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HSBC USA Inc 3Q 2013 Form 10-Q Part 1

4th Nov 2013 08:15

RNS Number : 0643S

HSBC Holdings PLC

04 November 2013

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2013

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

For the transition period from to

Commission file number 1-7436

HSBC USA Inc.

(Exact name of registrant as specified in its charter)

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

(212) 525-5000

Registrant's telephone number, including area code

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

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

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

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

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

As of October 31, 2013, there were 713 shares of the registrant's common stock outstanding, all of which are owned by HSBC North America Inc.

TABLE OF CONTENTS

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

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

PART I

Item 1. Financial Statements (Unaudited)

CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013		2012
	(in millions)
Interest income:
Loans....................................................................................................................................	$	454		$	472		$	1,396	$	1,391
Securities..............................................................................................................................	208			252			661		837
Trading assets.....................................................................................................................	34			27			85		86
Short-term investments......................................................................................................	19			23			49		82
Other.....................................................................................................................................	10			11			31		32
Total interest income...............................................................................................................	725			785			2,222		2,428
Interest expense:
Deposits...............................................................................................................................	48			82			147		243
Short-term borrowings.......................................................................................................	11			9			28		24
Long-term debt....................................................................................................................	159			170			492		502
Other.....................................................................................................................................	15			14			40		27
Total interest expense.............................................................................................................	233			275			707		796
Net interest income...................................................................................................................	492			510			1,515		1,632
Provision for credit losses.......................................................................................................	54			84			142		173
Net interest income after provision for credit losses.........................................................	438			426			1,373		1,459
Other revenues:
Credit card fees...................................................................................................................	1			18			35		70
Other fees and commissions.............................................................................................	181			177			527		573
Trust income........................................................................................................................	29			22			92		72
Trading revenue..................................................................................................................	117			113			388		395
Other securities gains, net.................................................................................................	35			50			189		145
Servicing and other fees from HSBC affiliates...............................................................	41			63			154		165
Residential mortgage banking revenue...........................................................................	18			4			73		31
Gain (loss) on instruments designated at fair value and related derivatives.............	(6		)	(187		)	82		(258		)
Gain on sale of branches...................................................................................................	-			103			-		433
Other income.......................................................................................................................	16			44			50		44
Total other revenues................................................................................................................	432			407			1,590		1,670
Operating expenses:
Salaries and employee benefits........................................................................................	218			207			717		733
Support services from HSBC affiliates............................................................................	378			372			1,064		1,143
Occupancy expense, net....................................................................................................	57			60			173		176
Expense related to certain regulatory matters (Note 20)...............................................	-			800			-		1,500
Other expenses....................................................................................................................	202			188			478		515
Total operating expenses.......................................................................................................	855			1,627			2,432		4,067
Income (loss) from continuing operations before income tax expense.............................	15			(794		)	531		(938		)
Income tax expense (benefit)...................................................................................................	11			(12		)	164		357
Income (loss) from continuing operations..........................................................................	4			(782		)	367		(1,295		)
Discontinued Operations (Note 2):
Income from discontinued operations before income tax expense....................................	-			-			-		315
Income tax expense...................................................................................................................	-			-			-		112
Income from discontinued operations.................................................................................	-			-			-		203
Net income (loss)......................................................................................................................	$	4		$	(782	)	$	367	$	(1,092	)

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in millions)
Net income (loss)..................................................................................................................	$	4		$	(782	)	$	367		$	(1,092	)
Net change in unrealized gains (losses), net of tax:
Securities available-for-sale(1)....................................................................................	(50		)	97			(785		)	218
Other-than-temporarily impaired debt securities held-to-maturity......................	2			-			2			-
Derivatives designated as cash flow hedges..........................................................	21			11			95			11
Pension and post-retirement benefit plan................................................................	1			-			1			1
Total other comprehensive income (loss).......................................................................	(26		)	108			(687		)	230
Comprehensive (loss)..........................................................................................................	$	(22	)	$	(674	)	$	(320	)	$	(862	)

(1) During the three and nine months ended September 30, 2013 and 2012, there were no other-than-temporary impairment ("OTTI") losses on securities recognized in other revenues and no OTTI losses related to the non-credit component of securities were recognized in accumulated other comprehensive income.

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

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	September 30, 2013		December 31, 2012
	(in millions, except share data)
Assets(1)
Cash and due from banks..............................................................................................................................	$	1,512	$	1,359
Interest bearing deposits with banks............................................................................................................	29,917		13,279
Securities purchased under agreements to resell...........................................................................................	2,216		3,149
Trading assets...............................................................................................................................................	25,527		30,874
Securities available-for-sale...........................................................................................................................	48,053		67,716
Securities held-to-maturity (fair value of $1.6 billion and $1.8 billion at September 30, 2013 and December 31, 2012, respectively)............................................................................................................	1,433		1,620
Loans.............................................................................................................................................................	67,710		63,258
Less - allowance for credit losses.................................................................................................................	595		647
Loans, net...............................................................................................................................................	67,115		62,611
Loans held for sale (includes $1 million and $465 million designated under fair value option at September 30, 2013 and December 31, 2012, respectively).......................................................................................	236		1,018
Properties and equipment, net......................................................................................................................	258		276
Intangible assets, net.....................................................................................................................................	295		247
Goodwill.......................................................................................................................................................	2,228		2,228
Other assets..................................................................................................................................................	8,585		7,069
Total assets....................................................................................................................................................	$	187,375	$	191,446
Liabilities(1)
Debt:
Deposits in domestic offices:
Noninterest bearing...........................................................................................................................	$	31,534	$	31,315
Interest bearing (includes $7.9 billion and $8.7 billion designated under fair value option at September 30, 2013 and December 31, 2012, respectively).........................................................	63,608		66,520
Deposits in foreign offices:
Noninterest bearing...........................................................................................................................	1,470		1,813
Interest bearing..................................................................................................................................	16,309		18,023
Total deposits........................................................................................................................................	112,921		117,671
Short-term borrowings...........................................................................................................................	19,499		14,933
Long-term debt (includes $6.8 billion and $7.3 billion designated under fair value option at September 30, 2013 and December 31, 2012, respectively)..............................................................	22,151		21,745
Total debt......................................................................................................................................................	154,571		154,349
Trading liabilities...........................................................................................................................................	11,065		14,699
Interest, taxes and other liabilities.................................................................................................................	4,357		4,562
Total liabilities.............................................................................................................................................	169,993		173,610
Shareholders' equity
Preferred stock..............................................................................................................................................	1,565		1,565
Common shareholder's equity:
Common stock ($5 par; 150,000,000 shares authorized; 713 shares issued and outstanding at September 30, 2013 and December 31, 2012)..............................................................................	-		-
Additional paid-in capital.................................................................................................................	14,111		14,123
Retained earnings..............................................................................................................................	1,675		1,363
Accumulated other comprehensive income.......................................................................................	31		785
Total common shareholder's equity.............................................................................................................	15,817		16,271
Total shareholders' equity............................................................................................................................	17,382		17,836
Total liabilities and shareholders' equity...................................................................................................	$	187,375	$	191,446

(1) The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") as of September 30, 2013 and December 31, 2012 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation.

	September 30,		December 31,
	2013		2012
	(in millions)
Assets
Interest bearing deposits with banks.............................................................................................................	$	5	$	-
Securities held-to-maturity...........................................................................................................................	208		-
Other assets.................................................................................................................................................	479		533
Total assets..................................................................................................................................................	$	692	$	533
Liabilities
Long-term debt............................................................................................................................................	92		92
Interest, taxes and other liabilities................................................................................................................	99		152
Total liabilities.............................................................................................................................................	$	191	$	244

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

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Nine Months Ended September 30,	2013			2012
	(dollars are in millions)
Preferred stock
Balance at beginning and end of period.............................................................................................................	$	1,565		$	1,565
Common stock
Balance at beginning and end of period.............................................................................................................	-			-
Additional paid-in capital
Balance at beginning of period..........................................................................................................................	14,123			13,814
Employee benefit plans and other....................................................................................................................	(12		)	(16		)
Balance at end of period....................................................................................................................................	14,111			13,798
Retained earnings
Balance at beginning of period..........................................................................................................................	1,363			2,481
Net income (loss)..............................................................................................................................................	367			(1,092		)
Cash dividends declared on preferred stock......................................................................................................	(55		)	(55		)
Balance at end of period....................................................................................................................................	1,675			1,334
Accumulated other comprehensive income
Balance at beginning of period..........................................................................................................................	785			642
Other-than-temporary impairment on securities held-to-maturity due to the consolidation of a variable interest entity................................................................................................................................................	(67		)	-
Other comprehensive income (loss), net of tax.................................................................................................	(687		)	230
Balance at end of period....................................................................................................................................	31			872
Total common shareholder's equity.................................................................................................................	15,817			16,004
Total shareholders' equity................................................................................................................................	$	17,382		$	17,569

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

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,	2013			2012
	(in millions)
Cash flows from operating activities
Net income (loss).........................................................................................................................................................	$	367		$	(1,092	)
Income from discontinued operations.........................................................................................................................	-			203
Income (loss) from continuing operations...................................................................................................................	367			(1,295		)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization..............................................................................................................................	249			243
Gain on sale of branches.......................................................................................................................................	-			(433		)
Expense accrual related to certain regulatory matters...........................................................................................	-			1,500
Provision for credit losses.....................................................................................................................................	142			173
Realized gains on securities available-for-sale.......................................................................................................	(189		)	(145		)
Realized gains on securities held-to-maturity.......................................................................................................	-			-
Net change in other assets and liabilities...............................................................................................................	(805		)	2,246
Net change in loans held for sale:..........................................................................................................................
Originations of loans........................................................................................................................................	(1,481		)	(2,678		)
Sales and collection of loans held for sale........................................................................................................	1,804			2,795
Net change in trading assets and liabilities............................................................................................................	1,857			7,576
Lower of amortized cost or fair value adjustments on loans held for sale............................................................	10			32
Mark-to-market loss on financial instruments designated at fair value and related derivatives............................	(82		)	258
Cash provided by operating activities - continuing operations..................................................................................	1,872			10,272
Cash provided by operating activities - discontinued operations...............................................................................	-			34
Net cash provided by operating activities...................................................................................................................	1,872			10,306
Cash flows from investing activities
Net change in interest bearing deposits with banks.....................................................................................................	(16,619		)	10,141
Net change in securities purchased under agreements to resell....................................................................................	933			(8,569		)
Securities available-for-sale:
Purchases of securities available-for-sale..............................................................................................................	(22,594		)	(29,177		)
Proceeds from sales of securities available-for-sale..............................................................................................	33,270			10,183
Proceeds from maturities of securities available-for-sale......................................................................................	7,099			9,601
Securities held-to-maturity:
Proceeds from sales of securities held-to-maturity...............................................................................................	79			-
Proceeds from maturities of securities held-to-maturity......................................................................................	340			301
Change in loans:
Originations, net of collections.............................................................................................................................	(4,687		)	(9,509		)
Loans sold to third parties....................................................................................................................................	491			49
Net cash used for acquisitions of properties and equipment......................................................................................	(26		)	(6		)
Net outflows related to the sale of branches...............................................................................................................	-			(10,137		)
Other, net.....................................................................................................................................................................	(17		)	(40		)
Cash used in investing activities - continuing operations...........................................................................................	(1,731		)	(27,163		)
Cash provided by investing activities - discontinued operations...............................................................................	-			20,746
Net cash used in investing activities............................................................................................................................	(1,731		)	(6,417		)
Cash flows from financing activities
Net change in deposits.................................................................................................................................................	(4,761		)	(5,536		)
Debt:
Net change in short-term borrowings....................................................................................................................	4,151			(1,896		)
Issuance of long-term debt....................................................................................................................................	4,630			5,354
Repayment of long-term debt...............................................................................................................................	(3,941		)	(1,928		)
Repayment of debt related to the sale and leaseback of 452 Fifth Avenue property..........................................	-			(8		)
Other decreases in capital surplus...............................................................................................................................	(12		)	(16		)
Dividends paid.............................................................................................................................................................	(55		)	(55		)
Cash provided by (used in) financing activities - continuing operations....................................................................	12			(4,085		)
Cash used in financing activities - discontinued operations........................................................................................	-			(35		)
Net cash provided by (used in) financing activities.....................................................................................................	12			(4,120		)
Net change in cash and due from banks.......................................................................................................................	153			(231		)
Cash and due from banks at beginning of period.........................................................................................................	1,359			1,616
Cash and due from banks at end of period................................................................................................................	$	1,512		$	1,385
Supplemental disclosure of non-cash investing activities
Trading securities pending settlement.........................................................................................................................	$	144		$	20
Transfer of loans to held for sale.................................................................................................................................	33			39

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. Organization and Presentation

HSBC USA Inc. ("HSBC USA"), incorporated under the laws of Maryland, is a New York State based bank holding company and an indirect wholly-owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect wholly-owned subsidiary of HSBC Holdings plc ("HSBC"). The accompanying unaudited interim consolidated financial statements of HSBC USA Inc. and its subsidiaries (collectively "HUSI") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. HSBC USA (together with its subsidiaries, "HUSI") may also be referred to in these notes to the consolidated financial statements as "we," "us" or "our." These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Form 10-K"). Certain reclassifications have been made to prior period amounts to conform to the current period presentation. In addition, a reduction in trading assets and trading liabilities of $5.1 billion at December 31, 2012 was made to properly reflect the elimination of certain affiliate inter-company balances relating to trading derivatives. We have determined that this correction had no impact to any other consolidated financial information presented for 2012.

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.

In May 2013, we consolidated our commercial paper conduit variable interest entity, otherwise known as Bryant Park Funding LLC ("Bryant Park") upon the completion of a restructuring of that entity. See Note 17, "Variable Interest Entities" for further details.

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 and other wholly-owned affiliates, entered into an agreement to sell its Card and Retail Services business to Capital One Financial Corporation ("Capital One"). This transaction was completed on May 1, 2012. The sale included our General Motors ("GM") and Union Plus ("UP") credit card receivables as well as our private label credit card and closed-end receivables, all of which were purchased from HSBC Finance. Prior to completing the transaction, we recorded lower of amortized cost or fair value adjustments on these receivables which, prior to the sale, were classified as held for sale on our balance sheet as a component of assets of discontinued operations which totaled $440 million in the nine months ended September 30, 2012 and is reflected in net interest income and other revenues in the table below. These fair value adjustments were largely offset by held for sale accounting adjustments in which loan impairment charges and premium amortization were no longer recorded. The total final cash consideration allocated to us was approximately $19.2 billion, which did not result in the recognition of a gain or loss upon completion of the sale as the receivables were recorded at fair value. The sale to Capital One did not include credit card receivables associated with HSBC Bank USA N. A.'s ("HSBC Bank USA") legacy credit card program and, therefore, are excluded from the table below. However a portion of these receivables were included as part of the branch sale to First Niagara Bank, N.A. in 2012 and HSBC Bank USA continues to offer credit cards to its customers. No significant one-time closure costs were incurred as a result of exiting these portfolios. In connection with the sale of our credit card portfolio to Capital One, we entered into an outsourcing arrangement with Capital One with respect to the servicing of our remaining credit card portfolio. In September 2013, the outsourcing arrangement with Capital One ended and we resumed the servicing of our remaining credit card portfolio.

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

Following the completion of the sale in May of 2012, there was no remaining impact on our results related to the discontinued credit cards operations. The following table summarizes the results of our discontinued credit card operations for the prior year periods:

	Three Months Ended September 30, 2012		Nine Months Ended September 30, 2012
	(in millions)
Net interest income and other revenues (1)...........................................................................	$	-	$	541
Income from discontinued operations before income tax...................................................	-		315

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

At September 30, 2013 and December 31, 2012 there were no remaining assets and liabilities of our discontinued credit cards operations reported on our consolidated balance sheet.

3. Trading Assets and Liabilities

Trading assets and liabilities consisted of the following.

	September 30, 2013		December 31, 2012
	(in millions)
Trading assets:
U.S. Treasury..............................................................................................................................................	$	2,064	$	2,484
U.S. Government agency issued or guaranteed....................................................................................	330		337
U.S. Government sponsored enterprises(1)............................................................................................	161		32
Obligations of U.S. states and political subdivisions..........................................................................	16		-
Asset backed securities............................................................................................................................	482		687
Corporate and foreign bonds(2)................................................................................................................	7,277		9,583
Other securities..........................................................................................................................................	24		36
Precious metals...........................................................................................................................................	10,587		12,332
Derivatives..................................................................................................................................................	4,586		5,383
	$	25,527	$	30,874
Trading liabilities:
Securities sold, not yet purchased..........................................................................................................	$	921	$	207
Payables for precious metals....................................................................................................................	3,549		5,767
Derivatives..................................................................................................................................................	6,595		8,725
	$	11,065	$	14,699

(1) Includes mortgage backed securities of $134 million and $16 million issued or guaranteed by the Federal National Mortgage Association ("FNMA") and $27 million and $16 million issued or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") at September 30, 2013 and December 31, 2012, respectively.

(2) We did not hold any foreign bonds issued by the governments of Greece, Ireland, Italy, Portugal or Spain at either September 30, 2013 or December 31, 2012.

At September 30, 2013 and December 31, 2012, the fair value of derivatives included in trading assets has been reduced by $4.5 billion and $5.1 billion, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

At September 30, 2013 and December 31, 2012, the fair value of derivatives included in trading liabilities has been reduced by $2.1 billion and $1.3 billion, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

See Note 10, "Derivative Financial Instruments" for further information on our trading derivatives and related collateral.

4. Securities

Our securities available-for-sale and securities held-to-maturity portfolios consisted of the following.

September 30, 2013	Amortized Cost		Non-Credit Loss Component of OTTI Securities			Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury...................................................................................	$	18,228	$	-		$	423	$	(60	)	$	18,591
U.S. Government sponsored enterprises:(1)
Mortgage-backed securities....................................................	161		-			-		(11		)	150
Collateralized mortgage obligations.......................................	43		-			-		(1		)	42
Direct agency obligations........................................................	4,082		-			276		(14		)	4,344
U.S. Government agency issued or guaranteed:
Mortgage-backed securities....................................................	10,800		-			179		(270		)	10,709
Collateralized mortgage obligations.......................................	8,045		-			30		(139		)	7,936
Direct agency obligations........................................................	1		-			-		-			1
Obligations of U.S. states and political subdivisions...............	867		-			17		(26		)	858
Asset backed securities collateralized by:
Residential mortgages..............................................................	1		-			1		-			2
Commercial mortgages..............................................................	133		-			2		-			135
Home equity...............................................................................	272		-			-		(42		)	230
Other............................................................................................	103		-			-		-			103
Foreign debt securities(2)(4)............................................................	4,805		-			10		(27		)	4,788
Equity securities.............................................................................	165		-			2		(3		)	164
Total available-for-sale securities.......................................................	$	47,706	$	-		$	940	$	(593	)	$	48,053
Securities held-to-maturity:
U.S. Government sponsored enterprises:(3)
Mortgage-backed securities....................................................	$	893	$	-		$	105	$	-		$	998
U.S. Government agency issued or guaranteed:
Mortgage-backed securities....................................................	55		-			9		-			64
Collateralized mortgage obligations.......................................	225		-			28		-			253
Obligations of U.S. states and political subdivisions...............	31		-			1		-			32
Asset-backed securities collateralized by residential mortgages........................................................................................	21		-			1		-			22
Asset-backed securities and other debt securities held by consolidated VIE(5).........................................................................	320		(112		)	21		-			229
Total held-to-maturity securities..................................................	$	1,545	$	(112	)	$	165	$	-		$	1,598

December 31, 2012	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury......................................................................................................	$	34,800	$	566	$	(24	)	$	35,342
U.S. Government sponsored enterprises:(1)
Mortgage-backed securities.......................................................................	144		1		(1		)	144
Collateralized mortgage obligations..........................................................	22		-		-			22
Direct agency obligations...........................................................................	4,039		364		(2		)	4,401
U.S. Government agency issued or guaranteed:
Mortgage-backed securities.......................................................................	15,646		674		(6		)	16,314
Collateralized mortgage obligations..........................................................	4,315		156		-			4,471
Direct agency obligations...........................................................................	1		-		-			1
Obligations of U.S. states and political subdivisions..................................	877		37		(2		)	912
Asset backed securities collateralized by:
Residential mortgages.................................................................................	1		-		-			1
Commercial mortgages.................................................................................	208		6		-			214
Home equity..................................................................................................	310		-		(52		)	258
Other...............................................................................................................	102		-		(18		)	84
Corporate and other domestic debt securities..............................................	24		2		-			26
Foreign debt securities(2)(4)...............................................................................	5,385		16		(48		)	5,353
Equity securities................................................................................................	167		6		-			173
Total available-for-sale securities..........................................................................	$	66,041	$	1,828	$	(153	)	$	67,716
Securities held-to-maturity:
U.S. Government sponsored enterprises:(3)
Mortgage-backed securities.......................................................................	$	1,121	$	148	$	-		$	1,269
U.S. Government agency issued or guaranteed:
Mortgage-backed securities.......................................................................	66		12		-			78
Collateralized mortgage obligations..........................................................	277		42		-			319
Obligations of U.S. states and political subdivisions..................................	38		3		-			41
Asset-backed securities collateralized by residential mortgages...............	118		6		-			124
Total held-to-maturity securities............................................................................	$	1,620	$	211	$	-		$	1,831

(1) Includes securities at amortized cost of $170 million and $153 million issued or guaranteed by FNMA at September 30, 2013 and December 31, 2012, respectively, and $34 million and $13 million issued or guaranteed by FHLMC at September 30, 2013 and December 31, 2012, respectively.

(2) At September 30, 2013 and December 31, 2012, foreign debt securities consisted of $1.2 billion and $1.5 billion, respectively, of securities fully backed by foreign governments. The remainder of foreign debt securities represents foreign bank or corporate debt.

(3) Includes securities at amortized cost of $422 million and $507 million issued or guaranteed by FNMA at September 30, 2013 and December 31, 2012, respectively, and $471 million and $614 million issued and guaranteed by FHLMC at September 30, 2013 and December 31, 2012, respectively.

(4) We did not hold any foreign debt securities issued by the governments of Greece, Ireland, Italy, Portugal or Spain at September 30, 2013 and December 31, 2012.

(5) Relates to securities held by Bryant Park Funding LLC, a variable interest entity which was consolidated in May 2013. See Note 17, "Variable Interest Entities" for additional information.

The following table summarizes gross unrealized losses and related fair values as of September 30, 2013 and December 31, 2012 classified as to the length of time the losses have existed:

	One Year or Less						Greater Than One Year
September 30, 2013	Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury................................................	10	$	(43	)	$	5,644	7	$	(17	)	$	609
U.S. Government sponsored enterprises..	31	(21		)	531		16	(5		)	237
U.S. Government agency issued or guaranteed................................................	202	(409		)	7,759		1	-			-
Obligations of U.S. states and political subdivisions.............................................	50	(26		)	455		-	-			-
Asset backed securities..............................	-	-			-		12	(42		)	241
Foreign debt securities................................	1	-			15		8	(27		)	3,324
Equity Securities..........................................	1	(3		)	156		-	-			-
Securities available-for-sale..............................	295	$	(502	)	$	14,560	44	$	(91	)	$	4,411
Securities held-to-maturity:
U.S. Government sponsored enterprises..	15	$	-		$	-	45	$	-		$	-
U.S. Government agency issued or guaranteed................................................	72	-			-		874	-			2
Obligations of U.S. states and political subdivisions.............................................	5	-			2		2	-			-
Asset backed securities..............................	2	-			2		-	-			-
Securities held-to-maturity.........................	94	$	-		$	4	921	$	-		$	2

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

Net unrealized gains decreased within the available-for-sale portfolio in the first nine months of 2013 primarily due to a significant rise in yields on U.S. Treasury and other U.S. Government securities during 2013 due to concerns that the Federal Reserve will wind down its bond buying program sooner than previously expected as well as security sales during the first nine months of 2013. We have reviewed the securities for which there is an unrealized loss for other-than-temporary impairment in accordance with our accounting policies. During the three and nine months ended September 30, 2013 and 2012, none of our debt securities were determined to have either initial other-than-temporary impairment or changes to previous other-than-temporary impairment estimates relating to credit.

Upon consolidation of Bryant Park Funding LLC during the second quarter of 2013, we have held-to-maturity asset backed securities totaling $208 million at September 30, 2013 which were previously determined to be other-than-temporarily impaired. We do not consider any other debt securities to be other-than-temporarily impaired at September 30, 2013 as we expect to recover their amortized cost basis and we neither intend nor expect to be required to sell these securities prior to recovery, even if that equates to holding securities until their individual maturities. However, additional other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.

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

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

For all securities held in the available-for-sale or held-to-maturity portfolios for which unrealized losses attributed to factors other than credit 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. 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 high levels of pending foreclosure volume associated with a U.S. housing market in the early stages of recovery;

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

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

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

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

• The severity and duration of unrealized loss.

For a complete description of the factors considered when analyzing debt securities for impairment, see Note 7, "Securities" in our 2012 Form 10-K. There have been no material changes in our process for assessing impairment during 2013.

For the three and nine months ended September 30, 2013 and 2012 there were no other-than-temporary impairment losses recognized related to credit loss. At September 30, 2013, as a result of consolidating a previously unconsolidated VIE in the second quarter of 2013, the excess of discounted future cash flows over fair value, representing the non-credit component of the unrealized loss associated with all other-than-temporarily impaired securities, was $112 million. At December 31, 2012, there were no non-credit component unrealized loss amounts recognized.

The following table summarizes the rollforward of credit losses on debt securities that were other-than-temporarily impaired which have previously been recognized in income that we do not intend to sell nor will likely be required to sell:

	Three Months Ended September 30, 2013		Nine Months Ended September 30, 2013
	(in millions)
Credit losses at the beginning of the period...................................................................	$	61	$	-
Credit losses previously recognized on held-to-maturity debt securities of VIE consolidated during the second quarter of 2013............................................................	-		61
Ending balance of credit losses on held-to-maturity debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss)............................................................................................	$	61	$	61

At September 30, 2013, we held 24 individual asset-backed securities in the available-for-sale portfolio, of which 8 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $333 million of the total aggregate fair value of asset-backed securities of $470 million at September 30, 2013. The gross unrealized losses on these monoline securities were $42 million at September 30, 2013. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of September 30, 2013 and, therefore, we only considered the financial guarantee of monoline insurers on securities for purposes of evaluating other-than-temporary impairment on securities with a fair value of $100 million. No security wrapped by a below investment grade monoline insurance company was deemed to be other-than-temporarily impaired at September 30, 2013.

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

As discussed above, certain asset-backed securities in the available-for-sale portfolio 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. We did not consider the value of the monoline wrap of any non-investment grade monoline insurer at September 30, 2013 and December 31, 2012. In evaluating the extent of our reliance on investment grade monoline insurance companies, consideration is given to our assessment of the creditworthiness of the monoline and other market factors. We perform both a credit as well as a liquidity analysis on the monoline insurers each quarter. Our analysis also compares market-based credit default spreads, when available, to assess the appropriateness of our monoline insurer's creditworthiness. Based on the public information available, including the regulatory reviews and actions undertaken by the state insurance commissions and the published financial results, we determine the degree of reliance to be placed on the financial guarantee policy in estimating the cash flows to be collected for the purpose of recognizing and measuring impairment loss.

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

Realized Gains (Losses) The following table summarizes realized gains and losses on investment securities transactions attributable to available-for-sale securities.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
							(in millions)
Gross realized gains..............................................................................................................	$	68		$	59		$	275		$	260
Gross realized losses............................................................................................................	(33		)	(9		)	(94		)	(115		)
Net realized gains..................................................................................................................	$	35		$	50		$	181		$	145

During the first quarter of 2013, we sold six asset-backed securities out of our held-to-maturity portfolio with a total carrying value of $71 million and recognized a gain of $8 million. These sales were in response to the significant credit deterioration which had occurred on these securities which had been classified as substandard for regulatory reporting purposes and, therefore, these disposals do not affect our intent and ability to hold our remaining held-to-maturity portfolio until maturity.

Contractual Maturities and Yields The following table summarizes the amortized cost and fair values of securities available-for-sale and securities held-to-maturity at September 30, 2013 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 September 30, 2013, together with the approximate taxable equivalent yield of the portfolio. The yields shown are calculated by dividing annual interest income, including the accretion of discounts and the amortization of premiums, by the amortized cost of securities outstanding at September 30, 2013. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates.

	Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years
Taxable Equivalent Basis	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(dollars are in millions)
Available-for-sale:
U.S. Treasury.......................................	$	500	.32	%	$	13,165	.82	%	$	2,656	2.45	%	$	1,907	4.07	%
U.S. Government sponsored enterprises........................................	50		.38		570		2.36		2,940		3.20		726		3.99
U.S. Government agency issued or guaranteed........................................	-		-		15		4.23		86		2.28		18,745		2.68
Obligations of U.S. states and political subdivisions......................	-		-		88		3.95		329		3.54		450		3.56
Asset backed securities.....................	-		-		1		2.02		11		.39		497		2.62
Foreign debt securities.......................	657		2.60		4,148		1.95				-		-		-
Total amortized cost..................................	$	1,207	1.57	%	$	17,987	1.14	%	$	6,022	2.87	%	$	22,325	2.86	%
Total fair value............................................	$	1,210			$	18,027			$	6,374			$	22,278
Held-to-maturity:
U.S. Government sponsored enterprises........................................	$	1	8.00	%	$	1	7.20	%	$	2	8.02	%	$	889	6.16	%
U.S. Government agency issued or guaranteed........................................	-		-		1		7.62		2		7.69		277		6.51
Obligations of U.S. states and political subdivisions......................	5		4.99		12		4.70		6		3.96		8		5.12
Asset backed securities.....................	-		-		-		-		-		-		21		6.24
Asset backed securities issued by consolidated VIE.................................	-		-		-		-		67		.29		141		.29
Total amortized cost..................................	$	6	5.71	%	$	14	5.18	%	$	77	.96	%	$	1,336	5.61	%
Total fair value............................................	$	6			$	16			$	79			$	1,497

Investments in Federal Home Loan Bank ("FHLB") stock and Federal Reserve Bank ("FRB") stock of $139 million and $482 million, respectively, were included in other assets at September 30, 2013. 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 December 31, 2012.

5. Loans

Loans consisted of the following:

	September 30, 2013		December 31, 2012
	(in millions)
Commercial loans:
Construction and other real estate.....................................................................................................	$	8,919	$	8,457
Business and corporate banking........................................................................................................	13,668		12,608
Global banking(1)(2).......................................................................................	23,370		20,009
Other commercial..................................................................................................................................	2,552		3,076
Total commercial...................................................................................................................................	48,509		44,150
Consumer loans:
Residential mortgages..........................................................................................................................	15,720		15,371
Home equity mortgages.......................................................................................................................	2,087		2,324
Credit cards............................................................................................................................................	856		815
Other consumer.....................................................................................................................................	538		598
Total consumer.....................................................................................................................................	19,201		19,108
Total loans....................................................................................................................................................	$	67,710	$	63,258

(1) Represents large multinational firms including globally focused U.S. corporate and financial institutions and U.S. Dollar lending to multinational banking customers managed by HSBC on a global basis as well as loans to HSBC affiliates.

(2) Includes loans to HSBC affiliates of $5.9 billion and $4.5 billion at September 30, 2013 and December 31, 2012, respectively. See Note 14, "Related Party Transactions" for additional information regarding loans to HSBC affiliates.

Net deferred origination costs (fees) totaled ($10 million) and $30 million at September 30, 2013 and December 31, 2012, respectively.

At September 30, 2013 and December 31, 2012, we had a net unamortized premium on our loans of $17 million and $25 million, respectively. We amortized net premiums of $1 million and $4 million on our loans in the three and nine months ended September 30, 2013, respectively, compared with $2 million and $20 million on our loans in the three and nine months ended September 30, 2012, respectively.

Age Analysis of Past Due Loans The following table summarizes the past due status of our loans at September 30, 2013 and December 31, 2012. The aging of past due amounts is 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, which results in the re-setting of the contractual delinquency status to current.

	Past Due				Total Past Due 30 Days or More
At September 30, 2013	30 - 89 days		90+ days				Current(1)		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate.....................................	$	3	$	58	$	61	$	8,858	$	8,919
Business and corporate banking........................................	42		35		77		13,591		13,668
Global banking.......................................................................	-		4		4		23,366		23,370
Other commercial...................................................................	28		27		55		2,497		2,552
Total commercial..........................................................................	73		124		197		48,312		48,509
Consumer loans:
Residential mortgages..........................................................	457		1,043		1,500		14,220		15,720
Home equity mortgages.......................................................	29		64		93		1,994		2,087
Credit cards............................................................................	15		13		28		828		856
Other consumer.....................................................................	7		24		31		507		538
Total consumer.............................................................................	508		1,144		1,652		17,549		19,201
Total loans....................................................................................	$	581	$	1,268	$	1,849	$	65,861	67,710

	Past Due				Total Past Due 30 Days or More
At December 31, 2012	30 - 89 days		90+ days		Total Past Due 30 Days or More		Current(1)		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate.....................................	$	89	$	152	$	241	$	8,216	$	8,457
Business and corporate banking........................................	73		70		143		12,465		12,608
Global banking.......................................................................	30		8		38		19,971		20,009
Other commercial...................................................................	16		31		47		3,029		3,076
Total commercial....................................................................	208		261		469		43,681		44,150
Consumer loans:
Residential mortgages..........................................................	493		976		1,469		13,902		15,371
Home equity mortgages.......................................................	40		82		122		2,202		2,324
Credit cards............................................................................	14		15		29		786		815
Other consumer.....................................................................	5		33		38		560		598
Total consumer......................................................................	552		1,106		1,658		17,450		19,108
Total loans....................................................................................	$	760	$	1,367	$	2,127	$	61,131	$	63,258

(1) Loans less than 30 days past due are presented as current.

Nonaccrual Loans Nonaccrual loans totaled $1.4 billion and $1.6 billion at September 30, 2013 and December 31, 2012, respectively. Interest income that would have been recorded if such nonaccrual loans had been current and in accordance with contractual terms was approximately $25 million and $86 million in the three and nine months ended September 30, 2013, respectively, compared with $37 million and $92 million in the three and nine months ended September 30, 2012, respectively. Interest income that was included in interest income on these loans was $11 million and $27 million in the three and nine months ended September 30, 2013, respectively, compared with $10 million and $14 million in the three and nine months ended September 30, 2012, respectively. For an analysis of reserves for credit losses, see Note 6, "Allowance for Credit Losses."

Nonaccrual loans and accruing receivables 90 days or more delinquent consisted of the following:

	September 30, 2013		December 31, 2012
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:....................................................................................................................................
Construction and land loans.................................................................................................	$	44	$	104
Other real estate......................................................................................................................	103		281
Business and corporate banking...............................................................................................	47		47
Global banking..............................................................................................................................	14		18
Other commercial..........................................................................................................................	2		13
Total commercial................................................................................................................................	210		463
Consumer:
Residential mortgages.................................................................................................................	1,020		1,038
Home equity mortgages..............................................................................................................	85		86
Total residential mortgages(1)................................................................................................	1,105		1,124
Other consumer loans..................................................................................................................	-		5
Total consumer loans..................................................................................................................	1,105		1,129
Nonaccrual loans held for sale......................................................................................................	45		37
Total nonaccruing loans..............................................................................................................................	1,360		1,629
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:....................................................................................................................................
Construction and land loans.................................................................................................	-		-
Other real estate......................................................................................................................	-		8
Business and corporate banking...............................................................................................	-		28
Other commercial..........................................................................................................................	9		1
Total commercial...........................................................................................................................	9		37
Consumer:
Credit card receivables................................................................................................................	13		15
Other consumer............................................................................................................................	24		28
Total consumer loans..................................................................................................................	37		43
Total accruing loans contractually past due 90 days or more..............................................................	46		80
Total nonperforming loans..........................................................................................................................	$	1,406	$	1,709

(1) Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7 bankruptcy and not re-affirmed and second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.

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

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

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

The following table presents information about receivables which were modified during the three and nine months ended September 30, 2013 and 2012 and as a result of this action became classified as TDR Loans.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in millions)
Commercial loans:
Construction and other real estate..................................................................................	$	-	$	38	$	15	$	105
Business and corporate banking.....................................................................................	29		1		34		22
Global banking....................................................................................................................	51		-		51		-
Total commercial................................................................................................................	80		39		100		127
Consumer loans:
Residential mortgages.......................................................................................................	64		220		155		328
Credit cards.........................................................................................................................	-		1		1		3
Total consumer...................................................................................................................	64		221		156		331
Total............................................................................................................................................	$	144	$	260	$	256	$	458

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and nine months ended September 30, 2013 was 1.80 percent and 2.00 percent, respectively, compared with 1.90 percent and 1.80 percent during the three and nine months ended September 30, 2012, respectively. Weighted-average contractual rate reduction for commercial loans was not significant in both number of loans and rate.

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

	September 30, 2013		December 31, 2012
	(in millions)
TDR Loans(1)(2):
Commercial loans:
Construction and other real estate.....................................................................................................	$	375	$	343
Business and corporate banking........................................................................................................	51		86
Global banking.......................................................................................................................................	51		-
Other commercial...................................................................................................................................	27		31
Total commercial....................................................................................................................................	504		460
Consumer loans:
Residential mortgages (3)......................................................................................................................	921		960
Credit cards............................................................................................................................................	10		14
Total consumer......................................................................................................................................	931		974
Total TDR Loans(4).........................................................................................................................................	$	1,435	$	1,434

	September 30, 2013		December 31, 2012
	(in millions)
Allowance for credit losses for TDR Loans(5):
Commercial loans:
Construction and other real estate.....................................................................................................	$	12	$	23
Business and corporate banking........................................................................................................	30		3
Global banking.......................................................................................................................................	4		-
Other commercial...................................................................................................................................	-		-
Total commercial....................................................................................................................................	46		26
Consumer loans:
Residential mortgages..........................................................................................................................	68		109
Credit cards............................................................................................................................................	3		5
Total consumer......................................................................................................................................	71		114
Total allowance for credit losses for TDR Loans......................................................................................	$	117	$	140

(1) TDR Loans are considered to be impaired loans. For consumer loans, all such loans are considered impaired loans regardless of accrual status. For commercial loans, impaired loans include other loans in addition to TDRs which totaled $98 million and $237 million at September 30, 2013 and December 31, 2012, respectively.

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

	September 30, 2013		December 31, 2012
	(in millions)
Commercial loans:
Construction and other real estate...............................................................................................	$	393	$	398
Business and corporate banking....................................................................................................	89		137
Global banking.............................................................................................................................	51		-
Other commercial........................................................................................................................	30		34
Total commercial.............................................................................................................................	563		569
Consumer loans:
Residential mortgages..................................................................................................................	1,101		1,118
Credit cards..................................................................................................................................	10		14
Total consumer.................................................................................................................................	1,111		1,132
Total.......................................................................................................................................................	$	1,674	$	1,701

(3) Includes $687 million and $608 million at September 30, 2013 and December 31, 2012, respectively, of loans that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.

(4) Includes $404 million and $519 million at September 30, 2013 and December 31, 2012, respectively, which are classified as nonaccrual loans.

(5) Included in the allowance for credit losses.

The following table provides additional information relating to TDR Loans.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in millions)
Average balance of TDR Loans
Commercial loans:
Construction and other real estate.............................................................................	$	405	$	364	$	362	$	361
Business and corporate banking................................................................................	39		85		49		92
Global banking...............................................................................................................	25		-		13		-
Other commercial...........................................................................................................	28		34		29		34
Total commercial...........................................................................................................	497		483		453		487
Consumer loans:
Residential mortgages(1)...............................................................................................	904		745		910		676
Credit cards....................................................................................................................	11		17		12		16
Total consumer..............................................................................................................	915		762		922		692
Total average balance of TDR Loans....................................................................................	$	1,412	$	1,245	$	1,375	$	1,179
Interest income recognized on TDR Loans
Commercial loans:
Construction and other real estate.............................................................................	$	4	$	2	$	9	$	6
Business and corporate banking................................................................................	-		-		-		-
Other commercial...........................................................................................................	1		3		3		6
Total commercial...........................................................................................................	5		5		12		12
Consumer loans:
Residential mortgages..................................................................................................	8		8		24		22
Credit cards....................................................................................................................	-		-		1		-
Total consumer..............................................................................................................	8		8		25		22
Total interest income recognized on TDR Loans.................................................................	$	13	$	13	$	37	$	34

(1) Beginning in the third quarter of 2012, average balances for residential mortgages include loans discharged under Chapter 7 bankruptcy and not re-affirmed.

The following table presents loans which were classified as TDR Loans during the previous 12 months which for commercial loans became 90 days or greater contractually delinquent or for consumer loans became 60 days or greater contractually delinquent during the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in millions)
Commercial loans:
Construction and other real estate..................................................................................	$	28	$	-	$	28	$	-
Business and corporate banking.....................................................................................	2		-		2		-
Other commercial................................................................................................................	-		-		-		-
Total commercial.................................................................................................................	30		-		30		-
Consumer loans:
Residential mortgages.......................................................................................................	10		57		35		159
Credit cards.........................................................................................................................	-		-		-		-
Total consumer...................................................................................................................	10		57		35		159
Total............................................................................................................................................	$	40	$	57	$	65	$	159

Impaired commercial loans The following table summarizes impaired commercial loan statistics:

	Amount with Impairment Reserves		Amount without Impairment Reserves		Total Impaired Commercial Loans(1)(2)(3)		Impairment Reserve
	(in millions)
At September 30, 2013
Construction and other real estate........................................................	$	71	$	349	$	420	$	17
Business and corporate banking...........................................................	39		17		56		32
Global banking.........................................................................................	65		-		65		9
Other commercial.....................................................................................	-		61		61		-
Total...........................................................................................................	$	175	$	427	$	602	$	58
At December 31, 2012
Construction and other real estate........................................................	$	192	$	305	$	497	$	86
Business and corporate banking...........................................................	57		49		106		10
Global banking.........................................................................................	-		18		18		-
Other commercial.....................................................................................	1		75		76		-
Total...........................................................................................................	$	250	$	447	$	697	$	96

(1) The decrease in construction and other real estate impaired loans with impairment allowances since December 31, 2012 largely reflects the partial charge-off of a loan with a balance of $71 million and other decreases in previously impaired loans which was partially offset by the addition of currently performing TDR loans added in the second quarter of 2013 totaling $152 million, for which an insignificant amount of impairment reserves were required.

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

	September 30, 2013		December 31, 2012
	(in millions)
Construction and other real estate............................................................................................................	$	375	$	343
Business and corporate banking................................................................................................................	51		86
Global banking..........................................................................................................................................	51
Other commercial....................................................................................................................................	27		31
Total........................................................................................................................................................	$	504	$	460

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

	September 30, 2013		December 31, 2012
	(in millions)
Construction and other real estate.............................................................................................................	$	438	$	552
Business and corporate banking..................................................................................................................	94		157
Global banking...........................................................................................................................................	65		18
Other commercial......................................................................................................................................	64		79
Total.........................................................................................................................................................	$	661	$	806

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
					(in millions)
Average balance of impaired commercial loans:
Construction and other real estate..................................................................................	$	443	$	562	$	444	$	628
Business and corporate banking.....................................................................................	62		112		69		122
Global banking....................................................................................................................	42		129		30		103
Other commercial................................................................................................................	63		87		69		88
Total average balance of impaired commercial loans...................................................	$	610	$	890	$	612	$	941
Interest income recognized on impaired commercial loans:
Construction and other real estate..................................................................................	$	4	$	5	$	10	$	8
Business and corporate banking.....................................................................................	-		2		-		4
Global banking....................................................................................................................	-		-		-		-
Other commercial................................................................................................................	1		1		4		2
Total interest income recognized on impaired commercial loans................................	$	5	$	8	$	14	$	14

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. The following table summarizes criticized assets for commercial loans:

	Special Mention		Substandard		Doubtful		Total
	(in millions)
At September 30, 2013
Construction and other real estate........................................................	$	358	$	511	$	16	$	885
Business and corporate banking...........................................................	529		161		31		721
Global banking.........................................................................................	396		101		5		502
Other commercial.....................................................................................	12		50		-		62
Total...........................................................................................................	$	1,295	$	823	$	52	$	2,170
At December 31, 2012
Construction and other real estate........................................................	$	627	$	677	$	105	$	1,409
Business and corporate banking...........................................................	369		115		10		494
Global banking.........................................................................................	93		50		-		143
Other commercial.....................................................................................	36		74		2		112
Total...........................................................................................................	$	1,125	$	916	$	117	$	2,158

Nonperforming The following table summarizes the status of our commercial loan portfolio:

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At September 30, 2013
Commercial:
Construction and other real estate.....................................	$	8,772	$	147	$	-	$	8,919
Business and corporate banking........................................	13,621		47		-		13,668
Global banking.......................................................................	23,356		14		-		23,370
Other commercial...................................................................	2,541		2		9		2,552
Total commercial..........................................................................	$	48,290	$	210	$	9	$	48,509
At December 31, 2012
Commercial:
Construction and other real estate.....................................	$	8,064	$	385	$	8	$	8,457
Business and corporate banking........................................	12,533		47		28		12,608
Global banking.......................................................................	19,991		18		-		20,009
Other commercial...................................................................	3,062		13		1		3,076
Total commercial..........................................................................	$	43,650	$	463	$	37	$	44,150

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

	Investment Grade(1)		Non-Investment Grade		Total
	(in millions)
At September 30, 2013
Construction and other real estate...........................................................................................	$	5,583	$	3,336	$	8,919
Business and corporate banking..............................................................................................	6,953		6,715		13,668
Global banking............................................................................................................................	19,518		3,852		23,370
Other commercial........................................................................................................................	1,188		1,364		2,552
Total commercial..................................................................................................................	$	33,242	$	15,267	$	48,509
At December 31, 2012
Construction and other real estate...........................................................................................	$	4,727	$	3,730	$	8,457
Business and corporate banking..............................................................................................	6,012		6,596		12,608
Global banking............................................................................................................................	16,206		3,803		20,009
Other commercial........................................................................................................................	1,253		1,823		3,076
Total commercial..................................................................................................................	$	28,198	$	15,952	$	44,150

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

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

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

	September 30, 2013				December 31, 2012
	Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgages(1)..............................................................................	$	1,221	7.70	%	$	1,233	7.78	%
Home equity mortgages..............................................................................	75		3.61		75		3.23
Total residential mortgages.....................................................................	1,296		7.23		1,308		7.20
Credit cards...................................................................................................	18		2.10		21		2.58
Other consumer............................................................................................	28		4.65		30		4.52
Total consumer...................................................................................................	$	1,342	6.92	%	$	1,359	6.92	%

(1) At September 30, 2013 and December 31, 2012, residential mortgage loan delinquency includes $1.1 billion and $1.0 billion, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

Nonperforming The following table summarizes the status of our consumer loan portfolio:

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At September 30, 2013
Consumer:
Residential mortgages................................................................	$	14,700	$	1,020	$	-	$	15,720
Home equity mortgages.............................................................	2,002		85		-		2,087
Total residential mortgages.................................................	16,702		1,105		-		17,807
Credit cards..................................................................................	843		-		13		856
Other consumer...........................................................................	514		-		24		538
Total consumer..................................................................................	$	18,059	$	1,105	$	37	$	19,201
At December 31, 2012
Consumer:
Residential mortgages................................................................	$	14,333	$	1,038	$	-	$	15,371
Home equity mortgages.............................................................	2,238		86		-		2,324
Total residential mortgages.................................................	16,571		1,124		-		17,695
Credit cards..................................................................................	800		-		15		815
Other consumer...........................................................................	565		5		28		598
Total consumer..................................................................................	$	17,936	$	1,129	$	43	$	19,108

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

Concentration of Credit Risk At September 30, 2013 and December 31, 2012, our loan portfolio included interest-only residential mortgage loans totaling $3.7 billion and $4.0 billion, respectively. An interest-only residential mortgage loan 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 which increases the credit risk of this loan type.

6. Allowance for Credit Losses

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 nine months ended September 30, 2013 and 2012:

	Commercial												Consumer
	Construction and Other Real Estate			Business and Corporate Banking			Global Banking			Other Comm'l			Residential Mortgages			Home Equity Mortgages			Credit Card			Other Consumer			Total
	(in millions)
Three Months Ended September 30, 2013
Allowance for credit losses - beginning of period...................	$	110		$	103		$	69		$	17		$	196		$	52		$	45		$	13		$	605
Provision charged to income.........	(10		)	32			(2		)	-			(1		)	28			6			1			54
Charge offs...............................	(3		)	(7		)	-			-			(40		)	(15		)	(7		)	(1		)	(73		)
Recoveries................................	1			3			-			-			3			1			1			-			9
Net (charge offs) recoveries..........	(2		)	(4		)	-			-			(37		)	(14		)	(6		)	(1		)	(64		)
Allowance for credit losses - end of period...................................	$	98		$	131		$	67		$	17		$	158		$	66		$	45		$	13		$	595

Three Months Ended September 30, 2012
Allowance for credit losses - beginning of period.......................	$	198		$	80		$	44		$	18		$	188		$	47		$	31		$	13		$	619
Provision charged to income.........	(11		)	18			12			-			33			13			15			4			84
Charge offs...............................	(9		)	(8		)	-			-			(24		)	(18		)	(14		)	(3		)	(76		)
Recoveries................................	3			2			-			-			3			-			2			-			10
Net (charge offs) recoveries..........	(6		)	(6		)	-			-			(21		)	(18		)	(12		)	(3		)	(66		)
Allowance for credit losses - end of period.......................................	$	181		$	92		$	56		$	18		$	200		$	42		$	34		$	14		$	637

Nine Months Ended September 30, 2013
Allowance for credit losses - beginning of period...................	$	162		$	97		$	41		$	17		$	210		$	45		$	55		$	20		$	647
Provision charged to income.........	(15		)	49			26			(4		)	10			58			17			1			142
Charge offs...............................	(62		)	(22		)	-			-			(69		)	(38		)	(30		)	(10		)	(231		)
Recoveries................................	13			7			-			4			7			1			3			2			37
Net (charge offs) recoveries..........	(49		)	(15		)	-			4			(62		)	(37		)	(27		)	(8		)	(194		)
Allowance for credit losses - end of period...................................	$	98		$	131		$	67		$	17		$	158		$	66		$	45		$	13		$	595
Ending balance: collectively evaluated for impairment..........	$	81		$	99		$	58		$	17		$	92		$	64		$	42		$	13		$	466
Ending balance: individually evaluated for impairment..........	17			32			9			-			66			2			3			-			129
Total allowance for credit losses...	$	98		$	131		$	67		$	17		$	158		$	66		$	45		$	13		$	595

Loans:
Collectively evaluated for impairment...................................	$	8,499		$	13,612		$	23,305		$	2,491		$	13,899		$	2,068		$	846		$	538		$	65,258
Individually evaluated for impairment(1)................................	420			56			65			61			215			19			10			-			846
Loans carried at lower of amortized cost or fair value less cost to sell....................................	-			-			-			-			1,606			-			-			-			1,606
Total loans...................................	$	8,919		$	13,668		$	23,370		$	2,552		$	15,720		$	2,087		$	856		$	538		$	67,710


Nine Months Ended September 30, 2012
Allowance for credit losses - beginning of period...................	$	212		$	78		$	131		$	21		$	192		$	52		$	39		$	18		$	743
Provision charged to income.........	(36		)	39			9			(9		)	72			55			35			8			173
Charge offs...............................	(12		)	(31		)	(84		)	-			(73		)	(65		)	(47		)	(17		)	(329		)
Recoveries................................	17			6			-			6			9			-			7			5			50
Net (charge offs) recoveries..........	5			(25		)	(84		)	6			(64		)	(65		)	(40		)	(12		)	(279		)
Allowance for credit losses - end of period...................................	$	181		$	92		$	56		$	18		$	200		$	42		$	34		$	14		$	637
Ending balance: collectively evaluated for impairment..........	$	79		$	82		$	41		$	17		$	93		$	36		$	29		$	14		$	391
Ending balance: individually evaluated for impairment..........	102			10			15			1			107			6			5			-			246
Total allowance for credit losses...	$	181		$	92		$	56		$	18		$	200		$	42		$	34		$	14		$	637

Loans:
Collectively evaluated for impairment...................................	$	7,387		$	12,389		$	18,868		$	3,054		$	13,462		$	2,365		$	780		$	615		$	58,920
Individually evaluated for impairment(1)................................	533			108			143			86			345			22			16			-			1,253
Loans carried at lower of amortized cost or fair value less cost to sell	-			-			-			-			1,279			-			-			-			1,279
Total loans...................................	$	7,920		$	12,497		$	19,011		$	3,140		$	15,086		$	2,387		$	796		$	615		$	61,452

(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. Loans individually evaluated for impairment exclude TDR loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell which totaled $687 million and $516 million at September 30, 2013 and 2012, respectively.

7. Loans Held for Sale

Loans held for sale consisted of the following:

	September 30, 2013		December 31, 2012
	(in millions)
Commercial loans...............................................................................................................................	$	42	$	481
Consumer loans:
Residential mortgages................................................................................................................	130		472
Other consumer...........................................................................................................................	64		65
Total consumer..................................................................................................................................	194		537
Total loans held for sale...................................................................................................................	$	236	$	1,018

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale at September 30, 2013 and December 31, 2012. The fair value of commercial loans held for sale under this program was $1 million and $465 million at September 30, 2013 and December 31, 2012, respectively. We have elected to designate all of the leveraged acquisition finance syndicated loans classified as held for sale at fair value under fair value option. See Note 11, "Fair Value Option," for additional information.

Commercial loans held for sale also includes commercial real estate loans totaling $41 million and $16 million at September 30, 2013 and December 31, 2012, respectively.

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). Upon conversion of our mortgage processing and servicing operations to PHH Mortgage in the second quarter of 2013, we no longer retain the servicing rights in relation to new mortgage loans and new agency eligible loan originations are sold servicing released directly to PHH Mortgage beginning with May 2013 applications. Also included in residential mortgage loans held for sale are subprime residential mortgage loans with a fair value of $48 million and $52 million at September 30, 2013 and December 31, 2012, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties.

Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value. While the initial carrying amount of loans held for sale continued to exceed fair value at September 30, 2013, we experienced a decrease in the valuation allowance for consumer loans held for sale during 2013 due primarily to loan sales. The valuation allowance on consumer loans held for sale was $81 million and $114 million at September 30, 2013 and December 31, 2012, respectively.

Loans held for sale are subject to market risk, liquidity risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions, as well as the credit environment. Interest rate risk for residential mortgage loans held for sale was partially mitigated through an economic hedging program to offset changes in the fair value of the mortgage loans held for sale attributable to changes in market interest rates. Trading related revenue associated with this economic hedging program, which is included in residential mortgage banking revenue in the consolidated statement of income (loss), were losses of $9 million and $5 million during the three and nine months ended September 30, 2013, respectively, compared with losses of $4 million and gains of $0 million during the three and nine months ended September 30, 2012, respectively. With the conversion of our mortgage processing and servicing operations to PHH Mortgage in the second quarter of 2013, PHH Mortgage is obligated to purchase agency eligible loans from us as of the earlier of when the customer locks the mortgage loan pricing or when the mortgage loan application is approved beginning with May 2013 applications. As a result, we retain none of the risk of market changes in mortgage rates and, therefore, an economic hedging program is no longer required for these loans.

8. Intangible Assets

Intangible assets consisted of the following:

	September 30, 2013		December 31, 2012
	(in millions)
Mortgage servicing rights:................................................................................................................
Residential.....................................................................................................................................	$	224	$	168
Commercial....................................................................................................................................	11		11
Total mortgage servicing rights.......................................................................................................	$	235	$	179
Purchased credit card relationships.................................................................................................	55		60
Favorable lease agreements..............................................................................................................	5		8
Total intangible assets.......................................................................................................................	$	295	$	247

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

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

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

The following table summarizes the critical assumptions used to calculate the fair value of residential MSRs:

	September 30, 2013		December 31, 2012
Annualized constant prepayment rate ("CPR")................................................................................	12.5	%	22.4	%
Constant discount rate..........................................................................................................................	12.8	%	11.3	%
Weighted average life...........................................................................................................................	5.0		3.4

The following table summarizes residential MSRs activity:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in millions)
Fair value of MSRs:
Beginning balance...........................................................................................................	$	225		$	187		$	168		$	220
Additions related to loan sales......................................................................................	3			6			14			20
Changes in fair value due to:
Change in valuation model inputs or assumptions...............................................	4			(5		)	73			(20		)
Customer payments....................................................................................................	(8		)	(15		)	(31		)	(47		)
Ending balance........................................................................................................................	$	224		$	173		$	224		$	173

The following table summarizes information regarding residential mortgage loans serviced for others, which are not included in the consolidated balance sheet:

	September 30, 2013		December 31, 2012
	(in millions)
Outstanding principal balances at period end.......................................................................................	$	28,211	$	32,041
Custodial balances maintained and included in noninterest bearing deposits at period end........	$	-	$	810

Our CPR assumption declined significantly at September 30, 2013 compared with December 31, 2012 due to rising interest rates which was the primary driver of the increase in value.

During the second quarter of 2013, we completed the conversion of our mortgage processing and servicing operations to PHH Mortgage under our previously announced strategic relationship agreement with PHH Mortgage to manage our mortgage processing and servicing operations. Under the terms of the agreement, PHH Mortgage provides us with mortgage origination processing services as well as sub-servicing of our portfolio of owned and serviced mortgages totaling $45.2 billion as of September 30, 2013. Although we continue to own both the mortgages on our balance sheet and the mortgage servicing rights associated with the serviced loans at the time of conversion, we now sell our agency eligible originations beginning with May 2013 applications to PHH Mortgage on a servicing released basis which results in no new mortgage servicing rights being recognized. As a result, we no longer maintain custodial balances for loans sold to PHH. No significant one-time restructuring costs have been incurred as a result of this transaction.

Servicing fees collected are included in residential mortgage banking revenue and totaled $20 million and $62 million during the three and nine months ended September 30, 2013, respectively, compared with $21 million and $68 million during the three and nine months ended September 30, 2012, respectively.

Commercial mortgage servicing rights Commercial MSRs, which are accounted for using the lower of amortized cost or fair value method, totaled $11 million and $11 million at September 30, 2013 and December 31, 2012, respectively.

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

9. Goodwill

Goodwill was $2.2 billion at both September 30, 2013 and December 31, 2012, and includes accumulated impairment losses from prior years of $54 million.

In July 2013, we completed our annual impairment test of goodwill and determined that the fair value of all of our reporting units exceeded their carrying amounts. However, our testing results continued to indicate that there is only marginal excess of fair value over book value in our Global Banking and Markets reporting unit as its book value including allocated goodwill was 92 percent of fair value. Based on the results of this testing, as of September 30, 2013, we performed an interim impairment test of the goodwill associated with our Global Banking and Markets reporting unit which indicated that the fair value of the reporting unit continued to exceed its book value. At September 30, 2013, the book value of our Global Banking and Markets reporting unit including allocated goodwill of $612 million, was 90 percent of fair value.

10. Derivative Financial Instruments

In the normal course of business, the derivative instruments entered into are for trading, market making and risk management purposes. For financial reporting purposes, a derivative instrument is designated in one of the following categories: (a) financial instruments held for trading, (b) hedging instruments designated as a qualifying hedge under derivative and hedge accounting principles or (c) a non-qualifying economic hedge. The derivative instruments held are predominantly swaps, futures, options and forward contracts. All 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.

The following table presents the fair value of derivative contracts by major product type on a gross basis. Gross fair values exclude the effects of both counterparty netting as well as collateral, and therefore are not representative of our exposure. The table below presents the amounts of counterparty netting and cash collateral that have been offset in the consolidated balance sheet, as well as cash and securities collateral posted and received under enforceable credit support agreements that do not meet the criteria for netting. Derivative assets and liabilities which are not subject to an enforceable master netting agreement, or are subject to a netting agreement that we have not yet determined to be enforceable, have not been netted in the table below. Where we have received or posted collateral under credit support agreements, but have not yet determined such agreements are enforceable, the related collateral also has not been netted in the table below.

	September 30, 2013				December 31, 2012
	Derivative assets		Derivative liabilities		Derivative assets		Derivative liabilities
	(in millions)
Derivatives accounted for as fair value hedges(1)
OTC-cleared(2)...................................................................................	$	50	$	23	$	-	$	15
Bilateral OTC(2).................................................................................	141		327		10		860
Interest rate contracts......................................................................	191		350		10		875

Derivatives accounted for as cash flow hedges(1)
Bilateral OTC(2).................................................................................	92		3		33		9
Foreign exchange contracts.............................................................	92		3		33		9

OTC-cleared(2)...................................................................................	7		-		-		-
Bilateral OTC(2).................................................................................	21		97		14		227
Interest rate contracts......................................................................	28		97		14		227

Total derivatives accounted for as hedges..........................................	311		450		57		1,111

Trading derivatives not accounted for as hedges(3)
Exchange-traded(2).............................................................................	77		59		99		82
OTC-cleared(2)...................................................................................	20,213		21,130		17,204		16,663
Bilateral OTC(2).................................................................................	34,702		33,974		48,480		48,623
Interest rate contracts......................................................................	54,992		55,163		65,783		65,368

Exchange-traded(2).............................................................................	1		3		4		25
Bilateral OTC(2).................................................................................	14,158		13,802		13,756		13,537
Foreign exchange contracts.............................................................	14,159		13,805		13,760		13,562

Equity contract - bilateral OTC(2)....................................................	1,237		1,238		1,287		1,291

Exchange-traded(2).............................................................................	107		45		135		19
Bilateral OTC(2).................................................................................	1,176		985		656		719
Precious metals contracts................................................................	1,283		1,030		791		738

OTC-cleared(2)...................................................................................	577		559		511		437
Bilateral OTC(2).................................................................................	4,638		4,726		6,617		6,910
Credit contracts................................................................................	5,215		5,285		7,128		7,347

Other derivatives not accounted for as hedges(1)

Interest rate contracts - bilateral OTC(2).......................................	548		92		901		97

Foreign exchange contracts - bilateral OTC(2).............................	-		26		52		17

Equity contracts - bilateral OTC(2)..................................................	588		169		472		126

Precious metals contracts - bilateral OTC(2).................................	-		33		-		-

Credit contracts - bilateral OTC(2)..................................................	12		11		1		4

Total derivatives	78,345		77,302		90,232		89,661

Less: Gross amounts of receivable / payable subject to enforceable master netting agreements(4)(6)......................................	67,809		67,809		78,244		78,244
Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements(5)(6)..................................	4,491		2,116		5,123		1,336
Net amounts of derivative assets / liabilities presented in the balance sheet........................................................................................	6,045		7,377		6,865		10,081

Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet	1,276		2,972		627		4,887
Net amounts of derivative assets / liabilities....................................	$	4,769	$	4,405	$	6,238	$	5,194

(1) Derivative assets/liabilities related to cash flow hedges, fair value hedges and derivative instruments held for purposes other than for trading are recorded in other assets / interest, taxes and other liabilities on the consolidated balance sheet.

(2) Over-the-counter (OTC) derivatives include derivatives executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. The credit risk associated with bilateral OTC derivatives is managed through master netting agreements and obtaining collateral. OTC-cleared derivatives are executed bilaterally in the OTC market but then novated to a central clearing counterparty, whereby the central clearing counterparty becomes the counterparty to both of the original counterparties. Exchange traded derivatives are executed directly on an organized exchange that provides pre-trade price transparency. Credit risk is minimized for OTC-cleared derivatives and exchange traded derivatives through daily margining required by central clearing counterparties.

(3) Trading related derivative assets/liabilities are recorded in trading assets/trading liabilities on the consolidated balance sheet.

(4) Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable netting agreements.

(5) Represents the netting of cash collateral posted and received by counterparty under enforceable credit support agreements.

(6) Netting is performed at a counterparty level in cases where enforceable master netting and credit support agreements are in place, regardless of the type of derivative instrument. Therefore, we have not attempted to allocate netting to the different types of derivative instruments shown in the table above.

See Note 18, "Guarantee Arrangements, Pledged Assets and Collateral" for further information on offsetting related to resale and repurchase agreements and securities borrowing and lending arrangements.

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

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

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

The changes in the fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying amount of the hedged item (basis adjustment). If the hedging relationship is terminated and the hedged item continues to exist, the basis adjustment is amortized over the remaining life of the hedged item. We recorded basis adjustments for active fair value hedges which increased the carrying amount of our debt by $1 million during the nine months ended September 30, 2013, respectively, compared with a decrease in the carrying amount of our debt by $3 million and $9 million during the three and nine months ended September 30, 2012, respectively. We amortized $3 million and $10 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships during the three and nine months ended September 30, 2013, respectively, compared with $3 million and $9 million during the three and nine months ended September 30, 2012, respectively. The total accumulated unamortized basis adjustment amounted to an increase in the carrying amount of our debt of $37 million and $49 million as of September 30, 2013 and December 31, 2012, respectively. Basis adjustments for active fair value hedges of available-for-sale securities increased the carrying amount of the securities by $38 million and decreased the carrying amount of the securities by $563 million during the three and nine months ended September 30, 2013, respectively, compared with an increase in the carrying amount of the securities by $44 million and $231 million during the three and nine months ended September 30, 2012. Total accumulated unamortized basis adjustments for active fair value hedges of available-for-sale securities amounted to an increase in carrying amount of $161 million and $836 million as of September 30, 2013 and December 31, 2012, respectively.

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

	Gain (Loss) on Derivative						Gain (Loss) on Hedged Items						Net Ineffective Gain (Loss) Recognized
	Interest Income (Expense)			Other Income			Interest Income (Expense)			Other Income			Other Income
	(in millions)
Three Months Ended September 30, 2013
Interest rate contracts/AFS Securities..............	$	(56	)	$	42		$	112		$	(39	)	$	3
Interest rate contracts/subordinated debt.......	4			-			(15		)	1			1
Total.......................................................................	$	(52	)	$	42		$	97		$	(38	)	$	4

Three Months Ended September 30, 2012
Interest rate contracts/AFS Securities..............	$	(33	)	$	(41	)	$	141		$	58		$	17
Interest rate contracts/subordinated debt.......	3			3			(15		)	(3		)	-
Total.......................................................................	$	(30	)	$	(38	)	$	126		$	55		$	17

Nine Months Ended September 30, 2013
Interest rate contracts/AFS Securities..............	$	(168	)	$	609		$	337		$	(593	)	$	16
Interest rate contracts/subordinated debt.......	12			(1		)	(46		)	1			-
Total.......................................................................	$	(156	)	$	608		$	291		$	(592	)	$	16

Nine Months Ended September 30, 2012
Interest rate contracts/AFS Securities..............	$	(117	)	$	(326	)	$	482		$	323		$	(3	)
Interest rate contracts/subordinated debt.......	10			9			(46		)	(9		)	-
Total.......................................................................	$	(107	)	$	(317	)	$	436		$	314		$	(3	)

Cash Flow Hedges We own or issue floating rate financial instruments and enter into forecasted transactions that give rise to variability in future cash flows. As a part of our risk management strategy, we use interest rate swaps, currency swaps and futures contracts to mitigate risk associated with variability in the cash flows. Changes in fair value of a derivative instrument associated with the effective portion of a qualifying cash flow hedge are recognized initially in other comprehensive income. When the cash flows for which the derivative is hedging materialize and are recorded in income or expense, the associated gain or loss from the hedging derivative previously recorded in accumulated other comprehensive income is reclassified into earnings in the same accounting period in which the designated forecasted transaction or hedged item affects earnings. If a cash flow hedge of a forecasted transaction is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in accumulated other comprehensive income (loss) unless it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period as documented at the inception of the hedge, at which time the cumulative gain or loss is released into earnings. As of September 30, 2013 and December 31, 2012, active cash flow hedge relationships extend or mature through July 2036. During the three and nine months ended September 30, 2013, $2 million and $9 million, respectively, of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income compared with $4 million and $12 million during the three and nine months ended September 30, 2012, respectively. During the next twelve months, we expect to amortize $6 million of remaining losses to earnings resulting from these terminated and/or de-designated cash flow hedges. The interest accrual related to the derivative contract is recognized in interest income.

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 (loss).

	Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)				Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Gain (Loss) Reclassed From AOCI into Income (Effective Portion)						Location of Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion)
	2013		2012			2013			2012				2013		2012
	(in millions)
Three Months Ended September 30,
Foreign exchange contracts.............................	$	2	$	-	Interest income (expense)	$	-		$	-		Other income	$	-	$	-
Interest rate contracts......	32		14		Interest income (expense)	(2		)	(4		)	Other income	-		-
Total....................................	$	34	$	14		$	(2	)	$	(4	)		$	-	$	-

Nine Months Ended September 30,
Foreign exchange contracts.............................	$	3	$	-	Interest income (expense)	$	-		$	-		Other income	$	-	$	-
Interest rate contracts......	150		4		Interest income (expense)	(9		)	(12		)	Other income	-		-
Total....................................	$	153	$	4		$	(9	)	$	(12	)		$	-	$	-

Trading Derivatives and Non-Qualifying Hedging Activities 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.

We have elected the fair value option for certain fixed rate long-term debt issuances as well as hybrid instruments which include all structured notes and structured deposits and have entered into certain derivative contracts related to these debt issuances and hybrid instruments carried at fair value. These derivative contracts are non-qualifying hedges but are considered economic hedges. We have also entered into credit default swaps which are designated as economic hedges against the credit risks within our loan portfolio. In the event of an impairment loss occurring in a loan that is economically hedged, the impairment loss is recognized as provision for credit losses while the gain on the credit default swap is recorded as other income. In addition, we also from time to time have designated certain forward purchase or sale of to-be-announced ("TBA") securities to economically hedge mortgage servicing rights. Changes in the fair value of TBA positions, which are considered derivatives, are recorded in residential mortgage banking revenue. 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 gain (loss) on instruments designated at fair value and related derivatives, other income or residential mortgage banking revenue while the derivative asset or liability positions are reflected as other assets or other liabilities

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

	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,						Nine Months Ended September 30,
		2013			2012			2013			2012
		(in millions)
Interest rate contracts.........................	Trading revenue	$	13		$	(24	)	$	(369	)	$	(8	)
Interest rate contracts.........................	Residential mortgage banking revenue	(4		)	7			(45		)	28
Foreign exchange contracts...............	Trading revenue	77			3			655			648
Equity contracts...................................	Trading revenue	2			2			4			62
Precious metals contracts...................	Trading revenue	(55		)	44			6			96
Credit contracts....................................	Trading revenue	2			(27		)	80			(705		)
Total.......................................................		$	35		$	5		$	331		$	121

The following table presents information on gains and losses on derivative instruments held for non-qualifying hedging activities and their locations on the consolidated statement of income (loss).

	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,						Nine Months Ended September 30,
		2013			2012			2013			2012
	(in millions)
Interest rate contracts.........................	Gain (loss) on instruments designated at fair value and related derivatives	$	(15	)	$	15		$	(253	)	$	120
Interest rate contracts.........................	Residential mortgage banking revenue	(9		)	(5		)	(5		)	-
Foreign exchange contracts...............	Gain (loss) on instruments designated at fair value and related derivatives	(2		)	23			(57		)	73
Equity contracts...................................	Gain (loss) on instruments designated at fair value and related derivatives	234			351			474			597
Precious metals contracts...................	Gain (loss) on instruments designated at fair value and related derivatives	42			-			-			-
Credit contracts....................................	Gain (loss) on instruments designated at fair value and related derivatives	(1		)	1			-			3
Credit contracts....................................	Other income	(3		)	(1		)	-			(6		)
Total.......................................................		$	246		$	384		$	159		$	787

Credit-Risk Related Contingent Features We enter into total return swap, interest rate swap, cross-currency swap and credit default swap contracts, amongst others which contain provisions that require us to maintain a specific credit rating from each of the major credit rating agencies. Sometimes the derivative instrument transactions are a part of broader structured product transactions. If HSBC Bank USA's credit ratings were to fall below the current ratings, the counterparties to our derivative instruments could demand us to post additional collateral. The amount of additional collateral required to be posted will depend on whether HSBC Bank USA is downgraded by one or more notches and whether the downgrade is in relation to long-term or short-term ratings. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of September 30, 2013, is $5.9 billion for which we have posted collateral of $5.3 billion. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of December 31, 2012, is $8.7 billion for which we have posted collateral of $7.9 billion. Substantially all of the collateral posted is in the form of cash or securities available-for-sale. See Note 18, "Guarantee Arrangements, Pledged Assets and Collateral," for further details.

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

Moody's	Long-Term Ratings
Short-Term Ratings	A1		A2		A3
	(in millions)
P-1.................................................................................................................................................	$	-	$	42	$	141
P-2.................................................................................................................................................	2		42		141

S&P	Long-Term Ratings
Short-Term Ratings	AA-		A+		A
	(in millions)
A-1+..............................................................................................................................................	$	-	$	-	$	40
A-1................................................................................................................................................	14		14		54

We would be required to post $15 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.

	September 30, 2013		December 31, 2012
	(in billions)
Interest rate:
Futures and forwards...............................................................................................................................	$	182.0	$	313.9
Swaps..........................................................................................................................................................	3,472.0		2,842.6
Options written..........................................................................................................................................	97.3		43.3
Options purchased...................................................................................................................................	97.5		44.2
	3,848.8		3,244.0
Foreign Exchange:
Swaps, futures and forwards...................................................................................................................	756.6		743.7
Options written..........................................................................................................................................	77.0		54.9
Options purchased...................................................................................................................................	79.0		55.5
Spot.............................................................................................................................................................	63.3		56.3
	975.9		910.4
Commodities, equities and precious metals:
Swaps, futures and forwards...................................................................................................................	47.2		48.1
Options written..........................................................................................................................................	21.6		21.0
Options purchased...................................................................................................................................	22.0		21.4
	90.8		90.5
Credit derivatives.............................................................................................................................................	403.0		484.9
Total...................................................................................................................................................................	$	5,318.5	$	4,729.8

11. Fair Value Option

We report our results to HSBC in accordance with its reporting basis, International Financial Reporting Standards ("IFRSs"). We typically have elected to apply fair value option accounting to selected financial instruments to align the measurement attributes of those instruments under U.S. GAAP and IFRSs and to simplify the accounting model applied to those financial instruments. We elected to apply fair value option ("FVO") reporting to commercial leveraged acquisition finance loans held for sale 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 (loss).

Loans We elected to apply FVO to all commercial leveraged acquisition finance loans held for sale and related unfunded commitments. The election allows us to account for these loans and commitments at fair value which is consistent with the manner in which the instruments are managed. During the first quarter of 2013, we completed the sale of substantially all of our remaining leveraged acquisition finance syndicated loans which we had been holding since the financial crisis.

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 (loss). 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 September 30, 2013 and December 31, 2012, no loans for which the fair value option has been elected are 90 days or more past due or on nonaccrual status.

Long-Term Debt (Own Debt Issuances) We elected to apply FVO for certain fixed-rate long-term debt for which we had applied or otherwise would elect to apply fair value hedge accounting. The election allows us to achieve a similar accounting effect without having to meet the hedge accounting requirements. We measure the fair value of these debt issuances based on inputs observed in the secondary market. Changes in fair value of these instruments are attributable to changes of our own credit risk and interest rates. Interest on the fixed-rate debt accounted for under FVO is recorded as interest expense in the consolidated statement of income (loss). The components of gain (loss) related to long-term debt designated at fair value are summarized in the table below.

Hybrid Instruments We elected to apply fair value option accounting to all of our hybrid instruments, inclusive of structured notes and structured deposits, issued after January 1, 2006. Interest on this debt is recorded as interest expense in the consolidated statement of income (loss). 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.

The following table summarizes the fair value and unpaid principal balance for items we account for under FVO:

	Fair Value		Unpaid Principal Balance
	(in millions)
September 30, 2013
Commercial leveraged acquisition finance loans...................................................................	$	1	$	1
Fixed rate long-term debt...........................................................................................................	1,845		1,750
Hybrid instruments:
Interest bearing deposits in domestic offices...................................................................	7,851		7,693
Structured notes....................................................................................................................	5,002		4,852
December 31, 2012
Commercial leveraged acquisition finance loans...................................................................	$	465	$	486
Fixed rate long-term debt...........................................................................................................	2,016		1,750
Hybrid instruments:
Interest bearing deposits in domestic offices...................................................................	8,692		8,399
Structured notes....................................................................................................................	5,264		5,030

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

	Loans			Long-Term Debt			Hybrid Instruments			Total
	(in millions)
Three Months Ended September 30, 2013
Interest rate and other components(1)......................................................	$	-		$	40		$	(280	)	$	(240	)
Credit risk component.................................................................................	-			(63		)	39			(24		)
Total mark-to-market on financial instruments designated at fair value..........................................................................................................	-			(23		)	(241		)	(264		)
Mark-to-market on the related derivatives...............................................	-			(39		)	280			241
Net realized gain on the related long-term debt derivatives..................	-			17			-			17
Gain (loss) on instruments designated at fair value and related derivatives................................................................................................	$	-		$	(45	)	$	39		$	(6	)

Three Months Ended September 30, 2012
Interest rate and other components(1)......................................................	$	1		$	14		$	(389	)	$	(374	)
Credit risk component.................................................................................	14			(179		)	(39		)	(204		)
Total mark-to-market on financial instruments designated at fair value..............................................................................................................	15			(165		)	(428		)	(578		)
Net realized loss on financial instruments...............................................	1			-			-			1
Mark-to-market on the related derivatives...............................................	-			(21		)	396			375
Net realized gain on the related long-term debt derivatives..................	-			15			-			15
Gain (loss) on instruments designated at fair value and related derivatives....................................................................................................	$	16		$	(171	)	$	(32	)	$	(187	)

Nine Months Ended September 30, 2013
Interest rate and other components(1)......................................................	$	-		$	223		$	(392	)	$	(169	)
Credit risk component.................................................................................	21			(52		)	126			95
Total mark-to-market on financial instruments designated at fair value..........................................................................................................	21			171			(266		)	(74		)
Net realized loss on financial instruments...............................................	(8		)	-			-			(8		)
Mark-to-market on the related derivatives...............................................	-			(229		)	344			115
Net realized gain on the related long-term debt derivatives..................	-			49			-			49
Gain (loss) on instruments designated at fair value and related derivatives................................................................................................	$	13		$	(9	)	$	78		$	82

Nine Months Ended September 30, 2012
Interest rate and other components(1)......................................................	$	2		$	(26	)	$	(744	)	$	(768	)
Credit risk component.................................................................................	48			(269		)	(62		)	(283		)
Total mark-to-market on financial instruments designated at fair value..............................................................................................................	50			(295		)	(806		)	(1,051		)
Mark-to-market on the related derivatives...............................................	-			6			741			747
Net realized gain on the related long-term debt derivatives..................	-			46			-			46
Gain (loss) on instruments designated at fair value and related derivatives....................................................................................................	$	50		$	(243	)	$	(65	)	$	(258	)

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

12. Accumulated Other Comprehensive Income

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

Three Months Ended September 30,	2013			2012
	(in millions)
Unrealized gains (losses) on securities available-for-sale:
Balance at beginning of period.........................................................................................................................	$	257		$	1,004
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $(13) million and $89 million, respectively.........................................................................................................................................	(29		)	126
Reclassification adjustment for gains realized in net income (loss), net of tax of $(14) million and $(20) million, respectively(1).......................................................................................................	(21		)	(29		)
Total other comprehensive loss for period..............................................................................................	(50		)	97
Balance at end of period....................................................................................................................................	207			1,101
Unrealized losses on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period.........................................................................................................................	(67		)	-
Other comprehensive income for period:
Reclassification adjustment related to the accretion of unrealized other-than-temporary impairment, net of tax of $1 million(2)....................................................................................................	2			-
Total other comprehensive income for period.........................................................................................	2			-
Balance at end of period....................................................................................................................................	(65		)	-
Unrealized gains (losses) on derivatives designated as cash flow hedges:
Balance at beginning of period.........................................................................................................................	(127		)	(229		)
Other comprehensive income (loss) for period:
Net gains arising during period, net of tax of $14 million and $5 million, respectively................	20			9
Reclassification adjustment for losses realized in net income (loss), net of tax of $1 million and $2 million, respectively(3)............................................................................................................	1			2
Total other comprehensive income (loss) for period..............................................................................	21			11
Balance at end of period....................................................................................................................................	(106		)	(218		)
Pension and postretirement benefit liability:
Balance at beginning of period..................................................................................................................	(6		)	(11		)
Other comprehensive income for period:
Reclassification adjustment of prior service costs and transition obligations in net income (loss), net of tax of less than $1 million(4)........................................................................................	1			-
Total other comprehensive income for period.........................................................................................	1			-
Balance at end of period....................................................................................................................................	(5		)	(11		)
Total accumulated other comprehensive income at end of period.............................................................	$	31		$	872

Nine Months Ended September 30,	2013			2012
	(in millions)
Unrealized gains (losses) on securities available-for-sale:
Balance at beginning of period.........................................................................................................................	$	992		$	883
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $(468) million and $217 million, respectively............................................................................................................................	(679		)	303
Reclassification adjustment for gains realized in net income (loss), net of tax of $(75) million and $(60) million, respectively(1).......................................................................................................	(106		)	(85		)
Total other comprehensive income (loss) for period..............................................................................	(785		)	218
Balance at end of period....................................................................................................................................	207			1,101
Unrealized losses on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period.........................................................................................................................	-			-
Adjustment to add other-than-temporary impairment due to the consolidation of VIE, net of tax of $(48) million..........................................................................................................................................	(67		)	-
Other comprehensive income for period:
Reclassification adjustment related to the accretion of unrealized other-than-temporary impairment, net of tax of $1 million(2)....................................................................................................	2			-
Total other comprehensive income for period.........................................................................................	2			-
Balance at end of period....................................................................................................................................	(65		)	-
Unrealized gains (losses) on derivatives designated as cash flow hedges:
Balance at beginning of period.........................................................................................................................	(201		)	(229		)
Other comprehensive income (loss) for period:
Net gains arising during period, net of tax of $63 million and $0 million, respectively................	90			4
Reclassification adjustment for losses realized in net income (loss), net of tax of $4 million and $5 million, respectively(3)............................................................................................................	5			7
Total other comprehensive income for period.........................................................................................	95			11
Balance at end of period....................................................................................................................................	(106		)	(218		)
Pension and postretirement benefit liability:
Balance at beginning of period..................................................................................................................	(6		)	(12		)
Other comprehensive income for period:
Reclassification adjustment of prior service costs and transition obligations in net income (loss), net of tax of less than $1 million(4)........................................................................................	1			1
Total other comprehensive income for period.........................................................................................	1			1
Balance at end of period....................................................................................................................................	(5		)	(11		)
Total accumulated other comprehensive income at end of period.............................................................	$	31		$	872

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

(2) Amount reclassified to net income (loss) is included in interest income in our consolidated statement of income (loss).

(3) Amount reclassified to net income (loss) is included in interest income (expense) in our consolidated statement of income (loss).

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

13. Pension and Other Postretirement Benefits

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
							(in millions)
Service cost - benefits earned during the period...............................................................	$	1		$	4		$	3		$	11
Interest cost on projected benefit obligation......................................................................	18			17			52			52
Expected return on assets......................................................................................................	(19		)	(23		)	(60		)	(66		)
Amortization of prior service cost (benefit).........................................................................	-			(1		)	-			(4		)
Recognized losses...................................................................................................................	10			13			36			34
Curtailment benefit recognized..............................................................................................	-			(29		)	-			(31		)
Pension expense......................................................................................................................	$	10		$	(19	)	$	31		$	(4	)

Pension expense in 2012 reflects the recognition of a curtailment benefit associated with the decision in the third quarter of 2012 to cease all future contributions under the Cash Balance formula and freeze the Plan effective January 1, 2013.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
					(in millions)
Service cost - benefits earned during the period...............................................................	$	-	$	1	$	-	$	1
Interest cost..............................................................................................................................	$	1	$	-	$	2	$	2
Amortization of transition obligation...................................................................................	-		1		-		2
Net periodic postretirement benefit cost..............................................................................	$	1	$	2	$	2	$	5

14. Related Party Transactions

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

	September 30, 2013		December 31, 2012
	(in millions)
Assets:
Cash and due from banks.............................................................................................................	$	343	$	114
Interest bearing deposits with banks (1).....................................................................................	1,028		714
Trading assets (2)............................................................................................................................	17,169		21,370
Loans...............................................................................................................................................	5,854		4,514
Other (3)............................................................................................................................................	765		858
Total assets.....................................................................................................................................	$	25,159	$	27,570
Liabilities:
Deposits..........................................................................................................................................	$	16,577	$	13,863
Trading liabilities (2).......................................................................................................................	19,692		23,910
Short-term borrowings..................................................................................................................	1,950		2,721
Long-term debt...............................................................................................................................	3,990		3,990
Other (2)............................................................................................................................................	606		459
Total liabilities................................................................................................................................	$	42,815	$	44,943

(1) Includes interest bearing deposits with HSBC Mexico S.A. of $800 million and $500 million at September 30, 2013 and December 31, 2012, respectively.

(2) Trading assets and liabilities do not reflect the impact of netting which allows the offsetting of amounts relating to certain contracts if certain conditions are met. Trading assets and liabilities primarily consist of derivatives contracts.

(3) Other assets and other liabilities primarily consist of derivative contracts.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
							(in millions)
Income/(Expense):
Interest income........................................................................................................................	$	31		$	19		$	143		$	117
Interest expense......................................................................................................................	(19		)	(23		)	(59		)	(70		)
Net interest income (loss)......................................................................................................	$	12		$	(4	)	$	84		$	47
Servicing and other fees from HSBC affiliate:
Fees and commissions:
HSBC Finance Corporation.......................................................................................	$	20		$	21		$	67		$	51
HSBC Markets (USA) Inc. ("HMUS").....................................................................	4			4			13			14
Other HSBC affiliates.................................................................................................	9			17			39			59
Other HSBC affiliates income.........................................................................................	8			21			35			41
Total affiliate income..............................................................................................................	$	41		$	63		$	154		$	165
Residential mortgage banking revenue...............................................................................	$	-		$	-		$	-		$	3
Support services from HSBC affiliates:
HSBC Finance Corporation............................................................................................	$	(2	)	$	(5	)	$	(11	)	$	(22	)
HMUS................................................................................................................................	(58		)	(87		)	(164		)	(248		)
HSBC Technology & Services (USA) ("HTSU")........................................................	(274		)	(237		)	(749		)	(711		)
Other HSBC affiliates.......................................................................................................	(44		)	(43		)	(140		)	(162		)
Total support services from HSBC affiliates......................................................................	$	(378	)	$	(372	)	$	(1,064	)	$	(1,143	)
Stock based compensation expense with HSBC (1)...........................................................	$	(7	)	$	(8	)	$	(29	)	$	(27	)

(1) Employees participate in one or more stock compensation plans sponsored by HSBC. These expenses are included in Salaries and employee benefits in our consolidated statement of income (loss). Employees also participate in a defined benefit pension plan and other postretirement plans sponsored by HSBC North America which are discussed in Note 13, "Pension and Other Postretirement Benefits."

Funding Arrangements with HSBC Affiliates:

We use HSBC affiliates to fund a portion of our borrowing and liquidity needs. Long-term debt with affiliates reflects $4.0 billion in senior debt with HSBC North America. Of this amount, $1.0 billion is a 5 year floating rate note which matures in August 2014 and $3.0 billion that matures in three equal installments of $1.0 billion in April 2015, 2016 and 2017. The debt bears interest at 90 day USD Libor plus a spread, with each maturity at a different spread.

We have the following funding arrangements available with HSBC affiliates, although there are no outstanding balances at either September 30, 2013 and December 31, 2012:

• $900 million committed line of credit with HSBC Investment (Bahamas) Limited;

• $500 million committed line of credit with HSBC Holdings plc; and

• $150 million uncommitted line of credit with HSBC North America Inc. ("HNAI").

We have also incurred short-term borrowings with certain affiliates, largely related to metals activity. In addition, certain affiliates have also placed deposits with us.

Lending and Derivative Related Arrangements Extended to HSBC Affiliates:

At September 30, 2013 and December 31, 2012, we have the following loan balances outstanding with HSBC affiliates:

	September 30, 2013		December 31, 2012
	(in millions)
HSBC Finance Corporation................................................................................................................	$	3,015	$	2,019
HSBC Markets (USA) Inc. ("HMUS") and subsidiaries................................................................	929		310
HSBC Bank Brasil S.A.........................................................................................................................	1,000		1,000
HSBC Bank Panama S.A.....................................................................................................................	200		372
Other short-term affiliate lending......................................................................................................	710		813
Total assets..........................................................................................................................................	$	5,854	$	4,514

HSBC Finance Corporation - We have extended a $4.0 billion, 364 day uncommitted unsecured revolving credit agreement to HSBC Finance which allows for borrowings with maturities of up to 15 years. As of September 30, 2013 and December 31, 2012, $3.0 billion and $2.0 billion, respectively, was outstanding under this credit agreement with $512 million maturing in September 2017, $1.5 billion maturing in January 2018 and $1.0 billion maturing in September 2018.

HMUS and subsidiaries - We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $3.8 billion at September 30, 2013 and December 31, 2012, of which $929 million and $310 million, respectively, was outstanding. The outstanding balances at September 30, 2013 mature in 2013.

HSBC Bank Brasil S.A. - We have extended uncommitted lines of credit to HSBC Bank Brasil in the amount of $1.5 billion and $1.0 billion at September 30, 2013 and December 31, 2012, respectively, of which $1.0 billion was outstanding at both September 30, 2013 and December 31, 2012. The outstanding balances mature at various stages between 2014 and 2015.

HSBC Bank Panama S.A. - We have extended an uncommitted line of credit to HSBC Panama in the amount of $752 million at September 30, 2013 and December 31, 2012, of which $200 million and $372 million, respectively, was outstanding. In October 2013, this outstanding loan amount was repaid in full.

Other Short-term Affiliate Lending - In addition to loans and lines extended to affiliates discussed above, from time to time we may extend loans to affiliates which are generally short term in nature. At September 30, 2013 and December 31, 2012, there were $710 million and $813 million of loans outstanding primarily related to metals activities.

The following summarizes lending arrangements we have extended to HSBC affiliates which do not have any outstanding balances at either September 30, 2013 and December 31, 2012:

• $1.5 billion uncommitted secured credit facility extended to certain subsidiaries of HSBC Finance which matures in November 2013 and is currently expected to be renewed. Any draws on this credit facility by HSBC Finance require regulatory approval;

• $2.0 billion committed revolving credit facility extended to HSBC Finance which expires in May 2017.

• We have extended lines of credit to various other HSBC affiliates totaling 2.6 billion.

Historically, we have provided support to several HSBC affiliate sponsored asset-backed commercial paper ("ABCP") conduits by purchasing A-1/P-1 rated commercial paper issued by them. At September 30, 2013 and December 31, 2012, no ABCP issued by such conduits was held. Pursuant to a global restructure of HSBC sponsored ABCP conduits, certain assets previously originated and funded by Bryant Park, an ABCP conduit organized by HUSI, have been refinanced by Regency, another ABCP conduit organized and consolidated by our affiliate. HUSI is committed to provide liquidity facilities to backstop the liquidity risk in Regency in relation to assets originated in the U.S. region. The notional amount of the liquidity facilities provided by HUSI to Regency was approximately $2.5 billion as of September 30, 2013, which is less than half of Regency's total liquidity facilities.

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, we routinely enter into derivative transactions with HSBC Finance and other HSBC affiliates. The notional value of derivative contracts related to these contracts was approximately $1,164.1 billion and $1,066.5 billion at September 30, 2013 and December 31, 2012, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities) related to the contracts was approximately $789 million and $691 million at September 30, 2013 and December 31, 2012, respectively. Our Global Banking and Markets business accounts for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.

Services Provided Between HSBC Affiliates:

Under multiple service level agreements, we provide services to and receive services from various HSBC affiliates. The following summarizes these activities:

• Servicing activities for residential mortgage loans across North America are performed both by us and HSBC Finance. As a result, we receive servicing fees from HSBC Finance for services performed on their behalf and pay servicing fees to HSBC Finance for services performed on our behalf. The fees we receive from HSBC Finance are reported in Servicing and other fees from HSBC affiliates. Fees we pay to HSBC Finance are reported in Support services from HSBC affiliates. This includes fees paid for the servicing of residential mortgage loans (with a carrying amount of $1.0 billion and $1.2 billion at September 30, 2013 and December 31, 2012) that we purchased from HSBC Finance in 2003 and 2004.

• 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. HTSU also provides certain item processing and statement processing activities to us. The fees we pay HTSU for the centralized support services and processing activities are included in Support services from HSBC affiliates. We also receive fees from HTSU for providing certain administrative services to them. The fees we receive from HTSU are included in Servicing and other fees from HSBC affiliates.

• 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 are included in Support services from HSBC affiliates.

• We utilize HSBC Securities (USA) Inc. ("HSI") for broker dealer, debt underwriting, customer referrals, loan syndication and all 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. Customer referral fees paid to HSI are netted against customer fee income, which is included in other fees and commissions.

Other Transactions with HSBC Affiliates

In July 2004, we sold the account relationships associated with $970 million of credit card receivables to HSBC Finance and on a daily basis, we purchased new originations on these credit card receivables. As discussed in Note 8, "Intangible Assets," on March 29, 2012 we re-purchased these account relationships from HSBC Finance on $746 million of credit card receivables on that date for $108 million and as a result, we stopped purchasing new originations on these credit card accounts from HSBC Finance. We purchased $492 million of credit card receivables from HSBC Finance during the three months ended March 31, 2012. HSBC Finance continued to service these loans for us through April 30, 2012 for a fee which was included in Support services from affiliates. Effective with the close of the sale of our GM and UP credit card receivables and our private label credit card and closed-end receivables on May 1, 2012, these loans had been serviced by Capital One for a fee. In September 2013, the outsourcing arrangement with Capital One ended and we resumed the servicing of our remaining credit card portfolio. Premiums previously paid are amortized to interest income over the estimated life of the receivables purchased.

In addition to purchases of U.S. Treasury and U.S. Government Agency securities, we purchased both foreign-denominated and USD denominated marketable securities from certain affiliates including HSI, HSBC Asia-Pacific, HSBC Mexico, HSBC London, HSBC Brazil, HSBC Chile and HSBC Canada. Marketable securities outstanding from these purchases are reflected in trading assets and were immaterial in all periods.

Transactions with HSBC Affiliates involving our Discontinued Operations:

As it relates to our discontinued credit card and private label operations, in January 2009 we purchased the General Motors ("GM") and Union Plus ("UP") portfolios from HSBC Finance with an outstanding principal balance of $12.4 billion at the time of sale, at a total net premium of $113 million. Additionally in December 2004, we purchased the private label credit card receivable portfolio as well as private label commercial and closed end loans from HSBC Finance. HSBC Finance retained the customer account relationships for both the GM and UP receivables and the private label credit card receivables and by agreement we purchased on a daily basis substantially all new originations from these account relationships from HSBC Finance prior to the sale of these accounts to Capital One on May 1, 2012. 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 serviced these credit card loans for us for a fee through April 30, 2012. During the nine months ended September 30, 2012, we purchased a total of $9.9 billion of loans on a daily basis from HSBC Finance. Fees paid for servicing these loan portfolios, which are included as a component of Income from discontinued operations, totaled $199 million during the nine months ended September 30, 2012, respectively.

15. Business Segments

We have four distinct business segments that we utilize for management reporting and analysis purposes, which are aligned with HSBC's global businesses and business strategy. There have been no changes in the basis of our segmentation or measurement of segment profit as compared with the presentation in Note 25, "Business Segments," in our 2012 Form 10-K except as noted below.

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

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

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented in Note 25, "Business Segments," in our 2012 Form 10-K. Except as noted below, there have been no significant changes since December 31, 2012 in the differences between U.S. GAAP and IFRSs impacting our results. As it relates to loan impairment charges, prior to the second quarter of 2013, we concluded that for IFRSs the estimated average period of time from last current status to write-off for real estate secured loans collectively evaluated for impairment using a roll rate migration analysis was 10 months. In the second quarter of 2013, we updated our review under IFRSs to reflect the period of time after a loss event that a loan remains current before delinquency is observed. This review resulted in an estimated average period of time from a loss event occurring and its ultimate migration from current status through to delinquency and ultimately write-off for real estate secured loans collectively evaluated for impairment using a roll rate migration analysis of 12 months.

The following table summarizes the results for each segment on an IFRSs basis, as well as provides a reconciliation of total results under IFRSs to U.S. GAAP consolidated totals.

	IFRSs Consolidated Amounts
	RBWM			CMB			GBM			PB			Other			Adjustments/ Reconciling Items			Total			IFRSs Adjustments(4)			IFRSs Reclassi- fications(5)			U.S. GAAP Consolidated Totals
	(in millions)
Three Months Ended September 30, 2013
Net interest income(1)................	$	205		$	181		$	78		$	46		$	(6	)	$	(2	)	$	502		$	(17	)	$	7		$	492
Other operating income...................	81			77			296			27			(45		)	2			438			(1		)	(5		)	432
Total operating income...................	286			258			374			73			(51		)	-			940			(18		)	2			924
Loan impairment charges(3)................	44			26			(3		)	3			-			-			70			(11		)	(5		)	54
	242			232			377			70			(51		)	-			870			(7		)	7			870
Operating expenses(2)..............	301			169			255			62			52			-			839			9			7			855
Profit before income tax expense	$	(59	)	$	63		$	122		$	8		$	(103	)	$	-		$	31		$	(16	)	$	-		$	15

Three Months Ended September 30, 2012
Net interest income(1)................	$	209		$	172		$	129		$	45		$	(13	)	$	(3	)	$	539		$	(22	)	$	(7	)	$	510
Other operating income...................	138			136			251			26			(164		)	3			390			5			12			407
Total operating income...................	347			308			380			71			(177		)	-			929			(17		)	5			917
Loan impairment charges(3)................	72			6			6			2			-			-			86			(4		)	2			84
	275			302			374			69			(177		)	-			843			(13		)	3			833
Operating expenses(2)..............	368			154			249			57			844			-			1,672			(48		)	3			1,627
Profit before income tax expense	$	(93	)	$	148		$	125		$	12		$	(1,021	)	$	-		$	(829	)	$	35		$	-		$	(794	)

Nine Months Ended September 30, 2013
Net interest income(1)................	$	626		$	523		$	312		$	140		$	(34	)	$	(9	)	$	1,558		$	(55	)	$	12		$	1,515
Other operating income...................	270			219			973			85			(10		)	9			1,546			53			(9		)	1,590
Total operating income...................	896			742			1,285			225			(44		)	-			3,104			(2		)	3			3,105
Loan impairment charges(3)................	97			41			6			4			-			-			148			(15		)	9			142
	799			701			1,279			221			(44		)	-			2,956			13			(6		)	2,963
Operating expenses(2)..............	892			502			735			189			138			-			2,456			(18		)	(6		)	2,432
Profit before income tax expense	$	(93	)	$	199		$	544		$	32		$	(182	)	$	-		$	500		$	31		$	-		$	531
Balances at end of period:
Total assets............	$	19,297		$	22,571		$	190,174		$	7,996		$	804		$	-		$	240,842		$	(53,563	)	$	96		$	187,375
Total loans, net......	16,221			21,414			21,738			5,869			-			-			65,242			1,794			79			67,115
Goodwill.................	581			358			480			325			-			-			1,744			484			-			2,228
Total deposits........	30,594			21,614			46,829			11,875			-			-			110,912			(4,491		)	6,500			112,921

Nine Months Ended September 30, 2012
Net interest income(1)................	$	653		$	502		$	439		$	137		$	(31	)	$	(10	)	$	1,690		$	(73	)	$	15		$	1,632
Other operating income...................	497			471			742			83			(234		)	10			1,569			41			60			1,670
Total operating income...................	1,150			973			1,181			220			(265		)	-			3,259			(32		)	75			3,302
Loan impairment charges(3)................	174			(3		)	(2		)	(3		)	-			-			166			-			7			173
	976			976			1,183			223			(265		)	-			3,093			(32		)	68			3,129
Operating expenses(2)..............	1,010			487			744			178			1,628			-			4,047			(48		)	68			4,067
Profit before income tax expense	$	(34	)	$	489		$	439		$	45		$	(1,893	)	$	-		$	(954	)	$	16		$	-		$	(938	)
Balances at end of period:
Total assets............	$	23,726		$	24,012		$	217,185		$	7,093		$	92		$	-		$	272,108		$	(73,460	)	$	(65	)	$	198,583
Total loans, net......	16,334			19,066			32,559			5,290			-			-			73,249			(1,124		)	(11,310		)	60,815
Goodwill.................	581			358			480			325			-			-			1,744			484			-			2,228
Total deposits........	35,494			22,012			44,669			12,319			-			-			114,494			(5,897		)	12,738			121,335

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

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

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

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

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

16. Retained Earnings and Regulatory Capital Requirements

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

	September 30, 2013							December 31, 2012
	Capital Amount		Well-Capitalized Minimum Ratio(1)			Actual Ratio		Capital Amount		Well-Capitalized Minimum Ratio(1)			Actual Ratio
	(dollars are in millions)
Total capital ratio:
HSBC USA Inc...........................	$	20,482	10.00	%		16.30	%	$	20,764	10.00	%		19.52	%
HSBC Bank USA.......................	21,374		10.00			18.01		21,464		10.00			21.07
Tier 1 capital ratio:
HSBC USA Inc...........................	14,652		6.00			11.66		14,480		6.00			13.61
HSBC Bank USA.......................	15,817		6.00			13.33		15,482		6.00			15.20
Tier 1 common ratio:
HSBC USA Inc...........................	12,544		5.00		(2)	9.98		12,373		5.00		(2)	11.63
HSBC Bank USA.......................	15,817		5.00			13.33		15,482		5.00			15.20
Tier 1 leverage ratio:
HSBC USA Inc...........................	14,652		3.00		(3)	8.40		14,480		3.00		(3)	7.70
HSBC Bank USA.......................	15,817		5.00			9.30		15,482		5.00			8.43
Risk weighted assets:
HSBC USA Inc...........................	125,641							106,395
HSBC Bank USA.......................	118,656							101,865

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

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

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

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

We did not receive any cash capital contributions from our immediate parent, HNAI during the first nine months of 2013. We did not make any capital contributions to our subsidiary, HSBC Bank USA, during the nine months ended September 30, 2013.

Regulatory guidelines impose certain restrictions that may limit the inclusion of deferred tax assets in the computation of regulatory capital. We closely monitor the deferred tax assets for potential limitations or exclusions. At September 30, 2013 and December 31, 2012, deferred tax assets of $701 million and $622 million, respectively, were excluded in the computation of regulatory capital.

17. Variable Interest Entities

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

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

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

Consolidated VIEs The following table summarizes assets and liabilities related to our consolidated VIEs as of September 30, 2013 and December 31, 2012 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation:

	September 30, 2013				December 31, 2012
	Consolidated Assets		Consolidated Liabilities		Consolidated Assets		Consolidated Liabilities
	(in millions)
Asset-backed commercial paper conduit:
Interest bearing deposits with banks...............................................	$	5	$	-	$	-	$	-
Held-to-maturity securities................................................................	208		-		-		-
Other assets.........................................................................................	2		-		-		-
Other liabilities.....................................................................................	-		3		-		-
Subtotal...................................................................................................	$	215	$	3	$	-	$	-
Low income housing limited liability partnership:
Other assets.........................................................................................	477		-		533		-
Long term debt.....................................................................................	-		92		-		92
Other liabilities.....................................................................................	-		96		-		152
Subtotal...................................................................................................	$	477	$	188	$	533	$	244
Total.............................................................................................................	$	692	$	191	$	533	$	244

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

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

Unconsolidated VIEs We also have variable interests in other VIEs that were not consolidated at September 30, 2013 and December 31, 2012 because we were not the primary beneficiary. The following table provides additional information on those unconsolidated VIEs, the variable interests held by us and our maximum exposure to loss arising from our involvements in those VIEs as of September 30, 2013 and December 31, 2012:

	Variable Interests Held Classified as Assets		Variable Interests Held Classified as Liabilities		Total Assets in Unconsolidated VIEs		Maximum Exposure to Loss
	(in millions)
September 30, 2013
Asset-backed commercial paper conduits.....................	$	-	$	-	$	16,456	$	2,216
Structured note vehicles...................................................	1,712		68		6,365		6,253
Total.....................................................................................	$	1,712	$	68	$	22,821	$	8,469
December 31, 2012
Asset-backed commercial paper conduits.....................	$	-	$	-	$	16,104	$	2,212
Structured note vehicles...................................................	2,117		154		7,055		6,893
Total.....................................................................................	$	2,117	$	154	$	23,159	$	9,105

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

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

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

Each seller of assets to an ABCP conduit typically provides credit enhancements in the form of asset overcollateralization and, therefore, bears the risk of first loss related to the specific assets transferred. We do not transfer our own assets to the conduits. We do not provide the majority of the liquidity facilities to any of these ABCP conduits. We have no ownership interests in, perform no administrative duties for, and do not service any of the assets held by the conduits. We are not the primary beneficiary and do not consolidate any of the ABCP conduits to which we provide liquidity facilities. Credit risk related to the liquidity facilities provided is managed by subjecting these facilities to our normal underwriting and risk management processes. The $2.2 billion maximum exposure to loss presented in the table above represents the maximum amount of loans and asset purchases we could be required to fund under the liquidity facilities. The maximum loss exposure is estimated assuming the facilities are fully drawn and the underlying collateralized assets are in default with zero recovery value.

Structured note vehicles Our involvement in structured note vehicles includes derivatives such as interest rate and currency swaps and investments in the vehicles' debt instruments. With respect to several of these VIEs, we hold variable interests in the form of total return swaps entered into in connection with the transfer of certain assets to the VIEs. In these transactions, we transferred financial assets from our trading portfolio to the VIEs and entered into total return swaps under which we receive the total return on the transferred assets and pay a market rate of return. The transfers of assets in these transactions do not qualify as sales under the applicable accounting literature and are accounted for as secured borrowings. Accordingly, the transferred assets continue to be recognized as trading assets on our balance sheet and the funds received are recorded as liabilities in long-term debt. As of September 30, 2013, we recorded approximately $30 million of trading assets and $33 million of trading liabilities on our balance sheet as a result of "failed sale" accounting treatment for certain transfers of financial assets. As of December 31, 2012, we recorded approximately $140 million of trading assets and $147 million of trading liabilities on our balance sheet as a result of "failed sale" accounting treatment for certain transfers of financial assets. The financial assets and financial liabilities were not legally ours and we have no control over the financial assets which are restricted solely to satisfy the liability.

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

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

Beneficial interests issued by third-party sponsored securitization entities We hold certain beneficial interests such as mortgage-backed securities issued by third party sponsored securitization entities which may be considered VIEs. The investments are transacted at arm's-length and decisions to invest are based on a credit analysis of the underlying collateral assets or the issuer. We are a passive investor in these issuers and do not have the power to direct the activities of these issuers. As such, we do not consolidate these securitization entities. Additionally, we do not have other involvements in servicing or managing the collateral assets or provide financial or liquidity support to these issuers which potentially give rise to risk of loss exposure. These investments are an integral part of the disclosure in Note 4, "Securities" and Note 19, "Fair Value Measurements" and, therefore, are not disclosed in this note to avoid redundancy.

18. Guarantee Arrangements, Pledged Assets and Collateral

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

The following table presents total carrying value and contractual amounts of our sell protection credit derivatives and major off-balance sheet guarantee arrangements as of September 30, 2013 and December 31, 2012. Following the table is a description of the various arrangements.

	September 30, 2013					December 31, 2012
	Carrying Value			Notional/Maximum Exposure to Loss		Carrying Value			Notional/Maximum Exposure to Loss
	(in millions)
Credit derivatives(1)(4)........................................................................................	$	(331	)	$	198,020	$	(76	)	$	237,548
Financial standby letters of credit, net of participations(2)(3)......................	-			5,165		-			5,554
Performance (non-financial) guarantees(3).....................................................	-			3,119		-			2,878
Liquidity asset purchase agreements(3)..........................................................	-			2,216		-			2,212
Total.....................................................................................................................	$	(331	)	$	208,520	$	(76	)	$	248,192

(1) Includes $38.6 billion and $44.2 billion of notional issued for the benefit of HSBC affiliates at September 30, 2013 and December 31, 2012, respectively.

(2) Includes $862 million and $808 million issued for the benefit of HSBC affiliates at September 30, 2013 and December 31, 2012, respectively.

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

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

Credit-Risk Related Guarantees

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

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

We manage our exposure to credit derivatives using a variety of risk mitigation strategies where we enter into offsetting hedge positions or transfer the economic risks, in part or in entirety, to investors through the issuance of structured credit products. We actively manage the credit and market risk exposure in the credit derivative portfolios on a net basis and, as such, retain no or a limited net sell protection position at any time. The following table summarizes our net credit derivative positions as of September 30, 2013 and December 31, 2012.

	September 30, 2013						December 31, 2012
	Carrying (Fair) Value			Notional			Carrying (Fair) Value			Notional
	(in millions)
Sell-protection credit derivative positions........................................	$	(331	)	$	198,020		$	(76	)	$	237,548
Buy-protection credit derivative positions.......................................	366			204,971			120			247,384
Net position(1)........................................................................................	$	35		$	(6,951	)	$	44		$	(9,836	)

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

Standby letters of credit A standby letter of credit is issued to a third party for the benefit of a customer and is a guarantee that the customer will perform or satisfy certain obligations under a contract. It irrevocably obligates us to pay a specified amount to the third party beneficiary if the customer fails to perform the contractual obligation. We issue two types of standby letters of credit: performance and financial. A performance standby letter of credit is issued where the customer is required to perform some nonfinancial contractual obligation, such as the performance of a specific act, whereas a financial standby letter of credit is issued where the customer's contractual obligation is of a financial nature, such as the repayment of a loan or debt instrument. As of September 30, 2013, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5.2 billion and $3.1 billion, respectively. As of December 31, 2012, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5.6 billion and $2.9 billion, respectively.

The issuance of a standby letter of credit is subject to our credit approval process and collateral requirements. We charge fees for issuing letters of credit commensurate with the customer's credit evaluation and the nature of any collateral. Included in other liabilities are deferred fees on standby letters of credit, which represent the value of the stand-ready obligation to perform under these guarantees, amounting to $40 million and $46 million at September 30, 2013 and December 31, 2012, respectively. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of $19 million and $19 million at September 30, 2013 and December 31, 2012, respectively.

The following table summarizes the credit ratings of credit risk related guarantees including the credit ratings of counterparties against which we sold credit protection and financial standby letters of credit as of September 30, 2013 as an indicative proxy of payment risk:

	Average Life (in years)	Credit Ratings of the Obligors or the Transactions
Notional/Contractual Amounts	Average Life (in years)	Investment Grade		Non-Investment Grade		Total
	(dollars are in millions)
Sell-protection Credit Derivatives(1)
Single name CDS.........................................................................	2.4	$	116,525	$	22,946	$	139,471
Structured CDS...........................................................................	1.8	22,433		3,045		25,478
Index credit derivatives..............................................................	3.2	21,197		666		21,863
Total return swaps......................................................................	8.7	10,055		1,153		11,208
Subtotal...............................................................................................		170,210		27,810		198,020
Standby Letters of Credit(2)..............................................................	1.1	6,813		1,471		8,284
Total....................................................................................................		$	177,023	$	29,281	$	206,304

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

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

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

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

Mortgage Loan Repurchase Obligations

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

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

To date, a majority of the repurchase demands we have received primarily relate to prime loans sourced during 2004 through 2008 from the legacy broker channel which we exited in late 2008. Loans sold to GSEs and other third parties originated in 2004 through 2008 subject to representations and warranties for which we may be liable had an outstanding principal balance of approximately $12.6 billion and $15.1 billion at September 30, 2013 and December 31, 2012, respectively, including $8.1 billion and $9.6 billion, respectively, of loans sourced from our legacy broker channel.

The following table shows the trend in repurchase demands received on loans sold to GSEs and other third parties by loan origination vintage for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in millions)
Pre- 2004................................................................................................................................	$	1	$	2	$	4	$	5
2004........................................................................................................................................	4		5		15		16
2005........................................................................................................................................	13		6		20		19
2006........................................................................................................................................	12		20		38		65
2007........................................................................................................................................	25		51		86		170
2008........................................................................................................................................	13		28		48		106
Post 2008...............................................................................................................................	2		4		12		15
Total repurchase demands received(1).............................................................................	$	70	$	116	$	223	$	396

(1) Includes repurchase demands on loans sourced from our legacy broker channel of $55 million and $98 million for the three months ended September 30, 2013 and 2012, respectively, and $175 million and $330 million for the nine months ended September 30, 2013 and 2012, respectively.

The following table provides information about outstanding repurchase demands received from GSEs and other third parties at September 30, 2013 and December 31, 2012:

	September 30, 2013		December 31, 2012
	(in millions)
GSEs...............................................................................................................................................................	$	64	$	86
Others............................................................................................................................................................	3		3
Total(1) ...........................................................................................................................................................	$	67	$	89

(1) Includes repurchase demands on loans sourced from our legacy broker channel of $55 million and $65 million at September 30, 2013 and December 31, 2012, respectively.

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

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

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

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

The following table summarizes the change in our estimated repurchase liability for loans sold to the GSEs and other third parties during the three and nine months ended September 30, 2013 and 2012 for obligations arising from the breach of representations and warranties associated with the sale of these loans:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in millions)
Balance at beginning of period.........................................................................................	$	217		$	222		$	219		$	237
Increase in liability recorded through earnings..............................................................	-			28			36			81
Realized losses.....................................................................................................................	(19		)	(34		)	(57		)	(102		)
Balance at end of period.....................................................................................................	$	198		$	216		$	198		$	216

Our reserve for potential repurchase liability exposures relates primarily to previously originated mortgages through broker channels. Our mortgage repurchase liability of $198 million at September 30, 2013 represents our best estimate of the loss that has been incurred including interest, resulting from various representations and warranties in the contractual provisions of our mortgage loan sales. Because the level of mortgage loan repurchase losses is dependent upon economic factors, investor demand strategies and other external risk factors such as housing market trends that may change, the level of the liability for mortgage loan repurchase losses requires significant judgment. We have seen recent changes in investor demand trends and continue to evaluate our methods of determining the best estimate of loss based on these recent trends. As these estimates are influenced by factors outside our control, there is uncertainty inherent in these estimates making it reasonably possible that they could change. The range of reasonably possible losses in excess of our recorded repurchase liability is between zero and $160 million at September 30, 2013. This estimated range of reasonably possible losses was determined based upon modifying the assumptions utilized in our best estimate of probable losses to reflect what we believe to be reasonably possible adverse assumptions.

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

Liquidity asset purchase agreements We provide liquidity facilities to a number of multi-seller and single-seller asset-backed commercial paper conduits sponsored by affiliates and third parties. The conduits finance the purchase of individual assets by issuing commercial paper to third party investors. Each liquidity facility is transaction specific and has a maximum limit. Pursuant to the liquidity agreements, we are obligated, subject to certain limitations, to purchase the eligible assets from the conduit at an amount not to exceed the face value of the commercial paper in the event the conduit is unable to refinance its commercial paper. A liquidity asset purchase agreement is essentially a conditional written put option issued to the conduit where the exercise price is the face value of the commercial paper. As of September 30, 2013 and December 31, 2012, we have issued $2.2 billion and $2.2 billion, respectively, of liquidity facilities to provide liquidity support to the commercial paper issued by various conduits See Note 17, "Variable Interest Entities," for further information.

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

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

	September 30, 2013		December 31, 2012
	(in millions)
Interest bearing deposits with banks..........................................................................................................	$	535	$	673
Trading assets(1).............................................................................................................................................	3,434		2,346
Securities available-for-sale(2).......................................................................................................................	19,976		17,236
Securities held-to-maturity............................................................................................................................	587		456
Loans(3) ...........................................................................................................................................................	3,953		2,142
Other assets(4).................................................................................................................................................	2,692		2,265
Total.................................................................................................................................................................	$	31,177	$	25,118

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

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

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

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

Debt securities pledged as collateral that can be sold or repledged by the secured party continue to be reported on the consolidated balance sheet. The fair value of securities available-for-sale that can be sold or repledged was $9.3 billion and $6.5 billion at September 30, 2013 and December 31, 2012, respectively. The fair value of trading assets that can be sold or repledged was $3.4 billion and $2.2 billion at September 30, 2013 and December 31, 2012, respectively.

The fair value of collateral we accepted but not reported on the consolidated balance sheet that can be sold or repledged was $4.3 billion and $5.7 billion at September 30, 2013 and December 31, 2012, respectively. This collateral was obtained under security resale agreements. Of this collateral, $2.1 billion and $1.3 billion has been sold or repledged as collateral under repurchase agreements or to cover short sales at September 30, 2013 and December 31, 2012, respectively.

Securitization Activity In addition to the repurchase risk described above, we have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by our affiliate, HSI. In this regard, we began acquiring residential mortgage loans beginning in 2005 which were warehoused on our balance sheet with the intent of selling them to HSI to facilitate HSI's whole loan securitization program which was discontinued in the second half of 2007. During 2005-2007, we purchased and sold $24 billion of such loans to HSI which were subsequently securitized and sold by HSI to third parties. See "Mortgage Securitization Activity and Litigation" in Note 20, "Litigation and Regulatory Matters" for additional discussion of related exposure.

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

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

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

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

The following table provides information about repurchase agreements and resell agreements that are subject to offset as of September 30, 2013 and December 31, 2012:

					Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts Recognized		Gross Amounts Offset in the Balance Sheet(1)	Net Amounts Presented in the Balance Sheet	Financial Instruments (2)	Cash Collateral Received / Pledged	Net Amount (3)
	(in millions)
As of September 30, 2013:
Assets:
Securities purchased under agreements to resell....................................	$	4,524	2,308	2,216	2,216	-	$	-
Liabilities:
Securities sold under repurchase agreements....	$	14,831	2,308	12,523	12,523	-	$	-

As of December 31, 2012:
Assets:
Securities purchased under agreements to resell....................................	$	5,736	2,587	3,149	3,146	-	$	3
Liabilities:
Securities sold under repurchase agreements....	$	9,404	2,587	6,817	6,817	-	$	-

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

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

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

19. Fair Value Measurements

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

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

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

For derivative instruments, we calculate the credit risk adjustment by applying the probability of default of the counterparty to the expected exposure, and multiplying the result by the expected loss given default. We estimate the implied probability of default based on the counterparty's credit spread. Where credit default spreads of the counterparty are not available, we use the credit default spread of specific proxy (e.g. the credit default swap spread of the counterparty's parent). Where specific proxy credit default swaps are not available, we apply a blended approach based on a mixture of proxy credit default swap referencing to credit names of similar credit standing and the historical rating-based probability of default.

During 2012, we changed our estimate of credit valuation adjustments on derivative assets and debit valuation adjustments on derivative liabilities to be based on a market-implied probability of default calculation rather than a ratings-based historical counterparty probability of default calculation, consistent with recent changes in industry practice.

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

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

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

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

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

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

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

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

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

A valuation committee, chaired by the Head of Business Finance of Global Banking and Markets, meets monthly to review, monitor and discuss significant valuation matters arising from credit and market risks. The committee is responsible for establishing valuation policies and procedures, approving the internal valuation techniques and models developed by the Quantitative Risk and Valuation Group ("QRVG"), reviewing and approving valuation adjustments pertaining to, among other things, unobservable inputs, market liquidity, selection of valuation model and counterparty credit risk. Significant valuation risks identified in business activities are corroborated and addressed by the committee members and, where applicable, are escalated to the Chief Financial Officer of HUSI and the Audit Committee of the Board of Directors.

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

The following factors are considered in determining fair values:

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

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

▪ consistency among different pricing sources;

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

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

▪ the source of the fair value information; and

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

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

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

The following table summarizes the carrying value and estimated fair value of our financial instruments at September 30, 2013 and December 31, 2012.

September 30, 2013	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets.............................................................	$	31,495	$	31,495	$	1,512	$	29,917	$	66
Securities purchased under resale agreements...........................	2,216		2,216		-		2,216		-
Non-derivative trading assets........................................................	20,941		20,941		2,277		16,593		2,071
Derivatives........................................................................................	6,045		6,045		14		5,962		69
Securities...........................................................................................	49,598		49,651		28,010		21,641		-
Commercial loans, net of allowance for credit losses.................	48,196		49,619		-		-		49,619
Commercial loans designated under fair value option and held for sale...............................................................................................	1		1		-		1		-
Commercial loans held for sale.......................................................	41		41		-		41		-
Consumer loans, net of allowance for credit losses...................	18,919		15,848		-		-		15,848
Consumer loans held for sale:
Residential mortgages................................................................	130		126		-		-		126
Other consumer...........................................................................	64		64		-		-		64
Financial liabilities:
Short-term financial liabilities.........................................................	$	19,584	$	19,584	$	-	$	19,518	$	66
Deposits:
Without fixed maturities............................................................	102,950		102,950		-		102,950		-
Fixed maturities...........................................................................	2,119		2,125		-		2,125		-
Deposits designated under fair value option..............................	7,851		7,851		-		5,182		2,669
Non-derivative trading liabilities...................................................	4,470		4,470		457		4,013		-
Derivatives........................................................................................	7,377		7,377		15		7,304		58
Long-term debt.................................................................................	15,304		15,718		-		15,718		-
Long-term debt designated under fair value option...................	6,847		6,847		-		6,286		561

December 31, 2012	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets.............................................................	$	14,719	$	14,719	$	1,359	$	13,279	$	81
Securities purchased under resale agreements...........................	3,149		3,149		-		3,149		-
Non-derivative trading assets........................................................	25,491		25,491		2,484		20,061		2,946
Derivatives........................................................................................	6,865		6,865		30		6,664		171
Securities...........................................................................................	69,336		69,547		43,421		26,126		-
Commercial loans, net of allowance for credit losses.................	43,833		45,153		-		-		45,153
Commercial loans designated under fair value option and held for sale...............................................................................................	465		465		-		465		-
Commercial loans held for sale.......................................................	16		16		-		16		-
Consumer loans, net of allowance for credit losses...................	18,778		15,173		-		-		15,173
Consumer loans held for sale:
Residential mortgages................................................................	472		485		-		-		485
Other consumer...........................................................................	65		65		-		-		65
Financial liabilities:
Short-term financial liabilities.........................................................	$	15,033	$	15,033	$	-	$	14,952	$	81
Deposits:
Without fixed maturities............................................................	104,414		104,414		-		104,414		-
Fixed maturities...........................................................................	4,565		4,574		-		4,574		-
Deposits designated under fair value option..............................	8,692		8,692		-		6,056		2,636
Non-derivative trading liabilities...................................................	5,974		5,974		207		5,767		-
Derivatives........................................................................................	10,081		10,081		21		9,933		127
Long-term debt.................................................................................	14,465		15,163		-		15,163		-
Long-term debt designated under fair value option...................	7,280		7,280		-		6,851		429

Loan values presented in the table above were determined using the Fair Value Framework for measuring fair value, which is based on our best estimate of the amount within a range of value we believe would be received in a sale as of the balance sheet date (i.e. exit price). The secondary market demand and estimated value for our residential mortgage loans has been heavily influenced by the challenging economic conditions during the past several years, including house price depreciation, elevated unemployment, changes in consumer behavior, changes in discount rates and the lack of financing options available to support the purchase of receivables. For certain consumer loans, investors incorporate numerous assumptions in predicting cash flows, such as future interest rates, higher charge-off levels, slower voluntary prepayment speeds, different default and loss curves and estimated collateral values than we, as the servicer of these loans, believe will ultimately be the case. The investor's valuation process reflects this difference in overall cost of capital assumptions as well as the potential volatility in the underlying cash flow assumptions, the combination of which may yield a significant pricing discount from our intrinsic value. The estimated fair values at September 30, 2013 and December 31, 2012 reflect these market conditions.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

	Fair Value Measurements on a Recurring Basis
September 30, 2013	Level 1		Level 2		Level 3		Gross Balance		Netting(1)			Net Balance
	(in millions)
Assets:
Trading Securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises.....................................................................................	$	2,277	$	278	$	-	$	2,555	$	-		$	2,555
Obligations of U.S. States and political subdivisions........................	-		16		-		16		-			16
Collateralized debt obligations........................................................	-		-		245		245		-			245
Asset-backed securities:
Residential mortgages...............................................................	-		163		-		163		-			163
Student Loans...........................................................................	-		74		-		74		-			74
Corporate and other domestic debt securities..................................	-		3		1,513		1,516		-			1,516
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		967		192		1,159		-			1,159
Government.............................................................................	-		4,481		121		4,602		-			4,602
Equity securities.............................................................................	-		24		-		24		-			24
Precious metals trading..................................................................	-		10,587		-		10,587		-			10,587
Derivatives(2):
Interest rate contracts....................................................................	73		55,684		2		55,759		-			55,759
Foreign exchange contracts............................................................	1		14,114		136		14,251		-			14,251
Equity contracts.............................................................................	-		1,688		137		1,825		-			1,825
Precious metals contracts...............................................................	107		1,175		1		1,283		-			1,283
Credit contracts.............................................................................	-		4,606		621		5,227		-			5,227
Derivatives netting........................................................................	-		-		-		-		(72,300		)	(72,300		)
Total derivatives................................................................................	181		77,267		897		78,345		(72,300		)	6,045
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises.....................................................................................	27,969		13,804		-		41,773		-			41,773
Obligations of U.S. states and political subdivisions........................	-		858		-		858		-			858
Asset-backed securities:
Residential mortgages...............................................................	-		2		-		2		-			2
Commercial mortgages.............................................................	-		135		-		135		-			135
Home equity.............................................................................	-		230		-		230		-			230
Other........................................................................................	-		103		-		103		-			103
Corporate and other domestic debt securities..................................	-		-		-		-		-			-
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		887		-		887		-			887
Government-backed..................................................................	41		3,860		-		3,901		-			3,901
Equity securities.............................................................................	-		164		-		164		-			164
Loans(3)..............................................................................................	-		1		-		1		-			1
Mortgage servicing rights(4)................................................................	-		-		224		224		-			224
Total assets............................................................................	$	30,468	$	113,904	$	3,192	$	147,564	$	(72,300	)	$	75,264
Liabilities:
Deposits in domestic offices(5)............................................................	$	-	$	5,182	$	2,669	$	7,851	$	-		$	7,851
Trading liabilities, excluding derivatives.............................................	457		4,013		-		4,470		-			4,470
Derivatives(2):
Interest rate contracts....................................................................	104		55,596		2		55,702		-			55,702
Foreign exchange contracts............................................................	3		13,800		31		13,834		-			13,834
Equity contracts.............................................................................	-		1,232		175		1,407		-			1,407
Precious metals contracts...............................................................	45		1,016		2		1,063		-			1,063
Credit contracts.............................................................................	-		4,888		408		5,296		-			5,296
Derivatives netting........................................................................	-		-		-		-		(69,925		)	(69,925		)
Total derivatives................................................................................	152		76,532		618		77,302		(69,925		)	7,377
Long-term debt(6)...............................................................................	-		6,286		561		6,847		-			6,847
Total liabilities	$	609	$	92,013	$	3,848	$	96,470	$	(69,925	)	$	26,545

	Fair Value Measurements on a Recurring Basis
December 31, 2012	Level 1		Level 2		Level 3		Gross Balance		Netting(1)			Net Balance
	(in millions)
Assets:
Trading Securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises.....................................................................................	$	2,484	$	369	$	-	$	2,853	$	-		$	2,853
Collateralized debt obligations........................................................	-		-		466		466		-			466
Asset-backed securities:
Residential mortgages...............................................................	-		221		-		221		-			221
Corporate and other domestic debt securities..................................	-		1,035		1,861		2,896		-			2,896
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		468		299		767		-			767
Government.............................................................................	-		5,609		311		5,920		-			5,920
Equity securities.............................................................................	-		27		9		36		-			36
Precious metals trading..................................................................	-		12,332		-		12,332		-			12,332
Derivatives(2):
Interest rate contracts....................................................................	98		66,602		8		66,708		-			66,708
Foreign exchange contracts............................................................	4		13,825		16		13,845		-			13,845
Equity contracts.............................................................................	-		1,593		166		1,759		-			1,759
Precious metals contracts...............................................................	135		649		7		791		-			791
Credit contracts.............................................................................	-		5,961		1,168		7,129		-			7,129
Derivatives netting........................................................................	-		-		-		-		(83,367		)	(83,367		)
Total derivatives................................................................................	237		88,630		1,365		90,232		(83,367		)	6,865
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises.....................................................................................	43,379		17,316		-		60,695		-			60,695
Obligations of U.S. states and political subdivisions........................	-		912		-		912		-			912
Asset-backed securities:
Residential mortgages...............................................................	-		1		-		1		-			1
Commercial mortgages.............................................................	-		214		-		214		-			214
Home equity.............................................................................	-		258		-		258		-			258
Other........................................................................................	-		84		-		84		-			84
Corporate and other domestic debt securities..................................	-		26		-		26		-			26
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		831		-		831		-			831
Government-backed..................................................................	42		4,480		-		4,522		-			4,522
Equity securities.............................................................................	-		173		-		173		-			173
Loans(3)..............................................................................................	-		465		-		465		-			465
Mortgage servicing rights(4)................................................................	-		-		168		168		-			168
Total assets............................................................................	$	46,142	$	133,451	$	4,479	$	184,072	$	(83,367	)	$	100,705
Liabilities:
Deposits in domestic offices(5)............................................................	$	-	$	6,056	$	2,636	$	8,692	$	-		$	8,692
Trading liabilities, excluding derivatives.............................................	207		5,767		-		5,974		-			5,974
Derivatives(2):
Interest rate contracts....................................................................	90		66,258		1		66,349		-			66,349
Foreign exchange contracts............................................................	25		13,770		11		13,806		-			13,806
Equity contracts.............................................................................	-		1,244		173		1,417		-			1,417
Precious metals contracts...............................................................	19		712		7		738		-			738
Credit contracts.............................................................................	-		6,754		597		7,351		-			7,351
Derivatives netting........................................................................	-		-		-		-		(79,580		)	(79,580		)
Total derivatives................................................................................	134		88,738		789		89,661		(79,580		)	10,081
Long-term debt(6)...............................................................................	-		6,851		429		7,280		-			7,280
Total liabilities	$	341	$	107,412	$	3,854	$	111,607	$	(79,580	)	$	32,027

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

(2) Includes trading derivative assets of $4.6 billion and $5.4 billion and trading derivative liabilities of $6.6 billion and $8.7 billion as of September 30, 2013 and December 31, 2012, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives.

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

(4) See Note 8, "Intangible Assets," for additional information.

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

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

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

Transfers between Levels 1 and 2 There were no transfers between Levels 1 and 2 during September 30, 2013 and 2012.

Information on Level 3 assets and liabilities The following table summarizes additional information about changes in the fair value of Level 3 assets and liabilities during the three months ended September 30, 2013 and 2012. As a risk management practice, we may risk manage the Level 3 assets and liabilities, in whole or in part, using securities and derivative positions that are classified as Level 1 or Level 2 measurements within the fair value hierarchy. Since those Level 1 and Level 2 risk management positions are not included in the table below, the information provided does not reflect the effect of such risk management activities related to the Level 3 assets and liabilities.

	Jul. 1, 2013			Total Gains and (Losses) Included in(1)						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2013			Current Period Unrealized Gains (Losses)
	Jul. 1, 2013			Trading Revenue (Loss)			Other Revenue			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2013			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations.......................	$	227		$	21		$	-		$	-	$	-		$	(3	)	$	-		$	-		$	245		$	20
Corporate and other domestic debt securities.	1,498			-			-			15		-			-			-			-			1,513			-
Corporate debt securities issued by foreign entities...........	285			6			-			-		-			(99		)	-			-			192			6
Government debt securities issued by foreign entities.......................	135			(7		)	-			-		-			(7		)	-			-			121			(8		)
Equity securities.........	-			-			-			-		-			-			-			-			-			-
Derivatives, net(2):
Interest rate contracts........	(1		)	-			2			-		-			-			-			-			1			2
Foreign exchange contracts........	104			6			-			-		-			(6		)	1			-			105			-
Equity contracts........	(83		)	50			-			-		-			(5		)	4			(4		)	(38		)	47
Precious metals contracts........	-			(1		)	-			-		-			-			-			-			(1		)	(1		)
Credit contracts........	225			(26		)	-			-		-			14			-			-			213			(18		)
Mortgage servicing rights(4).	225			-			(1		)	-		-			-			-			-			224			(1		)
Total assets........	$	2,615		$	49		$	1		$	15	$	-		$	(106	)	$	5		$	(4	)	$	2,575		$	47
Liabilities:
Deposits in domestic offices..	$	(2,662	)	$	(26	)	$	-		$	-	$	(73	)	$	123		$	(110	)	$	79		(2,669		)	$	(11	)
Long-term debt...	(458		)	(17		)	-			-		(156		)	46			-			24			(561		)	(25		)
Total liabilities...	$	(3,120	)	$	(43	)	$	-		$	-	$	(229	)	$	169		$	(110	)	$	103		$	(3,230	)	$	(36	)

	Jan. 1, 2013			Total Gains and (Losses) Included in(1)						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2013			Current Period Unrealized Gains (Losses)
	Jan. 1, 2013			Trading Revenue (Loss)			Other Revenue			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2013			Current Period Unrealized Gains (Losses)

(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations.......................	$	466		$	139		$	-		$	236	$	-		$	(596	)	$	-		$	-		$	245		$	137
Corporate and other domestic debt securities.	1,861			28			-			46		-			(422		)	-			-			1,513			28
Corporate debt securities issued by foreign entities...........	299			(8		)	-			-		-			(99		)	-			-			192			(8		)
Government debt securities issued by foreign entities.......................	311			14			-			-		-			(204		)	-			-			121			2
Equity securities.........	9			(5		)	-			-		-			(4		)	-			-			-			(5		)
Derivatives, net(2):
Interest rate contracts........	7			-			(6		)	-		-			-			-			-			1			(7		)
Foreign exchange contracts........	5			2			-			-		-			110			(12		)	-			105			107
Equity contracts........	(7		)	30			-			-		-			(52		)	16			(25		)	(38		)	(28		)
Precious metals contracts........	-			(1		)	-			-		-			-			-			-			(1		)	(1		)
Credit contracts........	571			(186		)	-			-		-			(126		)	(46		)	-			213			(287		)
Mortgage servicing rights(4).	168			-			45			-		11			-			-			-			224			45
Total assets........	$	3,690		$	13		$	39		$	282	$	11		$	(1,393	)	$	(42	)	$	(25	)	$	2,575		$	(17	)
Liabilities:
Deposits in domestic offices..	$	(2,636	)	$	98		$	-		$	-	$	(558	)	$	326		$	(265	)	$	366		(2,669		)	$	(79	)
Long-term debt...	(429		)	(33		)	-			-		(425		)	165			-			161			(561		)	(16		)
Total liabilities...	$	(3,065	)	$	65		$	-		$	-	$	(983	)	$	491		$	(265	)	$	527		$	(3,230	)	$	(95	)

	Jul. 1, 2012			Total Gains and (Losses) Included in(1)						Purch- ases			Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2012			Current Period Unrealized Gains (Losses)
	Jul. 1, 2012			Trading Revenue (Loss)			Other Revenue			Purch- ases			Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2012			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations....	$	658		$	44		$	-		$	20		$	-		$	(84	)	$	40		$	-		$	678		$	30
Corporate and other domestic debt securities.......	1,599			24			-			-			-			(5		)	-			-			1,618			24
Corporate debt securities issued by foreign entities..........	688			41			-			(1		)	-			(4		)	-			-			724			35
Equity securities.......	12			1			-			-			-			(1		)	-			-			12			1
Derivatives, net(2):
Interest rate contracts.......	12			-			2			-			-			-			-			-			14			1
Foreign exchange contracts.......	(25		)	(12		)	-			-			(1		)	9			-			32			3			20
Equity contracts.......	(46		)	84			-			-			-			(6		)	1			(2		)	31			71
Precious metals contracts.......	-			1			-			-			-			-			-			-			1			1
Credit contracts.......	921			(227		)	-			-			-			(7		)	(16		)	(370		)	301			(250		)
Mortgage servicing rights(4).........................	187			-			(20		)	-			6			-			-			-			173			(19		)
Total assets.......	$	4,006		$	(44	)	$	(18	)	$	19		$	5		$	(98	)	$	25		$	(340	)	$	3,555		$	(86	)
Liabilities:
Deposits in domestic offices	$	(2,908	)	$	(81	)	$	-		$	-		$	(119	)	$	94		$	2		$	132		(2,880		)	$	(79	)
Long-term debt.	(287		)	(22		)	-			-			(59		)	2			-			45			(321		)	(20		)
Total liabilities..	$	(3,195	)	$	(103	)	$	-		$	-		$	(178	)	$	96		$	2		$	177		$	(3,201	)	$	(99	)

	Jan. 1, 2012			Total Gains and (Losses) Included in(1)						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2012			Current Period Unrealized Gains (Losses)
	Jan. 1, 2012			Trading Revenue (Loss)			Other Revenue			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Sep. 30, 2012			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations.	$	703		$	101		$	-		$	45	$	-		$	(211	)	$	40		$	-		$	678		$	79
Corporate and other domestic debt securities....	1,679			42			-			101		-			(204		)	-			-			1,618			32
Corporate debt securities issued by foreign entities..............	253			107			-			388		-			(24		)	-			-			724			101
Equity securities	13			-			-			-		-			(1		)	-			-			12			-
Derivatives, net(2):
Interest rate contracts...........	9			-			5			-		-			-			-			-			14			4
Foreign exchange contracts...........	(1		)	(31		)	-			-		(6		)	11			(3		)	33			3			1
Equity contracts	(83		)	147			-			-		-			(35		)	-			2			31			93
Precious metals contracts...........	-			1			-			-		-			-			-			-			1			1
Credit contracts.	1,353			(615		)	-			-		-			(51		)	(16		)	(370		)	301			(605		)
Loans(3).................	11			-			-			-		-			-			-			(11		)	-			(12		)
Mortgage servicing rights(4)..................	220			-			(67		)	-		20			-			-			-			173			(66		)
Total assets...........	$	4,157		$	(248	)	$	(62	)	$	534	$	14		$	(515	)	$	21		$	(346	)	$	3,555		$	(372	)
Liabilities:
Deposits in domestic offices....	$	(2,867	)	$	(158	)	$	-		$	-	$	(675	)	$	254		$	(41	)	$	607		(2,880		)	$	(129	)
Long-term debt.....	(86		)	(13		)	-			-		(280		)	7			(7		)	58			(321		)	(16		)
Total liabilities......	$	(2,953	)	$	(171	)	$	-		$	-	$	(955	)	$	261		$	(48	)	$	665		$	(3,201	)	$	(145	)

(1) Includes realized and unrealized gains and losses.

(2) Level 3 net derivatives included derivative assets of $897 million and derivative liabilities of $618 million as of September 30, 2013 and derivative assets of $1.8 billion and derivative liabilities of $1.4 billion as of September 30, 2012.

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

(4) See Note 8, "Intangible Assets," for additional information.

The following table presents quantitative information about the unobservable inputs used to determine the recurring fair value measurement of assets and liabilities classified as Level 3 fair value measurements as of September 30, 2013 and December 31, 2012.

As of September 30, 2013
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations.........	245		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	1% - 5%
				Conditional default rates	6% - 7%
				Loss severity rates	90% -95%
Corporate and other domestic debt securities.........................................	1,513		Discounted cash flows	Spread volatility on collateral assets	1% - 3%
				Correlation between insurance claim shortfall and collateral value	80%
Corporate and government debt securities issued by foreign entities..	313		Discounted cash flows	Correlations of default among a portfolio of credit names of embedded credit derivatives	36% - 37%
Interest rate derivative contracts....	1		Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	10% - 99%
Foreign exchange derivative contracts(1)......................................	105		Option pricing model	Implied volatility of currency pairs	10% - 14%
Equity derivative contracts(1)..........	(38	)	Option pricing model	Equity / Equity Index volatility	7% - 81%
				Equity / Equity and Equity / Index correlation	51% - 60%
Credit derivative contracts..............	213		Option pricing model	Correlation of defaults of a portfolio of reference credit names	37% - 52%
				Issuer by issuer correlation of defaults	83% - 95%
Mortgage servicing rights................	224		Option adjusted discounted cash flows	Constant prepayment rates	6% - 23%
				Option adjusted spread	8% - 19%
				Estimated annualized costs to service	$91 - $333 per account
Deposits in domestic offices (structured deposits) (1)(2).................	(2,669	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	10% - 14%
				Equity / Equity Index volatility	7% - 81%
				Equity / Equity and Equity / Index correlation	51% - 60%
Long-term debt (structured notes) (1)(2).................................................	(561	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	10% - 14%
				Equity / Equity Index volatility	7% - 81%
				Equity / Equity and Equity / Index correlation	51% - 60%

As of December 31, 2012
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations.........	466		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	-% - 6%
				Conditional default rates	4% - 14%
				Loss severity rates	50% - 100%
Corporate and other domestic debt securities.........................................	1,861		Discounted cash flows	Spread volatility on collateral assets	2% - 4%
				Correlation between insurance claim shortfall and collateral value	80%
Corporate and government debt securities issued by foreign entities..	610		Discounted cash flows	Correlations of default among a portfolio of credit names of embedded credit derivatives	29%
Equity securities (investments in hedge funds)....................................	9		Net asset value of hedge funds	Range of fair value adjustments to reflect restrictions on timing and amount of redemption and realization risks	30% - 100%
Interest rate derivative contracts....	7		Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	8% - 100%
Foreign exchange derivative contracts(1)......................................	5		Option pricing model	Implied volatility of currency pairs	2% - 21%
Equity derivative contracts(1)..........	(7	)	Option pricing model	Equity / Equity Index volatility	6% - 104%
				Equity / Equity and Equity / Index correlation	56% - 64%
Credit derivative contracts..............	571		Option pricing model	Correlation of defaults of a portfolio of reference credit names	32% - 45%
				Industry by industry correlation of defaults	44% - 67%
Mortgage servicing rights................	168		Option adjusted discounted cash flows	Constant prepayment rates	9% - 45%
				Option adjusted spread	8% - 19%
				Estimated annualized costs to service	$98 - $263 per account
Deposits in domestic offices (structured deposits) (1)(2).................	(2,636	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	2% - 21%
				Equity / Equity Index volatility	6% - 104%
				Equity / Equity and Equity / Index correlation	56% - 64%
Long-term debt (structured notes) (1)(2).................................................	(429	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	2% - 21%
				Equity / Equity Index volatility	6% - 104%
				Equity / Equity and Equity / Index correlation	56% - 64%

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

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

Significant Unobservable Inputs for Recurring Fair Value Measurements

Collateralized Debt Obligations (CDOs)

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

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

▪ Loss Severity Rate - Included in our Level 3 CDOs portfolio are collateralized loan obligations (CLOs) and trust preferred securities which are about equally distributed. The loss severity rate for trust preferred securities as of September 30, 2013 is about 1.8 times of CLOs.

Derivatives

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

▪ Implied volatility - The implied volatility is a significant pricing input for freestanding or embedded options including equity, foreign currency and interest rate options. The level of volatility is a function of the nature of the underlying risk, the level of strike price and the years to maturity of the option. Depending on the underlying risk and tenure, we determine the implied volatility based on observable input where information is available. However, substantially all of the implied volatilities are derived based on historical information. The implied volatility for different foreign currency pairs is between 10% and 14% while the implied volatility for equity/equity or equity/equity index is between 7% and 81%, respectively at September 30, 2013. Although implied foreign currency volatility and equity volatility appear to be widely distributed at the portfolio level, the deviation of implied volatility on a trade-by-trade basis is narrower. The average deviation of implied volatility for the foreign currency pair and at-the-money equity option are 4.4% and 4.6%, respectively at September 30, 2013.

▪ Correlations of a group of foreign currency or equity - Correlation measures the relative change in values among two or more variables (i.e., equity or foreign currency pair). Variables can be positively or negatively correlated. Correlation is a key input in determining the fair value of a derivative referenced to a basket of variables such as equities or foreign currencies. A majority of the correlations are not observable, but are derived based on historical data. The correlation between equity/equity and equity/equity index was between 51% and 60% at September 30, 2013.

Sensitivity of Level 3 Inputs to Fair Value Measurements

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

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

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

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

Significant Additions to and Transfers Into (Out of) Level 3 Measurements During the nine months ended September 30, 2013, we transferred $46 million of credit derivatives from Level 2 to Level 3 as result of including specific fair value adjustments related to certain credit default swaps. During the three and nine months ended September 30, 2013, we transferred $79 million and $366 million, respectively, of deposits in domestic offices and $24 million and $161 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility. Additionally, during the three and nine months ended September 30, 2013, we transferred $110 million and $265 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

During the three and nine months ended September 30, 2012, we transferred $132 million and $607 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis Certain financial and non-financial assets are measured at fair value on a non-recurring basis and therefore, are not included in the tables above. These assets include (a) mortgage and consumer loans classified as held for sale reported at the lower of amortized cost or fair value and (b) impaired loans or assets that are written down to fair value based on the valuation of underlying collateral during the period. These instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances (e.g., impairment). The following table presents the fair value hierarchy level within which the fair value of the financial and non-financial assets has been recorded as of September 30, 2013 and December 31, 2012. The gains (losses) during the three and nine months ended September 30, 2013 and 2012 are also included.

	Non-Recurring Fair Value Measurements as of September 30, 2013								Total Gains (Losses) For the Three Months Ended September 30 2013			Total Gains (Losses) For the Nine Months Ended September 30 2013
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale(1).	$	-	$	31	$	63	$	94	$	(14	)	$	(4	)
Impaired commercial loans(2).........................	-		-		69		69		19			17
Consumer loans(3)...........................................	-		437		-		437		(20		)	(38		)
Real estate owned(4)........................................	16		-		-		16		(2		)	-
Total assets at fair value on a non-recurring basis.................................................	$	16	$	468	$	132	$	616	$	(17	)	$	(25	)

	Non-Recurring Fair Value Measurements as of December 31, 2012								Total Gains (Losses) For the Three Months Ended September 30 2012			Total Gains (Losses) For the Nine Months Ended September 30 2012
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale(1).	$	-	$	10	$	67	$	77	$	3		$	(4	)
Impaired commercial loans(2).........................	-		-		155		155		(4		)	(27		)
Consumer loans(3)...........................................	-		712		-		712		(20		)	(58		)
Real estate owned(4).......................................	24		-		-		24		1			3
Total assets at fair value on a non-recurring basis................................................	$	24	$	722	$	222	$	968	$	(20	)	$	(86	)

(1) As of September 30, 2013 and December 31, 2012, the fair value of the loans held for sale was below cost. Certain residential mortgage loans held for sale have been classified as a Level 3 fair value measurement within the fair value hierarchy as the underlying real estate properties which determine fair value are illiquid assets as a result of market conditions and significant inputs in estimating fair value were unobservable. Additionally, the fair value of these properties is affected by, among other things, the location, the payment history and the completeness of the loan documentation.

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

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

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

The following table presents quantitative information about non-recurring fair value measurements of assets and liabilities classified with Level 3 of the fair value hierarchy as of September 30, 2013 and December 31, 2012.

As of September 30, 2013
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale.........................	$	63	Valuation of third party appraisal on underlying collateral	Loss severity rates	-% - 100%
Impaired commercial loans............................................	69		Valuation of third party appraisal on underlying collateral	Loss severity rates	-% - 81%

As of December 31, 2012
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale.........................	$	67	Valuation of third party appraisal on underlying collateral	Loss severity rates	-% - 100%
Impaired commercial loans............................................	155		Valuation of third party appraisal on underlying collateral	Loss severity rates	1% - 79%

Significant Unobservable Inputs for Non-Recurring Fair Value Measurements

Residential mortgage loans held for sale primarily represent subprime residential mortgage loans which were previously acquired with the intent of securitizing or selling them to third parties. The weighted average loss severity rate for these loans was approximately 59% at September 30, 2013. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

Impaired loans represent commercial loans. The weighted average severity rate for these loans was approximately 34% at September 30, 2013. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

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

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

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

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

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

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

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

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

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

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

Lending-related commitments - The fair value of commitments to extend credit, standby letters of credit and financial guarantees are not included in the table. The majority of the lending related commitments are not carried at fair value on a recurring basis nor are they actively traded. These instruments generate fees, which approximate those currently charged to originate similar commitments, which are recognized over the term of the commitment period. Deferred fees on commitments and standby letters of credit totaled $40 million and $46 million at September 30, 2013 and December 31, 2012, respectively.

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

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

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

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

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

The following tables provide additional information relating to asset-backed securities and collateralized debt obligations as of September 30, 2013:

Trading residential mortgage asset-backed securities:

			Alt-A				Subprime
Rating of Securities:(1)	Collateral Type:		Level 2		Level 3		Level 2		Level 3		Total
		(in millions)
AAA -A..............................................	Residential mortgages......................................		$	90	$	-	$	69	$	-	$	159
CCC-Unrated......................................	Residential mortgages......................................		-		-		4		-		4
			$	90	$	-	$	73	$	-	$	163

Other trading asset-backed securities and collateralized debt obligations:

Rating of Securities:(1)	Collateral Type:	Level 2		Level 3
		(in millions)
AAA -A..............................................	Student loans..................................................................................	$	74	$	-
BBB -B................................................	Collateralized debt obligations.....................................................	-		245
		$	74	$	245

Available-for-sale securities backed by collateral:

		Commercial Mortgages				Alt-A
Rating of Securities:(1)	Collateral Type:	Level 2		Level 3		Level 2		Level 3		Total
		(in millions)
AAA -A...............................................	Commercial mortgages.......................................	$	135	$	-	$	-	$	-	$	135
	Home equity........................................................	-		-		100		-		100
	Total AAA -A.....................................................	135		-		100		-		235
BBB -B.................................................	Other.....................................................................	-		-		103		-		103
	Total BBB -B.......................................................	-		-		103		-		103
CCC -Unrated......................................	Residential mortgages.......................................	-		-		2		-		2
	Home equity........................................................	-		-		130		-		130
	Total CCC -Unrated............................................	-		-		132		-		132
		$	135	$	-	$	335	$	-	$	470

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Structured notes - Structured notes are hybrid instruments containing embedded derivatives. Certain structured notes were elected to be measured at fair value in their entirety under fair value option accounting principles. The valuation of the hybrid instruments is predominantly driven by the derivative features embedded within the instruments. The valuation of embedded derivatives may include significant unobservable inputs such as correlation of the referenced credit names or volatility of the embedded option. Cash flows of the funded notes are discounted at the appropriate rate for the applicable duration of the instrument adjusted for our own credit spreads. The credit spreads so applied are determined with reference to our own debt issuance rates observed in the primary and secondary markets, internal funding rates, and the structured note rates in recent executions.

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

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

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

20. Litigation and Regulatory Matters

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

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

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

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

Litigation

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

Numerous merchants-including absent class member large and small merchants and certain named plaintiff merchants and trade associations-have objected and/or opted out of the settlement during the exclusion period, which ended on May 28, 2013. Visa's and MasterCard's analysis of the data determined that the defendants had the right to terminate the settlement agreement because the volume threshold was reached, but elected not to do so. We anticipate that most of the larger merchants who opted out of the settlement will initiate separate actions seeking to recover damages. A hearing on class plaintiffs' motion for final approval of the class settlement was held on September 12, 2013, before the District Court. The parties now await the District Court's decision.

Checking Account Overdraft Litigation On March 1, 2011 an action captioned Ofra Levin et al v. HSBC Bank USA, N.A. et al. (N.Y. Sup. Ct. 650562/11) (the "State Action") was filed in New York State Court on behalf of a putative New York class of customers who allegedly incurred overdraft fees due to the posting order of debit card transactions. We filed a motion to dismiss the complaint, which was granted in part with leave to amend.

Subsequently, plaintiffs (the "Levin Plaintiffs") in the State Action acquired new attorneys and filed a new action in federal court, captioned Ofra Levin et al. v. HSBC Bank USA, N.A. et al. (E.D.N.Y. 12-CV-5696) (the "Levin Federal Action"). The Levin Federal Action seeks relief for a putative nationwide class and a putative New York subclass, asserting the same claims as the State Action and adding allegations that deposited funds are not made available pursuant to HSBC's funds availability disclosures. The Levin Plaintiffs also filed a motion to dismiss the State Action, which the state court denied.

The Levin Plaintiffs' former counsel amended the complaint in the State Action substituting a new named plaintiff, Darek Jura, and the State Action was recaptioned In Re HSBC Bank USA, N.A. Checking Account Overdraft Litigation. Jura then filed a motion for class certification. HSBC's response deadline has not been set, as the State Action is being held in abeyance until August 14, 2013. Jura also filed a federal action captioned Darek Jura v. HSBC Bank USA, N.A. et al. (E.D.N.Y. 12-CV-6224) (the "Jura Federal Action"), presenting similar claims to the State Action.

On February 20, 2013, a fourth action captioned Hanes v. HSBC Bank USA, N.A. (E.D. Va. 13-CV-00229) (the "Hanes Action") was filed. The Hanes Action presents similar claims to the previously filed actions and seeks relief for a putative nationwide class and a putative California subclass.

We subsequently sought centralization of all three federal actions with the Judicial Panel on Multidistrict Litigation ("JPML"), and on June 5, 2013, the JPML created the HSBC Overdraft MDL and transferred the Hanes Action to the United States District Court for the Eastern District of New York ("EDNY") for coordinated or consolidated pretrial proceedings with the Levin Federal Action and the Jura Federal Action. HSBC has filed motions to dismiss in each of the three federal actions,

On July 22, 2013 the EDNY issued an Order which: (1) consolidated the three federal actions; (2) appointed counsel in the Jura Federal Action and the Hanes Action as interim class counsel; (3) ordered the interim class counsel to file a consolidated complaint within 30 days; and (4) denied HSBC's previously filed motions to dismiss as moot, without prejudice. Interim class counsel filed their consolidated complaint on September 30, 2013. Additionally, the plaintiffs in each of the underlying federal actions, respectively, have served written discovery, and HSBC has responded and made productions in each of the actions.

DeKalb County, et al. v. HSBC North America Holdings Inc., et al. In October 2012, three of the five counties constituting the metropolitan area of Atlanta, Georgia, filed a lawsuit pursuant to the Fair Housing Act against HSBC North America and numerous subsidiaries, including HSBC Finance Corporation and HSBC Bank USA, in connection with residential mortgage lending, servicing and financing activities. In the action, captioned DeKalb County, Fulton County, and Cobb County, Georgia v. HSBC North America Holdings Inc., et al. (N.D. Ga. No. 12-CV-03640), the plaintiff counties assert that the defendants' allegedly discriminatory lending and servicing practices led to increased loan delinquencies, foreclosures and vacancies, which in turn caused the plaintiff counties to incur damages in the form of lost property tax revenues and increased municipal services costs, among other damages. The court denied defendants' motion to dismiss on September 26, 2013.

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

Between June 2011 and April 2013, several putative class actions related to lender-placed insurance were filed against various HSBC U.S. entities, including actions against HSBC USA, Inc. and certain of our subsidiaries captioned Montanez et al v. HSBC Mortgage Corporation (USA) et al. (E.D. Pa. No. 11-CV-4074); West et al. v. HSBC Mortgage Corporation (USA) et al. (South Carolina Court of Common Pleas, 14th Circuit No. 12-CP-00687); Weller et al. v. HSBC Mortgage Services, Inc. et al. (D. Col. No. 13-CV-00185); and Hoover et al. v. HSBC Bank USA, N.A. et al. (N.D.N.Y. 13-CV-00149); and Lopez v. HSBC Bank USA, N.A. et al. (S.D. Fla 13-CV-21104). A new putative class action was filed against HSBC Bank USA and HSBC Mortgage Corporation (USA) in the Southern of District of New York on August 21, 2013 entitled, Ross F. Gilmour v. HSBC Bank USA, N.A., et al. (S.D.N.Y. Case No. 1:13-cv-05896-ALC). These actions relate primarily to industry-wide practices, and include allegations regarding the relationships and potential conflicts of interest between the various entities that place the insurance, the value and cost of the insurance that is placed, back-dating policies to the date the borrower allowed it to lapse, self-dealing and insufficient disclosure. HSBC filed motions to dismiss the complaints in the Montanez, Lopez, Weller, and Hoover matters. The Court denied the motion to dismiss in the Lopez matter and we await the court's ruling on the other motions. In addition, in Montanez, plaintiffs filed a motion for multi-district litigation treatment to consolidate the action with Lopez, which was denied on July 25, 2013. In West, discovery is ongoing.

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

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

Credit Default Swap Litigation In July 2013 HSBC Bank, HSBC Holdings plc. and HSBC Bank plc. were named as defendants, among others, in three putative class actions filed in federal courts located in New York and Chicago. These class actions allege that the defendants, which include ISDA, Markit and several other financial institutions, conspired to restrain trade in violation of the federal anti-trust laws by, among other things, restricting access to credit default swap pricing exchanges and blocking new entrants into the exchange market, with the purpose and effect of artificially inflating the bid/ask spread paid to buy and sell credit default swaps in the United States. The Plaintiffs in these suits purport to represent a class of all persons who purchased or sold credit default swaps to defendants in the United States. Four additional putative class actions alleging violations of federal anti-trust laws concerning market practices relating to credit default swaps were filed in July and August 2013 in federal courts in New York and Chicago against HSBC Bank, HSBC Holdings plc and HSBC Bank plc. These actions all are at a very early stage. On October 16, 2013, in considering motions filed by plaintiffs to consolidate the case in federal court in New York or Chicago, the Multi-District Litigation panel ordered that all cases be consolidated in the Southern District of New York as In re Credit Default Swaps Antitrust Litigation, MDL No. 2476.

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

In November 2011, the District Court judge overseeing three related putative class actions in the Southern District of New York, captioned In re Herald, Primeo and Thema Funds Securities Litigation (S.D.N.Y. Nos. 09-CV-0289 (RMB), 09-CV-2558 (RMB)), dismissed all claims against the HSBC defendants on forum non conveniens grounds, but temporarily stayed this ruling as to one of the actions against the HSBC defendants - the claims of investors in Thema International Fund plc. - in light of a proposed amended settlement agreement between the lead plaintiff in that action and the relevant HSBC defendants (including, subject to the granting of leave to effect a proposed pleading amendment, HSBC Bank USA). In December 2011, the District Court lifted this temporary stay and dismissed all remaining claims against the HSBC defendants, and declined to consider preliminary approval of the settlement. In light of the District Court's decisions, HSBC has terminated the settlement agreement. The Thema plaintiff contests HSBC's right to terminate. Plaintiffs in all three actions filed notices of appeal to the U.S. Circuit Court of Appeals for the Second Circuit, where the actions are captioned In re Herald, Primeo and Thema Funds Securities Litigation (2nd Cir, Nos. 12-156, 12-184, 12-162). Briefing in that appeal was completed in September 2012 and oral argument was held in April 2013. On September 16, 2013, the U.S. Circuit Court of Appeals for the Second Circuit affirmed the District Court's dismissal of the action on forum non conveniens grounds. On October 1, 2013 the Thema plaintiff filed a petition to have the appeal reheard by the Court of Appeals en banc. The Court of Appeals has postponed its decision on the petition until after the United States Supreme Court decides Chadbourne & Park LLP v. Troice, No. 12-179.

In December 2010, the Madoff Securities trustee commenced suits against various HSBC companies in the U.S. Bankruptcy Court and in the English High Court. The U.S. action, captioned Picard v. HSBC et al (Bankr S.D.N.Y. No. 09-01364), which also names certain funds, investment managers, and other entities and individuals, sought $9 billion in damages and additional recoveries from HSBC Bank USA, certain of our foreign affiliates and the various other codefendants. It sought damages against the HSBC defendants for allegedly aiding and abetting Madoff's fraud and breach of fiduciary duty. In July 2011, after withdrawing the case from the Bankruptcy Court in order to decide certain threshold issues, the District Court dismissed the trustee's various common law claims on the grounds that the trustee lacks standing to assert them. In December 2011, the trustee filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit, where the action is captioned Picard v. HSBC Bank plc et al. (2nd Cir., No. 11-5207). Briefing in that appeal was completed in April 2012, and oral argument was held in November 2012. On June 20, 2013, the Second Circuit Court of Appeals affirmed the decision of the District Court. On October 9, 2013, the trustee filed a petition for a writ of certiorari seeking leave for a further appeal to the United States Supreme Court. The HSBC defendants' response to the petition for a writ of certiorari is currently due December 9, 2013.

The District Court returned the remaining claims to the Bankruptcy Court for further proceedings. Those claims seek, pursuant to U.S. bankruptcy law, recovery of unspecified amounts received by the HSBC defendants from funds invested with Madoff, including amounts that the HSBC defendants received when they redeemed units held in the various funds. The HSBC defendants acquired those fund units in connection with financing transactions the HSBC defendants had entered into with various clients. The trustee's U.S. bankruptcy law claims also seek recovery of fees earned by the HSBC defendants for providing custodial, administration and similar services to the funds. Between September 2011 and April 2012, the HSBC defendants and certain other defendants moved again to withdraw the case from the Bankruptcy Court. The District Court granted those withdrawal motions as to certain issues, and briefing and oral arguments on the merits of the withdrawn issues are now complete. The District Court has issued rulings on several of the withdrawn issues, but decisions with respect to other issues remain pending and are expected in 2013. The HSBC defendants' responses to the remaining bankruptcy law claims are currently due in the Bankruptcy Court on December 20, 2013. The trustee's English action, which names HSBC Bank USA and other HSBC entities as defendants, seeks recovery of unspecified transfers of money from Madoff Securities to or through HSBC on the ground that the HSBC defendants actually or constructively knew of Madoff's fraud. HSBC has not been served with the trustee's English action.

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

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

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

Federal Home Loan Mortgage Corporation v. Bank of America, et al. On March 14, 2013, the Federal Home Loan Mortgage Corporation ("Freddie Mac"), filed a lawsuit in the United States District Court for the Eastern District of Virginia naming as defendants HSBC Bank USA and other panel USD LIBOR panel banks, as well as the British Bankers' Association. The lawsuit alleges improper practices in connection with the setting of USD LIBOR, and claims violation of the Sherman Act, breach of contract, and fraud arising out of various swap agreements entered into by Freddie Mac with the USD LIBOR panel banks, including HSBC Bank USA. In May 2013 the lawsuit was transferred to the USD LIBOR Litigation Multi-District Proceeding pending before Judge Buchwald in the Southern District of New York where it will be subject to a stay imposed by that court on all new proceedings.

The lawsuit is at an early stage, and does not allege specific damages as to HSBC Bank USA.

Mortgage Securitization Activity and Litigation In addition to the repurchase risk described in Note 18, "Guarantee Arrangements and Pledged Assets," we have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by HSI. During 2005-2007, we purchased and sold $24 billion of whole loans to HSI which were subsequently securitized and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $6.6 billion and $7.4 billion at September 30, 2013 and December 31, 2012, respectively.

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

HSBC Bank USA and certain of our affiliates have been named as defendants in a number of actions in connection with residential mortgage-backed securities ("RMBS") offerings, which generally allege that the offering documents for securities issued by securitization trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans. In September 2011, the Federal Housing Finance Agency (the "FHFA"), acting in its capacity as conservator for the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), filed an action in the U.S. District Court for the Southern District of New York against HSBC Bank USA, HSBC USA, HSBC North America, HSI, HSI Asset Securitization Corporation ("HASCO") and five former and current officers and directors of HASCO seeking damages or rescission of mortgage-backed securities purchased by Fannie Mae and Freddie Mac that were either underwritten or sponsored by HSBC entities. The aggregate unpaid principal balance of the securities was approximately $1.6 billion at September 30, 2013. This action, captioned Federal Housing Finance Agency, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation v. HSBC North America Holdings Inc. et al. (S.D.N.Y. No. CV 11-6189-LAK), is one of a series of similar actions filed against 17 financial institutions alleging violations of federal and state securities laws in connection with the sale of private-label RMBS purchased by Fannie Mae and Freddie Mac, primarily from 2005 to 2008. This action, along with all of the similar FHFA RMBS actions that were filed in the U.S. District Court for the Southern District of New York, was transferred to a single judge, who directed the defendant in the first-filed matter, UBS, to file a motion to dismiss. In May 2012, the District Court filed its decision denying the motion to dismiss FHFA's securities law claims and granting the motion to dismiss FHFA's negligent misrepresentation claims. The District Court's ruling formed the basis for rulings on the other matters, including the action filed against HSBC Bank USA and our affiliates. On April 5, 2013, the Second Circuit Court of Appeals affirmed the ruling of the District Court. In December 2012, the District Court directed the FHFA parties to schedule mediation with the Magistrate Judge assigned to the action. In January 2013, the FHFA parties met with the Magistrate Judge to discuss how to structure a mediation. Since that time, three of the FHFA defendants (GE, Citigroup and UBS) have resolved their lawsuits (the terms of these settlements are largely confidential, but have been disclosed to varying degrees, including to some extent by the defendants in securities filings). Discovery in the action against HSBC is proceeding.

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

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

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

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

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

Governmental and Regulatory Matters

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

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

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

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

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

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

Under these agreements, HSBC and HSBC Bank USA made payments totaling $1.921 billion to U.S. authorities, of which $1.381 billion was attributed to and paid by HSBC Bank USA, and are continuing to comply with ongoing obligations. Over the five-year term of the agreements with the U.S. Department of Justice and the FCA, an independent monitor (who also will be, for FCA purposes, a "skilled person" under Section 166 of the Financial Services and Markets Act) will evaluate HSBC's progress in fully implementing its obligations, and will produce regular assessments of the effectiveness of HSBC's compliance function. Michael Cherkasky has been selected as the independent monitor and in July 2013, the United States District Court for the Eastern District of New York approved the U.S. DPA. The U.S. DPA remains pending under the jurisdiction of the United States District Court for the Eastern District of New York.

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

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

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

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

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

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

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

In July 2013, HSBC and certain of its affiliates, including HBUS, received a Statement of Objections from the European Commission relating to its ongoing investigation of alleged anti-competitive activity by a number of market participants in the credit derivatives market between 2006 and 2009. The Statement of Objections sets out the European Commission's preliminary views and does not prejudge the final outcome of its investigation. HSBC responded to the European Commission's Statement of Objections on October 11, 2013. Based on the facts currently known, it is not practicable at this time for us to predict the resolution of the European Commission's investigation, including the timing or impact on HSBC or us.

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

21. New Accounting Pronouncements

The following new accounting pronouncements were adopted in 2013:

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

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

Ÿ Additional Benchmark Interest Rate for Hedge Accounting Purposes In July 2013, the FASB issued an ASU that amends existing U.S. GAAP to recognize, in addition to U.S. Treasury and LIBOR swap rates, the Federal Funds Effective Swap Rate (also referred to as the Overnight Index Swap rate) as an acceptable U.S. benchmark interest rate for hedge accounting purposes. The amendment became effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. In light of the prospective transition, the amendment did not affect the accounting for our existing hedges and thus did not have an impact on our financial position or results of operations.

There were no accounting pronouncements issued during the first nine months of 2013, other than those discussed above, that had a significant impact on our financial position or results of operations.

This information is provided by RNS

The company news service from the London Stock Exchange

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