HSBC USA Inc 3Q 2013 Form 10-Q Part 2 | RNS | Ticker

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HSBC USA Inc 3Q 2013 Form 10-Q Part 2

RNS Announcement

RNS Number : 0820S

HSBC Holdings PLC

04 November 2013

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

Forward-Looking Statements

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

Executive Overview

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

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

Current Environment The U.S. economy continued to improve at a modest pace during the first nine months of 2013. GDP is expected to grow at an annualized rate of less than 2 percent in 2013, which remains well below the economy's potential growth rate. Consumer confidence rose to a six year high in July based on the University of Michigan's Consumer Confidence Index as consumers continue to feel better about their household finances due to rising home values and subdued inflation. Nonetheless, with continuing high gasoline prices, the increase in payroll taxes at the beginning of the year and the onset of budget sequestration in March, consumer confidence remains under pressure as domestic fiscal uncertainties, including federal budget and debt ceiling debates, continue to affect consumer sentiment. During the second quarter and continuing into the third quarter of 2013, long-term interest rates began to rise in part out of concern that the Federal Reserve may begin to slow its quantitative easing program if the economy continues to strengthen. These concerns subsided to a certain extent in September when the Federal Reserve announced its bond buying program would continue at current levels to support the slow growing economy. Federal Reserve policy makers previously announced that they do not expect to increase short-term rates until the unemployment rate falls below 6.5 percent. The prolonged period of low interest rates continues to put pressure on spreads earned on our deposit base.

While the economy continued to add jobs in 2013, the pace of new job creation continued to be slower than needed to meaningfully reduce unemployment. Although unemployment rates, which are a major factor influencing credit quality, fell from 7.8 percent at the beginning of the year to 7.2 percent in September 2013, unemployment remains high based on historical standards. Also, a significant number of U.S. residents are no longer looking for work and are not reflected in the U.S. unemployment rates. Unemployment has continued to have an impact on the provision for credit losses in our loan portfolio and in loan portfolios across the industry. Concerns about the future of the U.S. economy, including the pace and magnitude of recovery from the recent economic recession, consumer confidence, fiscal policy, including the ability of the legislature to work collaboratively to address fiscal issues in the U.S., volatility in energy prices, credit market volatility including the ability to resolve the European sovereign debt crisis and trends in corporate earnings will continue to influence the U.S. economic recovery and the capital markets. In particular, continued improvement in unemployment rates, a sustained recovery of the housing markets and stabilization in energy prices remain critical components of a broader U.S. economic recovery. These conditions in combination with the impact of recent regulatory changes, including the on-going implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"), will continue to impact our results in 2013 and beyond.

The housing market continued the strong rebound in 2013 with overall home prices moving higher in many regions as demand increased and the supply of homes for sale remained restricted. However, the sharp decline in the share of foreclosed home sales currently being experienced, which is contributing to the increase in home sale prices, may not continue as the impact of servicers resuming foreclosure activities and the listing of the underlying properties for sale along with the recent increases in mortgage interest rates could slow down future price gains. In addition, certain courts and state legislatures have issued new rules or statutes relating to foreclosures. Scrutiny of foreclosure documentation has increased in some courts. Also, in some areas, officials are requiring additional verification of information filed prior to the foreclosure proceeding. The combination of these factors has led to a significant backlog of foreclosures which will take time to resolve. If a significant number of foreclosures come to market at the same time, due to the backlog or other delays in processing, it could have an adverse impact upon home prices.

Performance, Developments and Trends The following table sets forth selected financial highlights of HSBC USA Inc. for the three and nine months ended September 30, 2013 and 2012 and as of September 30, 2013 and December 31, 2012.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(dollars are in millions)
Income (loss) from continuing operations............................................	$	4		$	(782	)	$	367		$	(1,295	)
Rate of return on average:
Total assets............................................................................................	-		%	(1.6		)%	.3		%	(.9		)%
Total common shareholder's equity..................................................	(.4		)	(19.1		)	2.6			(10.6		)
Net interest margin....................................................................................	1.26			1.22			1.29			1.31
Efficiency ratio...........................................................................................	92.5			177.4			78.3			123.2
Commercial net charge-off ratio⁽¹⁾...........................................................	.05			.18			.18			.35
Consumer net charge-off ratio⁽¹⁾.............................................................	1.19			.93			.94			1.31

(1) Excludes loans held for sale.

	September 30, 2013			December 31, 2012
	(dollars are in millions)
Additional Select Ratios:
Allowance as a percent of loans⁽¹⁾.............................................................................................................	.88		%	1.02		%
Commercial allowance as a percent of loans⁽¹⁾.........................................................................................	.65			.72
Consumer allowance as a percent of loans⁽¹⁾...........................................................................................	1.47			1.73
Consumer two-months-and-over contractual delinquency...................................................................	6.92			6.92
Loans to deposits ratio⁽²⁾.............................................................................................................................	77.48			71.35
Tier 1 capital to risk weighted assets.........................................................................................................	11.66			13.61
Tier 1 common equity to risk weighted assets.........................................................................................	9.98			11.63
Total capital to risk weighted assets.........................................................................................................	16.30			19.52
Total shareholders' equity to total assets................................................................................................	9.28			9.32

Select Balance Sheet Data:
Cash and interest bearing deposits with banks.......................................................................................	$	31,429		$	14,638
Trading assets...............................................................................................................................................	25,527			30,874
Securities available-for-sale........................................................................................................................	48,053			67,716
Loans:
Commercial loans......................................................................................................................................	48,509			44,150
Consumer loans........................................................................................................................................	19,201			19,108
Total loans.....................................................................................................................................................	67,710			63,258
Deposits.........................................................................................................................................................	112,921			117,671

(1) Excludes loans held for sale.

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

Income from continuing operations was $4 million and $367 million during the three and nine months ended September 30, 2013, respectively, compared with a loss from continuing operations of $782 million and $1,295 million during the three and nine months ended September 30, 2012, respectively. Income from continuing operations before income tax was $15 million and $531 million during the three and nine months ended September 30, 2013, respectively, compared with a loss from continuing operations before income tax of $794 million and $938 million during the three and nine months ended September 30, 2012, respectively. The significant improvement in both periods reflects lower operating expenses as the three and nine months ended September 30, 2012 include an expense of $800 million and $1,500 million, respectively, related to certain regulatory matters and a lower provision for credit losses which was partially offset by lower net interest income and in the year-to-date period, lower other revenues. Other revenues in the three and nine months ended September 30, 2012 includes pre-tax gains of $103 million and $433 million, respectively, from the sale of certain retail branches to First Niagara. In addition, our results in all periods were impacted by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option which distorts comparability of the underlying performance trends of our business. The following table summarizes the impact of this item on our income from continuing operations before income tax for all periods presented:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
	(in millions)
Income (loss) from continuing operations before income tax, as reported......................	$	15	$	(794	)	$	531	$	(938	)
Fair value movement on own fair value option debt attributable to credit spread.........	63		179			52		269
Underlying income (loss) from continuing operations before income tax ⁽¹⁾...................	$	78	$	(615	)	$	583	$	(669	)

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

Excluding the impact of the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting in the table above, our underlying income (loss) from continuing operations before tax for the three and nine months ended September 30, 2013 increased $693 million and $1,252 million, respectively, compared with the prior year periods as as lower operating expenses and a lower provision for credit losses was partially offset by lower net interest income and lower other revenues.

During the nine months ended September 30, 2013, we continued to reduce legacy and other risk positions as opportunities arose, including the sale of $475 million of leveraged acquisition finance loans previously held for sale. The following table provides a summary of the significant valuation adjustments associated with these positions that impacted revenue 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)
Gains (Losses)
Insurance monoline structured credit products⁽¹⁾................................................................	$	1		$	16		$	42	$	6
Other structured credit products⁽¹⁾.........................................................................................	15			38			53		112
Mortgage whole loans held for sale (predominantly subprime)⁽²⁾.....................................	(2		)	(9		)	5		(12		)
Leverage acquisition finance loans⁽³⁾....................................................................................	-			14			13		48
Total gains.................................................................................................................................	$	14		$	59		$	113	$	154

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

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

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

See "Results of Operations" for a more detailed discussion of our operating trends. In addition, see "Balance Sheet Review" for further discussion on our receivable trends, "Liquidity and Capital Resources" for further discussion on funding and capital and "Credit Quality" for additional discussion on our credit trends.

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 goodwill was 92 percent of fair value. Based on the results of this testing, during the third quarter of 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. Our goodwill impairment testing is, however, highly sensitive to certain assumptions and estimates used. We will continue to monitor our Global Banking and Markets reporting unit and perform interim impairment testing in future periods as very small changes in cash flow projections could result in either partial or full goodwill impairment of this reporting unit. We continue to perform periodic analysis of the risks and strategies of all our business and product offerings. If deterioration in economic conditions occurs or changes in the strategy or performance of our businesses or product offerings occur, interim impairment tests for reporting units in addition to Global Banking and Markets could be required.

We continue to focus on cost optimization efforts to ensure realization of cost efficiencies. To date, we have identified and implemented various opportunities to reduce costs through organizational structure redesign, vendor spending, discretionary spending and other general efficiency initiatives. Additional cost reduction opportunities have been identified and are in the process of implementation. Workforce reductions, some of which relate to our retail branch divestitures, have resulted in total legal entity full-time equivalent employees being reduced by 38 percent since December 31, 2010. Workforce reductions are also occurring in certain non-compliance shared services functions, which we expect will result in additional reductions to future allocated costs for these functions. These efforts continue and, as a result, we may incur restructuring charges in future periods, the amount of which will depend upon the actions that ultimately are implemented.

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. See Note 8, "Intangible Assets" for a complete discussion of this agreement. We continue to originate mortgages for our customers with particular emphasis on Premier relationships.

In October 2013, our Board of Directors approved a sale of our London Branch precious metals custody and clearing business to HSBC Bank plc. As the sale of this business is between affiliates under common control, we expect the consideration received in excess of our carrying value including allocated goodwill of approximately $8 million will result in an increase to additional paid-in-capital, net of tax, of approximately $55 million upon close. The cash sale is currently expected to be completed in the first quarter of 2014. Had the sale occurred on September 30, 2013, the book value of our remaining Global Banking and Markets reporting unit would have been 91 percent of fair value. At September 30, 2013, assets and liabilities related to this business totaled approximately $11.0 billion each, while revenue associated with this business was approximately $37 million and $52 million in the nine months ended September 30, 2013 and 2012, respectively. We will continue to operate our metals trading business which is unaffected by this decision.

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

Basis of Reporting

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

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in millions)
Net income - U.S. GAAP basis............................................................................................	$	4		$	(782	)	$	367		$	(1,092	)
Adjustments, net of tax:
IFRSs reclassification of fair value measured financial assets during 2008...............	-			(17		)	(17		)	(59		)
Securities..............................................................................................................................	6			(3		)	2			(4		)
Derivatives...........................................................................................................................	-			3			1			1
Loan impairment..................................................................................................................	3			(2		)	14			8
Property................................................................................................................................	(6		)	(7		)	(10		)	(16		)
Pension costs......................................................................................................................	3			(11		)	10			(3		)
Transfer of credit card receivables to held for sale and subsequent sale..................	-			-			-			(31		)
Gain on sale of branches...................................................................................................	-			22			-			92
Litigation accrual................................................................................................................	13			(13		)	6			(10		)
Other.....................................................................................................................................	(1		)	13			(24		)	21
Net income - IFRSs basis......................................................................................................	22			(797		)	349			(1,093		)
Tax expense (benefit) - IFRSs basis....................................................................................	9			(34		)	151			390
Profit before tax - IFRSs basis..............................................................................................	$	31		$	(831	)	$	500		$	(703	)

The significant differences between U.S. GAAP and IFRSs impacting our results presented in the table above are discussed in more detail within "Basis of Reporting" 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. With regard 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.

Balance Sheet Review

We utilize deposits and borrowings from various sources to provide liquidity, fund balance sheet growth, meet cash and capital needs, and fund investments in subsidiaries. The following table provides balance sheet totals at September 30, 2013 and the increases (decreases) since December 31, 2012:

			Increase (Decrease) From
			December 31, 2012
	September 30, 2013		Amount			%
	(dollars are in millions)
Period end assets:
Short-term investments.....................................................................................................	$	33,645	$	15,858		89.2	%
Loans, net............................................................................................................................	67,115		4,504			7.2
Loans held for sale.............................................................................................................	236		(782		)	(76.8	)
Trading assets....................................................................................................................	25,527		(5,347		)	(17.3	)
Securities.............................................................................................................................	49,486		(19,850		)	(28.6	)
Other assets........................................................................................................................	11,366		1,546			15.7
	$	187,375	$	(4,071	)	(2.1	)%
Funding sources:
Total deposits.....................................................................................................................	$	112,921	$	(4,750	)	(4.0	)%
Trading liabilities................................................................................................................	11,065		(3,634		)	(24.7	)
Short-term borrowings.......................................................................................................	19,499		4,566			30.6
All other liabilities..............................................................................................................	4,357		(205		)	(4.5	)
Long-term debt...................................................................................................................	22,151		406			1.9
Shareholders' equity..........................................................................................................	17,382		(454		)	(2.5	)
	$	187,375	$	(4,071	)	(2.1	)%

Short-Term Investments Short-term investments include cash and due from banks, interest bearing deposits with banks and securities purchased under resale agreements. Balances will fluctuate from period to period depending upon our liquidity position at the time. Overall balances increased since December 31, 2012 as we managed our short-term liquidity to maximize earnings while retaining liquidity.

Loans, Net The following summarizes our loan balances at September 30, 2013 and increases (decreases) since December 31, 2012:

			Increase (Decrease) From
			December 31, 2012
	September 30, 2013		Amount			%
	(dollars are in millions)
Commercial loans:
Construction and other real estate..................................................................................	$	8,919	$	462		5.5	%
Business and corporate banking.....................................................................................	13,668		1,060			8.4
Global banking⁽¹⁾...................................................................................................................	23,370		3,361			16.8
Other commercial loans.....................................................................................................	2,552		(524		)	(17.0	)
Total commercial loans......................................................................................................	48,509		4,359			9.9
Consumer loans:
Residential mortgages.....................................................................................................	15,720		349			2.3
Home equity mortgages..................................................................................................	2,087		(237		)	(10.2	)
Total residential mortgages..............................................................................................	17,807		112			.6
Credit Card...........................................................................................................................	856		41			5.0
Other consumer..................................................................................................................	538		(60		)	(10.0	)
Total consumer loans........................................................................................................	19,201		93			.5
Total loans...............................................................................................................................	67,710		4,452			7.0
Allowance for credit losses..................................................................................................	595		(52		)	(8.0	)
Loans, net................................................................................................................................	$	67,115	$	4,504		7.2	%

⁽¹⁾Represents large multinational firms including globally focused U.S. corporate and financial institutions and USD lending to select Latin American and other multinational customers managed by HSBC on a global basis as well as loans to HSBC affiliates which totaled $5.9 billion at September 30, 2013.

Commercial loan balances increased since December 31, 2012 due to new business activity, largely in global banking, including an increase of $1.4 billion in affiliate loans and in business and corporate banking. These increases were partially offset by pay downs and managed reductions in certain exposures.

Residential mortgage loans increased since December 31, 2012 due primarily to the inclusion of approximately $312 million in guaranteed loans purchased from GNMA which had previously been recorded in other assets. Repayments on these purchased GNMA loans are predominantly insured by the FHA and as such, these loans have different risk characteristics from the rest of our consumer loan portfolio. As a result of balance sheet initiatives to manage interest rate risk and improve the structural liquidity of HSBC Bank USA, we continue to sell a substantial portion of our new residential loan originations and target new residential mortgage loan originations towards our Premier customer relationships.

Over the past several years, real estate markets in a large portion of the United States have been affected by stagnation or declines in property values. As a result, while the loan-to-value ("LTV") ratios for our mortgage loan portfolio has declined since origination, we have recently seen a general improvement in refreshed loan-to-value ratios ("Refreshed LTVs"). The following table presents refreshed LTVs for our mortgage loan portfolio, excluding subprime residential mortgage loans held for sale.

	Refreshed LTVs⁽¹⁾⁽²⁾ at September 30, 2013				Refeshed LTVs⁽¹⁾⁽²⁾ at December 31, 2012
	First Lien		Second Lien		First Lien		Second Lien
LTV < 80%.........................................................................................	85.0	%	63.1	%	79.5	%	59.4	%
80% < LTV < 90%.............................................................................	7.0	%	14.0	%	8.6	%	13.3	%
90% < LTV < 100%...........................................................................	4.4	%	10.0	%	5.7	%	11.5	%
LTV > 100%.......................................................................................	3.7	%	12.9	%	6.2	%	15.8	%
Average LTV for portfolio...............................................................	63.1	%	68.5	%	66.6	%	71.9	%

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

⁽²⁾Current property values are calculated using the most current HPIs available and applied on an individual loan basis, which results in an approximate three month delay in the production of reportable statistics. Therefore, the information in the table above reflects current estimated property values using HPIs as of June 30, 2013 and September 30, 2012, respectively.

Credit card receivable balances, which represent our legacy HSBC Bank USA credit card portfolio, remained relatively flat compared with December 31, 2012.

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

Loans Held for Sale The following table summarizes loans held for sale at September 30, 2013 and increases (decreases) since December 31, 2012.

			Increase (Decrease) From
			December 31, 2012
	September 30, 2013		Amount			%
	(dollars are in millions)
Total commercial loans..........................................................................................................	$	42	$	(439	)	(91.3	)%
Consumer loans:
Residential mortgages..................................................................................................	130		(342		)	(72.5	)
Other consumer.............................................................................................................	64		(1		)	(1.5	)
Total consumer loans......................................................................................................	194		(343		)	(63.9	)
Total loans held for sale........................................................................................................	$	236	$	(782	)	(76.8	)%

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans are originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale. During the first quarter of 2013, we completed the sale of substantially all of our remaining leveraged acquisition finance syndicated loans which we had been holding since the financial crisis. Commercial loans held for sale under this program were $1 million and $465 million at September 30, 2013 and December 31, 2012, respectively, all of which are recorded at fair value as we have elected to designate these loans under fair value option. See Note 11, "Fair Value Option," in the accompanying consolidated financial statements for further information. Commercial loans held for sale also includes commercial real estate loans of $41 million and $16 million at September 30, 2013 and December 31, 2012, respectively.

Residential mortgage loans held for sale primarily include agency eligible first mortgage loans originated and held for sale. Upon conversion of our mortgage processing and servicing operations to PHH Mortgage in the second quarter of 2013, these loans are sold directly to PHH Mortgage and we no longer retain the servicing rights in relation to the mortgages upon sale beginning with May 2013 applications. Also included in residential mortgage loans held for sale are subprime residential mortgage loans 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.

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

Consumer loans held for sale are recorded at the lower of cost or fair value. The valuation adjustment on loans held for sale was $81 million and $114 million at September 30, 2013 and December 31, 2012, respectively.

Trading Assets and Liabilities The following table summarizes trading assets and liabilities balances at September 30, 2013 and increases (decreases) since December 31, 2012.

			Increase (Decrease) From
			December 31, 2012
	September 30, 2013		Amount			%
	(dollars are in millions)
Trading assets:
Securities⁽¹⁾..........................................................................................................................	$	10,354	$	(2,805	)	(21.3	)%
Precious metals...................................................................................................................	10,587		(1,745		)	(14.2	)
Derivatives⁽²⁾.......................................................................................................................	4,586		(797		)	(14.8	)
	$	25,527	$	(5,347	)	(17.3	)%
Trading liabilities:
Securities sold, not yet purchased..................................................................................	921		714			*
Payables for precious metals............................................................................................	3,549		(2,218		)	(38.5	)
Derivatives⁽³⁾.......................................................................................................................	6,595		(2,130		)	(24.4	)
	$	11,065	$	(3,634	)	(24.7	)%

• Not meaningful.

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

⁽²⁾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.

⁽³⁾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.

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

Precious metals trading assets decreased since December 31, 2012 due primarily to a decrease in our own inventory positions held as hedges for client activity, declines in spot rates and, to a lesser extent, a decrease in unallocated metal balances held for customers. The lower payable for precious metals compared with December 31, 2012 was primarily due to a decrease in unallocated customer balances as well as a reduction in spot rates.

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

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

Securities Securities include securities available-for-sale and securities held-to-maturity. Balances will fluctuate between periods depending upon our liquidity position at the time. The decline in balances since December 31, 2012 reflect the sale of $33.3 billion of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment. Partially offsetting the decline was the addition of $208 million of securities held-to-maturity as a result of the consolidation of a VIE in the second quarter of 2013. See Note 4, "Securities," in the accompanying consolidated financial statements for additional information.

Deposits The following summarizes deposit balances by major depositor categories at September 30, 2013 and increases (decreases) since December 31, 2012.

			Increase (Decrease) From
			December 31, 2012
	September 30, 2013		Amount			%
	(dollars are in millions)
Individuals, partnerships and corporations.......................................................................	$	91,772	$	(4,078	)	(4.3	)%
Domestic and foreign banks.................................................................................................	19,300		(959		)	(4.7	)%
U.S. government and states and political subdivisions...................................................	945		252			36.4	%
Foreign governments and official institutions...................................................................	904		35			4.0	%
Total deposits.........................................................................................................................	$	112,921	$	(4,750	)	(4.0	)%
Total core deposits⁽¹⁾.............................................................................................................	$	87,698	(2,383		)	(2.6	)%

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

Deposits continued to be a significant source of funding during the nine months of 2013. Deposit balances decreased since December 31, 2012. Core domestic deposits, which are a substantial source of our core liquidity, also decreased compared with December 31, 2012 driven largely by a strategic decision to actively reduce deposit interest rates in all customer segments with particular emphasis in the non-premier segments. The strategy for our core retail banking business includes building relationship deposits and wealth management across multiple markets, channels and segments. This strategy involves various initiatives, such as:

• HSBC Premier, a premium service wealth and relationship banking proposition designed for the internationally-minded client with a dedicated premier relationship manager. Total Premier deposits decreased to $21.2 billion at September 30, 2013 as compared with $22.8 billion at December 31, 2012, primarily as a result of the impact of the deposit rate reductions; and

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

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

Short-Term Borrowings Short-term borrowings increased since December 31, 2012 largely as a result of increased levels of securities sold under agreements to repurchase.

Long-Term Debt Long-term debt increased modestly since December 31, 2012 as debt issuances were largely offset by debt retirements. Debt issuances included $1.8 billion and $4.6 billion during the three and nine months ended September 30, 2013, of which $11 million and $1.1 billion, respectively, was issued by HSBC Bank USA.

Incremental issuances from the $40 billion HSBC Bank USA Global Bank Note Program totaled $11 million and $1.1 billion during the three and nine months ended September 30, 2013, respectively, compared with $35 million and $237 million during the three and nine months ended September 30, 2012, respectively. Total debt outstanding under this program was $4.6 billion and $4.8 billion at September 30, 2013 and December 31, 2012. Given the adequate liquidity of HSBC Bank USA, we do not anticipate the Global Bank Note Program being heavily used in the future as deposits will continue to be the primary funding source for HSBC Bank USA.

Incremental long-term debt issuances from our shelf registration statement with the Securities and Exchange Commission totaled $1.7 billion and $3.5 billion during the three and nine months ended September 30, 2013 compared with $579 million and $5.1 billion during the three and nine months ended September 30, 2012, respectively. Total long-term debt outstanding under this shelf was $11.2 billion and $10.1 billion at September 30, 2013 and December 31, 2012, respectively.

Borrowings from the Federal Home Loan Bank of New York ("FHLB") totaled $1.0 billion at September 30, 2013 and December 31, 2012. At September 30, 2013, we had the ability to access further borrowings of up to $5.5 billion based on the amount pledged as collateral with the FHLB.

Results of Operations

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

Net Interest Income Dollars of net interest income declined in both periods reflecting the impact of lower interest income on securities due to lower outstanding balances and in the year-to-date period lower interest rates reflecting the impact from sales and an increase in interest charges relating to estimated tax exposures. These decreases were partially offset by lower interest expense on deposits reflecting the impact of our retail branch sales to First Niagara as well as lower average rates paid and, in the year-to-date period, higher interest income on loans driven by higher average balances on commercial loans due to new business volume.

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

In the following table which summarizes the significant components of net interest income, interest expense includes $50 million in the nine months ended September 30, 2012 that has been allocated to our discontinued operations in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by these transactions.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Yield on total earning assets..................................................................................................	1.84	%	1.88	%	1.88	%	2.00	%
Expense on interest bearing liabilities...................................................................................	.79		.91		.80		.84
Interest rate spread..................................................................................................................	1.05		.97		1.08		1.16
Benefit from net non-interest paying funds⁽¹⁾.....................................................................	.21		.25		.21		.15
Net interest margin...................................................................................................................	1.26	%	1.22	%	1.29	%	1.31	%

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

The following table summarizes the significant trends affecting the comparability of the three and nine months ended September 30, 2013 and 2012 net interest income and interest rate spread. Net interest income in the table is presented on a taxable equivalent basis.

	Three Months Ended September 30, 2013					Nine Months Ended September 30, 2013
	Amount			Interest Rate Spread		Amount			Interest Rate Spread
	(dollars are in millions)
Net interest income/interest rate spread from prior year.....................................	$	515		0.97	%	$	1,596		1.16	%
Increase (decrease) in net interest income associated with:
Trading related activities...................................................................................	12					13
Balance sheet management activities⁽¹⁾...........................................................	(17		)			(36		)
Commercial loans................................................................................................	11					122
Deposits...............................................................................................................	4					(27		)
Residential mortgage banking..........................................................................	(6		)			(13		)
Interest on estimated tax exposures.................................................................	(1		)			(13		)
Other activity.......................................................................................................	(21		)			(112		)
Net interest income/interest rate spread for current year.............................	$	497		1.05	%	$	1,530		1.08	%

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

Trading related activities Net interest income for trading related activities increased during the three and nine months ended September 30, 2013 as lower funding costs were partially offset by lower average balances.

Balance sheet management activities Net interest income from balance sheet management activities was lower during the three and nine months ended September 30, 2013 as the impact of the sale of certain securities for risk management purposes and a lower interest rate environment was partially offset by lower funding costs.

Commercial loans Net interest income on commercial loans increased during the three and nine months ended September 30, 2013 primarily due to higher average loan balances due to new business activity as well as lower levels of nonperforming loans which was partially offset by a lower average yield on these loans.

Deposits Lower net interest income during the nine months ended September 30, 2013 primarily reflects the impact of lower rates of return on invested capital and, to a lesser extent, lower average balances and lower rates paid on interest bearing deposits.

Residential mortgage banking revenue Net interest income on residential mortgage banking revenue was lower in both periods as lower residential mortgage average outstanding balances (and the associated net interest income) primarily as a result of the sale of branches to First Niagara in 2012 and in the year-to-date period higher portfolio prepayments, were partially offset by widening interest spreads largely as a result of lower portfolio funding costs.

Interest on estimated tax exposures Reflects the impact of higher interest expense associated with tax reserves on estimated exposures during the three and nine months ended September 30, 2013.

Other activity Net interest income on other activity was lower during the three and nine months ended September 30, 2013, largely driven by lower rates of return on invested capital related to short-term and long-term borrowing.

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

							Increase (Decrease)
Three Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Commercial:
Construction and other real estate...........................................................................	$	(10	)	$	(11	)	$	1		9.1%
Business and corporate banking..............................................................................	32			18			14			77.8
Global banking.............................................................................................................	(2		)	12			(14		)	*
Other commercial.........................................................................................................	-			-			-			-
Total commercial..........................................................................................................	$	20		$	19		$	1		5.3%
Consumer:
Residential mortgages................................................................................................	(1		)	33			(34		)	*
Home equity mortgages.............................................................................................	28			13			15			*
Credit card receivables...............................................................................................	6			15			(9		)	(60.0)
Other consumer...........................................................................................................	1			4			(3		)	(75.0)
Total consumer	34			65			(31		)	(47.7)
Total provision for credit losses...................................................................................	$	54		$	84		$	(30	)	(35.7)%
Provision as a percentage of average loans, annualized	0.3		%	0.6		%

							Increase (Decrease)
Nine Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Commercial:
Construction and other real estate...........................................................................	$	(15	)	$	(36	)	$	21		58.3	%
Business and corporate banking..............................................................................	49			39			10			25.6
Global banking.............................................................................................................	26			9			17			*
Other commercial.........................................................................................................	(4		)	(9		)	5			55.6
Total commercial..........................................................................................................	$	56		$	3		$	53		*
Consumer:
Residential mortgages................................................................................................	10			72			(62		)	(86.1	)%
Home equity mortgages.............................................................................................	58			55			3			5.5
Credit card receivables...............................................................................................	17			35			(18		)	(51.4	)
Other consumer...........................................................................................................	1			8			(7		)	(87.5	)
Total consumer............................................................................................................	86			170			(84		)	(49.4	)
Total provision for credit losses...................................................................................	$	142		$	173		$	(31	)	(17.9	)%
Provision as a percentage of average loans, annualized...........................................	0.3		%	0.4		%

• Not meaningful.

During the three months ended September 30, 2013, our provision for credit losses decreased $30 million driven by a lower provision for credit losses in our consumer loan portfolio, while our commercial loan credit loss provision increased modestly. Our provision for credit losses decreased $31 million during the nine months ended September 30, 2013 driven by a lower provision for credit losses in our consumer loan portfolio partially offset by a higher provision for credit losses in our commercial loan portfolio. During the three and nine months ended September 30, 2013, we decreased our credit loss reserves as the provision for credit losses was lower than net charge-offs by $ 10 million and $52 million, respectively.

In our commercial portfolio, the provision for credit losses in both periods reflects a specific provision associated with a single corporate banking customer relationship. Excluding the impact of this item, our commercial provision for credit losses declined in the three month period reflecting improvements in economic and credit conditions as discussed below and remained higher in the year-to-date period, reflecting higher levels of reserves primarily associated with large Global Banking and Markets loan exposures. In addition, while we experienced continued improvements in economic and credit conditions including lower nonperforming loans and criticized asset levels in 2013, reductions in higher risk rated loan balances and stabilization in credit downgrades, including managed reductions in certain exposures and improvements in the financial circumstances of certain customer relationships in both years resulted in a higher overall release in our credit loss reserves in the prior year-to-date period.

The provision for credit losses on residential mortgages including home equity mortgages decreased $19 million and $59 million during the three and nine months ended September 30, 2013, respectively, as compared with the year-ago periods driven by continued improvements in economic and credit conditions including lower dollars of delinquency on reservable accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates.

The provision for credit losses associated with credit card receivables decreased $9 million and $18 million during the three and nine months ended September 30, 2013 reflecting improved economic conditions, including lower dollars of delinquency, improvements in loan delinquency roll rates and lower average receivable levels.

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

Other Revenues The following table summarizes the components of other revenues.

							Increase (Decrease)
Three Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Credit card fees................................................................................................................	$	1		$	18		$	(17	)	(94.4	)%
Other fees and commissions..........................................................................................	181			177			4			2.3
Trust income....................................................................................................................	29			22			7			31.8
Trading revenue..............................................................................................................	117			113			4			3.5
Other securities gains, net.............................................................................................	35			50			(15		)	(30.0	)
HSBC affiliate income:
Fees and commissions.............................................................................................	32			42			(10		)	(23.8	)
Other affiliate income...............................................................................................	9			21			(12		)	(57.1	)
Total HSBC affiliate income....................................................................................	41			63			(22		)	(34.9	)
Residential mortgage banking revenue........................................................................	18			4			14			*
Gain on instruments designated at fair value and related derivatives....................	(6		)	(187		)	181			96.8
Gain on sale of branches................................................................................................	-			103			(103		)	(100.0	)%
Other income:
Valuation of loans held for sale..............................................................................	1			(12		)	13			*
Insurance...................................................................................................................	4			11			(7		)	(63.6	)
Earnings from equity investments.........................................................................	1			-			1			*
Miscellaneous income.............................................................................................	10			45			(35		)	(77.8	)
Total other income....................................................................................................	16			44			(28		)	(63.6	)
Total other revenues.......................................................................................................	$	432		$	407		$	25		6.1	%

							Increase (Decrease)
Nine Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Credit card fees................................................................................................................	$	35		$	70		$	(35	)	(50.0	)%
Other fees and commissions..........................................................................................	527			573			(46		)	(8.0	)
Trust income....................................................................................................................	92			72			20			27.8
Trading revenue..............................................................................................................	388			395			(7		)	(1.8	)
Other securities gains, net.............................................................................................	189			145			44			30.3
HSBC affiliate income:
Fees and commissions.............................................................................................	118			124			(6		)	(4.8	)
Other affiliate income...............................................................................................	36			41			(5		)	(12.2)
Total HSBC affiliate income....................................................................................	154			165			(11		)	(6.7	)
Residential mortgage banking revenue........................................................................	73			31			42			*
Gain (loss) on instruments designated at fair value and related derivatives.........	82			(258		)	340			*
Gain on sale of branches................................................................................................	-			433			(433		)	(100.0	)%
Other income:
Valuation of loans held for sale..............................................................................	10			(15		)	25			*
Insurance...................................................................................................................	8			15			(7		)	(46.7	)
Earnings from equity investments.........................................................................	3			(1		)	4			*
Miscellaneous income.............................................................................................	29			45			(16		)	(35.6	)
Total other income....................................................................................................	50			44			6			13.6
Total other revenues.......................................................................................................	$	1,590		$	1,670		$	(80	)	(4.8	)%

• Not meaningful.

Credit card fees Credit card fees declined during both periods due to lower outstanding balances driven by the sale of a portion of the portfolio as part of the sale of 195 retail branches in 2012, as well as a continued trend towards lower late fees due to improved customer behavior. Also contributing to the decrease in both periods was higher costs associated with our credit card rewards program due to higher estimated customer redemption rates.

Other fees and commissions Other fee-based income remained relatively flat during the three months ended September 30, 2013, but declined during the nine months ended September 30, 2013. The decrease in the year-to-date period reflects lower account service related fees primarily due to the impact of the sale of 195 retail branches as discussed above and a decline in credit facility related fees primarily due to a decrease in syndication fees. Also impacting the nine months ended September 30, 2013 was a decline in custodial fees due to a decrease in precious metals average inventory held under custody as well as a decline in average metals prices. The following table summarizes the components of other fees and commissions.

					Increase (Decrease)
Three Months Ended September 30,	2013		2012		Amount			%
	(dollars are in millions)
Account services......................................................................................................	$	76	$	75	1			1.3
Credit facilities...........................................................................................................	48		49		(1		)	(2.0	)
Custodial fees............................................................................................................	12		20		(8		)	(40.0	)
Other fees...................................................................................................................	45		33		12			36.4
Total other fees and commissions................................................................................	$	181	$	177	$	4		2.3	%

					Increase (Decrease)
Nine Months Ended September 30,	2013		2012		Amount			%
	(dollars are in millions)
Account services......................................................................................................	$	216	$	234	(18		)	(7.7	)
Credit facilities...........................................................................................................	152		166		(14		)	(8.4	)
Custodial fees............................................................................................................	45		56		(11		)	(19.6	)
Other fees...................................................................................................................	114		117		(3		)	(2.6	)
Total other fees and commissions................................................................................	$	527	$	573	$	(46	)	(8.0	)%

Trust income Trust income increased during both periods due to an increase in fee income associated with our management of fixed income assets, partially offset by reduced fee income associated with the continued decline in money market assets under management.

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

							Increase (Decrease)
Three Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Trading revenue..............................................................................................................	$	117		$	113		$	4		3.5	%
Net interest income.........................................................................................................	2			(10		)	12			*
Trading related revenue.................................................................................................	$	119		$	103		$	16		15.5	%
Business:
Derivatives⁽¹⁾.............................................................................................................	$	71		$	57		$	14		24.6	%
Balance sheet management.....................................................................................	7			(3		)	10			*
Foreign exchange......................................................................................................	28			44			(16		)	(36.4	)
Precious metals.........................................................................................................	11			11			-			-
Global banking..........................................................................................................	1			1			-			-
Other trading.............................................................................................................	1			(7		)	8			*
Trading related revenue.................................................................................................	$	119		$	103		$	16		15.5	%

							Increase (Decrease)
Nine Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Trading revenue..............................................................................................................	$	388		$	395		$	(7	)	(1.8	)%
Net interest income.........................................................................................................	(13		)	(27		)	14			51.9
Trading related revenue.................................................................................................	$	375		$	368		$	7		1.9	%
Business:
Derivatives⁽¹⁾.............................................................................................................	$	166		$	146		$	20		13.7	%
Balance sheet management.....................................................................................	11			(6		)	17			*
Foreign exchange......................................................................................................	136			166			(30		)	(18.1	)
Precious metals.........................................................................................................	59			52			7			13.5
Global banking..........................................................................................................	2			3			(1		)	(33.3	)
Other trading.............................................................................................................	1			7			(6		)	(85.7	)
Trading related revenue.................................................................................................	$	375		$	368		$	7		1.9	%

• Not meaningful.

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

Trading revenue during the three and nine months ended September 30, 2013 reflects higher revenue from derivatives products and balance sheet management activities and in the year-to-date period, higher precious metals revenue, partially offset by lower foreign exchange revenue.

Trading revenue related to derivatives products increased during the three and nine months ended September 30, 2013 from increased new deal activity on interest rate related products and lower interest cost on issuance of structured notes. These increases were partially offset by lower valuation gains from structured credit products and declines in emerging markets related derivatives revenue, which were impacted by weakening economic conditions in Latin America.

Trading revenue related to balance sheet management activities increased during the three and nine months ended September 30, 2013 primarily due to higher revenue from economic hedge positions used to manage interest rate risk.

Foreign exchange trading revenue decreased during the three and nine months ended September 30, 2013 due to lower revenue from a reduction in trade volumes and price volatility.

Precious metals trading revenues remained flat during the three months ended September 30, 2013 but increased during the nine months ended September 30, 2013 as a result of increased metals price volatility.

Other trading revenue increased during the three months ended September 30, 2013 and decreased during the nine months ended September 30, 2013 due to valuation adjustments that were previously included in other trading that are now included in other business lines.

Other securities gains, net We maintain various securities portfolios as part of our balance sheet diversification and risk management strategies. In the third quarter and first nine months of 2013, we sold $10.0 billion and $33.3 billion, respectively, of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a continuing strategy to re-balance the securities portfolio for risk management purposes based on the current interest rate environment and recognized gains of $68 million and $275 million and losses of $33 million and $94 million, respectively, which is included as a component of other security gains, net above. In the third quarter and first nine months of 2012, we sold $3.0 billion and $10.4 billion, respectively, of U.S. Treasury, mortgage-backed and other asset-backed securities as part of a strategy to adjust portfolio risk duration as well as to reduce risk-weighted asset levels and recognized gains of $59 million and $260 million and losses of $9 million and $115 million, respectively.

HSBC affiliate income Affiliate income decreased in both the three and nine months ended September 30, 2013 primarily due to lower income associated with performance based activity and in the three month period, lower billings associated with internal audit activities performed for other HSBC affiliates.

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

							Increase (Decrease)
Three Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Net interest income...............................................................................................................	$	42		$	48		$	(6	)	(12.5	)%
Servicing related income:
Servicing fee income......................................................................................................	20			21			(1		)	(4.8	)
Changes in fair value of MSRs due to:.......................................................................
Changes in valuation model inputs or assumptions...........................................	5			(5		)	10			*
Customer payments..................................................................................................	(8		)	(15		)	7			46.7
Trading - Derivative instruments used to offset changes in value of MSRs.	(1		)	7			(8		)	*
Total servicing related income.....................................................................................	16			8			8			100.0
Originations and sales related income:
Gains on sales of residential mortgages.....................................................................	9			24			(15		)	(62.5	)
Provision for repurchase obligations..........................................................................	-			(28		)	28			100.0
Trading and hedging activity.......................................................................................	(9		)	(4		)	(5		)	*
Total originations and sales related income..............................................................	-			(8		)	8			100.0
Other mortgage income........................................................................................................	2			4			(2		)	(50.0)
Total residential mortgage banking revenue included in other revenues....................	18			4			14			*
Total residential mortgage banking related revenue.......................................................	$	60		$	52		$	8		15.4	%

							Increase (Decrease)
Nine Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Net interest income...............................................................................................................	$	137		$	150		$	(13	)	(8.7	)%
Servicing related income:
Servicing fee income......................................................................................................	62			68			(6		)	(8.8	)
Changes in fair value of MSRs due to:.......................................................................
Changes in valuation model inputs or assumptions...........................................	73			(20		)	93			*
Customer payments..................................................................................................	(31		)	(47		)	16			34.0
Trading - Derivative instruments used to offset changes in value of MSRs.	(42		)	33			(75		)	*
Total servicing related income.....................................................................................	62			34			28			82.4
Originations and sales related income:
Gains on sales of residential mortgages.....................................................................	41			57			(16		)	(28.1	)
Provision for repurchase obligations..........................................................................	(36		)	(81		)	45			55.6
Trading and hedging activity.......................................................................................	(5		)	-			(5		)	*
Total originations and sales related income..............................................................	-			(24		)	24			100.0
Other mortgage income........................................................................................................	11			21			(10		)	(47.6)
Total residential mortgage banking revenue included in other revenues....................	73			31			42			*
Total residential mortgage banking related revenue.......................................................	$	210		$	181		$	29		16.0	%

• Not meaningful.

Net interest income in both periods was lower compared with the year-ago periods as lower residential mortgage average outstanding balances (and the associated net interest income) primarily as a result of the sale of branches to First Niagara in 2012 and continued higher portfolio prepayments were partially offset by widening interest spreads largely the result of lower portfolio funding costs. Consistent with our Premier strategy, additions to our residential mortgage portfolio are primarily to our Premier customers, while sales of loans consist primarily of conforming non-premier loans sold to PHH Mortgage as discussed further below.

Total servicing related income increased in the three and nine months ended September 30, 2013 driven by improved net hedged MSR performance partially offset by lower servicing fees driven by a lower serviced loan portfolio as a result of prepayments in excess of new additions to the serviced portfolio. As a result of our strategic relationship with PHH Mortgage, beginning with May 2013 applications, we no longer add new volume to our serviced portfolio as all agency eligible loans are now sold on a servicing released basis. Changes in MSR valuations are driven by updated market based assumptions such as interest rates, expected prepayments, primary-secondary spreads and cost of servicing. Consequently, primarily as a result of rising mortgage rates, the MSR asset fair value increased in the three and nine months ended September 30, 2013 partially offset by losses on instruments used to hedge changes in the fair value of the MSRs.

Originations and sales related income improved in the three and nine months ended September 30, 2013 largely due to lower loss provisions for loan repurchase obligations associated with loans previously sold. During the three and nine months ended September 30, 2013, we recorded a charge of $0 million and $36 million, respectively, due to our estimated exposure associated with repurchase obligations on loans previously sold compared with a charge of $28 million and $81 million, respectively, in the year-ago periods. This improvement was partially offset in both periods by lower gains on sales of residential mortgage loans.

Other mortgage income has fallen in the three and nine months ended September 30, 2013 due to a contractual fee arrangement with PHH Mortgage wherein PHH Mortgage retains ancillary fee income.

Gain (loss) on instruments designated at fair value and related derivatives We have elected to apply fair value option accounting to commercial leveraged acquisition finance loans, unfunded commitments, certain own fixed-rate debt issuances and all structured notes and structured deposits issued after January 1, 2006 that contain embedded derivatives. We also use derivatives to economically hedge the interest rate risk associated with certain financial instruments for which fair value option has been elected. See Note 11, "Fair Value Option," in the accompanying consolidated financial statements for additional information including a breakout of these amounts by individual component.

Gain on sale of branches As discussed above, in May 2012 we completed the sale of 138 non-strategic retail branches to First Niagara and recognized a pre-tax gain, net of allocated non-deductible goodwill, of $330 million. In the third quarter of 2012, we completed the sale of the remaining 57 branches and recognized a pre-tax gain, net of allocated non-deductible goodwill, of $103 million. See Note 3, "Discontinued Operations" in our 2012 Form 10-K for additional information.

Valuation of loans held for sale Valuation adjustments on loans held for sale improved during the three and nine months ended September 30, 2013 due to lower average balances and reduced volatility. Valuations on loans held for sale relate primarily to residential mortgage loans purchased from third parties and HSBC affiliates with the intent of securitization or sale. Included in this portfolio are subprime residential mortgage loans with a fair value of $48 million and $52 million as of September 30, 2013 and December 31, 2012, respectively. Loans held for sale are recorded at the lower of their aggregate cost or fair value, with adjustments to fair value being recorded as a valuation allowance. Valuations on residential mortgage loans held for sale that we originate are recorded as a component of residential mortgage banking revenue in the consolidated statement of income (loss).

Other income Other income, excluding the valuation of loans held for sale as discussed above, decreased during the three and nine months ended September 30, 2013 driven largely by lower insurance income, the establishment of a repurchase reserve of approximately $8 million in the third quarter of 2013 relating to loans previously securitized and, in the three month period, lower income associated with fair value hedge ineffectiveness related to securities available-for-sale. In addition, both prior year periods include miscellaneous income relating to the retail branch sale.

Operating Expenses Lower operating expenses in both periods reflect lower compliance costs, the impact of our retail branch divestitures, excluding the impact of the prior year pension curtailment gain, lower salaries and employee benefits, the non-recurrence of expense related to certain regulatory matters which totaled $800 million and $1,500 million during the three and nine months ended September 30, 2013 and, in the year-to-date period, lower expenses related to support services from affiliates and lower other expenses. Compliance costs, while remaining a significant component of our cost base in both periods, declined and totaled $81 million and $228 million in the three and nine months ended September 30, 2013, respectively, compared with $92 million and $300 million in the prior year periods, as the prior year reflects investment in BSA/AML process enhancements and infrastructure and, to a lesser extent, foreclosure remediation which did not occur at the same level in 2013. While we continue to focus attention on cost mitigation efforts in order to continue realization of optimal cost efficiencies, we believe compliance related costs have permanently increased to higher levels due to the remediation of regulatory consent agreements.

The following table summarizes the components of operating expenses.

							Increase (Decrease)
Three Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Salary and employee benefits.....................................................................................	$	218		$	207		11			5.3	%
Occupancy expense, net..............................................................................................	57			60			(3		)	(5.0	)
Support services from HSBC affiliates:
Fees paid to HSBC Finance for loan servicing and other administrative support....................................................................................................................	2			5			(3		)	(60.0	)
Fees paid to HMUS...............................................................................................	58			87			(29		)	(33.3	)
Fees paid to HTSU.................................................................................................	274			237			37			15.6
Fees paid to other HSBC affiliates.......................................................................	44			43			1			2.3
Total support services from HSBC affiliates......................................................	378			372			6			1.6
Expense related to certain regulatory matters..........................................................	-			800			(800		)	(100.0	)
Other expenses:
Equipment and software.......................................................................................	14			11			3			27.3
Marketing................................................................................................................	9			12			(3		)	(25.0	)
Outside services.....................................................................................................	23			30			(7		)	(23.3	)
Professional fees....................................................................................................	38			28			10			35.7
Postage, printing and office supplies.................................................................	1			2			(1		)	(50.0	)
Off-balance sheet credit reserves........................................................................	5			(7		)	12			*
FDIC assessment fee.............................................................................................	24			21			3			14.3
Insurance business................................................................................................	-			2			(2		)	(100.0	)
Miscellaneous........................................................................................................	88			89			(1		)	(1.1	)
Total other expenses.............................................................................................	202			188			14			7.4
Total operating expenses............................................................................................	$	855		$	1,627		$	(772	)	(47.4	)%
Personnel - average number........................................................................................	6,490			7,187
Efficiency ratio..............................................................................................................	92.5		%	177.4		%

							Increase (Decrease)
Nine Months Ended September 30,	2013			2012			Amount			%
	(dollars are in millions)
Salary and employee benefits.....................................................................................	$	717		$	733		(16		)	(2.2	)
Occupancy expense, net..............................................................................................	173			176			(3		)	(1.7	)
Support services from HSBC affiliates:
Fees paid to HSBC Finance for loan servicing and other administrative support....................................................................................................................	11			22			(11		)	(50.0	)
Fees paid to HMUS...............................................................................................	164			248			(84		)	(33.9	)
Fees paid to HTSU.................................................................................................	749			711			38			5.3
Fees paid to other HSBC affiliates.......................................................................	140			162			(22		)	(13.6)
Total support services from HSBC affiliates......................................................	1,064			1,143			(79		)	(6.9	)
Expense related to certain regulatory matters..........................................................	-			1,500			(1,500		)	(100.0	)
Other expenses:
Equipment and software.......................................................................................	42			33			9			27.3
Marketing................................................................................................................	27			37			(10		)	(27.0	)
Outside services.....................................................................................................	76			77			(1		)	(1.3	)
Professional fees....................................................................................................	92			89			3			3.4
Postage, printing and office supplies.................................................................	5			10			(5		)	(50.0	)
Off-balance sheet credit reserves........................................................................	(12		)	(19		)	7			36.8
FDIC assessment fee.............................................................................................	66			75			(9		)	(12.0	)
Insurance business................................................................................................	1			4			(3		)	(75.0	)
Miscellaneous........................................................................................................	181			209			(28		)	(13.4)
Total other expenses.............................................................................................	478			515			(37		)	(7.2	)
Total operating expenses............................................................................................	$	2,432		$	4,067		$	(1,635	)	(40.2	)%
Personnel - average number........................................................................................	6,578			8,026
Efficiency ratio..............................................................................................................	78.3		%	123.2		%

• Not meaningful.

Salaries and employee benefits Salaries and employee benefits expense increased during the three months ended September 30, 2013, but declined during the nine months ended September 30, 2013. While both 2013 periods benefited from the impact of the sale of 195 non-strategic retail branches completed in 2012 and continued cost management efforts which were partially offset by higher salaries expense relating to expansion activities associated with certain businesses, these overall improvements were more than offset in the three month period by the non-recurrence of a pension curtailment gain recorded in the third quarter of 2012.

Occupancy expense, net Occupancy expense decreased during the three and nine months ended September 30, 2013, reflecting the impact of the reduction in size of our retail branch network including lower maintenance and utilities costs.

Support services from HSBC affiliates includes technology and certain centralized support services, including human resources, corporate affairs and other shared services, legal, compliance, tax and finance charged to us by HTSU. Support services from HSBC affiliates also includes services charged to us by an HSBC affiliate located outside of the United States which provides operational support to our businesses, including among other areas, customer service, systems, risk management, collection and accounting functions as well as servicing fees paid to HSBC Finance for servicing nonconforming residential mortgage loans and, prior to May 1, 2012, certain credit card receivables. Higher support services from HSBC affiliates during the three months ended September 30, 2013 reflects higher fees paid to HTSU relating to additional staff and consulting fees associated with regulatory requirements and compliance, partially offset by lower fees paid to HMUS largely related to lower compliance costs as the prior year periods reflect investment in AML process enhancements and infrastructure which did not occur at the same level in 2013. Support services from HSBC affiliates declined, however, during the nine months ended September 30, 2013 as the higher fees paid to HTSU discussed above were more than offset by lower fees paid to HMUS as discussed above and lower fees paid to HSBC Finance, which no longer services our credit card portfolio. Compliance costs reflected in support services from affiliates totaled $80 million and $215 million during the three and nine months ended September 30, 2013, respectively, compared with $68 million and $232 million in the year-ago periods.

Expense related to certain regulatory matters Included in the three and nine months ended September 30, 2012 is an expense of $800 million and $1,500 million, respectively, related to certain regulatory matters. See Note 20, "Litigation and Regulatory Matters" for additional information.

Marketing expenses Lower marketing and promotional expenses in the three and nine months ended September 30, 2013 resulted from continued optimization of marketing spend as a result of general cost saving initiatives.

Other expenses Other expenses (excluding marketing expenses) increased during the three month period ended September 30, 2013 primarily due to higher loss estimates associated with off-balance sheet credit exposures and higher professional fees associated with regulatory reporting and capital planning activities which were partially offset by lower legal expense. While lower compared with the prior year periods, legal expense in the third quarter of 2013 includes an expense accrual of $27 million relating to estimated exposure associated with certain previous residential mortgage backed securities activity. Other expenses decreased during the nine months ended September 30, 2013 as the higher loss estimates on off-balance sheet credit exposures and higher professional fees discussed above were more than offset by lower legal expense and lower FDIC assessment fees.

Efficiency ratio Our efficiency ratio from continuing operations was 92.5 percent and 78.3 percent during the three and nine months ended September 30, 2013, respectively, compared with 177.4 percent and 123.2 percent during the year-ago periods. Our efficiency ratio was impacted in each period by the change in the fair value of our own debt attributable to credit spread for which we have elected fair value option accounting. Excluding the impact of this item, our efficiency ratio for the three and nine months ended September 30, 2013 improved to 86.6 percent and 77.0 percent, respectively, compared with 148.4 percent and 113.9 percent in the year-ago periods due to a decrease in operating expenses partially offset by a decrease in net interest income and in other revenues as the prior year periods include a $103 million and $330 million, respectively, pre-tax gain from the sale of certain branches to First Niagara. While operating expenses declined in both periods driven by the impact of our retail branch divestitures, cost mitigation efforts and the non-recurrence of an $800 million and $1,500 million expense in the three and nine months ended September 30, 2012, respectively, related certain regulatory matters, they continue to reflect elevated levels of compliance costs.

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

	2013					2012
	(dollars are in millions)
Three Months Ended September 30, 2013
Tax expense at the U.S. federal statutory income tax rate	$	5		35.0	%	$	(278	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit...................................................	1			6.7		14			1.8
Non-deductible expense accrual related to certain regulatory matters⁽¹⁾..	-			-		280			35.3
Non-deductible goodwill related to branch sale⁽¹⁾........................................	-			-		33			4.2
Other non-deductible / non-taxable items⁽²⁾..................................................	(1		)	(6.7	)	(6		)	(0.8	)
Items affecting prior periods⁽³⁾.........................................................................	20			133.3		(34		)	(4.3	)
Uncertain tax positions⁽⁴⁾..................................................................................	-			-		(9		)	(1.1	)
Foreign tax credits and other credits..............................................................	-			-		-			-
Impact of foreign operations............................................................................	5			33.3		-			-
Low income housing tax credits......................................................................	(21		)	(140.0	)	(21		)	(2.6	)
Other....................................................................................................................	2			5.1		9			1.0
Total income tax expense........................................................................................	$	11		66.7	%	$	(12	)	(1.5	)%

	2013					2012
	(dollars are in millions)
Nine Months Ended September 30, 2013
Tax expense at the U.S. federal statutory income tax rate..................................	$	186		35.0	%	$	(328	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit...................................................	31			5.8		23			2.5
Adjustment of tax rate used to value deferred taxes....................................	-			-		(10		)	(1.1	)
Non-deductible expense accrual related to certain regulatory matters⁽¹⁾..	-			-		525			56.0
Non-deductible goodwill related to branch sale⁽¹⁾........................................	-			-		139			14.8
Other non-deductible / non-taxable items⁽²⁾..................................................	(14		)	(2.6	)	(11		)	(1.2	)
Items affecting prior periods⁽³⁾.........................................................................	(4		)	(0.8	)	22			2.3
Uncertain tax positions⁽⁴⁾..................................................................................	18			3.4		57			6.1
Impact of foreign operations............................................................................	9			1.7		-			-
Low income housing tax credits......................................................................	(64		)	(12.1	)	(63		)	(6.7	)
Other....................................................................................................................	2			0.3		3			0.4
Total income tax expense........................................................................................	$	164		30.7	%	$	357		38.1	%

⁽¹⁾Represents non-deductible expense relating to certain regulatory matters and non-deductible goodwill related to the branches sold to First Niagara in 2012.

⁽²⁾For 2013, mainly relates to a change in the assessment of the deductibility of other non-deductible expenses and tax exempt income.

⁽³⁾Relates to corrections to current and deferred tax balance sheet accounts.

⁽⁴⁾Reflects changes in state uncertain tax positions which no longer meet the more likely than not requirement for recognition.

Segment Results - IFRSs Basis

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

Commercial Banking has historically held investments in low income housing tax credits. The financial benefit from these investments is obtained through lower taxes. Since business segment returns 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.

We report financial information to our parent, HSBC, in accordance with International Financial Reporting Standards ("IFRSs"). As a result, our segment results are presented on an IFRSs basis (a non-U.S. GAAP financial measure) as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources such as employees are made almost exclusively on an IFRSs basis. However, we continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP basis. The significant differences between U.S. GAAP and IFRSs as they impact our results are summarized in Note 25, "Business Segments," in our 2012 Form 10-K.

Retail Banking and Wealth Management ("RBWM") Our RBWM segment provides a full range of banking and wealth products and services through our branches and direct channels to individuals. These services include asset-driven services such as credit and lending, liability-driven services such as deposit taking and account services and fee-driven services such as advisory and wealth management. During the first nine months of 2013, we continued to direct resources towards the development and delivery of premium service, client needs based wealth and banking services with particular focus on HSBC Premier, HSBC's global banking service that offers customers a seamless international service.

Consistent with our strategy, additions to our residential mortgage portfolio are primarily to our Premier customers, while sales of loans historically consist primarily of conforming loans sold to GSEs and beginning in May 2013, PHH Mortgage. In addition to normal sales activity, at times we have historically sold prime adjustable and fixed rate mortgage loan portfolios to third parties and retained the servicing rights in relation to the mortgages upon sale. Upon conversion of our mortgage processing and servicing operations to PHH Mortgage, we now sell our agency eligible originations beginning with May 2013 applications directly to PHH Mortgage on a servicing released basis which will result in no new mortgage servicing rights being recognized going forward.

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

							Increase (Decrease)
Three Months Ended September 30,	2013			2012			Amount			%
	(in millions)
Net interest income..........................................................................................................	$	205		$	209		$	(4	)	(1.9	)%
Other operating income..................................................................................................	81			138			(57		)	(41.3	)
Total operating income...................................................................................................	286			347			(61		)	(17.6	)
Loan impairment charges................................................................................................	44			72			(28		)	(38.9	)
	242			275			(33		)	(12.0	)
Operating expenses.........................................................................................................	301			368			(67		)	(18.2	)
Profit (loss) before tax.....................................................................................................	$	(59	)	$	(93	)	$	34		36.6	%

							Increase (Decrease)
Nine Months Ended September 30,	2013			2012			Amount			%
	(in millions)
Net interest income..........................................................................................................	$	626		$	653		$	(27	)	(4.1	)%
Other operating income..................................................................................................	270			497			(227		)	(45.7	)
Total operating income...................................................................................................	896			1,150			(254		)	(22.1	)
Loan impairment charges................................................................................................	97			174			(77		)	(44.3	)
	799			976			(177		)	(18.1	)
Operating expenses.........................................................................................................	892			1,010			(118		)	(11.7	)
Profit (loss) before tax.....................................................................................................	$	(93	)	$	(34	)	$	(59	)	*

• Not meaningful.

Our RBWM segment reported a lower loss before tax during the three month period ended September 30, 2013, while loss before tax increased during the nine months ended September 30, 2013. Prior year periods include a gain of $59 million and $238 million, respectively, relating to the sale of certain branches to First Niagara. Excluding the gain on the sale of these branches, loss before tax improved $93 million and $179 million, respectively, during the three and nine months ended September 30, 2013 as compared with the corresponding prior year periods driven primarily by lower loan impairment charges and lower operating expenses.

Net interest income was lower during the three and nine months ended September 30, 2013 driven by lower deposit levels as a result of the branch sale to First Niagara. Partially offsetting the impact of branch sale to First Niagara in both periods were margin improvements due to active re-pricing of the deposit base especially in the non-premier segments which reduced our funding costs. Residential mortgage average balances were lower than the year-ago periods due to the impact of the branch sales partially offset by an increase in residential mortgage loans to our Premier customers.

Other operating income included a gain from the completion of the sale of certain branches to First Niagara totaling $59 million and $238 million in the three and nine months ended September 30, 2012. Excluding the gain on the sale of branches, other operating income remained flat in the three month period but increased in the year-to-date period driven by lower provisions for mortgage loan repurchase obligations associated with previously sold loans and improved net hedged mortgage servicing rights results, partially offset by lower gains on sales of mortgage loans.

Loan impairment charges decreased during the three and nine months ended September 30, 2013 driven by continued improvements in economic and credit conditions including lower delinquency levels on accounts less than 180 days contractually delinquent, improvements in delinquency roll rates as well as lower charge-offs in the year-to-date period including significant improvements in market value adjustments on loan collateral due to improvements in home prices which was partially offset by an incremental loan impairment charge of $15 million during the second quarter of 2013 to reflect an update to the period of time after a loss event a loan remains current before delinquency is observed.

Operating expenses were lower in both periods primarily due to the sale of the 195 branches to First Niagara as well as lower compliance and legal costs and decreases in expenses driven by several cost reduction initiatives relating to our retail branch network, primarily optimizing staffing and administrative areas, as well as reduced marketing expenditures. Partially offsetting these improvements was the impact of a reduction in the amount of branch costs allocated to Commercial Banking.

Commercial Banking ("CMB") CMB's business strategy is to be the leading international trade and business bank in the U.S. CMB strives to execute this vision and strategy in the U.S. by focusing on key markets with high concentration of internationally minded customers. Our Commercial Banking segment serves the markets through three client groups, notably Corporate Banking, Business Banking and Commercial Real Estate which allows us to align our resources in order to efficiently deliver suitable products and services based on the client's needs. Whether it is through commercial centers, retail branch network, or via HSBCnet, CMB provides customers with the products and services needed to grow their businesses internationally. Our relationship managers operate within a robust, customer focused compliance and risk culture, and collaborate across HSBC to capture a larger percentage of a relationship. In first nine months of 2013, an increase in the number of relationship managers and product partners is enabling us to gain a larger presence in key growth markets, including the West Coast, Southeast and Midwest.

New loan originations have resulted in a 13 percent increase in average loans outstanding to Corporate Banking customers since September 30, 2012. The Commercial Real Estate group is focusing on selective business opportunities in markets with strong portfolio expertise, which resulted in a 20 percent increase in average outstanding loans for this portfolio since September 30, 2012. Total average loans increased 13 percent across all CMB business lines as compared with September 30, 2012.

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

						Increase (Decrease)
Three Months Ended September 30,	2013		2012			Amount			%
	(in millions)
Net interest income..........................................................................................................	$	181	$	172		$	9		5.2	%
Other operating income..................................................................................................	77		136			(59		)	(43.4	)
Total operating income...................................................................................................	258		308			(50		)	(16.2	)
Loan impairment charges................................................................................................	26		6			20			*
	232		302			(70		)	(23.2	)
Operating expenses.........................................................................................................	169		154			15			9.7
Profit before tax................................................................................................................	$	63	$	148		$	(85	)	(57.4	)%

						Increase (Decrease)
Nine Months Ended September 30,	2013		2012			Amount			%
	(in millions)
Net interest income..........................................................................................................	$	523	$	502		$	21		4.2	%
Other operating income..................................................................................................	219		471			(252		)	(53.5	)
Total operating income...................................................................................................	742		973			(231		)	(23.7	)
Loan impairment charges (recoveries)..........................................................................	41		(3		)	44			*
	701		976			(275		)	(28.2	)
Operating expenses.........................................................................................................	502		487			15			3.1
Profit before tax................................................................................................................	$	199	$	489		$	(290	)	(59.3	)%

• Not meaningful.

Our CMB segment reported a lower profit before tax during the three and nine months ended September 30, 2013. Prior year periods include a gain of $65 million and $278 million, respectively, relating to the sale of certain branches to First Niagara. Excluding the gain on the sale of these branches, profit before tax remained lower declining $20 million and $12 million, respectively, during the three and nine months ended September 30, 2013 as compared with the corresponding prior year periods driven by lower business banking revenues due to the branch sale, higher loan impairment charges and higher operating expenses, partially offset by higher net interest income and higher other operating income.

Net interest income increased during both periods due to the favorable impact of higher loan balances in expansion markets.

Other operating income included a gain from the completion of the sale of certain branches to First Niagara totaling $65 million and $278 million in the three and nine months ended September 30, 2012, respectively. Excluding the gain on the sale of branches, other operating income was higher during both periods due to higher fees generated from trade services, foreign currency revenue and credit commitments, as well as an increase in debt and leverage acquisition financing activity.

Loan impairment charges were higher during the three and nine months ended September 30, 2013 primarily due to a specific provision associated with a single corporate banking customer relationship as well as higher provisions as a result of loan growth in expansion markets.

Operating expenses increased during the three and nine months ended September 30, 2013 as additional expenses relating to staffing increases in growth markets including the West Coast, Southeast and Midwest and higher technology infrastructure costs were partially offset by a reduction in network costs due to the branch sale and a reduction in the amount of branch costs allocated from RBWM.

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

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

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

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

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

We continue to proactively target U.S. companies with international banking requirements and foreign companies with banking needs in the Americas. Furthermore, we have seen higher average corporate loan balances as well as growth in revenue from the cross-sale of our products to CMB and RBWM customers consistent with our global strategy of cross-sale to other global businesses. Global Banking and Markets segment results during the first nine months of 2013 benefited from more stable U.S. financial market conditions, which reflected continued low interest rates and generally less volatile credit spreads and foreign exchange prices.

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

							Increase (Decrease)
Three Months Ended September 30,	2013			2012			Amount			%
	(in millions)
Net interest income..........................................................................................................	$	78		$	129		$	(51	)	(39.5	)%
Other operating income..................................................................................................	296			251			45			17.9
Total operating income...................................................................................................	374			380			(6		)	(1.6	)
Loan impairment charges (recoveries)..........................................................................	(3		)	6			(9		)	*
	377			374			3			.8
Operating expenses.........................................................................................................	255			249			6			2.4
Profit before tax................................................................................................................	$	122		$	125		$	(3	)	(2.4	)%

							Increase (Decrease)
Nine Months Ended September 30,	2013			2012			Amount			%
	(in millions)
Net interest income..........................................................................................................	$	312		$	439		$	(127	)	(28.9	)%
Other operating income..................................................................................................	973			742			231			31.1
Total operating income...................................................................................................	1,285			1,181			104			8.8
Loan impairment charges (recoveries)..........................................................................	6			(2		)	8			*
	1,279			1,183			96			8.1
Operating expenses.........................................................................................................	735			744			(9		)	(1.2	)
Profit before tax................................................................................................................	$	544		$	439		$	105		23.9	%

• Not meaningful.

Our GBM segment reported a slightly lower profit before tax during the three months ended September 30, 2013 as lower net interest income and higher operating expenses were mostly offset by higher other operating income and lower loan impairment charges. Our GBM segment reported a higher profit before tax during the nine months ended September 30, 2013 driven by higher other operating income and lower operating expenses, partially offset by lower net interest income and higher loan impairment charges.

Net interest income decreased in both periods due to lower rates on investment balances including the impact of security sales, partially offset by an increase due to growth in corporate loan balances. Other operating income is discussed further under the table below.

Loan impairment charges increased during the nine months ended September 30, 2013 compared with the year-ago period reflecting higher levels of impairment allowances for risk factors primarily associated with large loan exposures. Loan impairment charges decreased during the three months ended September 30, 2013 compared with the year-ago period due to exposure reduction in several lower rated credit facilities.

Operating expenses increased during the three months ended September 30, 2013 and decreased during the nine months ended September 30, 2013 as reduced staff costs due to lower headcount and lower compliance costs associated with our AML/BSA remediation activities in both periods were more than offset in the three month period by litigation related costs associated with our legacy credit business.

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

							Increase (Decrease)
Three Months Ended September 30,	2013			2012			Amount			%
	(in millions)
Foreign exchange and metals....................................................................................	$	48		$	78		$	(30	)	(38.5	)%
Credit⁽¹⁾.........................................................................................................................	15			41			(26		)	(63.4	)
Rates.............................................................................................................................	50			20			30			*
Equities.........................................................................................................................	4			3			1			33.3
Other Global Markets.................................................................................................	23			(25		)	48			*
Total Global Markets.........................................................................................................	140			117			23			19.7
Financing......................................................................................................................	61			48			13			27.1
Payments and cash management..............................................................................	88			93			(5		)	(5.4	)
Other transaction services.........................................................................................	14			13			1			7.7
Total Global Banking.........................................................................................................	163			154			9			5.8
Balance Sheet Management⁽²⁾.........................................................................................	82			108			(26		)	(24.1	)
Other....................................................................................................................................	(11		)	1			(12		)	*
Total operating income.....................................................................................................	$	374		$	380		$	(6	)	(1.6	)%

							Increase (Decrease)
Nine Months Ended September 30,	2013			2012			Amount			%
	(in millions)
Foreign exchange and metals....................................................................................	$	238		$	284		$	(46	)	(16.2	)%
Credit⁽¹⁾.........................................................................................................................	81			51			30			58.8
Rates.............................................................................................................................	115			117			(2		)	(1.7	)
Equities.........................................................................................................................	13			11			2			18.2
Other Global Markets.................................................................................................	47			(66		)	113			*
Total Global Markets.........................................................................................................	494			397			97			24.4
Financing......................................................................................................................	165			126			39			31.0
Payments and cash management..............................................................................	250			263			(13		)	(4.9	)
Other transaction services.........................................................................................	43			64			(21		)	(32.8	)
Total Global Banking.........................................................................................................	458			453			5			1.1
Balance Sheet Management⁽²⁾.........................................................................................	339			336			3			.9
Other....................................................................................................................................	(6		)	(5		)	(1		)	(20.0	)
Total operating income.....................................................................................................	$	1,285		$	1,181		$	104		8.8	%

• Not meaningful.

⁽¹⁾Credit includes operating income of $16 million and $82 million in the three and nine months ended September 30, 2013, respectively, compared with operating income of $46 million and $64 million in the three and nine months ended September 30, 2012, respectively, of revenue related to structured credit products and mortgage loans held for sale which we no longer offer.

⁽²⁾Includes gains on the sale of securities of $35 million and $189 million in the three and nine months ended September 30, 2013, respectively, compared with gains on the sale of securities of $34 million and $123 million in the three and nine months ended September 30, 2012, respectively.

Foreign exchange and metals revenue declined in both periods from a reduction in trading volumes and price volatility. Revenue from Credit decreased in the three month period and improved in the nine month period, substantially due to the impact of valuation adjustments on legacy structured credit exposures and mortgages held for sale. Gains on structured credit products due to changes in fair value of $24 million and $79 million during the three and nine months ended September 30, 2013, respectively, compared with losses of $43 million and gains of $56 million during the three and nine months ended September 30, 2012, respectively. Included in structured credit products were exposures to monoline insurance companies that resulted in gains of $1 million and $42 million due to fair value movements during the three and nine months ended September 30, 2013, respectively, compared with gains of $16 million and $6 million during the year-ago periods. Valuation losses of $1 million and gains of $6 million during the three and nine months ended September 30, 2013, respectively, were recorded against the fair values of sub-prime residential mortgage loans held for sale compared with valuation losses of $2 million and $6 million during the year-ago periods. Revenue from Rates increased during the three month period and decreased in the year-to-date period, mainly from the performance of emerging markets related products which were affected by volatile economic conditions in Latin America. Other global markets revenue improved during both periods due to an increase from fair value adjustments on our structured note liabilities, which reflects changes in our own credit risk.

Corporate loan growth and lower liquidity costs on unused commitments resulted in higher Financing revenue during the three and nine months ended September 30, 2013. Other transaction services revenue declined in the year-to-date period due to the transfer of our fund services business to an affiliate entity.

Balance Sheet Management reflected lower gains from the sale of securities during the three month period, but higher gains from the sales of securities during the nine months ended September 30, 2013 due to sales associated with a continued re-balancing of the portfolio for risk management purposes based on the low interest rate environment.

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

During the first nine months of 2013, we continued to dedicate resources in the wealth management market. Areas of focus are banking and cash management, investment advice including discretionary portfolio management, investment and structured products, residential mortgages, as well as wealth planning for trusts and estates. Also in the first nine months of 2013, our compliance and risk framework was strengthened by the establishment of a Global Private Banking Global Standards Committee and a revised risk appetite framework. Client deposit levels decreased $480 million or 4 percent compared with September 30, 2012 from domestic and international market customers. Total loans increased $290 million or 5 percent compared with prior year primarily in the residential mortgage portfolio. Overall period end client assets were lower than September 2012 by $3 billion and $2 billion lower than December 31, 2012 primarily due to reduction in highly active institutional customer balances partially offset by higher PB wealth management and investment products.

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

Nine Months Ended September 30,	2013			2012
	(in billions)
Client assets at beginning of the period.......................................................................................................	$	46.5		$	47.7
Net new money (outflows).........................................................................................................................	(2.3		)	.4
Value change................................................................................................................................................	.5			(.1		)
Client assets at end of period.........................................................................................................................	$	44.7		$	48.0

The following table summarizes IFRSs results for the PB segment.

						Increase (Decrease)
Three Months Ended September 30,	2013		2012			Amount			%
	(in millions)
Net interest income..........................................................................................................	$	46	$	45		$	1		2.2	%
Other operating income..................................................................................................	27		26			1			3.8
Total operating income...................................................................................................	73		71			2			2.8
Loan impairment charges (recoveries)..........................................................................	3		2			1			50.0
	70		69			1			1.4
Operating expenses.........................................................................................................	62		57			5			8.8
Profit (loss) before tax.....................................................................................................	$	8	$	12		$	(4	)	(33.3	)%

						Increase (Decrease)
Nine Months Ended September 30,	2013		2012			Amount			%
	(in millions)
Net interest income..........................................................................................................	$	140	$	137		$	3		2.2	%
Other operating income..................................................................................................	85		83			2			2.4
Total operating income...................................................................................................	225		220			5			2.3
Loan impairment charges (recoveries)..........................................................................	4		(3		)	7			*
	221		223			(2		)	(.9	)
Operating expenses.........................................................................................................	189		178			11			6.2
Profit (loss) before tax.....................................................................................................	$	32	$	45		$	(13	)	(28.9	)%

• Not meaningful.

Our PB segment reported lower profit before tax during the three and nine months ended September 30, 2013, primarily driven by higher operating expenses and in the year-to-date period higher loan impairment charges, partially offset by higher net interest income.

Net interest income was higher in both periods as improved volumes in lending, primarily in residential mortgages, were partially offset by lower net interest from the reduction in term deposit balances.

Other operating income remained essentially flat in the three month period but increased in the year-to-date period, reflecting higher volumes and fees on managed and structured investment products as well as higher funds fees.

Loan impairment charges remained relatively flat during the quarter but increased during the nine months ended September 30, 2013 due to a lower level of recoveries and higher provisions as a result of loan growth.

Operating expenses increased during both periods primarily due to higher compliance and regulatory costs and, in the year-to-date period, costs associated with the closure of a foreign branch.

Other The other segment primarily includes adjustments made at the corporate level for fair value option accounting related to credit risk on certain debt issued, income and expense associated with certain affiliate transactions, adjustments to the fair value on HSBC shares held for stock plans and interest expense associated with certain tax exposures and in both 2012 periods, an expense accrual for certain regulatory matters.

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

							Increase (Decrease)
Three Months Ended September 30,	2013			2012			Amount			%
	(in millions)
Net interest expense........................................................................................................	$	(6	)	$	(13	)	$	7		53.8	%
Gain (loss) on own fair value option debt attributable to credit spread..................	(63		)	(179		)	116			64.8
Other operating income (loss).......................................................................................	18			15			3			20.0
Total operating income (loss)........................................................................................	(51		)	(177		)	126			71.2
Loan impairment charges................................................................................................	-			-			-			-
	(51		)	(177		)	126			71.2
Operating expenses.........................................................................................................	52			844			(792		)	(93.8	)
Profit (loss) before tax.....................................................................................................	$	(103	)	$	(1,021	)	$	918		89.9	%

							Increase (Decrease)
Nine Months Ended September 30,	2013			2012			Amount			%
	(in millions)
Net interest expense........................................................................................................	$	(34	)	$	(31	)	$	(3	)	(9.7	)%
Gain (loss) on own fair value option debt attributable to credit spread..................	(52		)	(269		)	217			80.7
Other operating income (loss).......................................................................................	42			35			7			20.0
Total operating income (loss)........................................................................................	(44		)	(265		)	221			83.4
Loan impairment charges................................................................................................	-			-			-			-
	(44		)	(265		)	221			83.4
Operating expenses.........................................................................................................	138			1,628			(1,490		)	(91.5	)
Profit (loss) before tax.....................................................................................................	$	(182	)	$	(1,893	)	$	1,711		90.4	%

Profit (loss) before tax improved $918 million and $1.7 billion during the three and nine months ended September 30, 2013, respectively, driven largely by an expense accrual related to certain regulatory matters totaling $800 million and $1.5 billion recorded in the three and nine months ended September 30, 2012, respectively, that did not re-occur. Excluding the impact of this item on both prior year periods, profit (loss) before tax improved $118 million and 211million during the three and nine month periods ended September 30, 2013, respectively. The improvement in both periods was primarily due to improvements in revenue associated with changes in fair value attributable to credit spread of our own debt for which fair value option was elected.

Reconciliation of Segment Results As previously discussed, segment results are reported on an IFRSs basis. See Note 15, "Business Segments," in the accompanying consolidated financial statements for a discussion of the differences between IFRSs and U.S. GAAP. For segment reporting purposes, intersegment transactions have not been eliminated, and we generally account for transactions between segments as if they were with third parties. Also see Note 15, "Business Segments," in the accompanying consolidated financial statements for a reconciliation of our IFRSs segment results to U.S. GAAP consolidated totals.

Credit Quality

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

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

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

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

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

For pools of homogeneous consumer loans which do not qualify as troubled debt restructures, probable losses are estimated using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge-off based upon recent historical performance experience of other loans in our portfolio. This migration analysis incorporates estimates of the period of time between a loss occurring and the confirming event of its charge-off. This analysis considers delinquency status, loss experience and severity and takes into account whether loans have filed for bankruptcy, have been re-aged or are subject to an external debt management plan, hardship, modification, extension or deferment. The allowance for credit losses on consumer receivables also takes into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default based on historical and recent trends which are updated monthly based on a rolling average of several months' data using the most recently available information and is typically in the range of 25-40 percent for first lien mortgage loans and 90-100 percent for second lien home equity loans. At September 30, 2013, approximately 1 percent of our second lien mortgages where the first lien mortgage is held or serviced by us and has a delinquency status of 90 days or more delinquent, were less than 90 days delinquent and not considered to be a troubled debt restructure or already recorded at fair value less costs to sell.

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

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

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

	September 30, 2013			June 30, 2013			December 31, 2012
	(dollars are in millions)
Allowance for credit losses.................................................................................................	$	595		$	605		$	647
Ratio of Allowance for credit losses to:
Loans:⁽¹⁾
Commercial.............................................................................................................................	.6		%	.6		%	.7		%
Consumer:
Residential mortgages....................................................................................................	1.0		%	1.2		%	1.4		%
Home equity mortgages.................................................................................................	3.2		%	2.4		%	1.9		%
Credit card receivables...................................................................................................	5.3		%	5.2		%	6.7		%
Other consumer loans....................................................................................................	2.4		%	2.3		%	3.3		%
Total consumer loans.....................................................................................................	1.5		%	1.6		%	1.7		%
Total........................................................................................................................................	.9		%	.9		%	1.0		%
Net charge-offs⁽¹⁾⁽²⁾:
Commercial.......................................................................................................................	*			*			173.2		%
Consumer.........................................................................................................................	122.6		%	225.0			129.9
Total........................................................................................................................................	234.0		%	504.2		%	148.1		%
Nonperforming loans⁽¹⁾:
Commercial.......................................................................................................................	142.9		%	117.7		%	63.4		%
Consumer.........................................................................................................................	24.7			26.9			28.2
Total........................................................................................................................................	43.7		%	43.4		%	38.7		%

* Not meaningful.

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

⁽²⁾Quarter-to-date net charge-offs, annualized.

See Note 6, "Allowance for Credit Losses," in the accompanying consolidated financial statements for a rollforward of credit losses by general loan categories for the three months and nine months ended September 30, 2013 and 2012.

The allowance for credit losses at September 30, 2013 decreased $10 million, or 2 percent as compared with June 30, 2013 and decreased $52 million, or 8 percent as compared with December 31, 2012. The decrease since June 30, 2013 was driven by lower allowance levels in our consumer loan portfolio reflecting lower loss estimates in our residential mortgage loan portfolio due to continued improvements in credit quality as discussed below, partially offset by a modest increase in the allowance for commercial loans driven largely by an increase in the allowance driven from a specific provision associated with a single corporate banking customer relationship and a higher allowance for certain portfolio risk factors, partially offset by improved credit quality. The decrease from December 31, 2012 was due to lower loss estimates in both our commercial and consumer loan portfolios. Our commercial allowance for credit losses decreased $4 million in the first nine months of 2013 due to reductions in certain loan exposures including the charge-off of a single client relationship and continued improvements in economic conditions which led to lower levels of non-performing loans and criticized assets. These reductions were partially offset by higher allowances for certain portfolio risk factors associated primarily with large loan exposure and the specific provision relating to a single customer relationship discussed above. Our consumer allowance for credit losses decreased $48 million in the first nine months of 2013, driven primarily by lower loss estimates in our residential mortgage loan portfolio due to continued improvements in credit quality including lower delinquency levels on accounts less than 180 days contractually delinquent and improvements in loan delinquency roll rates. Our residential mortgage loan allowance for credit losses in all periods reflects consideration of certain risk factors relating to trends such as recent portfolio performance as compared with average roll rates and economic uncertainty, including housing market trends and foreclosure timeframes. Also contributing to the decrease was lower loss estimates in our credit card portfolio due to improvements in credit quality including improved loan delinquency roll rates. Reserve levels for all consumer loan categories however continue to be impacted by the slow pace of the economic recovery in the U.S. economy, including elevated unemployment rates and, as it relates to residential mortgage loans, a housing market which is in the early stages of recovery.

The allowance for credit losses as a percentage of total loans at September 30, 2013 remained flat compared with June 30, 2013 and decreased compared with December 31, 2012 for the reasons discussed above.

The allowance for credit losses as a percentage of net charge-offs decreased as compared with June 30, 2013 due to higher dollars of residential mortgage charge-offs as explained more fully below, as well as higher dollars of commercial loan net charge-offs, while total allowance levels declined. The allowance for credit losses as a percentage of net charge-offs increased as compared with December 31, 2012 largely due to lower net charge-offs in both our commercial and consumer portfolios as the decline outpaced the decrease in the allowance.

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

	Amount		% of Loans to Total Loans⁽¹⁾		Amount		% of Loans to Total Loans⁽¹⁾		Amount		% of Loans to Total Loans⁽¹⁾
	September 30, 2013				June 30, 2013				December 31, 2012
	(dollars are in millions)
Commercial⁽²⁾............................................................................................	$	313	71.6	%	$	299	70.9	%	$	317	69.8	%
Consumer:
Residential mortgages......................................................................	158		23.2		196		23.7		210		24.3
Home equity mortgages...................................................................	66		3.1		52		3.3		45		3.7
Credit card receivables.....................................................................	45		1.3		45		1.3		55		1.3
Other consumer.................................................................................	13		.8		13		.8		20		0.9
Total consumer..................................................................................	282		28.4		306		29.1		330		30.2
Total...........................................................................................................	$	595	100.0	%	$	605	100.0	%	$	647	100.0	%

⁽¹⁾Excluding loans held for sale.

⁽²⁾See Note 6, "Allowance for Credit Losses" for components of the commercial allowance for credit losses.

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

Reserves for Off-Balance Sheet Credit Risk We also maintain a separate reserve for credit risk associated with certain off-balance sheet exposures, including letters of credit, unused commitments to extend credit and financial guarantees. This reserve, included in other liabilities, was $68 million, $63 million and $139 million at September 30, 2013, June 30, 2013 and December 31, 2012, respectively. The related provision is recorded as a component of other expense within operating expenses. The increase in off-balance sheet reserves at September 30, 2013 as compared with June 30, 2013 reflects new customer activity and higher estimated exposures on certain facilities, while the decrease since December 31, 2012 largely reflects the impact of an upgrade to an individual monoline which resulted in an improvement to our expectation of cash flows from an off-balance sheet liquidity facility and the consolidation of a previously unconsolidated commercial paper VIE in the second quarter of 2013 which resulted in the reclassification of $61 million of this reserve to held-to-maturity investment securities on our balance sheet. Off-balance sheet exposures are summarized under the caption "Off-Balance Sheet Arrangements, Credit Derivatives and Other Contractual Obligations" in this MD&A.

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

	September 30, 2013			June 30, 2013			December 31, 2012
	(dollars are in millions)
Delinquent loans:
Commercial..............................................................................................................................	$	153		$	197		$	339
Consumer:
Residential mortgages⁽¹⁾..............................................................................................	1,221			1,170			1,233
Home equity mortgages...............................................................................................	75			77			75
Total residential mortgages⁽²⁾........................................................................................	1,296			1,247			1,308
Credit card receivables...................................................................................................	18			15			21
Other consumer...............................................................................................................	28			26			30
Total consumer................................................................................................................	1,342			1,288			1,359
Total.........................................................................................................................................	$	1,495		$	1,485		$	1,698
Delinquency ratio:
Commercial..............................................................................................................................	.32		%	.42		%	.76		%
Consumer:
Residential mortgages..................................................................................................	7.70			7.26			7.78
Home equity mortgages...............................................................................................	3.61			3.55			3.23
Total residential mortgages⁽²⁾........................................................................................	7.23			6.82			7.20
Credit card receivables...................................................................................................	2.10			1.75			2.58
Other consumer...............................................................................................................	4.65			4.08			4.25
Total consumer................................................................................................................	6.92			6.51			6.92
Total.........................................................................................................................................	2.21		%	2.21		%	2.64		%

⁽¹⁾At September 30, 2013, June 30, 2013 and December 31, 2012, residential mortgage loan delinquency includes $1.1 billion, $1.1 billion and $1.0 billion, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less costs to sell, including $29 million, $33 million and $39 million, respectively, relating to loans held for sale.

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

⁽³⁾

	September 30, 2013			June 30, 2013			December 31, 2012
	(dollars are in millions)
Dollars of delinquent loans:
Interest-only loans....................................................................................................	$	66		$	68		$	87
ARM loans................................................................................................................	315			338			356
Delinquency ratio:
Interest-only loans....................................................................................................	1.79		%	1.78		%	2.18		%
ARM loans................................................................................................................	2.97			3.19			3.43

Compared with June 30, 2013, our two-months-and-over contractual delinquency ratio remained flat as higher consumer loan delinquency was offset by lower delinquency in our commercial loan portfolio. Our consumer loan two-month-and-over contractual delinquency ratio at September 30, 2013 increased 41 basis points from June 30, 2013 largely due to higher levels of late-stage residential mortgage loan delinquency while credit card delinquency declined. Residential mortgage loan delinquency levels continue to be impacted by an elongated foreclosure process which has resulted in loans which would otherwise have been foreclosed and transferred to REO remaining in loan account and, consequently, in delinquency. Overall consumer loan delinquency levels also continue to be impacted by elevated unemployment levels and, as it relates to residential mortgages, a housing market which is slowly recovering. Compared with June 30, 2013, our commercial two-months-and-over contractual delinquency ratio decreased 10 basis points due to continued improvements in the credit quality of the portfolio and higher outstanding loan balances.

Compared with December 31, 2012, our two-months-and-over contractual delinquency ratio decreased 43 basis points as we experienced lower delinquency levels in both our commercial and consumer loan portfolios. Our commercial loan two-months-and-over contractual delinquency ratio decreased 44 basis points compared with December 31, 2012 due to higher outstanding loan balances as well as improved credit quality including reductions in certain exposures and the resolution of certain matured loans which were in the process of refinancing or pay down at year-end. Compared with December 31, 2012, our consumer loan two-months-and-over contractual delinquency ratio remained flat as lower residential mortgage delinquency was offset by a decline in outstanding loan balances. The lower levels of residential mortgage loan delinquency reflect lower dollars of delinquency on accounts less than 180 days contractually delinquent due to improvements in credit quality, including improved delinquency roll rates, partially offset by higher late stage delinquency. Credit card delinquency also improved due to continued improvements in economic conditions.

Residential mortgage first lien delinquency is significantly higher than second lien home equity mortgage delinquency in all periods largely due to the inventory of loans which are held at the lower of amortized cost or fair value of the collateral less cost to sell and are in the foreclosure process. Given the extended foreclosure time lines, particularly in those states where HUSI has a large footprint, the first lien residential mortgage portfolio has a substantial inventory of loans which are greater than 180 days past due and have been written down to the fair value of the collateral less cost to sell. Therefore, there are no additional credit loss reserves required for these loans. There is a substantially lower volume of second lien home equity mortgage loans where we pursue foreclosure less frequently given the subordinate position of the lien. In addition, our legacy business originated through broker channels and loan transfers from HSBC is of a lower credit quality and, therefore, contributes to an overall higher weighted average delinquency rate for our first lien residential mortgages. Both of these factors are expected to diminish significantly in future periods as the foreclosure backlog resulting from extended foreclosure time lines is managed down and the portfolio mix continues to shift to higher quality loans as the legacy broker originated business and prior loan transfers run off.

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

	September 30, 2013			June 30, 2013			September 30, 2012
	(dollars are in millions)
Net Charge-off Dollars:
Commercial:
Construction and other real estate.............................................................................	$	2		$	(8	)	$	6
Business and corporate banking................................................................................	4			8			6
Global banking..............................................................................................................	-			-			-
Other commercial..........................................................................................................	-			(4		)	-
Total commercial...............................................................................................................	6			(4		)	12
Consumer:
Residential mortgages...............................................................................................	37			10			21
Home equity mortgages............................................................................................	14			11			18
Total residential mortgages.........................................................................................	51			21			39
Credit card receivables.................................................................................................	6			10			12
Other consumer.............................................................................................................	1			3			3
Total consumer.................................................................................................................	58			34			54
Total....................................................................................................................................	$	64		$	30		$	66
Net Charge-off Ratio:......................................................................................................
Commercial:
Construction and other real estate.............................................................................	.09		%	(.38		)%	.30		%
Business and corporate banking................................................................................	.12			.26			.20
Global banking..............................................................................................................	-			-			-
Other commercial..........................................................................................................	-			(.52		)	-
Total commercial...............................................................................................................	.05			(.04		)	.12
Consumer:
Residential mortgages...............................................................................................	.93			.25			.56
Home equity mortgages............................................................................................	2.63			2.00			2.93
Total residential mortgages.........................................................................................	1.13			.47			.89
Credit card receivables.................................................................................................	2.79			4.90			5.98
Other consumer.............................................................................................................	0.71			2.05			1.91
Total consumer.................................................................................................................	1.19			.70			1.14
Total....................................................................................................................................	.38		%	.19		%	.45		%

Our net charge-off ratio as a percentage of average loans increased 19 basis points for the quarter ended September 30, 2013 compared with the quarter ended June 30, 2013, due primarily to higher levels of commercial loan charge-offs as the prior quarter reflected net recoveries as well as higher residential mortgage loan charge-offs. The increase in residential mortgage loan charge-offs in the current quarter primarily reflects the charge-off of $17 million of corporate advances on loans which had been largely reserved for.

Compared with the year-ago quarter, our charge off ratio decreased 7 basis points, as the higher charge-offs in our residential mortgage loan portfolio discussed above were more than offset by the impact of lower commercial loan charge-offs and the impact of higher average commercial loan receivable balances due to loan growth.

Nonperforming Assets Nonperforming assets consisted of the following:

	September 30, 2013			June 30, 2013			December 31, 2012
	(dollars are in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans.........................................................................................	$	44		$	47		$	104
Other real estate..............................................................................................................	103			132			281
Business and corporate banking.......................................................................................	47			44			47
Global banking......................................................................................................................	14			18			18
Other commercial..................................................................................................................	2			5			13
Total commercial..................................................................................................................	210			246			463
Consumer:
Residential mortgages......................................................................................................	1,020			1,013			1,038
Home equity mortgages...................................................................................................	85			89			86
Total residential mortgages⁽¹⁾⁽²⁾.........................................................................................	1,105			1,102			1,124
Others....................................................................................................................................	-			5			5
Total consumer loans..........................................................................................................	1,105			1,107			1,129
Nonaccrual loans held for sale...............................................................................................	45			50			37
Total nonaccruing loans........................................................................................................	1,360			1,403			1,629
Accruing loans contractually past due 90 days or more:
Commercial:
Real Estate:
Construction and land loans.........................................................................................	$	-		$	-		$	-
Other real estate..............................................................................................................	-			1			8
Business and corporate banking.......................................................................................	-			6			28
Other commercial..................................................................................................................	9			1			1
Total commercial..................................................................................................................	9			8			37
Consumer:
Credit card receivables........................................................................................................	13			11			15
Other consumer....................................................................................................................	24			21			28
Total consumer loans..........................................................................................................	37			32			43
Total accruing loans contractually past due 90 days or more........................................	46			40			80
Total nonperforming loans....................................................................................................	1,406			1,443			1,709
Other real estate owned..........................................................................................................	40			48			80
Total nonperforming assets..................................................................................................	$	1,446		$	1,491		$	1,789
Allowance for credit losses as a percent of nonperforming loans⁽³⁾:
Commercial............................................................................................................................	142.92		%	117.72		%	63.40		%
Consumer..............................................................................................................................	24.69			26.87			28.16

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

⁽²⁾Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as 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.

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

Nonaccrual loans at September 30, 2013 decreased as compared with June 30, 2013 and December 31, 2012 due largely to lower levels of commercial non-accrual loans. Commercial non-accrual loans decreased due to payoffs, charge-offs and customer upgrades out of default outpacing new defaults. Our consumer nonaccrual loans remained relatively flat compared with June 30, 2013 and decreased modestly compared with December 31, 2012. The decrease from December 31, 2012 was driven by lower nonaccrual residential mortgage loans. Residential mortgage loan nonaccrual levels however continue to be impacted by an elongated foreclosure process as previously discussed. Accruing loans past due 90 days or more increased modestly since June 30, 2013 due to higher levels of credit card and other consumer receivables but decreased compared with December 31, 2012 driven by lower commercial loan balances due to the resolution of certain loans which were refinanced in early 2013 at market rates.

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

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

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

	September 30, 2013		June 30, 2013		December 31, 2012
	(in millions)
Impaired commercial loans:
Balance at end of period.......................................................................................................	$	602	$	615	$	697
Amount with impairment reserve.........................................................................................	175		282		250
Impairment reserve.................................................................................................................	58		38		96

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

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

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

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

The following table summarizes criticized loans.

	September 30, 2013		June 30, 2013		December 31, 2012
	(in millions)
Special mention:
Commercial loans..............................................................................................................	$	1,295	$	909	$	1,125
Substandard:
Commercial loans..............................................................................................................	823		818		916
Consumer loans.................................................................................................................	1,028		1,005		1,031
Total substandard.............................................................................................................	1,851		1,823		1,947
Doubtful:
Commercial loans..............................................................................................................	52		36		117
Total........................................................................................................................................	$	3,198	$	2,768	$	3,189

The overall increases in criticized loans since June 30, 2013 resulted primarily due the addition of 6 special mention commercial loans in the third quarter of 2013 as a result of a regulatory shared national credit review.

Concentration of Credit Risk A concentration of credit risk is defined as a significant credit exposure with an individual or group engaged in similar activities or affected similarly by economic conditions. We enter into a variety of transactions in the normal course of business that involve both on and off-balance sheet credit risk. Principal among these activities is lending to various commercial, institutional, governmental and individual customers. We participate in lending activity throughout the United States and internationally. In general, we manage the varying degrees of credit risk involved in on and off-balance sheet transactions through specific credit policies. These policies and procedures provide for a strict approval, monitoring and reporting process. It is our policy to require collateral when it is deemed appropriate. Varying degrees and types of collateral are secured depending upon management's credit evaluation. As with any nonconforming and non-prime loan products, we utilize high underwriting standards and price these loans in a manner that is appropriate to compensate for higher risk. We do not offer teaser rate mortgage loans.

Our loan portfolio includes the following types of loans:

• Interest-only loans - A loan which allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period.

• Adjustable rate mortgage ("ARM") loans - A loan which allows us to adjust pricing on the loan in line with market movements.

The following table summarizes the balances of interest-only and ARM loans in our loan portfolios, including certain loans held for sale, at September 30, 2013 and December 31, 2012, respectively. Each category is not mutually exclusive and loans may appear in more than one category below.

	September 30, 2013		December 31, 2012
	(in billions)
Interest-only residential mortgage loans..................................................................................................	$	3.7	$	4.0
ARM loans⁽¹⁾................................................................................................................................................	10.6		10.4

(1) ARM loan balances above exclude $16 million and $19 million of subprime residential mortgage loans held for sale at September 30, 2013 and December 31, 2012, respectively. In 2013 and 2014, approximately $61 million and $284 million, respectively, of the ARM loans will experience their first interest rate reset.

The following table summarizes the concentrations of first and second liens within the outstanding residential mortgage loan portfolio. Amounts in the table exclude residential mortgage loans held for sale of $130 million and $472 million at September 30, 2013 and December 31, 2012, respectively.

	September 30, 2013		December 31, 2012
	(in millions)
Closed end:
First lien.................................................................................................................................................	$	15,720	$	15,371
Second lien............................................................................................................................................	146		186
Revolving:
Second lien............................................................................................................................................	1,941		2,138
Total..............................................................................................................................................................	$	17,807	$	17,695

Geographic Concentrations The following table reflects regional exposure at September 30, 2013 for certain loan portfolios .

	Commercial Construction and Other Real Estate Loans		Residential Mortgage Loans		Credit Card Receivables
New York State...................................................................................................	39.1	%	33.8	%	56.6	%
North Central United States..............................................................................	4.5		6.0		3.7
North Eastern United States, excluding New York State..............................	10.5		9.4		12.3
Southern United States.....................................................................................	23.1		15.3		13.8
Western United States......................................................................................	22.8		35.5		11.3
Others...................................................................................................................	-		-		2.3
Total.....................................................................................................................	100.0	%	100.0	%	100.0	%

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

Credit Risks Associated with Derivative Contracts There have been no significant changes to our credit risk associated with derivative contracts from the amounts disclosed in our 2012 Form 10-K under caption "Credit Quality". See Credit Risk Management section of "Risk Management" in this MD&A for further information on credit risks associated with derivative contracts.

Liquidity and Capital Resources

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

During the first nine months of 2013, marketplace liquidity continued to remain available for most sources of funding except mortgage securitization. However credit spreads continue to be impacted by concerns regarding government spending and the budget deficit as well as beginning in the second quarter of 2013, concern that the Federal Reserve would begin to slow its quantitative easing program later this year if the economy continues to strengthen. These concerns subsided to a degree in September when the Federal Reserve announced its bond buying program would continue at current levels. The combination of these factors has caused long-term interest rates to rise in 2013. The prolonged period of low interest rates also continues to put pressure on spreads earned on our deposit base.

On June 27, 2013, HSBC and HBUS submitted an initial resolution plan jointly to the FRB and the FDIC as required under Dodd-Frank and a rule issued by those bank regulators relating to the resolution of bank holding companies with assets of $50 billion or more and a FDIC rule relating to the resolution of insured depository institutions with assets of $50 billion or more.

Interest Bearing Deposits with Banks totaled $29.9 billion and $13.3 billion at September 30, 2013 and December 31, 2012, respectively, which includes $27.3 billion and 10.7 billion, respectively, held with the Federal Reserve Bank. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Securities Purchased under Agreements to Resell totaled $2.2 billion and $3.1 billion at September 30, 2013 and December 31, 2012, respectively. Balances will fluctuate from year to year depending upon our liquidity position at the time and our strategy for deploying such liquidity.

Short-Term Borrowings totaled $19.5 billion and $14.9 billion at September 30, 2013 and December 31, 2012, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on short-term borrowing trends.

Deposits totaled $112.9 billion and $117.7 billion at September 30, 2013 and December 31, 2012, respectively. See "Balance Sheet Review" in this MD&A for further analysis and discussion on deposit trends.

Long-Term Debt increased to $22.2 billion at September 30, 2013 from $21.7 billion at December 31, 2012. The following table presents the maturities of long-term debt at September 30, 2013, including secured financings and conduit facility renewals.

(in millions)
2013..............................................................................................................................................................................................	$	216
2014..............................................................................................................................................................................................	3,817
2015..............................................................................................................................................................................................	4,211
2016..............................................................................................................................................................................................	1,449
2017..............................................................................................................................................................................................	1,865
Thereafter....................................................................................................................................................................................	10,593
Total.............................................................................................................................................................................................	$	22,151

The following table summarizes issuances and retirements of long-term debt during the nine months ended September 30, 2013 and 2012:

Nine Months Ended September 30,	2013			2012
	(in millions)
Long-term debt issued............................................................................................................................................	$	4,630		$	5,354
Long-term debt retired............................................................................................................................................	(3,941		)	(1,936		)
Net long-term debt issued......................................................................................................................................	$	689		$	3,418

Under our shelf registration statement on file with the Securities and Exchange Commission, we may issue debt securities or preferred stock. The shelf has no dollar limit, but the amount of debt outstanding is limited by the authority granted by the Board of Directors. At September 30, 2013, we were authorized to issue up to $21 billion, of which $8.2 billion was available. HSBC Bank USA also has a $40 billion Global Bank Note Program of which $15.9 billion was available at September 30, 2013.

As a member of the New York Federal Home Loan Bank ("FHLB"), we have a secured borrowing facility which is collateralized by real estate loans and investment securities. At September 30, 2013 and December 31, 2012, long-term debt included $1.0 billion under this facility. The facility also allows access to further borrowings of up to $5.5 billion based upon the amount pledged as collateral with the FHLB.

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

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

Selected Capital Ratios Capital amounts and ratios are calculated in accordance with current banking regulations. In managing capital, we develop targets for Tier 1 capital to risk weighted assets, Tier 1 common equity to risk weighted assets, Total capital to risk weighted assets and Tier 1 capital to average assets (this latter ratio, also known as the "leverage ratio"). Our targets may change from time to time to accommodate changes in the operating environment, regulatory requirements or other considerations such as those listed above. The following table summarizes selected capital ratios:

	September 30, 2013		December 31, 2012
Tier 1 capital to risk weighted assets.........................................................................................................	11.66	%	13.61	%
Tier 1 common equity to risk weighted assets.........................................................................................	9.98		11.63
Total capital to risk weighted assets..........................................................................................................	16.30		19.52
Tier 1 capital to average assets (leverage ratio).......................................................................................	8.40		7.70
Total equity to total assets..........................................................................................................................	9.28		9.32

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

In June 2012, the U.S. regulators issued three joint Notices of Proposed Rulemaking ("NPRs") which would both implement many of the capital provisions of Basel III for U.S. banking institutions and substantially revise the U.S. banking regulators' Basel I risk-based guidelines to make them more risk sensitive. In July 2013, the U.S. banking regulators adopted a final rule which consolidates the three NPRs released in June 2012 and implements the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision, and certain changes required by Dodd-Frank. The final rule establishes an integrated regulatory capital framework to improve the quality and quantity of regulatory capital and introduces the "Standardized Approach" for risk weighted assets, which will replace the Basel I risk-based guidance for determining risk-weighted assets as of January 1, 2015. For the largest banking organizations, such as HSBC USA, the final rule is largely unchanged from the three NPRs and will take effect from January 1, 2014, but with a number of the provisions being phased in through to 2019. The final rule is also largely consistent with regard to the Standardized Approach, although it did not adopt modifications from the Basel I standards to the calculation of risk-weighting for mortgages as proposed.

With regard to the elements of capital, the final rule will require HSBC USA to phase trust preferred securities issued prior to May 19, 2010 out of Tier 1 Capital by January 1, 2016, with 50% of these capital instruments includable in Tier 1 Capital in 2014 and 25% includable in 2015. The trust preferred securities excluded from Tier 1 Capital may be included fully in Tier 2 Capital during those two years, but must be phased out of Tier 2 Capital by January 1, 2022. As previously noted (see "Liquidity and Capital Resources-Long-Term Debt" in our 2012 Form 10-K), we exercised our option to call and redeem the trust preferred securities issued by HSBC USA Capital Trust VII. We continue to consider options for redeeming other trust preferred securities issued which total $550 million at September 30, 2013.

In connection with the final rule, the regulatory agencies provided certain information with regard to the appropriate subordination standard for Tier 2 qualifying subordinated debt. This information represents a modification of current guidance on the subordination standards to qualify for Tier 2 regulatory capital treatment at the bank holding company level. Under the final rule, any nonconforming Tier 2 subordinated debt issued prior to May 19, 2010 will be required to be phased out by January 1, 2016, and issuances after May 19, 2010 will be required to be excluded from capital as of January 1, 2014. We intend to review any clarifying guidance from the regulatory agencies and assess the impact, if any, on our currently outstanding Tier 2 qualifying subordinated debt of approximately $1.2 billion. Also under the final rule, Tier 1 capital is expected to include only noncumulative perpetual preferred stock, in addition to common stock and the final rule removes the limitation on the amount of Tier 2 capital that may be recognized relative to Tier 1 capital.

As previously disclosed, Advanced Approaches banking organizations such as HSBC North America and HSBC Bank USA participate in a "parallel run" wherein they must report both their Basel I (and in 2015, their Standardized Approach) risk-based ratios as well as their Advanced Approaches ratios to their primary federal regulator, and publicly disclose only their Basel I (or in 2015, their Standardized Approach) ratios. Upon receiving approval to exit parallel run, Advanced Approaches banking organizations would then publicly disclose both their risk-based and Advanced Approaches capital ratios. Although we began a parallel run period in January 2010, it is unclear as to when approval from the appropriate regulators will be received to exit parallel run.

The final rule has only recently been issued, is not yet in effect, and has not yet been the subject of regulatory guidance or interpretation. We continue to review the final rule and its impact on our regulatory capital.

In August 2012, U.S. regulators published a final rule (known in the industry as Basel 2.5), that would change the U.S. regulatory market risk capital rules to better capture positions for which the market risk capital rules are appropriate, reduce procyclicality, enhance the sensitivity to risks that are not adequately captured under current methodologies and increase transparency through enhanced disclosures. This final rule became effective January 1, 2013 and is reflected in our September 30, 2013 Basel I risk-weighted asset levels. In July 2013, the U.S. banking regulators proposed changes to the Basel 2.5 rule that would conform to changes in the final capital rules. We are currently reviewing the proposed changes to assess the impact on our regulatory capital.

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

In October 2012, the Federal Reserve Board published a final rule setting out the stress testing requirements for bank holding companies with $50 billion or more in total consolidated assets. HSBC North America becomes subject to the rule from October 2013 and will be required to comply with the Federal Reserve Board's Comprehensive Capital Analysis and Review ("CCAR") program for its capital plan submission in January 2014. HSBC Bank USA is also subject to stress testing requirements under OCC rules finalized in October 2012.

We and HSBC Bank USA are required to meet minimum capital requirements by our principal regulators. Risk-based capital amounts and ratios are presented in Note 16, "Retained Earnings and Regulatory Capital Requirements," in the accompanying consolidated financial statements.

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

	Actual January 1 through September 30, 2013		Estimated October 1 through December 31, 2013		Estimated Full Year 2013
	(in billions)
Funding needs:
Net loan growth....................................................................................................................	$	7	$	3	$	10
Long-term debt maturities...................................................................................................	5		-		5
Total funding needs.................................................................................................................	$	12	$	3	$	15
Funding sources:
Liquidation of short-term investments..............................................................................	$	7	$	2	$	9
Long-term debt issuance.....................................................................................................	5		1		6
Total funding sources..............................................................................................................	$	12	$	3	$	15

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

We will continue to sell a substantial portion of new mortgage loan originations going forward, largely to PHH Mortgage.

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

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

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

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

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

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

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

	Balance at September 30, 2013
	One Year or Less		Over One through Five Years		Over Five Years		Total		Balance at December 31, 2012
	(in billions)
Standby letters of credit, net of participations⁽¹⁾........................	$	5.5	$	2.8	$	-	$	8.3	$	8.4
Commercial letters of credit............................................................	.5		.1		-		0.6		1.0
Credit derivatives⁽²⁾.........................................................................	61.8		123.4		12.8		198.0		237.5
Other commitments to extend credit:
Commercial....................................................................................	16.4		48.4		3.4		68.2		57.7
Consumer......................................................................................	6.7		-		-		6.7		7.0
Total...................................................................................................	$	90.9	$	174.7	$	16.2	$	281.8	$	311.6

⁽¹⁾Includes $862 million and $808 million issued for the benefit of HSBC affiliates at September 30, 2013 and December 31, 2012, respectively.

⁽²⁾Includes $38.6 billion and $44.2 billion issued for the benefit of HSBC affiliates at September 30, 2013 and December 31, 2012, respectively.

Other Commitments to Extend Credit Other commitments to extend credit include arrangements whereby we are contractually obligated to extend credit in the form of loans, participations in loans, lease financing receivables, or similar transactions. Consumer commitments are comprised of certain unused MasterCard/Visa credit card lines and commitments to extend credit secured by residential properties. We have the right to change or terminate any terms or conditions of a customer's credit card or home equity line of credit account, for cause, upon notification to the customer. Commercial commitments comprise primarily those related to secured and unsecured loans and lines of credit and certain asset purchase commitments. In connection with our commercial lending activities, we provide liquidity support to a number of multi-seller and single-seller asset backed commercial paper conduits ("ABCP conduits") sponsored by affiliates and third parties. See Note 17, "Variable Interest Entities," in the accompanying consolidated financial statements for additional information regarding these ABCP conduits and our variable interests in them.

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

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

The following tables present information on our liquidity facilities with ABCP conduits at September 30, 2013. The maximum exposure to loss presented in the first table represents the maximum contractual amount of loans and asset purchases we could be required to make under the liquidity agreements. This amount does not reflect the funding limits discussed above and also assumes that we suffer a total loss on all amounts advanced and all assets purchased from the ABCP conduits. As such, we believe that this measure significantly overstates our expected loss exposure.

			Conduit Assets⁽¹⁾			Conduit Funding⁽¹⁾
Conduit Type	Maximum Exposure to Loss		Total Assets		Weighted Average Life (Months)	Commercial Paper		Weighted Average Life (Days)
	(dollars are in millions)
HSBC affiliate sponsored (multi-seller)...................................	$	1,917	$	1,256	13	$	1,256	14
Third-party sponsored:
Single-seller.............................................................................	299		4,256		37	4,036		60
Total..............................................................................................	$	2,216	$	5,512		$	5,292

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

	Average Asset Mix		Average Credit Quality⁽¹⁾
Asset Class	Average Asset Mix		AAA		AA+/AA		A		A-		BB/BB-
Multi-seller conduits
Debt securities backed by:
Auto loans and leases............................................	27	%	53	%	-	%	-	%	-	%	-	%
Trade receivables.....................................................	38		-		100		32		-		-
Credit card receivables............................................	11		-		-		68		-		-
Equipment loans......................................................	24		47		-		-		-		-
	100	%	100	%	100	%	100	%	-	%	-	%

⁽¹⁾Credit quality is based on Standard and Poor's ratings at September 30, 2013 except for loans and trade receivables held by single-seller conduits, which are based on our internal ratings. For the single-seller conduits, external ratings are not available; however, our internal credit ratings were developed using similar methodologies and rating scales equivalent to the external credit ratings.

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

During the first nine months of 2013, U.S. asset-backed commercial paper volumes continued to be stable as most major bank conduit sponsors continue to extend new financing to clients. Credit spreads in the multi-seller conduit market generally trended lower during the first nine months of 2013 following a pattern that was prevalent across the U.S. credit markets.

The preceding tables do not include information on liquidity facilities that we previously provided to certain Canadian multi-seller ABCP conduits that have been subject to restructuring agreements as part of the Montreal Accord. As part of the enhanced collateral pool established for the restructuring, we have provided a $307 million Margin Funding Facility to a new Master Asset Vehicle, which expires in July 2017 and is currently undrawn.

We have established and manage a number of constant net asset value ("CNAV") money market funds that invest in shorter-dated highly-rated money market securities to provide investors with a highly liquid and secure investment. These funds price the assets in their portfolio on an amortized cost basis, which enables them to create and liquidate shares at a constant price. The funds, however, are not permitted to price their portfolios at amortized cost if that amount varies by more than 50 basis points from the portfolio's market value. In that case, the fund would be required to price its portfolio at market value and consequently would no longer be able to create or liquidate shares at a constant price. We do not consolidate the CNAV funds because we do not absorb the majority of the expected future risk associated with the fund's assets, including interest rate, liquidity, credit and other relevant risks that are expected to affect the value of the assets.

Fair Value

Fair value measurement accounting principles require a reporting entity to take into consideration its own credit risk in determining the fair value of financial liabilities. The incorporation of our own credit risk accounted for a decrease of $24 million and increase of $74 million in the fair value of financial liabilities during the three and nine months ended September 30, 2013, respectively, compared with a decrease of $218 million and $331 million during the prior year periods.

Net income volatility arising from changes in either interest rate or credit components of the mark-to-market on debt designated at fair value and related derivatives affects the comparability of reported results between periods. Accordingly, the gain (loss) on debt designated at fair value and related derivatives during the nine months ended September 30, 2013 should not be considered indicative of the results for any future period.

Control Over Valuation Process and Procedures We have established a control framework which is designed to ensure that fair values are either determined or validated by a function independent of the risk-taker. See Note 19, "Fair Value Measurements" for further details on our valuation control framework.

Fair Value Hierarchy Fair value measurement accounting principles establish a fair value hierarchy structure that prioritizes the inputs to determine the fair value of an asset or liability (the "Fair Value Framework"). The Fair Value Framework distinguishes between inputs that are based on observed market data and unobservable inputs that reflect market participants' assumptions. It emphasizes the use of valuation methodologies that maximize observable market inputs. For financial instruments carried at fair value, the best evidence of fair value is a quoted price in an actively traded market (Level 1). Where the market for a financial instrument is not active, valuation techniques are used. The majority of our valuation techniques use market inputs that are either observable or indirectly derived from and corroborated by observable market data for substantially the full term of the financial instrument (Level 2). Because Level 1 and Level 2 instruments are determined by observable inputs, less judgment is applied in determining their fair values. In the absence of observable market inputs, the financial instrument is valued based on valuation techniques that feature one or more significant unobservable inputs (Level 3). The determination of the level of fair value hierarchy within which the fair value measurement of an asset or a liability is classified often requires judgment and may change over time as market conditions evolve. We consider the following factors in developing the fair value hierarchy:

• whether the asset or liability is transacted in an active market with a quoted market price;

• the level of bid-ask spreads;

• a lack of pricing transparency due to, among other things, complexity of the product and market liquidity;

• whether only a few transactions are observed over a significant period of time;

• whether the pricing quotations vary substantially among independent pricing services;

• whether inputs to the valuation techniques can be derived from or corroborated with market data; and

• whether significant adjustments are made to the observed pricing information or model output to determine the fair value.

Level 1 inputs are unadjusted quoted prices in active markets that the reporting entity has the ability to access for identical assets or liabilities. A financial instrument is classified as a Level 1 measurement if it is listed on an exchange or is an instrument actively traded in the over-the-counter ("OTC") market where transactions occur with sufficient frequency and volume. We regard financial instruments such as equity securities and derivative contracts listed on the primary exchanges of a country to be actively traded. Non-exchange-traded instruments classified as Level 1 assets include securities issued by the U.S. Treasury or by other foreign governments, to-be-announced ("TBA") securities and non-callable securities issued by U.S. government sponsored entities.

Level 2 inputs are those that are observable either directly or indirectly but do not qualify as Level 1 inputs. We classify mortgage pass-through securities, agency and certain non-agency mortgage collateralized obligations, certain derivative contracts, asset-backed securities, corporate debt, preferred securities and leveraged loans as Level 2 measurements. Where possible, at least two quotations from independent sources are obtained based on transactions involving comparable assets and liabilities to validate the fair value of these instruments. We have established a process to understand the methodologies and inputs used by the third party pricing services to ensure that pricing information met the fair value objective. Where significant differences arise among the independent pricing quotes and the internally determined fair value, we investigate and reconcile the differences. If the investigation results in a significant adjustment to the fair value, the instrument will be classified as Level 3 within the fair value hierarchy. In general, we have observed that there is a correlation between the credit standing and the market liquidity of a non-derivative instrument.

Level 2 derivative instruments are generally valued based on discounted future cash flows or an option pricing model adjusted for counterparty credit risk and market liquidity. The fair value of certain structured derivative products is determined using valuation techniques based on inputs derived from observable benchmark index tranches traded in the OTC market. Appropriate control processes and procedures have been applied to ensure that the derived inputs are applied to value only those instruments that share similar risks to the relevant benchmark indices and therefore demonstrate a similar response to market factors. In addition, a validation process has been established, which includes participation in peer group consensus pricing surveys, to ensure that valuation inputs incorporate market participants' risk expectations and risk premium.

Level 3 inputs are unobservable estimates that management expects market participants would use to determine the fair value of the asset or liability. That is, Level 3 inputs incorporate market participants' assumptions about risk and the risk premium required by market participants in order to bear that risk. We develop Level 3 inputs based on the best information available in the circumstances. As of September 30, 2013 and December 31, 2012, our Level 3 instruments included the following: collateralized debt obligations ("CDOs") for which there is a lack of pricing transparency due to market illiquidity, certain structured deposits as well as certain structured credit and structured equity derivatives where significant inputs (e.g., volatility or default correlations) are not observable, credit default swaps with certain monoline insurers where the deterioration in the creditworthiness of the counterparty has resulted in significant adjustments to fair value, U.S. subprime mortgage loans and subprime related asset-backed securities, mortgage servicing rights, and derivatives referenced to illiquid assets of less desirable credit quality. See Note 19, "Fair Value Measurements" in the accompanying consolidated financial statements for additional information on Level 3 inputs.

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

Transfers Between Level 1 and Level 2 Measurements During the nine months ended September 30, 2013 and 2012, there were no transfers between Level 1 and Level 2 measurements.

Level 3 Measurements The following table provides information about Level 3 assets/liabilities in relation to total assets/liabilities measured at fair value as of September 30, 2013 and December 31, 2012.

	September 30, 2013			December 31, 2012
	(dollars are in millions)
Level 3 assets⁽¹⁾⁽²⁾..........................................................................................................................................	$	3,324		$	4,701
Total assets measured at fair value⁽³⁾.........................................................................................................	148,180			185,040
Level 3 liabilities............................................................................................................................................	3,848			3,854
Total liabilities measured at fair value⁽¹⁾.....................................................................................................	96,470			111,607
Level 3 assets as a percent of total assets measured at fair value.........................................................	2.2		%	2.5		%
Level 3 liabilities as a percent of total liabilities measured at fair value................................................	4.0		%	3.5		%

⁽¹⁾Presented without netting which allows the offsetting of amounts relating to certain contracts if certain conditions are met.

⁽²⁾Includes $3.2 billion of recurring Level 3 assets and $132 million of non-recurring Level 3 assets at September 30, 2013. Includes $4.5 billion of recurring Level 3 assets and $222 million of non-recurring Level 3 assets at December 31, 2012.

⁽³⁾Includes $147.6 billion of assets measured on a recurring basis and $616 million of assets measured on a non-recurring basis at September 30, 2013. Includes $184.1 billion of assets measured on a recurring basis and $968 million of assets measured on a non-recurring basis at December 31, 2012.

Significant Changes in Fair Value for Level 3 Assets and Liabilities

Derivative Assets and Counterparty Credit Risk We have entered into credit default swaps with monoline insurers to hedge our credit exposure in certain asset-backed securities and synthetic CDOs. We made $42 million positive and $6 million positive credit risk adjustments to the fair value of our credit default swap contracts during the nine months ended September 30, 2013 and 2012, respectively, which is reflected in trading revenue. We have recorded a cumulative credit adjustment reserve of $76 million and $136 million against our monoline exposure at September 30, 2013 and December 31, 2012, respectively. The fair value of our monoline exposure net of cumulative credit adjustment reserves equaled $279 million and $534 million at September 30, 2013 and December 31, 2012, respectively. The decrease since December 31, 2012 reflects both reductions in our outstanding positions and improvements in exposure estimates.

Loans As of September 30, 2013 and December 31, 2012, we have classified $48 million and $52 million, respectively, of mortgage whole loans held for sale as a non-recurring Level 3 financial asset. These mortgage loans are accounted for on a lower of amortized cost or fair value basis. Based on our assessment, we recorded loss of $2 million and gain of $5 million during the three and nine months ended September 30, 2013, respectively, compared with a loss of $9 million and $12 million during the three and nine months ended September 30, 2012, respectively. The changes in fair value are recorded as other revenues in the consolidated statement of income (loss).

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 $370 million of credit derivatives from Level 3 to Level 2 as a result of a qualitative analysis of the foreign exchange and credit correlation attributes of our model used for certain credit default swaps. In addition, 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.

See Note 19, "Fair Value Measurements," in the accompanying consolidated financial statements for information on additions to and transfers into (out of) Level 3 measurements during the three and nine months ended September 30, 2013 and 2012 as well as for further details including the classification hierarchy associated with assets and liabilities measured at fair value.

Assets Underlying Asset-backed Securities The following tables summarize the types of assets underlying our asset-backed securities as well as certain collateralized debt obligations held as of September 30, 2013:

Asset-backed securities:

				Commercial Mortgages				Alt-A				Subprime
Year of Issuance:		Total		Prior to 2006		2006 to Present		Prior to 2006		2006 to Present		Prior to 2006		2006 to Present
		(in millions)
Rating of securities:⁽¹⁾	Collateral type:
AAA	Commercial mortgages............................	$	135	$	51	$	84	$	-	$	-	$	-	$	-
	Residential mortgages..............................	$	94	-		-		90		-		4		-
	Total AAA..............................................	229		51		84		90		-		4		-
AA	Residential mortgages..............................	2		-		-		2		-		-		-
	Total AA................................................	2		-		-		2		-		-		-
A	Residential mortgages..............................	76		-		-		12		-		64		-
	Home equity loans...................................	100		-		-		-		100		-		-
	Total A...................................................	176		-		-		12		100		64		-
BBB	Residential mortgages..............................	9		-		-		9		-		-		-
	Other......................................................	103		-		-		103		-		-		-
	Total BBB...............................................	112		-		-		112		-		-		-
CCC	Home equity loans...................................	130		-		-		-		130		-		-
	Residential mortgages..............................	4		-		-		-		-		-		4
	Total CCC...............................................	134		-		-		-		130		-		4
Unrated	Residential mortgages..............................	1		-		-		1		-		-		-
		$	654	$	51	$	84	$	217	$	230	$	68	$	4

Collateralized debt obligations and student loan asset-backed securities:

		Total		A or Higher		BBB
		(in millions)
Rating of securities:⁽¹⁾	Collateral type:
	Collateralized debt obligations..................................	245		-		245
	Student Loans..............................................................	74		74		-
		$	319	$	74	$	245
	Total asset-backed securities....................................	$	974

⁽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.

Effect of Changes in Significant Unobservable Inputs The fair value of certain financial instruments is measured using valuation techniques that incorporate pricing assumptions not supported by, derived from or corroborated by observable market data. The resultant fair value measurements are dependent on unobservable input parameters which can be selected from a range of estimates and may be interdependent. Changes in one or more of the significant unobservable input parameters may change the fair value measurements of these financial instruments. For the purpose of preparing the financial statements, the final valuation inputs selected are based on management's best judgment that reflect the assumptions market participants would use in pricing similar assets or liabilities.

The unobservable input parameters selected are subject to the internal valuation control processes and procedures. When we perform a test of all the significant input parameters to the extreme values within the range at the same time, it could result in an increase of the overall fair value measurement of approximately $44 million or a decrease of the overall fair value measurement of approximately $54 million as of September 30, 2013. The effect of changes in significant unobservable input parameters are primarily driven by mortgage servicing rights, certain asset-backed securities including CDOs, and the uncertainty in determining the fair value of credit derivatives executed against monoline insurers.

Risk Management

Overview Some degree of risk is inherent in virtually all of our activities. Accordingly, we have comprehensive risk management policies and practices in place to address potential risks, which include the following:

• Credit risk is the potential that a borrower or counterparty will default on a credit obligation, as well as the impact on the value of credit instruments due to changes in the probability of borrower default; Credit risk includes risk associated with cross-border exposures.

• Liquidity risk is the potential that an institution will be unable to meet its obligations as they become due or fund its customers because of inadequate cash flow or the inability to liquidate assets or obtain funding itself;

• Interest rate risk is the potential impairment of net interest income due to mismatched pricing between assets and liabilities as well as losses in value due to rate movements;

• Market risk is the risk that movements in market risk factors, including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices, will reduce HSBC USA's income or the value of its portfolios;

• Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events (including legal risk but excluding strategic and reputational risk);

• Compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations, regulatory requirements and standards of good market practice, and incur fines and penalties and suffer damage to our business as a consequence;

• Fiduciary risk is the risk of breaching fiduciary duties where we act in a fiduciary capacity as trustee, investment manager or as mandated by law or regulation.

• Reputational risk is the risk arising from a failure to safeguard our reputation by maintaining the highest standards of conduct at all times and by being aware of issues, activities and associations that might pose a threat to the reputation of HSBC locally, regionally or internationally;

• Strategic risk is the risk that the business will fail to identify, execute, and react appropriately to opportunities and/or threats arising from changes in the market, some of which may emerge over a number of years such as changing economic and political circumstances, customer requirements, demographic trends, regulatory developments or competitor action;

• Security and Fraud risk is the risk to the business from terrorism, crime, incidents/disasters, and groups hostile to HSBC interests;

• Model risk is the risk of incorrect implementation or inappropriate application of models. Model risk occurs when a model does not properly capture risk(s) or perform functions as designed; and

• Pension risk is the risk that the cash flows associated with pension assets will not be enough to cover the pension benefit obligations required to be paid.

See "Risk Management" in MD&A in our 2012 Form 10-K for a more complete discussion of the objectives of our risk management system as well as our risk management policies and practices. Our risk management process involves the use of various simulation models. We believe that the assumptions used in these models are reasonable, but actual events may unfold differently than what is assumed in the models. Consequently, model results may be considered reasonable estimates, with the understanding that actual results may vary significantly from model projections.

Credit Risk Management Credit risk is the potential that a borrower or counterparty will default on a credit obligation, as well as the impact on the value of credit instruments due to changes in the probability of borrower default. Credit risk includes risk associated with cross-border exposures. There have been no material changes to our approach towards operational risk since December 31, 2012. See "Risk Management" in MD&A in our 2012 Form 10-K for a more complete discussion of our approach to credit risk.

Credit risk is inherent in various on- and off-balance sheet instruments and arrangements, such as:

• loan portfolios;

• investment portfolios;

• unfunded commitments such as letters of credit and lines of credit that customers can draw upon; and

• treasury instruments, such as interest rate swaps which, if more valuable today than when originally contracted, may represent an exposure to the counterparty to the contract.

While credit risk exists widely in our operations, diversification among various commercial and consumer portfolios helps to lessen risk exposure. Day-to-day management of credit and market risk is performed by the Chief Credit Officer / Head of Wholesale Credit and Market Risk North America and the HSBC North America Chief Retail Credit Officer, who report directly to the HSBC North America Chief Risk Officer and maintain independent risk functions. The credit risk associated with commercial portfolios is managed by the Chief Credit Officer, while credit risk associated with retail consumer loan portfolios, such as credit cards, installment loans and residential mortgages, is managed by the HSBC North America Chief Retail Credit Officer. Further discussion of credit risk can be found under the "Credit Quality" caption in this MD&A.

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

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

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

• current market events or trends;

• country risk;

• maturity and liquidity of contracts;

• credit worthiness of the counterparties in the transaction;

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

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

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

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

	September 30, 2013		December 31, 2012
	(in millions)
Risk associated with derivative contracts:
Total credit risk exposure..............................................................................................................................	$	38,975	$	41,248
Less: collateral held against exposure........................................................................................................	4,921		7,530
Net credit risk exposure.................................................................................................................................	$	34,054	$	33,718

Liquidity Risk Management There have been no material changes to our approach towards liquidity risk management since December 31, 2012. See "Risk Management" in MD&A in our 2012 Form 10-K for a more complete discussion of our approach to liquidity risk. Although our overall approach to liquidity management has not changed, we continue to enhance our implementation of that approach to reflect best practices. The past few years have suggested that in a market crisis, traditional sources of crisis liquidity such as secured lending and deposits with other banks may not be available. Similarly, the current regulatory initiatives are suggesting banks need to retain a portfolio of extremely high quality liquid assets. Consistent with these items, we are expanding our portfolio of high quality sovereign and sovereign guaranteed securities.

We continuously monitor the impact of market events on our liquidity positions. In general terms, the strains due to the recent credit crisis have been concentrated in the wholesale market as opposed to the retail market (the latter being the market from which we source core demand and time deposit accounts). Financial institutions with less reliance on the wholesale markets were in many respects less affected by those conditions. Our limited dependence upon the wholesale markets for funding has been a significant competitive advantage through the most recent period of financial market turmoil.

Our liquidity management approach includes increased deposits and potential sales (e.g. residential mortgage loans) in liquidity contingency plans. As previously discussed, HSBC Finance completed the wind-down of its commercial paper program in 2012 and now relies on its affiliates, including HSBC USA to satisfy its funding needs outside of cash generated from its loan sales and operations.

Our ability to regularly attract wholesale funds at a competitive cost is enhanced by strong ratings from the major credit ratings agencies. The following table reflects the long and short-term debt ratings we and HSBC Bank USA maintained at September 30, 2013:

	Moody's	S&P	Fitch	DBRS⁽¹⁾
HSBC USA Inc.:
Short-term borrowings................................................................	P-1	A-1	F1+	R-1 (middle)
Long-term/senior debt................................................................	A2	A+	AA-	AA (low)
HSBC Bank USA:
Short-term borrowings................................................................	P-1	A-1+	F1+	R-1 (middle)
Long-term/senior debt................................................................	A1	AA-	AA-	AA (low)

(1) Dominion Bond Rating Service.

On February 8, 2013, DBRS downgraded the HSBC USA and HSBC Bank USA senior debt ratings to AA (low) from AA, and corresponding short-term instrument rating to R-1 (middle) from R-1 (high), and removed these ratings from "rating under review with negative implications". DBRS cited concerns with recent regulatory and compliance remediation costs, which despite HSBC's ongoing reforms and organizational changes still represent a significant challenge to implement in such a large, complex banking organization.

As of September 30, 2013, there were no pending actions in terms of changes to ratings on the debt of HSBC USA or HSBC Bank USA from any of the rating agencies.

In January 2013, the Bank for International Settlements, Basel Committee on Banking Supervision (the "Basel Committee"), issued revised Basel III liquidity rules and HSBC North America is in the process of evaluating the Basel III framework for liquidity risk management. The framework consists of two liquidity metrics: the liquidity coverage ratio ("LCR"), designed to be a short-term measure to ensure banks have sufficient high-quality liquid assets to survive a significant stress scenario lasting 30 days and the net stable funding ratio ("NSFR"), which is a longer term measure with a 12-month time horizon to ensure a sustainable maturity structure of assets and liabilities.

In October 2013, the Federal Reserve Board, the OCC and the FDIC issued for public comment a rule to introduce a quantitative liquidity requirement in the United States, applicable to certain large banking institutions, including HSBC North America. The LCR proposed by the Federal Reserve Board is generally consistent with the Basel Committee guidelines, but is more stringent in several areas including the range of assets that will qualify as high-quality liquid assets and the assumed rate of outflows of certain kinds of funding. Under the proposal, U.S. institutions would begin the LCR transition period on January 1, 2015 and would be required to be fully compliant by January 1, 2017, as opposed to the Basel Committee's requirement to be fully compliant by January 1, 2019. The Federal Reserve Board's Proposed rule does not address the NSFR requirement, which is currently in an international observation period. Based on the results of the observation period, the Basel Committee and U.S. Banking regulators may make further changes and the U.S. regulators are expected to issue a proposed rulemaking implementing the NSFR in advance of its scheduled global implementation in 2018.

It is anticipated that HSBC North America and HSBC Bank USA will meet these requirements prior to their formal introduction. The actual impact will be dependent on the specific regulations issued by the U.S. regulators to implement these standards. HSBC USA and HSBC Bank USA may need to change their liquidity profile to support our compliance with the new rules. We are unable at this time, however, to determine the extent of changes we will need to make to our liquidity position, if any.

Interest Rate Risk Management Various techniques are utilized to quantify and monitor risks associated with the repricing characteristics of our assets, liabilities and derivative contracts. Our approach to managing interest rate risk is summarized in MD&A in our 2012 Form 10-K under the caption "Risk Management". There have been no material changes to our approach towards interest rate risk management since December 31, 2012.

Present value of a basis point is the change in value of the balance sheet for a one basis point upward movement in all interest rates. The following table reflects the PVBP position at September 30, 2013 and December 31, 2012.

	September 30, 2013		December 31, 2012
	(in millions)
Institutional PVBP movement limit....................................................................................................	$	8.0	$	8.0
PVBP position at period end..............................................................................................................	4.6		1.7

Dynamic simulation modeling techniques are utilized to monitor a number of interest rate scenarios for their impact on net interest income. These techniques include both rate shock scenarios, which assume immediate market rate movements by as much as 200 basis points, as well as scenarios in which rates rise or fall by as much as 200 basis points over a twelve month period. The following table reflects the impact on net interest income of the scenarios utilized by these modeling techniques.

	September 30, 2013					December 31, 2012
	Amount			%		Amount			%
	(dollars are in millions)
Projected change in net interest income (reflects projected rate movements on January 1):
Change resulting from a gradual 100 basis point increase in the yield curve.....	$	63		3		$	107		5
Change resulting from a gradual 100 basis point decrease in the yield curve....	(106		)	(5	)	(155		)	(8	)
Change resulting from a gradual 200 basis point increase in the yield curve.....	92			4		128			6
Change resulting from a gradual 200 basis point decrease in the yield curve....	(182		)	(9	)	(210		)	(10	)
Other significant scenarios monitored (reflects projected rate movements on January 1):
Change resulting from an immediate 100 basis point increase in the yield curve..............................................................................................................................	100			5		182			9
Change resulting from an immediate 100 basis point decrease in the yield curve..............................................................................................................................	(168		)	(8	)	(200		)	(10	)
Change resulting from an immediate 200 basis point increase in the yield curve..............................................................................................................................	174			8		158			8
Change resulting from an immediate 200 basis point decrease in the yield curve..............................................................................................................................	(299		)	(14	)	(234		)	(12	)

The projections do not take into consideration possible complicating factors such as the effect of changes in interest rates on the credit quality, size and composition of the balance sheet. Therefore, although this provides a reasonable estimate of interest rate sensitivity, actual results will vary from these estimates, possibly by significant amounts.

Capital Risk/Sensitivity of Other Comprehensive Income Large movements of interest rates could directly affect some reported capital balances and ratios. The mark-to-market valuation of available-for-sale securities is credited on a tax effective basis to accumulated other comprehensive income. Although this valuation mark is currently excluded from Tier 1 and Tier 2 capital ratios, it is included in two important accounting based capital ratios: the tangible common equity to tangible assets and the tangible common equity to risk weighted assets. Under the final rule adopting the Basel III regulatory capital reforms, the valuation mark will no longer be excluded from Tier 1 and Tier 1 capital ratios and the impact of this change for HSBC USA will be assessed along with the other Basel III changes being introduced. As of September 30, 2013, we had an available-for-sale securities portfolio of approximately $48.1 billion with a positive mark-to-market of $347 million included in tangible common equity of $13.5 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $268 million to a net gain of $79 million with the following results on our tangible capital ratios. As of December 31, 2012, we had an available-for-sale securities portfolio of approximately $67.7 billion with a positive mark-to-market of $1.7 billion included in tangible common equity of $13.2 billion. An increase of 25 basis points in interest rates of all maturities would lower the mark-to-market by approximately $238 million to a net gain of $1.4 billion with the following results on our tangible capital ratios.

	September 30, 2013				December 31, 2012
	Actual		Proforma⁽¹⁾		Actual		Proforma⁽¹⁾
Tangible common equity to tangible assets..................................................	7.29	%	7.22	%	6.79	%	6.72	%
Tangible common equity to risk weighted assets.........................................	10.75		10.62		12.39		12.26

⁽¹⁾Proforma percentages reflect a 25 basis point increase in interest rates.

Market Risk Management We have incorporated the qualitative and quantitative requirements of Basel 2.5, including stressed VAR, Incremental Risk Charge and Comprehensive Risk Measure into our process and received regulatory approval to initiate these enhancements effective January 1, 2013. See "Risk Management" in MD&A in our 2012 Form 10-K for a more complete discussion of our approach to market risk. There have been no material changes to our approach towards market risk management since December 31, 2012.

Value at Risk VAR analysis is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. VAR calculations are performed for all material trading activities and as a tool for managing risk inherent in non-trading activities. VAR is calculated daily for a one-day holding period to a 99 percent confidence level.

Trading Activities Our management of market risk is based on a policy of restricting individual operations to trading within an authorized list of permissible instruments, enforcing new product approval procedures and restricting trading in the more complex derivative products to offices with appropriate levels of product expertise and robust control systems. Market making trading is undertaken within Global Banking and Markets.

In addition, at both portfolio and position levels, market risk in trading portfolios is monitored and managed using a complementary set of techniques, including VAR and a variety of interest rate risk monitoring techniques as discussed above. These techniques quantify the impact on capital of defined market movements.

Trading portfolios reside primarily within the Markets unit of the Global Banking and Markets business segment, which include warehoused residential mortgage loans purchased with the intent of selling them, and within the mortgage banking subsidiary included within the RBWM business segment. Portfolios include foreign exchange, interest rate swaps and credit derivatives, precious metals (i.e. gold, silver, platinum), equities and money market instruments including "repos" and securities. Trading occurs as a result of customer facilitation, proprietary position taking and economic hedging. In this context, economic hedging may include forward contracts to sell residential mortgages and derivative contracts which, while economically viable, may not satisfy the hedge accounting requirements.

The trading portfolios have defined limits pertaining to items such as permissible investments, risk exposures, loss review, balance sheet size and product concentrations. "Loss review" refers to the maximum amount of loss that may be incurred before senior management intervention is required.

The following table summarizes trading VAR for the nine months ended September 30, 2013:

	September 30, 2013		Nine Months Ended September 30, 2013						December 31, 2012
	September 30, 2013		Minimum		Maximum		Average		December 31, 2012
	(in millions)
Total trading.....................................................................	$	8	$	6	$	19	$	9	$	8
Foreign exchange............................................................	5		4		12		7		5
Interest rate directional and credit spread...................	8		8		10		9		6

The following table summarizes the frequency distribution of daily market risk-related revenues for trading activities during the nine months ended September 30, 2013. Market risk-related trading revenues include realized and unrealized gains (losses) related to trading activities, but exclude the related net interest income. Analysis of the gain (loss) data for the nine months ended September 30, 2013 shows that the largest daily gain was $8 million and the largest daily loss was $14 million.

Ranges of daily trading revenue earned from market risk-related activities

Below

$(5)

to $0

to $5

to $10

Over

$10

(dollars are in millions)

Number of trading days market risk-related revenue was within the stated range.................................................................................

VAR - Non-trading Activities Interest rate risk in non-trading portfolios arises principally from mismatches between the future yield on assets and their funding cost as a result of interest rate changes. Analysis of this risk is complicated by having to make assumptions on embedded optionality within certain product areas such as the incidence of mortgage repayments, and from behavioral assumptions regarding the economic duration of liabilities which are contractually repayable on demand such as current accounts. The prospective change in future net interest income from non-trading portfolios will be reflected in the current realizable value of these positions if they were to be sold or closed prior to maturity. In order to manage this risk optimally, market risk in non-trading portfolios is transferred to Global Markets or to separate books managed under the supervision of the local ALCO. Once market risk has been consolidated in Global Markets or ALCO-managed books, the net exposure is typically managed through the use of interest rate swaps within agreed upon limits.

Non-trading VAR also includes the impact of asset market volatility on the current investment portfolio of financial investments including assets held on an available for sale (AFS) and held to maturity (HTM) basis. The main holdings of AFS securities are held by Balance Sheet Management within GB&M. These positions which are originated in order to manage structural interest rate and liquidity risk are treated as non-trading risk for the purpose of market risk management. The main holdings of AFS assets include U.S. Treasuries and Government backed GNMA securities.

The following table summarizes non-trading VAR for the nine months ended September 30, 2013, assuming a 99 percent confidence level for a two-year observation period and a one-day "holding period."

	September 30, 2013		Nine Months Ended September 30, 2013						December 31, 2012
	September 30, 2013		Minimum		Maximum		Average		December 31, 2012
	(in millions)
Total Accrual VAR..........................................................	$	98	$	78	$	145	$	100	$	92

Trading Activities MSRs - Trading occurs in mortgage banking operations as a result of an economic hedging program intended to offset changes in the value of mortgage servicing rights. Economic hedging may include, for example, forward contracts to sell residential mortgages and derivative instruments used to protect the value of MSRs.

MSRs are assets that represent the present value of net servicing income (servicing fees, ancillary income, escrow and deposit float, net of servicing costs). MSRs are separately recognized upon the sale of the underlying loans or at the time that servicing rights are purchased. MSRs are subject to interest rate risk, in that their value will decline as a result of actual and expected acceleration of prepayment of the underlying loans in a falling interest rate environment.

Interest rate risk is mitigated through an active hedging program that uses trading securities and derivative instruments to offset changes in value of MSRs. Since the hedging program involves trading activity, risk is quantified and managed using a number of risk assessment techniques.

The following table reflects the modeling techniques, primarily rate shock analyses, used to monitor certain interest rate scenarios for their impact on the economic value of net hedged MSRs.

	September 30, 2013			December 31, 2012
	(in millions)
Projected change in net market value of hedged MSRs portfolio (reflects projected rate movements on April 1 and January 1):
Value of hedged MSRs portfolio.............................................................................................................	$	224		$	168
Change resulting from an immediate 50 basis point decrease in the yield curve:
Change limit (no worse than)..............................................................................................................	(20		)	(20		)
Calculated change in net market value..............................................................................................	(1		)	4
Change resulting from an immediate 50 basis point increase in the yield curve:
Change limit (no worse than)..............................................................................................................	(8		)	(8		)
Calculated change in net market value..............................................................................................	(1		)	8
Change resulting from an immediate 100 basis point increase in the yield curve:
Change limit (no worse than)..............................................................................................................	(12		)	(12		)
Calculated change in net market value..............................................................................................	(2		)	28

The economic value of the net hedged MSRs portfolio is monitored on a daily basis for interest rate sensitivity. If the economic value declines by more than established limits for one day or one month, various levels of management review, intervention and/or corrective actions are required.

The following table summarized the frequency distribution of the weekly economic value of the MSR asset during the nine months ended September 30, 2013. This includes the change in the market value of the MSR asset net of changes in the market value of the underlying hedging positions used to hedge the asset. The changes in economic value are adjusted for changes in MSR valuation assumptions that were made during the course of the year.

Ranges of mortgage economic value from market risk-related activities

Below

$(2)

to $0

to $2

to $4

Over

(dollars are in millions)

Number of trading weeks market risk-related revenue was within the stated range.................................................................................

Operational Risk There have been no material changes to our approach toward operational risk since December 31, 2012.

Compliance Risk There have been no material changes to our approach toward compliance risk since December 31, 2012.

Fiduciary Risk There have been no material changes to our approach toward fiduciary risk since December 31, 2012.

Reputational Risk There have been no material changes to our approach toward reputational risk since December 31, 2012.

Strategic Risk There have been no material changes to our approach toward strategic risk since December 31, 2012.

Security and Fraud Risk There have been no material changes to our approach toward security and fraud risk since December 31, 2012.

Model Risk There have been no material changes to our approach toward model risk since December 31, 2012.

Pension Risk There have been no material changes to our approach toward pension risk since December 31, 2012.

CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES

The following tables summarize the quarter-to-date and year-to-date average daily balances of the principal components of assets, liabilities and shareholders' equity together with their respective interest amounts and rates earned or paid, presented on a taxable equivalent basis. Net interest margin is calculated by dividing annualized net interest income by the average interest earning assets from which interest income is earned. The calculation of net interest margin includes interest expense of $50 million for the nine months ended September 30, 2012, respectively, which has been allocated to our discontinued operations. This allocation of interest expense to our discontinued operations was in accordance with our existing internal transfer pricing policies as external interest expense is unaffected by these transactions.

Three Months Ended September 30,	2013							2012
	Average Balance			Interest		Rate⁽¹⁾		Average Balance			Interest		Rate⁽¹⁾
	(dollars are in millions)
Assets
Interest bearing deposits with banks....................................	$	24,182		$	16	.26	%	$	18,768		$	13	.29	%
Federal funds sold and securities purchased under resale agreements................................................................................	2,007			3		.61		9,758			10		.40
Trading assets..........................................................................	9,734			34		1.39		11,901			27		.91
Securities...................................................................................	52,064			213		1.62		63,536			257		1.61
Loans:
Commercial............................................................................	46,152			275		2.36		40,414			270		2.65
Consumer:
Residential mortgages....................................................	15,990			138		3.41		15,578			151		3.86
HELOCs and home equity mortgages..........................	2,127			17		3.20		2,468			20		3.30
Credit cards......................................................................	861			17		7.96		866			22		9.98
Other consumer...............................................................	625			7		4.73		703			9		5.22
Total consumer.....................................................................	19,603			179		3.63		19,615			202		4.10
Total loans.............................................................................	65,755			454		2.74		60,029			472		3.13
Other...........................................................................................	3,197			10		1.18		3,102			11		1.24
Total earning assets.................................................................	156,939			$	730	1.84	%	167,094			$	790	1.88	%
Allowance for credit losses....................................................	(614		)					(625		)
Cash and due from banks........................................................	1,062							1,455
Other assets..............................................................................	20,278							23,498
Assets of discontinued operations.......................................	-							339
Total assets...............................................................................	$	177,665						$	191,761

Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits..................................................................	$	42,577		$	16	.14	%	$	47,186		$	35	.29	%
Other time deposits..............................................................	19,722			30		.60		15,479			40		1.06
Deposits in foreign offices:
Foreign banks deposits.......................................................	7,391			1		.06		7,962			2		.08
Other interest bearing deposits..........................................	5,850			1		.09		14,670			4		.10
Deposits held for sale..............................................................	-			-		-		637			1		.61
Total interest bearing deposits..............................................	75,540			48		.25		85,934			82		.38
Short-term borrowings.............................................................	19,506			11		.22		13,797			9		.27
Long-term debt.........................................................................	21,183			159		2.97		20,322			170		3.35
Total interest bearing deposits and debt..............................	116,229			218				120,053			261
Tax liabilities..............................................................................	498			15		12.05		497			14		10.49
Total interest bearing liabilities..............................................	116,727			233		.79		120,550			275		.91
Net interest income/Interest rate spread				$	497	1.05	%				$	515	.97	%
Noninterest bearing deposits.................................................	30,646							33,995
Other liabilities..........................................................................	12,976							18,011
Liabilities of discontinued operations...................................	-							974
Total shareholders' equity......................................................	17,316							18,231
Total liabilities and shareholders' equity..........................	$	177,665						$	191,761
Net interest margin on average earning assets....................						1.26	%						1.22	%
Net interest income to average total assets.........................						1.11	%						1.07	%

Nine Months Ended September 30,	2013							2012
	Average Balance			Interest		Rate⁽¹⁾		Average Balance			Interest		Rate⁽¹⁾
	(dollars are in millions)
Assets
Interest bearing deposits with banks....................................	$	21,603		$	42	.26	%	$	22,244		$	47	.28	%
Federal funds sold and securities purchased under resale agreements.............................................................................	1,927			7		.49		7,794			35		.60
Trading assets...........................................................................	10,567			85		1.07		12,025			86		.96
Securities....................................................................................	57,396			676		1.58		59,406			851		1.92
Loans:
Commercial.............................................................................	44,974			843		2.51		37,834			767		2.71
Consumer:
Residential mortgages....................................................	15,927			424		3.55		15,454			449		3.88
HELOCs and home equity mortgages..........................	2,200			53		3.26		2,953			75		3.39
Credit cards......................................................................	816			52		8.53		1,037			64		8.08
Other consumer...............................................................	641			24		4.95		821			36		5.90
Total consumer.....................................................................	19,584			553		3.78		20,265			624		4.11
Total loans.............................................................................	64,558			1,396		2.89		58,099			1,391		3.20
Other...........................................................................................	3,089			31		1.34		3,553			32		1.22
Total earning assets.................................................................	159,140			$	2,237	1.88	%	163,121			$	2,442	2.00	%
Allowance for credit losses.....................................................	(607		)					(652		)
Cash and due from banks........................................................	1,107							1,548
Other assets...............................................................................	22,410							25,232
Assets of discontinued operations.......................................	-							9,101
Total assets...............................................................................	$	182,050						$	198,350
Liabilities and Shareholders' Equity
Deposits in domestic offices:
Savings deposits..................................................................	$	43,690		$	52	.16	%	$	53,413		$	147	.37	%
Other time deposits..............................................................	20,235			85		.57		15,157			104		.92
Deposits in foreign offices:
Foreign banks deposits.......................................................	7,420			4		.07		8,519			5		.08
Other interest bearing deposits..........................................	6,452			5		.09		14,763			12		.11
Deposits held for sale..............................................................	-			1		-		8,463			16		.25
Total interest bearing deposits...............................................	77,797			147		.25		100,315			284		.38
Short-term borrowings.............................................................	17,475			28		.22		14,784			24		.22
Long-term debt..........................................................................	21,748			492		3.02		19,393			511		3.52
Total interest bearing deposits and debt..............................	117,020			667				134,492			819
Tax liabilities..............................................................................	496			40		10.87		459			27		7.77
Total interest bearing liabilities..............................................	117,516			707		.80		134,951			846		.84
Net interest income/Interest rate spread				$	1,530	1.08	%				$	1,596	1.16	%
Noninterest bearing deposits.................................................	30,870							26,624
Other liabilities..........................................................................	16,026							17,236
Liabilities of discontinued operations...................................	-							971
Total shareholders' equity......................................................	17,638							18,568
Total liabilities and shareholders' equity..........................	$	182,050						$	198,350
Net interest margin on average earning assets....................						1.29	%						1.31	%
Net interest income to average total assets..........................						1.12	%						1.07	%

⁽¹⁾Rates are calculated on amounts that have not been rounded to the nearest million.

The total weighted average rate earned on earning assets is interest and fee earnings divided by daily average amounts of total interest earning assets, including the daily average amount on nonperforming loans. Loan interest for the three and nine months ended September 30, 2013 included fees of $37 million and $80 million, respectively compared with fees of $21 million and $54 million during the three and nine months ended September 30, 2012, respectively.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information required by this Item is included within Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Risk Management section under the captions "Interest Rate Risk Management" and "Market Risk Management" of this Form 10-Q.

Item 4. Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

See "Litigation and Regulatory Matters" in Note 20, "Litigation and Regulatory Matters," in the accompanying consolidated financial statements beginning on page 84 for our legal proceedings disclosure, which is incorporated herein by reference.

Item 5. Other Information.

Disclosures Pursuant to Section 13(R) of the Securities Exchange Act Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added a new subsection (r) to section 13 of the Securities Exchange Act, requiring each issuer registered with the SEC to disclose in its annual or quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions with persons or entities targeted by U.S. sanctions programs relating to Iran, terrorism, or the proliferation of weapons of mass destruction, even if those activities are not prohibited by U.S. law and are conducted outside the U.S. by non-U.S. affiliates in compliance with local laws and regulations.

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

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

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

Bank Melli and Bank Saderat acted as sub-participants in three of the aforementioned loans. In the third quarter of 2013, the repayments due to these banks under the loan agreements were paid into frozen accounts under licenses or authorizations from relevant European governments.

In 2002, HSBC provided a loan to Bank Tejarat with a guarantee from the Government of Iran to fund the construction of a petrochemical plant undertaken by a U.K. contractor. This loan was supported by the U.K. Export Credit Agency and is administered under license from the relevant European Government. No repayments were made under this loan in the third quarter of 2013.

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

Estimated gross revenue to HSBC generated by these loans in repayment for the third quarter of 2013, which includes interest and fees, was approximately $415,000. Estimated net profit for HSBC during the third quarter of 2013 was approximately $269,000. While HSBC intends to continue to seek repayment, it does not intend to extend any new loans.

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

HSBC has worked with relevant regulatory authorities to obtain licenses where required and ensure compliance with laws and regulations while seeking to cancel the guarantees and counter indemnities. One was canceled during the third quarter of 2013.

There was no measurable gross revenue or net profit generated by this activity in the third quarter of 2013. HSBC is seeking to cancel all relevant guarantees and does not intend to provide any new guarantees involving Iran.

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

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

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

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

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

Estimated gross revenue to HSBC for the third quarter of 2013 for all Iranian bank-related activity described in this section, which includes fees and/or commissions, was $41,880. HSBC does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure. HSBC intends to continue to wind down this Iranian bank-related activity and not enter into any new such activity.

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

HSBC previously reported that it was closing the U.K. account of an individual sanctioned under Executive Order 13224. That individual had been sanctioned by the U.K. and U.N. Security Council, but was delisted in 2012. The account was closed during the second quarter, and the account balance was returned to the individual. There was no measurable gross revenue or net profit generated to HSBC in the second or third quarters of 2013.

HSBC holds a frozen account for an individual who was designed under Executive Order 13224 during the second quarter. Subsequent to designation and prior to the freezing of the account in the second quarter, there were several transactions. Estimated gross revenue in the second quarter of 2013 was approximately $250. There has been no activity in the third quarter and no measurable gross revenue or net profit generated.

2013 Activity related to U.S. Executive Order 13382 HSBC held an account for a customer in the United Arab Emirates that was sanctioned under Executive Order 13382 in the second quarter of 2013. The account was closed in the third quarter of 2013, and the funds were moved into unclaimed balances. There was no measurable gross revenue or net profits generated to HSBC in the third quarter of 2013.

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

Item 6. Exhibits.

Exhibits included in this Report:

12	Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.

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

32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.⁽¹⁾

101.INS	XBRL Instance Document⁽²⁾

101.SCH	XBRL Taxonomy Extension Schema Document⁽²⁾

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document⁽²⁾

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document⁽²⁾

101.LAB	XBRL Taxonomy Extension Label Linkbase Document⁽²⁾

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document⁽²⁾

^1.This exhibit shall be not be deemed "filed" for purposes of Section 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

^2.Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in HSBC USA Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in eXentsible Business Reporting Language ("XBRL") interactive data files: (i) the Consolidated Statement of Income for the three and nine months ended September 30, 2013 and 2012, (ii) the Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012, (iii) the Consolidated Balance Sheet as of September 30, 2013 and December 31. 2012, (iv) the Consolidated Statement of Changes in Shareholders' Equity for the nine months ended September 30, 2013 and 2012, (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2013 and 2012, and (vi) the Notes to Consolidated Financial Statements.

Index

Assets:	Equity securities available-for-sale
by business segment	Estimates and assumptions
consolidated average balances	Eurozone exposures
fair value measurements	Executive overview
nonperforming	Fair value measurements:
trading	assets and liabilities recorded at fair value on a recurring basis
Asset-backed commercial paper conduits	assets and liabilities recorded at fair value on a non-recurring basis
Asset-backed securities	control over valuation process
Balance sheet:	financial instruments
consolidated	hierarchy
consolidated average balances	transfers into/out of level one and two
review	transfers into/out of level two and three
Basel 2.5	valuation techniques
Basel III	Fiduciary risk
Basis of reporting	Financial assets:
Business:	designated at fair value
consolidated performance review	reclassification under IFRSs
Capital:	Financial highlights metrics
2013 funding strategy	Financial liabilities:
common equity movements	designated at fair value
consolidated statement of changes	fair value of financial liabilities
regulatory capital	Forward looking statements
selected capital ratios	Funding
Cash flow (consolidated)	Gain on instruments designated at fair value and related derivatives
Cautionary statement regarding forward-looking statements	Gains (losses) from securities
Collateral - pledged assets	Global Banking and Markets
Collateralized debt obligations	Geographic concentration of receivables
Commercial banking segment results (IFRSs)	Goodwill
Compliance risk	Guarantee arrangements
Controls and procedures	Impairment:
Credit card fees	available-for-sale securities
Credit quality	credit losses
Credit risk:	nonperforming loans
adjustment	impaired loans
component of fair value option	Income (loss) from financial instruments designated at fair value, net
concentration	Income tax expenses
exposure	Intangible assets
management	Interest rate risk
related contingent features	Internal control
related arrangements	Key performance indicators
Current environment	Legal proceedings
Deferred tax assets	Leveraged finance transactions
Deposits	Liabilities:
Derivatives:	commitments, lines of credit
cash flow hedges	deposits
fair value hedges	financial liabilities designated at fair value
notional value	trading
trading and other	long-term debt
Discontinued operations	short-term borrowings
Equity:	Reconciliation of U.S. GAAP results to IFRSs
consolidated statement of changes	Refreshed loan-to-value
ratios
Liquidity and capital resources
Liquidity risk
Litigation and regulatory matters	Regulation
Loans:	Related party transactions
by category	Reputational risk
by charge-off (net)	Results of operations
by delinquency	Retail banking and wealth management segment results (IFRSs)
criticized assets	Risk elements in the loan portfolio
geographic concentration	Risk management:
held for sale	credit
impaired	compliance
nonperforming	fiduciary
overall review	interest rate
purchases from HSBC Finance	liquidity
risk concentration	market
troubled debt restructures	operational
Loan impairment charges	reputational
Loan-to-deposits ratio	strategic
Market risk	Securities:
Market turmoil:	fair value
exposures	impairment
impact on liquidity risk	maturity analysis
Monoline insurers	Segment results - IFRSs basis:
Mortgage lending products	retail banking and wealth management
Mortgage servicing rights	commercial banking
Net interest income	global banking and markets
New accounting pronouncements	private banking
Off balance sheet arrangements	other
Operating expenses	overall summary
Operational risk	Selected financial data
Other revenue	Sensitivity:
Other segment results (IFRSs)	projected net interest income
Pension and other postretirement benefits	Statement of changes in shareholders' equity
Performance, developments and trends	Statement of changes in comprehensive income (loss)
Pledged assets	Statement of income (loss)
Private banking segment results (IFRSs)	Strategic risk
Profit (loss) before tax:	Stress testing
by segment - IFRSs	Table of contents
consolidated	Tax expense
Provision for credit losses	Trading:
Ratios:	assets
capital	derivatives
charge-off (net)	liabilities
credit loss reserve related	portfolios
delinquency	Trading revenue (net)
earnings to fixed charges	Troubled debt restructures
efficiency	Value at risk
	Variable interest entities

Signatures

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

Date: November 4, 2013

HSBC USA Inc.

(Registrant)

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

Exhibit Index

12	Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.
31	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.⁽¹⁾
101.INS	XBRL Instance Document⁽²⁾
101.SCH	XBRL Taxonomy Extension Schema Document⁽²⁾
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document⁽²⁾
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document⁽²⁾
101.LAB	XBRL Taxonomy Extension Label Linkbase Document⁽²⁾
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document⁽²⁾

EXHIBIT 12

HSBC USA INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND

EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

	Nine Months Ended September 30,
	2013		2012
	(dollars are in millions)
Ratios excluding interest on deposits:
Income (loss) from continuing operations........................................................................................................	$	367	$	(1,295	)
Income tax expense...........................................................................................................................................	164		357
Less: Undistributed equity earnings..............................................................................................................	-		-
Fixed charges:
Interest on:
Borrowed funds......................................................................................................................................	28		24
Long-term debt........................................................................................................................................	492		502
Others.......................................................................................................................................................	40		27
One third of rents, net of income from subleases...................................................................................	26		22
Total fixed charges, excluding interest on deposits.....................................................................................	586		575
Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings..............................................................................................................................................................	1,117		(363		)
Ratio of earnings to fixed charges..................................................................................................................	1.91		(.63		)
Total preferred stock dividend factor⁽¹⁾.........................................................................................................	$	78	$	78
Fixed charges, including the preferred stock dividend factor....................................................................	$	664	$	653
Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends............................................................................................................................................................	1.68		(.56		)
Ratios including interest on deposits:
Total fixed charges, excluding interest on deposits.....................................................................................	$	586	$	575
Add: Interest on deposits................................................................................................................................	147		243
Total fixed charges, including interest on deposits.....................................................................................	$	733	$	818
Earnings from continuing operations before taxes and fixed charges, net of undistributed equity earnings.........................................................................................................................................................	$	1,117	$	(363	)
Add: Interest on deposits................................................................................................................................	147		243
Total....................................................................................................................................................................	$	1,264	$	(120	)
Ratio of earnings to fixed charges..................................................................................................................	1.72		(.15		)
Fixed charges, including the preferred stock dividend factor....................................................................	$	664	$	653
Add: Interest on deposits................................................................................................................................	147		243
Fixed charges, including the preferred stock dividend factor and interest on deposits........................	$	811	$	896
Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends............................................................................................................................................................	1.56		(.13		)

(1) Preferred stock dividends grossed up to their pretax equivalents.

EXHIBIT 31

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer

I, Irene M. Dorner, President, Chief Executive Officer and Chairman of the Board of HSBC USA Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of HSBC USA Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 4, 2013

/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

Certification of Chief Financial Officer

I, John T. McGinnis, Senior Executive Vice President and Chief Financial Officer of HSBC USA Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of HSBC USA Inc.;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 4, 2013

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

EXHIBIT 32

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted in connection with the HSBC USA Inc. (the "Company") quarterly report on Form 10-Q for the period ending September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code.

I, Irene M. Dorner, President, Chief Executive Officer and Chairman of the Board of the Company, certify that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of HSBC USA Inc.

Date: November 4, 2013

/s/ IRENE M. DORNER

Irene M. Dorner

President, Chief Executive

Officer and Chairman of the Board

Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

I, John T. McGinnis, Senior Executive Vice President and Chief Financial Officer of the Company, certify that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of HSBC USA Inc.

Date: November 4, 2013

/s/ JOHN T. MCGINNIS

John T. McGinnis

Senior Executive Vice President and

Chief Financial Officer

These certifications accompany each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by HSBC USA Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Signed originals of these written statements required by Section 906 of the Sarbanes-Oxley Act of 2002 have been provided to HSBC USA Inc. and will be retained by HSBC USA Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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RNS metadata

Title: HSBC USA Inc 3Q 2013 Form 10-Q Part 2
Time: 08:15:07
Date: 4 Nov 2013
Category: Miscellaneous
ID: 0820S