense in the consolidated statement of income. We enter into derivative contracts to offset our exposure to interest rate risk on these instruments. 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.

HSBC USA Inc.

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 both interest and credit risk as well as the mark-to-market adjustment on derivatives related to the debt 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 fixed rate debt accounted for under FVO are as follows:

	Three Months Ended June 30,
	2012				2011
	Loans	Long- Term Debt	Hybrid Instruments	Total	Loans	Long- Term Debt	Hybrid Instruments	Total
	(in millions)
Interest rate component.................................................................................................................................................................................	$         -	$   (123            )	$               74	$    (49           )	$        (1            )	$      (52            )	$             (192                     )	$    (245            )
Credit risk component....................................................................................................................................................................................	2	131	(56                     )	77	(15            )	36	23	44
Total mark-to-market on financial instruments designated at fair value................................................................................................	2	8	18	28	(16            )	(16            )	(169                     )	(201            )
Net realized gains on the financial instrument...........................................................................................................................................	-	-	-	-	(2            )	-	-	(2            )
Mark-to-market on the related derivatives..................................................................................................................................................................................................	-	142	(44                     )	98	(1            )	55	174	228
Net realized gain (losses) on the related derivatives.................................................................................................................................	-	15	-	15	-	15	-	15
Gain (loss) on instruments designated at fair value and related derivatives.........................................................................................	$        2	$    165	$              (26                     )	$   141	$      (19            )	$       54	$                  5	$       40

	Six Months Ended June 30,
	2012				2011
	Loans	Long- Term Debt	Hybrid Instruments	Total	Loans	Long- Term Debt	Hybrid Instruments	Total
	(in millions)
Interest rate component.............................................................................................................................................................	$        1	$      (40             )	$            (355                     )	$    (394             )	$        (2            )	$      (16            )	$             (311                     )	$     (329             )
Credit risk component.................................................................................................................................................................	34	(90             )	(23                     )	(79             )	16	7	38	61
Total mark-to-market on financial instruments designated at fair value.............................................................................	35	(130             )	(378                     )	(473             )	14	(9            )	(273                     )	(268             )
Net realized gains on the financial instrument........................................................................................................................	(1            )	-	-	(1             )	2	-	-	2
Mark-to-market on the related derivatives..............................................................................................................................	-	27	345	372	(1            )	16	280	295
Net realized gain (losses) on the related long-term debt derivatives..................................................................................	-	31	-	31	-	32	-	32
Gain (loss) on instruments designated at fair value and related derivatives.....................................................................	$      34	$      (72             )	$              (33                     )	$      (71             )	$       15	$       39	$                  7	$        61

HSBC USA Inc.

13.    Income Taxes

The following table presents our effective tax rates.

	2012		2011
	(dollars are in millions)
Three Months Ended June 30,
Tax expense (benefit) at the U.S. federal statutory income tax rate...............................................................................................	$     (84            )	(35.0      )%	$             32	35.0           %
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit.................................................................................................................................	16	6.5	16	17.8
Adjustment of tax rate used to value deferred taxes..................................................................................................................	-	-	(8                 )	(8.9             )
Valuation allowance on deferred tax assets.................................................................................................................................	-	-	(8                 )	(8.9             )
Non-deductible expense accrual related to certain regulatory matters...................................................................................	245	102.0	-	-
Non-deductible goodwill related to sale of branches................................................................................................................	106	44.3	-	-
Accrual of tax reserves...................................................................................................................................................................	21	8.7	-	-
Tax exempt interest income............................................................................................................................................................	(3            )	(1.2 )	(2                 )	(2.2             )
Low income housing and other tax credits..................................................................................................................................	(25            )	(10.3 )	(21                 )	(23.3             )
Impact of foreign operations..........................................................................................................................................................	29	11.9	7	7.8
Uncertain tax provision...................................................................................................................................................................	49	20.6	127	141.1
Other..................................................................................................................................................................................................	(3            )	(1.3 )	(9                 )	(9.5             )
Effective tax rate....................................................................................................................................................................................	$    351	146.2       %	$           134	148.9           %
Six Months Ended June 30,
Tax expense (benefit) at the U.S. federal statutory income tax rate...............................................................................................	$     (50            )	(35.0      )%	$           134	35.0           %
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit.................................................................................................................................	22	15.2	37	9.7
Adjustment of tax rate used to value deferred taxes..................................................................................................................	(10            )	(7.2 )	18	4.7
Valuation allowance on deferred tax assets.................................................................................................................................	-	-	(143                 )	(37.4             )
Non-deductible expense accrual related to certain regulatory matters...................................................................................	245	171.3	-	-
Non-deductible goodwill related to sale of branches................................................................................................................	106	74.3	-	-
Accrual of tax reserves...................................................................................................................................................................	21	14.7	-	-
Tax exempt interest income............................................................................................................................................................	(5            )	(3.4 )	(5                 )	(1.3             )
Low income housing and other tax credits..................................................................................................................................	(57            )	(39.7 )	(42                 )	(11.0             )
Impact of foreign operations..........................................................................................................................................................	36	24.8	8	2.1
Uncertain tax provision...................................................................................................................................................................	65	45.7	127	33.2
Other..................................................................................................................................................................................................	(4            )	(2.8 )	(13                 )	(3.3             )
Effective tax rate....................................................................................................................................................................................	$    369	257.9       %	$           121	31.7           %

The effective tax rate for the three and six months ended June 30, 2012 reflects non-deductible goodwill related to the branches sold to First Niagara, a non-deductible expense accrual related to certain regulatory matters, the establishment of a tax reserve against the current liability account, foreign tax expense, an increase in the state uncertain tax reserve accrual, the utilization of low income housing credits and the impact of state taxes. The effective tax rate for the six months ended June 30, 2012 also reflects the effect of a change in state rates used to value deferred taxes. The effective tax rate for the three and six months ended June 30, 2011 primarily reflects an adjustment in uncertain tax positions, the utilization of low income housing tax credits, a change in state tax rates used to value deferred taxes, the impact of state taxes and the release of valuation allowance previously established on foreign tax credits.

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 North American 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 they remain fully committed and have 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.

During the first quarter of 2011, the HNAH Group identified an additional tax planning strategy that provided support for the realization of the deferred tax assets recorded for its foreign tax credits and certain state related deferred tax assets. The use of foreign tax credits is limited by the HNAH Group's U.S. tax liability and the availability of foreign source income. The tax planning strategy included the purchase of foreign bonds and REMIC residual interests. These purchases are expected to generate sufficient foreign source taxable income to allow for the utilization of the foreign tax credits before the credits expire unused and recognition of certain state deferred tax assets.

HSBC USA Inc.

Notwithstanding the above, the HNAH Group had valuation allowances against certain state deferred tax assets and certain Federal tax loss carryforwards 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 both deferred tax liabilities and valuation allowances, totaled $1.1 billion and $0.9 billion as of June 30, 2012 and December 31, 2011, respectively.

During the second quarter of 2011, we reached a pending resolution of an issue with the Internal Revenue Service ("IRS") Appeals Office covering the tax periods 2004 and 2005. The settlement agreement with the IRS is currently under Joint Committee on Taxation review. We anticipate finalizing the resolution of this matter within the next twelve months. There is no resulting impact to our uncertain tax reserves.

The IRS began its audit of our 2006 and 2007 income tax returns in 2009, with an anticipated completion in 2012. The IRS began their examination of 2008 and 2009 during the third quarter of 2011, 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. Therefore, tax reserves of approximately $302 million and related accrued interest expense of $125 million were recorded through the second quarter of 2012 to recognize the estimated tax exposure on this matter.

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 that, if recognized, would affect the effective tax rate was $339 million and $276 million at June 30, 2012 and December 31, 2011.

It is our policy to recognize accrued interest related to unrecognized tax positions in interest expense in the consolidated statement of income (loss) and to recognize penalties related to unrecognized tax positions as a component of other servicing and administrative expenses in the consolidated statement of income (loss). We had accruals for the payment of interest and penalties associated with uncertain tax positions of $140 million and $130 million at June 30, 2012 and December 31, 2011.

HSBC USA Inc.

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 tables present changes in accumulated other comprehensive loss balances.

Three Months Ended June 30,	2012	2011
	(in millions)
Unrealized gains on securities available-for-sale, not other-than temporarily impaired:
Balance at beginning of period................................................................................................................................................	$       756	$       (51 )
Other comprehensive income for period:
Net unrealized holding gains arising during period, net of tax of $203 million and $198 million, respectively.	286	297
Reclassification adjustment for gains realized in net income, net of tax of $(27) million and $(5) million, respectively.................................................................................................................................................................	(38 )	(7 )
Total other comprehensive income for period.................................................................................................................	248	290
Balance at end of period...........................................................................................................................................................	1,004	239
Unrealized gains (losses) on other-than-temporarily impaired debt securities available-for-sale:
Balance at beginning of period................................................................................................................................................	-	-
Balance at end of period...........................................................................................................................................................	-	-
Unrealized gains (losses) on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period................................................................................................................................................	-	-
Balance at end of period...........................................................................................................................................................	-	-
Unrealized losses on derivatives classified as cash flow hedges:
Balance at beginning of period................................................................................................................................................	(192 )	(90 )
Other comprehensive loss for period:
Net losses arising during period, net of tax of $(29) million and $(25) million, respectively................................	(39 )	(15 )
Reclassification adjustment for losses realized in net income, net of tax of $2 million and $1 million, respectively.................................................................................................................................................................	2	1
Total other comprehensive (loss) for period....................................................................................................................	(37 )	(14 )
Balance at end of period...........................................................................................................................................................	(229 )	(104 )
Pension and postretirement benefit liability:
Balance at beginning of period................................................................................................................................................	(11 )	(8 )
Other comprehensive income (loss) for period:
Change in unfunded pension postretirement liability, net of tax of less than $1 million in 2012 and 2011........	-	1
Amortization of prior service cost and transition obligation included in net income, net of tax of less than $1 million in 2012 and 2011........................................................................................................................................	-	-
Total other comprehensive income for period.................................................................................................................	-	1
Balance at end of period...........................................................................................................................................................	(11 )	(7 )
Total accumulated other comprehensive income at end of period....................................................................................	$       764	$       128

HSBC USA Inc.

Six Months Ended June 30,	2012	2011
	(in millions)
Unrealized gains on securities available-for-sale, not other-than temporarily impaired:
Balance at beginning of period................................................................................................................................................	$       883	$         97
Other comprehensive income for period:
Net unrealized holding gains arising during period, net of tax of $127 million and $132 million, respectively.	177	175
Reclassification adjustment for gains realized in net income, net of tax of $(39) million and $(23) million, respectively.................................................................................................................................................................	(56 )	(33 )
Total other comprehensive income for period.................................................................................................................	121	142
Balance at end of period...........................................................................................................................................................	1,004	239
Unrealized gains (losses) on other-than-temporarily impaired debt securities available-for-sale:
Balance at beginning of period................................................................................................................................................	-	(1 )
Other comprehensive income for period:
Reclassification adjustment for losses realized in net income, net of tax of less than $1 million........................	-	1
Total other comprehensive income (loss) for period......................................................................................................	-	1
Balance at end of period...........................................................................................................................................................	-	-
Unrealized gains (losses) on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period................................................................................................................................................	-	(153 )
Other comprehensive income for period:
Net unrealized other-than-temporary impairment arising during period.................................................................	-	11
Adjustment to reverse other-than-temporary impairment due to deconsolidation of VIE...................................	-	142
Total other comprehensive income for period.................................................................................................................	-	153
Balance at end of period...........................................................................................................................................................	-	-
Unrealized losses on derivatives classified as cash flow hedges:
Balance at beginning of period................................................................................................................................................	(229 )	(87 )
Other comprehensive loss for period:
Net losses arising during period, net of tax of $(5) million and $(28) million, respectively..................................	(5 )	(20 )
Reclassification adjustment for losses realized in net income, net of tax of $3 million and $2 million, respectively.................................................................................................................................................................	5	3
Total other comprehensive income (loss) for period......................................................................................................	-	(17 )
Balance at end of period...........................................................................................................................................................	(229 )	(104 )
Pension and postretirement benefit liability:
Balance at beginning of period................................................................................................................................................	(12 )	(9 )
Other comprehensive income for period:
Change in unfunded pension postretirement liability, net of tax of less than $1 million in 2012 and 2011........	1	2
Amortization of prior service cost and transition obligation included in net income, net of tax of less than $1 million in 2012 and 2011........................................................................................................................................	-	-
Total other comprehensive income for period.................................................................................................................	1	2
Balance at end of period...........................................................................................................................................................	(11 )	(7 )
Total accumulated other comprehensive income at end of period....................................................................................	$       764	$       128

HSBC USA Inc.

15.    Pensions and Other Postretirement Benefits

The components of pension expense for the defined benefit pension plan reflected in our consolidated statement of income are shown in the table below and reflect the portion of the pension expense of the combined HSBC North America Pension Plan (either the "HSBC North America Pension Plan" or the "Plan") which has been allocated to HSBC USA Inc.:

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Service cost - benefits earned during the period.........................................................................................................................	$              4	$              4	$              7	$              8
Interest cost on projected benefit obligation................................................................................................................................	18	19	35	37
Expected return on assets................................................................................................................................................................	(23                 )	(21                 )	(44                 )	(41                 )
Recognized losses.............................................................................................................................................................................	8	8	19	18
Amortization of prior service cost..................................................................................................................................................	(2                 )	(1                 )	(3                 )	(2                 )
Net periodic pension cost................................................................................................................................................................	$              5	$              9	$           14	$            20

Pension expense declined in 2012 due to higher expected returns on plan assets driven by higher asset levels, including additional contributions to the Plan during 2012 and 2011, as well as lower service cost and interest cost as a result of a decrease in the number of active participants in the Plan.

Components of the net periodic benefit cost for our postretirement benefits other than pensions are as follows:

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Interest cost..................................................................................................................................................................................................	$             1	$              1	$           2	$            2
Amortization of transition obligation........................................................................................................................................................	-	-	1	1
Net periodic postretirement benefit cost..................................................................................................................................................	$             1	$              1	$           3	$            3

HSBC USA Inc.

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 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:

	June 30, 2012	December 31, 2011
	(in millions)
Assets:
Cash and due from banks.......................................................................................................................................................................................	$         212	$                 263
Interest bearing deposits with banks...................................................................................................................................................................	1,141	1,416
Federal funds sold and securities purchased under resale agreements.........................................................................................................	189	228
Trading assets(1).......................................................................................................................................................................................................	22,605	22,367
Loans.........................................................................................................................................................................................................................	2,057	858
Other..........................................................................................................................................................................................................................	907	248
Total assets..............................................................................................................................................................................................................	$   27,111	$            25,380
Liabilities:
Deposits....................................................................................................................................................................................................................	$   14,959	$            18,153
Trading liabilities(1)...................................................................................................................................................................................................	25,071	25,298
Short-term borrowings............................................................................................................................................................................................	3,142	2,916
Long-term debt........................................................................................................................................................................................................	3,989	3,988
Other..........................................................................................................................................................................................................................	589	451
Total liabilities..........................................................................................................................................................................................................	$   47,750	$            50,806

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

HSBC USA Inc.

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Income/(Expense):
Interest income............................................................................................................................................................................................................	$           14	$            17	$           27	$            30
Interest expense...........................................................................................................................................................................................................	(23                 )	(21                 )	(47                 )	(34                 )
Net interest expense....................................................................................................................................................................................................	$            (9                 )	$             (4                 )	$          (20                 )	$             (4                 )
Servicing and other fees with HSBC affiliates:
Fees and commissions:
HSBC Finance...................................................................................................................................................................................................	$              1	$              2	$              2	$              4
HSBC Markets (USA) Inc. ("HMUS")...........................................................................................................................................................	5	8	10	11
Other HSBC affiliates.......................................................................................................................................................................................	14	20	42	39
Other HSBC affiliates income...............................................................................................................................................................................	26	26	48	48
Total affiliate income...................................................................................................................................................................................................	$           46	$            56	$         102	$          102
Residential mortgage banking revenue....................................................................................................................................................................	$              1	$              2	$              3	$              4
Support services from HSBC affiliates:
HSBC Finance.........................................................................................................................................................................................................	$              7	$            10	$           17	$            19
HMUS......................................................................................................................................................................................................................	74	74	146	122
HSBC Technology & Services (USA) Inc. ("HTSU")......................................................................................................................................	240	240	474	446
Other HSBC affiliates.............................................................................................................................................................................................	49	40	101	93
Total support services from HSBC affiliates...........................................................................................................................................................	$         370	$          364	$         738	$          680
Stock based compensation expense with HSBC....................................................................................................................................................	$              8	$            15	$           20	$            24

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 through March 2012, we purchased new receivable originations on these credit card accounts. As discussed in Note 9, "Intangible Assets," on March 29, 2012 we re-purchased these account relationships from HSBC Finance for $108 million. As a result, we no longer purchase new originations on these credit card accounts from HSBC Finance. We purchased $0.5 billion of credit card receivables from HSBC Finance during the six months ended June 30, 2012, compared to purchases of credit card receivables of $.6 billion and $1.1 billion, respectively, during the three and six months ended June 30, 2011. 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 and Union Plus 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 paid are amortized to interest income over the estimated life of the receivables purchased. At December 31, 2011, HSBC Finance was servicing credit card receivables on our behalf of $1.2 billion. We paid HSBC Finance fees for servicing these loans of $2 million and $7 million during the three and six months ended June 30, 2012, respectively, compared to $4 million and $8 million during the year-ago periods.

•               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 both June 30, 2012 and December 31, 2011, HSBC Finance was servicing $1.3 billion of residential mortgage loans for us. We paid HSBC Finance fees for servicing these loans of $1 million and $2 million during the three and six months ended June 30, 2012, respectively, compared to $1 million and $2 million during the year-ago periods.

• 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 now 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 and six months ended June 30, 2012 we paid $1 million and $3 million, respectively, for services we received from HSBC Finance and received $1 million and $3 million, respectively, for services we provided to HSBC Finance. During the three and six months ended June 30, 2011 we paid $1 million and $3 million, respectively, for services we received from HSBC Finance and received $2 million and $4 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 and six months ended June 30, 2012 we received servicing revenue from HSBC Finance of $14 million and $28 million, respectively, compared to $15 million and $32 million during the year-ago periods.

• We extended a secured $1.5 billion uncommitted 364 day credit facility to certain subsidiaries of HSBC Finance in December 2009. This facility was renewed for an additional 364 days in November 2011. There were no balances outstanding at June 30, 2012 and December 31, 2011.

•               During the fourth quarter of 2011, we extended an unsecured $3.0 billion 364-day uncommitted revolving credit facility 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 June 30, 2012 and December 31, 2011, there were no amounts outstanding under this loan agreement.

• In May 2012, we extended a $2.0 billion 364-day committed revolving credit facility to HSBC Finance. There were no balances outstanding at June 30, 2012.

HSBC USA Inc.

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 prior to these loans being sold to Capital One on May 1, 2012, we purchased on a daily basis substantially all new originations from these account relationships from HSBC Finance. Premiums paid for these receivables were 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 continued to service these credit card loans for us for a fee. Information regarding these loans is summarized in the table below.

	Private Label		Credit Card
	Cards	Commercial and Closed End Loans(1)	General Motors	Union Privilege	Other	Total
	(in billions)
Loans serviced by HSBC Finance:
June 30, 2012................................................................................................................................................................................................	$          -	$                          -	$            -	$              -	$         -	$          -
December 31, 2011.......................................................................................................................................................................................	12.5	.3	4.1	3.5	.8	21.2
Total loans purchased on a daily basis from HSBC Finance during:
Three months ended June 30, 2012..........................................................................................................................................................	1.1	-	.9	.3	.2	2.5
Three months ended June 30, 2011..........................................................................................................................................................	3.6	-	3.3	.8	.4	8.1
Six months ended June 30, 2012................................................................................................................................................................	4.4	-	3.9	1.0	.6	9.9
Six months ended June 30, 2011................................................................................................................................................................	6.8	-	6.4	1.5	.8	15.5

⁽¹⁾  Private label commercial loans were previously included in other commercial loans and private label closed end loans were included in other consumer loans in Note 6, "Loans".

Fees paid for servicing these loan portfolios, which are included as a component of Income from discontinued operations, totaled $48 million and $199 million during the three and six months ended June 30, 2012, respectively, compared to $151 million and $297 million during the three and six months ended June 30, 2011, respectively.

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.

•               Certain of our consolidated subsidiaries have revolving lines of credit totaling $1.0 billion with HSBC Finance. There were no balances outstanding under any of these lines of credit at December 31, 2011. This credit facility was terminated in May 2012.

• We extended a $1.0 billion committed unsecured 364 day credit facility to HSBC Bank Nevada, a subsidiary of HSBC Finance, in December 2009. This facility was renewed for an additional 364 days in November 2011. There were no balances outstanding at December 31, 2011. This credit facility was terminated in May 2012.

Transactions Conducted with HMUS

• 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 $2.8 billion at June 30, 2012 and December 31, 2011. At June 30, 2012 and December 31, 2011, $317 million and $229 million, respectively, was outstanding on these loans and lines. Interest income on these loans and lines totaled $1 million and $2 million during the three and six months ended June 30, 2012, respectively, compared to $2 million and $4 million during the three and six months ended June 30, 2011, respectively.

Other Transactions with HSBC Affiliates

•               In January 2011, we acquired Halbis Capital Management (USA) Inc (Halbis), an asset management business, from an affiliate, Halbis Capital Management (UK) Ltd. as part of a reorganization which resulted in an increase to additional paid-in-capital of approximately $21 million.

• In April 2011, we completed the sale of our European Banknotes Business with assets of $123 million to HSBC Bank plc.

• HNAH extended a $1.0 billion senior note to us in August 2009. This is a five year floating rate note which matures on August 2014. In addition, in April 2011, we issued senior notes in the amount of $3.0 billion to HNAH. These notes mature in three equal installments of $1.0 billion in April 2013, 2015 and 2016. The notes bear interest at 90 day USD Libor plus a spread, with each maturity at a different spread. Interest expense on these notes totaled $17 million and $33 million during the three and six months ended June 30, 2012, respectively, compared to $13 million and $17 million during the three and six months ended June 30, 2011, respectively.

• In addition to purchases of U.S. Treasury and U.S. Government Agency securities, we have periodically 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 $1.3 billion and $8.5 billion at June 30, 2012 and December 31, 2011, respectively.

•               We have also entered into credit derivatives transactions, primarily in the form of credit default swaps, with certain affiliates. The notional value of these derivative contracts was $48.0 billion and $45.1 billion at June 30, 2012 and December 31, 2011, respectively. The net credit exposure (defined as the recorded fair value of the derivative liability) related to the contracts was $1.6 billion and $1.0 billion at June 30, 2012 and December 31, 2011, respectively.

• We have a committed unused line of credit with HSBC France of $2.5 billion at both June 30, 2012 and December 31, 2011. The facility is being terminated effective July 30, 2012.

• We have an uncommitted unused line of credit with HSBC North America Inc. ("HNAI") of $150 million at both June 30, 2012 and December 31, 2011.

• We have extended loans and lines of credit to various other HSBC affiliates totaling $460 million at June 30, 2012 and December 31, 2011. At June 30, 2012 and December 31, 2011, there were no amounts outstanding under these loans or lines of credit. There is no interest income on these lines during the three and six months ended June 30, 2012 and 2011, respectively.

• 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. No such commercial paper was held at June 30, 2012 and December 31, 2011.

•               We routinely enter into derivative transactions with 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 $960.3 billion and $887.1 billion at June 30, 2012 and December 31, 2011, respectively. The net credit exposure (defined as the recorded fair value of derivative receivables) related to the contracts was approximately $22.6 billion and $22.4 billion at June 30, 2012 and December 31, 2011, 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. The fees we pay to HTSU for centralized support services and processing activities are included in Support services from HSBC affiliates in the consolidated statement of income.

•               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 Postretirement 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 $8 million and $20 million during the three and six months ended June 30, 2012, respectively, compared to $15 million and $24 million during the three and six months ended June 30, 2011, 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 $6 million and $13 million during the three and six months ended June 30, 2012, respectively, compared to $7 million and $13 million in the year-ago periods. These amounts are included as a component of Support services from HSBC affiliates in the table above. Billing for these services was processed by HTSU.

•               We did not pay any dividends to our immediate parent, HNAI, on our common stock during the six months ended June 30, 2012 and 2011.

HSBC USA Inc.

17.    Regulatory Capital

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.

	June 30, 2012			December 31, 2011
	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........................................................................................................................................................................................	$      20,964	10.00                        %	20.61        %	$        21,908	10.00                           %	18.39           %
HSBC Bank USA....................................................................................................................................................................................	21,579	10.00	21.75	22,390	10.00	18.86
Tier 1 capital ratio:
HSBC USA Inc........................................................................................................................................................................................	14,588	6.00	14.34	15,179	6.00	12.74
HSBC Bank USA....................................................................................................................................................................................	15,511	6.00	15.64	15,996	6.00	13.48
Tier 1 common ratio:
HSBC USA Inc........................................................................................................................................................................................	12,181	5.00 (2)	11.97	12,773	5.00                             (2)	10.72
HSBC Bank USA....................................................................................................................................................................................	15,511	5.00	15.64	15,996	5.00	13.48
Tier 1 leverage ratio:
HSBC USA Inc........................................................................................................................................................................................	14,588	3.00 (3)	7.45	15,179	3.00                             (3)	7.43
HSBC Bank USA....................................................................................................................................................................................	15,511	5.00	8.04	15,996	5.00	7.98
Risk weighted assets:
HSBC USA Inc........................................................................................................................................................................................	101,728			119,099
HSBC Bank USA....................................................................................................................................................................................	99,193			118,688

⁽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 six months of 2012. During the six months ended June 30, 2012 we contributed $2 million to our subsidiary, HSBC Bank USA, in part to provide capital support for receivables purchased from our affiliate, HSBC Finance Corporation. See Note 16, "Related Party Transactions," for additional information.

As part of the regulatory approvals with respect to the aforementioned receivable purchases completed in January 2009, HSBC Bank USA and HSBC made certain additional capital commitments to ensure that HSBC Bank USA holds sufficient capital with respect to the purchased receivables that are or may become "low-quality assets", as defined by the Federal Reserve Act. These capital requirements, which require a risk-based capital charge of 100 percent for each "low-quality asset" transferred or arising in the purchased portfolios rather than the eight percent capital charge applied to similar assets that are not part of the transferred portfolios, are applied both for purposes of satisfying the terms of the commitments and for purposes of measuring and reporting HSBC Bank USA's risk-based capital and related ratios. This treatment applies as long as the low-quality assets are owned by an insured bank. During 2011, HSBC Bank USA sold low-quality credit card receivables with a net book value of approximately $266 million to a non-bank subsidiary of HSBC USA Inc. to reduce the capital requirement associated with these assets. Capital ratios and amounts at December 31, 2011 in the table above reflect this reporting. The remaining purchased receivables subject to this requirement have been sold to Capital One as part of the previously discussed sale which was completed on May 1, 2012.

HSBC USA Inc.

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 June 30, 2012 and December 31, 2011, deferred tax assets of $959 million and $363 million, respectively, were excluded in the computation of regulatory capital.

18.    Business Segments

We have four distinct segments that we utilize for management reporting and analysis purposes, which are generally based upon customer groupings and 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 2011 Form 10-K.

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 under IFRSs (a non-U.S. GAAP financial measure) on a legal entity basis ("IFRS 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 results to our parent, HSBC in accordance with its reporting basis, IFRSs. We continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP legal entity basis.

HSBC USA Inc.

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 as follows:

	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 June 30, 2012:
Net interest income(1)......................................................................................................................................................................................................	$      197	$      156	$        167	$        47	$      (3         )	$                (1                   )	$        563	$                 (36                      )	$             8	$              535
Other operating income...................................................................................................................................................................................................	262	301	165	28	131	1	888	(32                      )	7	863
Total operating income...................................................................................................................................................................................................	459	457	332	75	128	-	1,451	(68                      )	15	1,398
Loan impairment charges(3).................................................................................................................................................................................................................	61	8	23	(3            )	-	-	89	7	(7               )	89
	398	449	309	78	128	-	1,362	(75                      )	22	1,309
Operating expenses(2).......................................................................................................................................................................................................	321	190	236	63	723	-	1,533	(4                      )	22	1,551
Profit before income tax expense........................................................................................................................................................................................	$        77	$      259	$         73	$        15	$  (595         )	$                 -	$       (171             )	$                 (71                      )	$             -	$             (242                    )
Balances at end of period:
Total assets...................................................................................................................................................................................................................	$  25,654	$  23,221	$  219,724	$   6,860	$     92	$                 -	$  275,551	$           (75,139                      )	$           15	$        200,427
Total loans, net.............................................................................................................................................................................................................	16,312	18,080	33,386	5,081	-	-	72,859	(1,995                      )	(15,419               )	55,445
Goodwill......................................................................................................................................................................................................................	581	357	480	326	-	-	1,744	484	-	2,228
Total deposits...............................................................................................................................................................................................................	36,770	21,125	42,071	12,727	-	-	112,693	(6,229                      )	16,763	123,227
Three months ended June 30, 2011:
Net interest income(1)......................................................................................................................................................................................................	$      249	$      172	$        130	$        44	$      (3         )	$                (7                   )	$        585	$                 (88                      )	$           46	$              543
Other operating income...................................................................................................................................................................................................	130	106	272	34	19	7	568	(9                      )	(27               )	532
Total operating income...................................................................................................................................................................................................	379	278	402	78	16	-	1,153	(97                      )	19	1,075
Loan impairment charges(3).................................................................................................................................................................................................................	58	42	(10             )	(1            )	-	-	89	(5                      )	11	95
	321	236	412	79	16	-	1,064	(92                      )	8	980
Operating expenses(2).......................................................................................................................................................................................................	369	200	239	65	20	-	893	(11                      )	8	890
Profit before income tax expense........................................................................................................................................................................................	$       (48            )	$        36	$        173	$        14	$      (4         )	$                 -	$        171	$                 (81                      )	$             -	$                90
Balances at end of period:
Total assets...................................................................................................................................................................................................................	$  28,416	$  19,954	$  187,050	$   6,282	$     92	$                 -	$  241,794	$           (62,989                      )	$        (182               )	$        178,623
Total loans, net.............................................................................................................................................................................................................	17,397	15,137	23,025	4,343	-	-	59,902	(3,105                      )	(6,567               )	50,230
Goodwill......................................................................................................................................................................................................................	876	368	480	326	-	-	2,050	576	-	2,626
Total deposits...............................................................................................................................................................................................................	47,981	24,039	42,416	12,154	-	-	126,590	(3,477                      )	7,542	130,655
Six months ended June 30, 2012:
Net interest income(1)......................................................................................................................................................................................................	$      444	$      322	$        310	$        92	$    (10         )	$                (7                   )	$     1,151	$                 (51                      )	$           22	$           1,122
Other operating income...................................................................................................................................................................................................	359	405	491	57	(140         )	7	1,179	36	15	1,230
Total operating income...................................................................................................................................................................................................	803	727	801	149	(150         )	-	2,330	(15                      )	37	2,352
Loan impairment charges(3).................................................................................................................................................................................................................	102	(9            )	(8             )	(5            )	-	-	80	4	5	89
	701	736	809	154	(150         )	-	2,250	(19                      )	32	2,263
Operating expenses(2).......................................................................................................................................................................................................	642	375	495	121	742	-	2,375	-	32	2,407
Profit before income tax expense........................................................................................................................................................................................	$        59	$      361	$        314	$        33	$  (892         )	$                 -	$       (125             )	$                 (19                      )	$             -	$             (144                    )
Six months ended June 30, 2011:
Net interest income(1)......................................................................................................................................................................................................	$      497	$      347	$        262	$        90	$    (67         )	$              (15                   )	$     1,114	$                 (33                      )	$           92	$           1,173
Other operating income...................................................................................................................................................................................................	189	211	689	70	(17         )	15	1,157	24	(58               )	1,123
Total operating income...................................................................................................................................................................................................	686	558	951	160	(84         )	-	2,271	(9                      )	34	2,296
Loan impairment charges(3).................................................................................................................................................................................................................	90	12	(27             )	(10            )	-	-	65	5	23	93
	596	546	978	170	(84         )	-	2,206	(14                      )	11	2,203
Operating expenses(2).......................................................................................................................................................................................................	819	376	465	129	37	-	1,826	(16                      )	11	1,821
Profit before income tax expense........................................................................................................................................................................................	$     (223            )	$      170	$        513	$        41	$  (121         )	$                 -	$        380	$                   2	$             -	$              382

⁽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 basis of accounting.

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

Further discussion of the differences between IFRSs and U.S. GAAP are presented in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q under the caption "Basis of Reporting," A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented below:

Net Interest Income

Effective interest rate - The calculation of effective interest rates under IFRS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"), requires an estimate of changes in estimated contractual cash flows, including fees and points paid or recovered 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 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 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 receivables 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 on financial 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 recognize the difference between transaction price and fair value as profit or loss at inception in the consolidated statement of income. 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. This causes the net income under U.S. GAAP to be different than under IFRSs.

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 are reported in net interest income or trading revenue. Under U.S. GAAP, the income related to loans held for sale are reported similarly to loans held for investment.

HSBC USA Inc.

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 is generally later than 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.

Reclassification of financial assets - Certain securities were reclassified from "trading assets" to "loans and receivables" under IFRSs as of July 1, 2008 pursuant to an amendment to IAS 39 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 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.

Other-than-temporary impairment - Effective January 1, 2009 under U.S. GAAP, the credit loss component of an other-than-temporary impairment of a debt security is recognized in earnings while the remaining portion of the impairment loss is recognized in accumulated other comprehensive income (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 decline in value 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 other less significant differences in measuring other-than-temporary impairment under IFRSs versus U.S. GAAP.

Securities - Under IFRSs, securities include HSBC shares held for stock plans at fair value. These shares held for stock plans are recorded at fair value through other comprehensive income. If it is determined these shares have become impaired, the fair value loss is recognized in profit and loss and any fair value loss recorded in other comprehensive income is reversed. There is no similar requirement under U.S. GAAP.

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 can be 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 carrying amount net of impairment allowances, and therefore reflects the collectibility of the loans.

HSBC USA Inc.

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.

Operating Expenses

Pension costs - Costs under U.S. GAAP are higher than under IFRSs as a result of the amortization of the amount by which actuarial losses exceeded the higher of 10 percent of the projected benefit obligation or fair value of plan assets (the "corridor."). In 2011, amounts reflect a pension curtailment gain relating to the branch sales as under IFRSs recognition occurs when "demonstrably committed to the transaction" as compared to U.S. GAAP when recognition occurs when the transaction is completed. Furthermore, in 2010, changes to future accruals for legacy participants under the HSBC North America Pension Plan were accounted for as a plan curtailment under IFRSs, which resulted in immediate income recognition. Under 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 value of property held for own use reflects revaluation surpluses recorded prior to January 1, 2004. Consequently, the values 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.

Assets

Customer loans (Loans) - 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.

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. 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 under U.S. GAAP are based more on the power to control significant activities as opposed to the variability in cash flows. As a result, under U.S. GAAP we were determined to be the primary beneficiary and consolidated a commercial paper conduit effective January 1, 2010. However in 2011, changes involving liquidity asset purchase agreements were made which resulted in us no longer being considered the primary beneficiary and this commercial paper conduit was deconsolidated at March 31, 2011. Under IFRSs this conduit is not consolidated.

HSBC USA Inc.

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 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 can be a variable interest entity ("VIE"), which is an entity that 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) direct or indirect ability through voting or similar rights to make decisions about the entity's activities that have a significant effect on the success of the entity; b) the obligation to absorb the expected losses of the entity, the right to receive the expected residual returns of the entity, or both.

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

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

Consolidated VIEs  The following table summarizes assets and liabilities related to our consolidated VIEs as of June 30, 2012 and December 31, 2011 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation:

	June 30, 2012		December 31, 2011
	Consolidated Assets	Consolidated Liabilities	Consolidated Assets	Consolidated Liabilities
	(in millions)
Low income housing limited liability partnership:
Interest bearing deposits with banks...............................................................................................................................................................	$              110	$                    -	$                108	$                    -
Other assets..........................................................................................................................................................................................................	535	-	520	-
Long term debt.....................................................................................................................................................................................................	-	55	-	55
Other liabilities.....................................................................................................................................................................................................	-	195	-	166
Total............................................................................................................................................................................................................................	$              645	$              250	$                628	$                221

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 non-affiliated 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 as other liabilities and the consolidated assets of the LLP in other assets in our consolidated financial statements. The investments held by the LLP represent equity investments in the underlying low income housing partnerships for which the LLP applies equity-method accounting. The LLP does not consolidate the underlying partnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the economic performance of the partnerships.

Unconsolidated VIEs  We also have variable interests with other VIEs that were not consolidated at June 30, 2012 and December 31, 2011 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 June 30, 2012 and December 31, 2011:

	Variable Interests Held Classified as Assets	Variable Interests Held Classified as Liabilities	Total Assets in Unconsolidated VIEs	Maximum Exposure to Loss
	(in millions)
As of June 30, 2012:
Asset-backed commercial paper conduits............................................................................................................................................................	$                            -	$                            -	$            13,939	$       1,142
Structured note vehicles..........................................................................................................................................................................................	1,533	187	6,878	2,069
Total............................................................................................................................................................................................................................	$                   1,533	$                      187	$            20,817	$       3,211
As of December 31, 2011:
Asset-backed commercial paper conduits............................................................................................................................................................	$                            -	$                            -	$              14,989	$            677
Structured note vehicles..........................................................................................................................................................................................	1,392	88	6,605	1,793
Total............................................................................................................................................................................................................................	$                    1,392	$                         88	$              21,594	$         2,470

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  We provide liquidity facilities to a number of multi-seller and single-seller asset-backed commercial paper conduits ("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 $1.1 billion maximum exposure to loss presented in the table above represents the maximum amount of loans and asset purchases we could be required to fund under the liquidity facilities. The maximum loss exposure is estimated assuming the facilities are fully drawn and the underlying collateralized assets are in default with zero recovery value.

Structured note vehicles  Our involvement in structured note vehicles includes entering into derivative transactions such as interest rate and currency swaps, and investing in their 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 June 30, 2012, we recorded approximately $62 million of trading assets and $73 million of long-term liabilities on our balance sheet as a result of "failed sale" accounting treatment for certain transfers of financial assets. As of December 31, 2011, we recorded approximately $73 million of trading assets and $89 million of long-term 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 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 credit analysis on 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 that potentially give rise to risk of loss exposure. These investments are an integral part of the disclosure in Note 5, "Securities" and Note 22, "Fair Value Measurements" and, therefore, are not disclosed in this note to avoid redundancy.

Consolidated VIEs of Discontinued Credit Card and Private Label Operations  We have historically utilized entities that are structured as trusts to securitize certain private label and other credit card receivables where securitization provides an attractive source of low cost funding. We transferred certain private label and other credit card receivables to these trusts which in turn issue debt instruments collateralized by the transferred receivables. As our affiliate is the servicer of the assets of these trusts we performed a detailed analysis and determined that we retain the benefits and risks and are the primary beneficiary of the trusts and, as a result, consolidate them. In 2011, in connection with our agreement to sell certain credit card operations to Capital One, all remaining loans in the private label and other credit card receivables VIEs were transferred to a wholly-owned subsidiary of HSBC Bank USA. As of June 30, 2012, the only remaining balances related to these consolidated VIEs which are part of our discontinued credit card operations were $44 million of other assets and $273 million of other liabilities which represent tax related assets and liabilities of these VIEs and are included as a component of assets and liabilities of discontinued operations on our consolidated balance sheet. As of December 31, 2011 the only remaining balance related to these consolidated VIEs which are part of our discontinued credit card operations was $541 million of other liabilities which represents tax related liabilities of these VIEs and are included as a component of liabilities of discontinued operations on our consolidated balance sheet.

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 June 30, 2012 and December 31, 2011. Following the table is a description of the various arrangements.

	June 30, 2012		December 31, 2011
	Carrying Value	Notional	Carrying Value	Notional
	(in millions)
Credit derivatives(1)(4).................................................................................................................................................................................................	$    (4,299                 )	$   290,401	$      (7,759                 )	$      330,395
Financial standby letters of credit, net of participations(2)(3)................................................................................................................................	-	5,016	-	4,705
Performance (non-financial) guarantees(2)( 3)..........................................................................................................................................................	-	2,860	-	3,088
Liquidity asset purchase agreements(3)..................................................................................................................................................................	-	1,142	-	677
Total............................................................................................................................................................................................................................	$    (4,299                 )	$   299,419	$      (7,759                 )	$      338,865

⁽¹⁾  Includes $48.0 billion and $45.1 billion issued for the benefit of HSBC affiliates at June 30, 2012 and December 31, 2011, respectively.

⁽²⁾   Includes $652 million and $707 million issued for the benefit of HSBC affiliates at June 30, 2012 and December 31, 2011, 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 limited to the recorded amounts of these instruments.

Credit-Risk Related Arrangements:

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.

HSBC USA Inc.

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 June 30, 2012 and December 31, 2011:

	June 30, 2012		December 31, 2011
	Carrying (Fair) Value	Notional	Carrying (Fair) Value	Notional
	(in millions)
Sell-protection credit derivative positions.............................................................................................................................................	$              (4,299                          )	$   290,401	$               (7,759                          )	$      330,395
Buy-protection credit derivative positions............................................................................................................................................	4,383	280,613	8,131	326,882
Net position(1)..............................................................................................................................................................................................	$                     84	$        9,788	$                    372	$          3,513

⁽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 June 30, 2012, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5.0 billion and $2.9 billion, respectively. As of December 31, 2011, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $4.7 billion and $3.1 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 $52 million and $44 million at June 30, 2012 and December 31, 2011, respectively. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of $24 million and $22 million at June 30, 2012 and December 31, 2011, respectively.

HSBC USA Inc.

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 June 30, 2012 as an indicative proxy of payment risk:

	Average Life (in years)	Credit Ratings of the Obligors or the Transactions
Notional/Contractual Amounts		Investment         Grade	Non-Investment            Grade	Total
	(dollars are in millions)
Sell-protection Credit Derivatives(1)
Single name CDS..................................................................................................................................................................................................	2.5	$             150,501	$                  38,498	$           188,999
Structured CDS....................................................................................................................................................................................................	1.6	53,932	4,092	58,024
Index credit derivatives.......................................................................................................................................................................................	3.3	28,618	683	29,301
Total return swaps...............................................................................................................................................................................................	7.6	11,265	2,812	14,077
Subtotal......................................................................................................................................................................................................................		244,316	46,085	290,401
Standby Letters of Credit(2)......................................................................................................................................................................................	1.3	7,063	813	7,876
Total............................................................................................................................................................................................................................		$             251,379	$                  46,898	$           298,277

⁽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 $17.2 billion and $19.3 billion at June 30, 2012 and December 31, 2011, respectively, including $11.0 billion and $12.1 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 during the three and six months ended June 30, 2012 and 2011, respectively:

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Pre- 2004.......................................................................................................................................................................................................................	$                 2	$                  2	$                 3	$                  3
2004...............................................................................................................................................................................................................................	7	4	11	9
2005...............................................................................................................................................................................................................................	9	6	14	14
2006...............................................................................................................................................................................................................................	29	10	45	23
2007...............................................................................................................................................................................................................................	76	31	120	70
2008...............................................................................................................................................................................................................................	52	30	78	58
Post 2008......................................................................................................................................................................................................................	6	22	10	46
Total repurchase demands received(1).....................................................................................................................................................................	$             181	$              105	$             281	$              223

⁽¹⁾  Includes repurchase demands on loans sourced from our legacy broker channel of $151 million and $75 million for the three months ended June 30, 2012 and 2011, respectively. Includes repurchase demands on loans sourced from our legacy broker channel of $233 million and $157 million for the six months ended June 30, 2012 and 2011, respectively.

The following table provides information about outstanding repurchase demands received from GSEs and other third parties at June 30, 2012 and December 31, 2011:

	June 30, 2012	December 31, 2011
	(in millions)
GSEs............................................................................................................................................................................................................................	$       122	$                   77
Others.........................................................................................................................................................................................................................	45	25
Total(1)..........................................................................................................................................................................................................................	$       167	$                 102

⁽¹⁾  Includes repurchase demands on loans sourced from our legacy broker channel of $138 million and $87 million at June 30, 2012 and December 31, 2011, respectively.

HSBC USA Inc.

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 and six months ended June 30, 2012 and 2011 for obligations arising from the breach of representations and warranties associated with the sale of these loans:

	Three Months Ended June  30,		Six Months Ended June  30,
	2012	2011	2012	2011
	(in millions)
Balance at beginning of period.............................................................................................................................................................	$             223	$              270	$             237	$              262
Increase (decrease) in liability recorded through earnings...............................................................................................................	32	(4                     )	53	40
Realized losses.........................................................................................................................................................................................	(33                     )	(29                     )	(68                     )	(65                     )
Balance at end of period.........................................................................................................................................................................	$             222	$              237	$             222	$              237

Our reserve for potential repurchase liability exposures relates primarily to previously originated mortgages through broker channels. Our mortgage repurchase liability of $222 million at June 30, 2012 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. 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.

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 June 30, 2012 and December 31, 2011, we have issued $1.1 billion and $677 million, 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.

Visa covered litigation  We are an equity member of Visa Inc. ("Visa"). Prior to its initial public offering ("IPO") on March 19, 2008, Visa completed a series of transactions to reorganize and restructure its operations and to convert membership interests into equity interests. Pursuant to the restructuring, we, along with all the Class B shareholders, agreed to indemnify Visa for the claims and obligations arising from certain specific covered litigations. Class B shares are convertible into listed Class A shares upon (i) settlement of the covered litigations or (ii) the third anniversary of the IPO, whichever is later. The indemnification is subject to the accounting and disclosure requirements. Visa used a portion of the IPO proceeds to establish a $3.0 billion escrow account to fund future claims arising from those covered litigations (the escrow was subsequently increased to $4.1 billion). In 2009 and 2010, Visa exercised its rights to sell shares of existing Class B shareholders in order to increase the escrow account and announced that it had deposited collectively an additional $2.0 billion into the escrow account. As a result, we re-evaluated our contingent liability recorded relating to this litigation and reduced our liability by $24 million during 2009 and 2010. In 2011, Visa again exercised its rights to sell shares of existing Class B shareholders and funded an additional $2.0 billion into the escrow account and we reduced our liability by $9 million. At June 30, 2012, there was no net contingent liability recorded.

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. However, we believe that any potential requirement to make payments under these agreements is remote.

Pledged Assets  Pledged assets included in the consolidated balance sheet are summarized in the following table.

	June 30, 2012	December 31, 2011
	(in millions)
Interest bearing deposits with banks.....................................................................................................................................................................	$      1,360	$              4,426
Trading assets(1).........................................................................................................................................................................................................	1,784	1,640
Securities available-for-sale(2)..................................................................................................................................................................................	17,739	23,347
Securities held to maturity.......................................................................................................................................................................................	359	476
Loans(3)........................................................................................................................................................................................................................	1,947	2,113
Other assets(4).............................................................................................................................................................................................................	2,770	3,688
Total............................................................................................................................................................................................................................	$   25,959	$            35,690

⁽¹⁾  Trading assets are primarily pledged against liabilities associated with consolidated variable interest entities.

⁽²⁾   Securities available-for-sale are primarily pledged against 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.

 

END

 

 

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