HSBC USA Inc 2Q 2013 Form 10-Q - Part 1

RNS Number : 9012K

HSBC Holdings PLC

05 August 2013

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

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

For the transition period from to

Commission file number 1-7436

HSBC USA Inc.

(Exact name of registrant as specified in its charter)

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

(212) 525-5000

Registrant's telephone number, including area code

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

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

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

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

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

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

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

TABLE OF CONTENTS

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

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

PART I

Item 1. Financial Statements (Unaudited)

CONSOLIDATED STATEMENT OF INCOME (LOSS) (UNAUDITED)
	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013		2012
	(in millions)
Interest income:
Loans....................................................................................................................................	$	478	$	456		$	942	$	919
Securities..............................................................................................................................	225		280			453		585
Trading assets.....................................................................................................................	27		26			51		59
Short-term investments......................................................................................................	16		33			30		59
Other.....................................................................................................................................	11		10			21		21
Total interest income...............................................................................................................	757		805			1,497		1,643
Interest expense:
Deposits...............................................................................................................................	56		85			99		161
Short-term borrowings.......................................................................................................	8		6			17		15
Long-term debt....................................................................................................................	166		178			333		332
Other.....................................................................................................................................	9		1			25		13
Total interest expense.............................................................................................................	239		270			474		521
Net interest income...................................................................................................................	518		535			1,023		1,122
Provision for credit losses.......................................................................................................	67		89			88		89
Net interest income after provision for credit losses.........................................................	451		446			935		1,033
Other revenues:
Credit card fees...................................................................................................................	21		22			34		52
Other fees and commissions.............................................................................................	176		185			346		396
Trust income........................................................................................................................	31		25			63		50
Trading revenue..................................................................................................................	107		84			271		282
Other securities gains, net.................................................................................................	23		65			154		95
Servicing and other fees from HSBC affiliates...............................................................	59		46			113		102
Residential mortgage banking revenue...........................................................................	9		2			55		27
Gain (loss) on instruments designated at fair value and related derivatives.............	115		141			88		(71		)
Gain on sale of branches...................................................................................................	-		330			-		330
Other income (loss)............................................................................................................	25		(21		)	34		-
Total other revenues................................................................................................................	566		879			1,158		1,263
Operating expenses:
Salaries and employee benefits........................................................................................	247		246			499		526
Support services from HSBC affiliates............................................................................	362		386			686		771
Occupancy expense, net....................................................................................................	57		57			116		116
Expense related to certain regulatory matters (Note 21)...............................................	-		700			-		700
Other expenses....................................................................................................................	122		178			276		327
Total operating expenses.......................................................................................................	788		1,567			1,577		2,440
Income (loss) from continuing operations before income tax expense.............................	229		(242		)	516		(144		)
Income tax expense...................................................................................................................	49		351			153		369
Income (loss) from continuing operations..........................................................................	180		(593		)	363		(513		)
Discontinued Operations (Note 2):
Income from discontinued operations before income tax expense....................................	-		74			-		315
Income tax expense...................................................................................................................	-		26			-		112
Income from discontinued operations.................................................................................	-		48			-		203
Net income (loss)......................................................................................................................	$	180	$	(545	)	$	363	$	(310	)

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in millions)
Net income (loss)..................................................................................................................	$	180		$	(545	)	$	363		$	(310	)
Net change in unrealized gains (losses), net of tax as applicable on:
Securities available-for-sale⁽¹⁾....................................................................................	(585		)	248			(735		)	121
Derivatives designated as cash flow hedges..........................................................	51			(37		)	74			-
Pension and postretirement benefit plan adjustments, net of tax...........................	-			-			-			1
Other comprehensive income (loss), net of tax..............................................................	(534		)	211			(661		)	122
Comprehensive income (loss)............................................................................................	$	(354	)	$	(334	)	$	(298	)	$	(188	)

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

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

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	June 30, 2013		December 31, 2012
	(in millions, except share data)
Assets⁽¹⁾
Cash and due from banks...............................................................................................................................	$	1,311	$	1,359
Interest bearing deposits with banks..............................................................................................................	29,820		13,279
Securities purchased under agreements to resell.............................................................................................	1,399		3,149
Trading assets.................................................................................................................................................	27,448		35,995
Securities available-for-sale............................................................................................................................	52,858		67,716
Securities held-to-maturity (fair value of $1.7 billion and $1.8 billion at June 30, 2013 and December 31, 2012, respectively).........................................................................................................................................	1,538		1,620
Loans..............................................................................................................................................................	66,705		63,258
Less - allowance for credit losses..................................................................................................................	605		647
Loans, net................................................................................................................................................	66,100		62,611
Loans held for sale (includes $3 million and $465 million designated under fair value option at June 30, 2013 and December 31, 2012, respectively)..................................................................................................	359		1,018
Properties and equipment, net.......................................................................................................................	261		276
Intangible assets, net......................................................................................................................................	299		247
Goodwill.........................................................................................................................................................	2,228		2,228
Other assets....................................................................................................................................................	8,765		7,069
Total assets.....................................................................................................................................................	$	192,386	$	196,567
Liabilities⁽¹⁾
Debt:
Deposits in domestic offices:
Noninterest bearing............................................................................................................................	$	30,562	$	31,315
Interest bearing (includes $8.0 billion and $8.7 billion designated under fair value option at June 30, 2013 and December 31, 2012, respectively)................................................................................	63,147		66,520
Deposits in foreign offices:
Noninterest bearing............................................................................................................................	1,368		1,813
Interest bearing...................................................................................................................................	16,658		18,023
Total deposits..........................................................................................................................................	111,735		117,671
Short-term borrowings.............................................................................................................................	21,394		14,933
Long-term debt (includes $6.6 billion and $7.3 billion designated under fair value option at June 30, 2013 and December 31, 2012, respectively)...........................................................................................	20,934		21,745
Total debt.......................................................................................................................................................	154,063		154,349
Trading liabilities............................................................................................................................................	15,337		19,820
Interest, taxes and other liabilities..................................................................................................................	5,584		4,562
Total liabilities..............................................................................................................................................	174,984		178,731
Shareholders' equity
Preferred stock...............................................................................................................................................	1,565		1,565
Common shareholder's equity:
Common stock ($5 par; 150,000,000 shares authorized; 713 shares issued and outstanding at June 30, 2013 and December 31, 2012)......................................................................................................	-		-
Additional paid-in capital...................................................................................................................	14,090		14,123
Retained earnings................................................................................................................................	1,690		1,363
Accumulated other comprehensive income........................................................................................	57		785
Total common shareholder's equity...............................................................................................................	15,837		16,271
Total shareholders' equity.............................................................................................................................	17,402		17,836
Total liabilities and shareholders' equity.....................................................................................................	$	192,386	$	196,567

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

	June 30,		December 31,
	2013		2012
	(in millions)
Assets
Interest bearing deposits with banks.............................................................................................................	$	221	$	216
Securities held-to-maturity...........................................................................................................................	218		-
Other assets.................................................................................................................................................	544		533
Total assets..................................................................................................................................................	$	983	$	749
Liabilities
Short-term borrowings.................................................................................................................................	$	400	$	-
Long-term debt............................................................................................................................................	92		92
Interest, taxes and other liabilities................................................................................................................	122		152
Total liabilities.............................................................................................................................................	$	614	$	244

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

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Six Months Ended June 30,	2013			2012
	(dollars are in millions)
Preferred stock
Balance at beginning and end of period.............................................................................................................	$	1,565		$	1,565
Common stock
Balance at beginning and end of period.............................................................................................................	-			-
Additional paid-in capital
Balance at beginning of period..........................................................................................................................	14,123			13,814
Other.................................................................................................................................................................	(33		)	(24		)
Balance at end of period....................................................................................................................................	14,090			13,790
Retained earnings
Balance at beginning of period..........................................................................................................................	1,363			2,481
Net income (loss)..............................................................................................................................................	363			(310		)
Cash dividends declared on preferred stock......................................................................................................	(36		)	(37		)
Balance at end of period....................................................................................................................................	1,690			2,134
Accumulated other comprehensive income
Balance at beginning of period..........................................................................................................................	785			642
Adjustment to add other-than-temporary impairment on securities held-to-maturity due to the consolidation of a variable interest entity.........................................................................................................	(67		)	-
Other comprehensive income (loss), net of tax.................................................................................................	(661		)	122
Balance at end of period....................................................................................................................................	57			764
Total common shareholder's equity.................................................................................................................	15,837			16,688
Total shareholders' equity................................................................................................................................	$	17,402		$	18,253

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

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,	2013			2012
	(in millions)
Cash flows from operating activities
Net income (loss) ........................................................................................................................................................	$	363		$	(310	)
Income from discontinued operations.........................................................................................................................	-			203
Income (loss) from continuing operations...................................................................................................................	363			(513		)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization..............................................................................................................................	175			108
Gain on sale of branches.......................................................................................................................................	-			(330		)
Expense accrual related to certain regulatory matters...........................................................................................	-			700
Provision for credit losses.....................................................................................................................................	88			89
Realized gains on securities available-for-sale.......................................................................................................	(146		)	(95		)
Realized gains on securities held-to-maturity.......................................................................................................	(8		)	-
Net change in other assets and liabilities...............................................................................................................	244			868
Net change in loans held for sale:..........................................................................................................................
Originations of loans........................................................................................................................................	(1,043		)	(1,702		)
Sales and collection of loans held for sale........................................................................................................	1,246			1,756
Net change in trading assets and liabilities............................................................................................................	4,023			9,044
Lower of amortized cost or fair value adjustments on loans held for sale............................................................	9			18
Mark-to-market loss on financial instruments designated at fair value and related derivatives............................	(88		)	71
Cash provided by operating activities - continuing operations..................................................................................	4,863			10,014
Cash provided by operating activities - discontinued operations...............................................................................	-			614
Net cash provided by operating activities...................................................................................................................	4,863			10,628
Cash flows from investing activities
Net change in interest bearing deposits with banks.....................................................................................................	(16,522		)	6,645
Net change in federal funds sold and securities purchased under agreements to resell................................................	1,750			(10,557		)
Securities available-for-sale:
Purchases of securities available-for-sale..............................................................................................................	(13,876		)	(21,755		)
Proceeds from sales of securities available-for-sale..............................................................................................	22,216			7,049
Proceeds from maturities of securities available-for-sale......................................................................................	4,745			7,256
Securities held-to-maturity:
Proceeds from sales of securities held-to-maturity...............................................................................................	79			-
Proceeds from maturities of securities held-to-maturity......................................................................................	233			191
Change in loans:
Originations, net of collections.............................................................................................................................	(3,141		)	(4,464		)
Loans sold to third parties....................................................................................................................................	15			53
Net cash used for acquisitions of properties and equipment......................................................................................	(15		)	(2		)
Net outflows related to the sale of branches...............................................................................................................	-			(7,768		)
Other, net.....................................................................................................................................................................	(61		)	(66		)
Cash used in investing activities - continuing operations...........................................................................................	(4,577		)	(23,418		)
Cash provided by investing activities - discontinued operations...............................................................................	-			21,186
Net cash used in investing activities............................................................................................................................	(4,577		)	(2,232		)
Cash flows from financing activities
Net change in deposits.................................................................................................................................................	(5,894		)	(6,384		)
Debt:
Net change in short-term borrowings....................................................................................................................	6,046			(5,278		)
Issuance of long-term debt....................................................................................................................................	3,637			4,739
Repayment of long-term debt...............................................................................................................................	(4,054		)	(1,457		)
Repayment of debt related to the sale and leaseback of 452 Fifth Avenue property..........................................	-			(8		)
Other decreases in capital surplus...............................................................................................................................	(33		)	(24		)
Dividends paid.............................................................................................................................................................	(36		)	(37		)
Cash used in financing activities - continuing operations...........................................................................................	(334		)	(8,449		)
Cash provided by financing activities - discontinued operations...............................................................................	-			(35		)
Net cash used in financing activities............................................................................................................................	(334		)	(8,484		)
Net change in cash and due from banks.......................................................................................................................	(48		)	(88		)
Cash and due from banks at beginning of period.........................................................................................................	1,359			1,616
Cash and due from banks at end of period................................................................................................................	$	1,311		$	1,528
Supplemental disclosure of non-cash investing activities
Trading securities pending settlement.........................................................................................................................	$	(41	)	$	(12	)
Transfer of loans to held for sale.................................................................................................................................	32			39

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. Organization

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

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

During the second quarter of 2013, we consolidated our commercial paper conduit variable interest entity, otherwise known as Bryant Park Funding LLC ("Bryant Park") upon the completion of a restructuring of that entity. See Note 18, "Variable Interest Entities" for further details.

2. Discontinued Operations

Sale of Certain Credit Card Operations to Capital One On August 10, 2011, HSBC, through its wholly-owned subsidiaries HSBC Finance Corporation ("HSBC Finance"), HSBC USA and other wholly-owned affiliates, entered into an agreement to sell its Card and Retail Services business to Capital One Financial Corporation ("Capital One"). This transaction was completed on May 1, 2012. The sale included our General Motors ("GM") and Union Plus ("UP") credit card receivables as well as our private label credit card and closed-end receivables, all of which were purchased from HSBC Finance. Prior to completing the transaction, we recorded lower of amortized cost or fair value adjustments on these receivables which, prior to the sale, were classified as held for sale on our balance sheet as a component of assets of discontinued operations which totaled $107 million and $440 million in the three and six months ended June 30, 2012, respectively, and is reflected in net interest income and other revenues in the table below. These fair value adjustments were largely offset by held for sale accounting adjustments in which loan impairment charges and premium amortization were no longer recorded. The total final cash consideration allocated to us was approximately $19.2 billion, which did not result in the recognition of a gain or loss upon completion of the sale as the receivables were recorded at fair value. The sale to Capital One did not include credit card receivables associated with HSBC Bank USA N. A.'s ("HSBC Bank USA") legacy credit card program and, therefore, are excluded from the table below. However a portion of these receivables were included as part of the branch sale to First Niagara Bank, N.A. in 2012 and HSBC Bank USA continues to offer credit cards to its customers. No significant one-time closure costs were incurred as a result of exiting these portfolios. In connection with the sale of our credit card portfolio to Capital One, we have entered into an outsourcing arrangement with Capital One with respect to the servicing of our remaining credit card portfolio.

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

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

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

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

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

3. Trading Assets and Liabilities

Trading assets and liabilities are summarized in the following table.

	June 30, 2013		December 31, 2012
	(in millions)
Trading assets:
U.S. Treasury....................................................................................................................................................	$	1,530	$	2,484
U.S. Government agency................................................................................................................................	73		337
U.S. Government sponsored enterprises⁽¹⁾..............................................................................................	124		32
Asset backed securities..................................................................................................................................	469		687
Corporate and foreign bonds⁽²⁾.....................................................................................................................	6,830		9,583
Other securities................................................................................................................................................	24		36
Precious metals................................................................................................................................................	9,397		12,332
Derivatives........................................................................................................................................................	9,001		10,504
	$	27,448	$	35,995
Trading liabilities:
Securities sold, not yet purchased................................................................................................................	$	491	$	207
Payables for precious metals.........................................................................................................................	4,545		5,767
Derivatives........................................................................................................................................................	10,301		13,846
	$	15,337	$	19,820

⁽¹⁾Includes mortgage backed securities of $97 million and $16 million issued or guaranteed by the Federal National Mortgage Association ("FNMA") and $27 million and $16 million issued or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") at June 30, 2013 and December 31, 2012, respectively.

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

At June 30, 2013 and December 31, 2012, the fair value of derivatives included in trading assets has been reduced by $5.0 billion and $5.1 billion, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

At June 30, 2013 and December 31, 2012, the fair value of derivatives included in trading liabilities has been reduced by $1.9 billion and $1.3 billion, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

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

4. Securities

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

June 30, 2013	Amortized Cost		Non-Credit Loss Component of OTTI Securities			Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury...................................................................................	$	22,807	$	-		$	439	$	(84	)	$	23,162
U.S. Government sponsored enterprises:⁽¹⁾
Mortgage-backed securities....................................................	199		-			-		(13		)	186
Direct agency obligations........................................................	3,931		-			298		(14		)	4,215
U.S. Government agency issued or guaranteed:
Mortgage-backed securities....................................................	12,354		-			130		(240		)	12,244
Collateralized mortgage obligations.......................................	6,553		-			69		(100		)	6,522
Direct agency obligations........................................................	1		-			-		-			1
Obligations of U.S. states and political subdivisions...............	874		-			19		(24		)	869
Asset backed securities collateralized by:
Residential mortgages..............................................................	1		-			-		-			1
Commercial mortgages..............................................................	162		-			4		-			166
Home equity...............................................................................	285		-			-		(40		)	245
Student loans.............................................................................	-		-			-		-			-
Other............................................................................................	102		-			2		-			104
Corporate and other domestic debt securities...........................	23		-			1		-			24
Foreign debt securities⁽²⁾⁽⁴⁾............................................................	4,976		-			9		(31		)	4,954
Equity securities.............................................................................	165		-			2		(2		)	165
Total available-for-sale securities.......................................................	$	52,433	$	-		$	973	$	(548	)	$	52,858
Securities held-to-maturity:
U.S. Government sponsored enterprises:⁽³⁾
Mortgage-backed securities....................................................	$	956	$	-		$	113	$	-		$	1,069
U.S. Government agency issued or guaranteed:
Mortgage-backed securities....................................................	59		-			9		-			68
Collateralized mortgage obligations.......................................	242		-			31		-			273
Obligations of U.S. states and political subdivisions...............	33		-			2		-			35
Asset-backed securities collateralized by residential mortgages........................................................................................	30		-			1		-			31
Asset-backed securities and other debt securities held by consolidated VIE⁽⁵⁾.........................................................................	333		(115		)	20		-			238
Total held-to-maturity securities..................................................	$	1,653	$	(115	)	$	176	$	-		$	1,714

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

⁽¹⁾Includes securities at amortized cost of $165 million and $153 million issued or guaranteed by FNMA at June 30, 2013 and December 31, 2012, respectively, and $34 million and $13 million issued or guaranteed by FHLMC at June 30, 2013 and December 31, 2012, respectively.

⁽²⁾At June 30, 2013 and December 31, 2012, foreign debt securities consisted of $1.4 billion and $1.5 billion, respectively, of securities fully backed by foreign governments. The remainder of foreign debt securities represents foreign bank or corporate debt.

⁽³⁾Includes securities at amortized cost of $448 million and $507 million issued or guaranteed by FNMA at June 30, 2013 and December 31, 2012, respectively, and $508 million and $614 million issued and guaranteed by FHLMC at June 30, 2013 and December 31, 2012, respectively.

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

⁽⁵⁾Relates to securities held by Bryant Park Funding LLC, a variable interest entity which was consolidated in the second quarter of 2013, See Note 18, "Variable Interest Entities" for additional information.

A summary of gross unrealized losses and related fair values as of June 30, 2013 and December 31, 2012 classified as to the length of time the losses have existed follows:

	One Year or Less						Greater Than One Year
June 30, 2013	Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury................................................	17	$	(71	)	$	7,145	6	$	(13	)	$	531
U.S. Government sponsored enterprises..	25	(27		)	749		14	-			7
U.S. Government agency issued or guaranteed....................................................	160	(340		)	12,647		1	-			-
Obligations of U.S. states and political subdivisions.................................................	48	(24		)	434		-	-			-
Asset backed securities..............................	-	-			-		13	(40		)	258
Foreign debt securities................................	6	-			499		9	(31		)	3,649
Equity Securities..........................................	1	(2		)	157		-	-			-
Securities available-for-sale..............................	257	$	(464	)	$	21,631	43	$	(84	)	$	4,445
Securities held-to-maturity:
U.S. Government sponsored enterprises..	16	$	-		$	-	46	$	-		$	-
U.S. Government agency issued or guaranteed....................................................	68	-			-		900	-			2
Obligations of U.S. states and political subdivisions.................................................	3	-			2		2	-			1
Asset backed securities..............................	-	-			-		-	-			-
Securities held-to-maturity.........................	87	$	-		$	2	948	$	-		$	3

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

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

Upon consolidation of Bryant Park Funding LLC during the second quarter of 2013, we have held-to-maturity asset backed securities totaling $218 million which were previously determined to be other-than-temporarily impaired. We do not consider any other debt securities to be other-than-temporarily impaired at June 30, 2013 as we expect to recover the amortized cost basis of these securities and we neither intend nor expect to be required to sell these securities prior to recovery, even if that equates to holding securities until their individual maturities. However, additional other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.

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

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

For all securities held in the available-for-sale or held-to-maturity portfolio for which unrealized losses attributed to factors other than credit loss have existed for a period of time, we do not have the intention to sell and believe we will not be required to sell the securities for contractual, regulatory or liquidity reasons as of the reporting date. As debt securities issued by U.S. Treasury, U.S. Government agencies and government sponsored entities accounted for 88 percent and 90 percent of total available-for-sale and held-to-maturity securities as of June 30, 2013 and December 31, 2012, respectively, our assessment for credit loss was concentrated on private label asset-backed securities and foreign securities. Substantially all of the private label asset-backed securities are supported by residential mortgages, home equity loans or commercial mortgages. Our assessment for credit loss was concentrated on this particular asset class because of the following inherent risk factors:

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

• The high levels of pending foreclosure volume associated with a U.S. housing market in the early stages of recovery;

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

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

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

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

• The severity and duration of unrealized loss.

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

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

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

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

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

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

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

For the three and six months ended June 30, 2013 and 2012 there were no other-than-temporary impairment losses recognized related to credit loss. At June 30, 2013, as a result of consolidating a previously unconsolidated VIE in the second quarter of 2013, the excess future cash flows over fair value, representing the non-credit component of the unrealized loss associated with all other-than-temporarily impaired securities, was $115 million. At December 31, 2012, there were no non-credit component unrealized loss amounts recognized.

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

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

At June 30, 2013, we held 26 individual asset-backed securities in the available-for-sale portfolio, of which 8 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $349 million of the total aggregate fair value of asset-backed securities of $516 million at June 30, 2013. The gross unrealized losses on these monoline securities were $38 million at June 30, 2013. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of June 30, 2013 and, therefore, we only considered the financial guarantee of monoline insurers on securities for purposes of evaluating other-than-temporary impairment with a fair value of $107 million. No security wrapped by a below investment grade monoline insurance company was deemed to be other-than-temporarily impaired at June 30, 2013.

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

As discussed above, certain asset-backed securities in the available-for-sale portfolio have an embedded financial guarantee provided by monoline insurers. Because the financial guarantee is not a separate and distinct contract from the asset-backed security, they are considered as a single unit of account for fair value measurement and impairment assessment purposes. The monoline insurers are regulated by the insurance commissioners of the relevant states and certain monoline insurers that write the financial guarantee contracts are public companies. As discussed above, we did not consider the value of the monoline wrap of any non-investment grade monoline insurer at June 30, 2013 and December 31, 2012. In evaluating the extent of our reliance on investment grade monoline insurance companies, consideration is given to our assessment of the creditworthiness of the monoline and other market factors. We perform both a credit as well as a liquidity analysis on the monoline insurers each quarter. Our analysis also compares market-based credit default spreads, when available, to assess the appropriateness of our monoline insurer's creditworthiness. Based on the public information available, including the regulatory reviews and actions undertaken by the state insurance commissions and the published financial results, we determine the degree of reliance to be placed on the financial guarantee policy in estimating the cash flows to be collected for the purpose of recognizing and measuring impairment loss.

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

Realized Gains (Losses)

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
							(in millions)
Gross realized gains..............................................................................................................	$	83		$	132		$	207		$	201
Gross realized losses............................................................................................................	(60		)	(67		)	(61		)	(106		)
Net realized gains..................................................................................................................	$	23		$	65		$	146		$	95

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
					(in millions)
Gross realized gains..............................................................................................................	$	-	$	-	$	8	$	-
Gross realized losses............................................................................................................	-		-		-		-
Net realized gains (losses)...................................................................................................	$	-	$	-	$	8	$	-

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

Contractual Maturities and Yields The amortized cost and fair values of securities available-for-sale and securities held-to-maturity at June 30, 2013, are summarized in the table below by contractual maturity. Expected maturities differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties in certain cases. Securities available-for-sale amounts exclude equity securities as they do not have stated maturities. The table below also reflects the distribution of maturities of debt securities held at June 30, 2013, together with the approximate taxable equivalent yield of the portfolio. The yields shown are calculated by dividing annual interest income, including the accretion of discounts and the amortization of premiums, by the amortized cost of securities outstanding at June 30, 2013. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates.

	Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years
Taxable Equivalent Basis	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(dollars are in millions)
Available-for-sale:
U.S. Treasury.......................................	$	7,597	.30	%	$	10,424	.62	%	$	2,821	2.42	%	$	1,965	3.92	%
U.S. Government sponsored enterprises........................................	50		.39		515		2.49		2,798		3.19		767		3.91
U.S. Government agency issued or guaranteed........................................	-		-		6		5.09		102		2.43		18,800		2.59
Obligations of U.S. states and political subdivisions..........................	-		-		74		3.90		323		3.72		477		3.49
Asset backed securities.....................	-		-		1		1.99		11		.40		538		2.74
Other domestic debt securities..........	-		-		-		-		-		-		23		3.90
Foreign debt securities.......................	721		2.85		4,255		1.95		-		-		-		-
Total amortized cost..................................	$	8,368	.52	%	$	15,275	1.07	%	$	6,055	2.84	%	$	22,570	2.77	%
Total fair value............................................	$	8,376			$	15,270			$	6,451			$	22,596
Held-to-maturity:
U.S. Government sponsored enterprises........................................	$	2	7.98	%	$	2	7.45	%	$	1	7.91	%	$	951	6.16	%
U.S. Government agency issued or guaranteed........................................	-		-		1		7.61		2		7.70		298		6.51
Obligations of U.S. states and political subdivisions..........................	5		5.10		12		5.06		7		4.03		9		5.02
Asset backed securities.....................	-		-		-		-		-		-		30		6.37
Asset backed securities issued by consolidated VIE.................................	-		-		-		-		69		.30		149		.36
Total amortized cost..................................	$	7	5.85	%	$	15	5.61	%	$	79	.99	%	$	1,437	5.63	%
Total fair value............................................	$	7			$	16			$	81			$	1,610

Investments in Federal Home Loan Bank ("FHLB") stock and Federal Reserve Bank ("FRB") stock of $139 million and $482 million, respectively, were included in other assets at June 30, 2013 . Investments in Federal Home Loan Bank ("FHLB") stock and Federal Reserve Bank ("FRB") stock of $143 million and $483 million, respectively, were included in other assets at December 31, 2012.

5. Loans

Loans consisted of the following:

	June 30, 2013		December 31, 2012
	(in millions)
Commercial loans:
Construction and other real estate.........................................................................................................	$	8,529	$	8,457
Business and corporate banking............................................................................................................	12,391		12,608
Global banking⁽¹⁾⁽²⁾....................................................................................................................................	23,339		20,009
Other commercial......................................................................................................................................	3,005		3,076
Total commercial.......................................................................................................................................	47,264		44,150
Consumer loans:
Home equity mortgages...........................................................................................................................	2,172		2,324
Residential mortgages, excluding home equity mortgages................................................................	15,837		15,371
Credit cards................................................................................................................................................	858		815
Other consumer.........................................................................................................................................	574		598
Total consumer.........................................................................................................................................	19,441		19,108
Total loans........................................................................................................................................................	$	66,705	$	63,258

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

⁽²⁾Includes loans to HSBC affiliates of $7.0 billion and $4.5 billion at June 30, 2013 and December 31, 2012, respectively. See Note 15, "Related Party Transactions" for additional information regarding loans to HSBC affiliates.

Net deferred origination costs totaled $15 million and $30 million at June 30, 2013 and December 31, 2012, respectively.

At June 30, 2013 and December 31, 2012, we had net unamortized premium on our loans of $21 million and $25 million, respectively. We amortized net premiums of $1 million and $3 million on our loans in the three and six months ended June 30, 2013, respectively, compared with $9 million and $18 million on our loans in the three and six months ended June 30, 2012, respectively.

Age Analysis of Past Due Loans The following table summarizes the past due status of our loans at June 30, 2013 and December 31, 2012. The aging of past due amounts is determined based on the contractual delinquency status of payments under the loan. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status may be affected by customer account management policies and practices such as re-age, which results in the re-setting of the contractual delinquency status to current.

	Past Due				Total Past Due 30 Days or More
At June 30, 2013	30 - 89 days		90+ days				Current⁽¹⁾		Total Loans
	(in millions)
Commercial loans:
Construction and other real estate.....................................	$	79	$	38	$	117	$	8,412	$	8,529
Business and corporate banking........................................	25		39		64		12,327		12,391
Global banking.......................................................................	-		8		8		23,331		23,339
Other commercial...................................................................	20		16		36		2,969		3,005
Total commercial..........................................................................	124		101		225		47,039		47,264
Consumer loans:
Home equity mortgages.......................................................	37		64		101		2,071		2,172
Residential mortgages, excluding home equity mortgages...............................................................................	487		978		1,465		14,372		15,837
Credit cards............................................................................	11		11		22		836		858
Other consumer.....................................................................	3		26		29		545		574
Total consumer.............................................................................	538		1,079		1,617		17,824		19,441
Total loans....................................................................................	$	662	$	1,180	$	1,842	$	64,863	66,705

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

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

Nonaccrual Loans Nonaccrual loans totaled $1.4 billion and $1.6 billion at June 30, 2013 and December 31, 2012, respectively. Interest income that would have been recorded if such nonaccrual loans had been current and in accordance with contractual terms was approximately $30 million and $61 million in the three and six months ended June 30, 2013, respectively, compared with $26 million and $55 million in the three and six months ended June 30, 2012, respectively. Interest income that was included in interest income on these loans was $11 million and $16 million in the three and six months ended June 30, 2013, respectively, compared with $2 million and less than $1 million in the three and six months ended June 30, 2012, respectively. For an analysis of reserves for credit losses, see Note 6, "Allowance for Credit Losses."

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

	June 30, 2013		December 31, 2012
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:........................................................................................................................................
Construction and land loans.....................................................................................................	$	47	$	104
Other real estate..........................................................................................................................	132		281
Business and corporate banking...................................................................................................	44		47
Global banking..................................................................................................................................	18		18
Other commercial..............................................................................................................................	5		13
Total commercial....................................................................................................................................	246		463
Consumer:
Residential mortgages, excluding home equity mortgages.......................................................	1,013		1,038
Home equity mortgages..................................................................................................................	89		86
Total residential mortgages⁽¹⁾...................................................................................................	1,102		1,124
Other consumer loans.....................................................................................................................	5		5
Total consumer loans......................................................................................................................	1,107		1,129
Nonaccrual loans held for sale.......................................................................................................	50		37
Total nonaccruing loans..................................................................................................................................	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..............................................................................................................................	1		1
Total commercial..............................................................................................................................	8		37
Consumer:
Credit card receivables....................................................................................................................	11		15
Other consumer................................................................................................................................	21		28
Total consumer loans......................................................................................................................	32		43
Total accruing loans contractually past due 90 days or more..................................................................	40		80
Total nonperforming loans.............................................................................................................................	$	1,443	$	1,709

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

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

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

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

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(in millions)
Commercial loans:
Construction and other real estate......................................................................................	$	32	$	-	$	32	$	70
Business and corporate banking.........................................................................................	5		-		9		22
Total commercial....................................................................................................................	37		-		41		92
Consumer loans:
Residential mortgages...........................................................................................................	49		52		92		108
Credit cards.............................................................................................................................	1		-		1		-
Total consumer.......................................................................................................................	50		52		93		108
Total................................................................................................................................................	$	87	$	52	$	134	$	200

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and six months ended June 30, 2013 was 2.10 percent and 2.10 percent, respectively, compared with 1.70 percent and 1.80 percent during the three and six months ended June 30, 2012, respectively. Weighted-average contractual rate reduction for commercial loans was not significant in both number of loans and rate.

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

	June 30, 2013		December 31, 2012
	(in millions)
TDR Loans⁽¹⁾⁽²⁾:
Commercial loans:
Construction and other real estate.........................................................................................................	$	435	$	343
Business and corporate banking............................................................................................................	27		86
Other commercial......................................................................................................................................	28		31
Total commercial.......................................................................................................................................	490		460
Consumer loans:
Residential mortgages ⁽³⁾..........................................................................................................................	890		960
Credit cards................................................................................................................................................	11		14
Total consumer.........................................................................................................................................	901		974
Total TDR Loans⁽⁴⁾............................................................................................................................................	$	1,391	$	1,434

	June 30, 2013		December 31, 2012
	(in millions)
Allowance for credit losses for TDR Loans⁽⁵⁾:
Commercial loans:
Construction and other real estate.........................................................................................................	$	25	$	23
Business and corporate banking............................................................................................................	1		3
Other commercial......................................................................................................................................	-		-
Total commercial.......................................................................................................................................	26		26
Consumer loans:
Residential mortgages..............................................................................................................................	77		109
Credit cards................................................................................................................................................	4		5
Total consumer.........................................................................................................................................	81		114
Total allowance for credit losses for TDR Loans..........................................................................................	$	107	$	140

⁽¹⁾TDR Loans are considered to be impaired loans. For consumer loans, all such loans are considered impaired loans regardless of accrual status. For commercial loans, impaired loans include other loans in addition to TDRs which totaled $125 million and $237 million at June 30, 2013 and December 31, 2012, respectively.

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

	June 30, 2013		December 31, 2012
	(in millions)
Commercial loans:
Construction and other real estate...................................................................................................	$	451	$	398
Business and corporate banking.......................................................................................................	68		137
Other commercial...........................................................................................................................	31		34
Total commercial.................................................................................................................................	550		569
Consumer loans:
Residential mortgages......................................................................................................................	1,059		1,118
Credit cards.....................................................................................................................................	11		14
Total consumer....................................................................................................................................	1,070		1,132
Total..........................................................................................................................................................	$	1,620	$	1,701

⁽³⁾Includes $657 million and $608 million at June 30, 2013 and December 31, 2012, respectively, of loans that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.

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

⁽⁵⁾Included in the allowance for credit losses.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(in millions)
Average balance of TDR Loans
Commercial loans:
Construction and other real estate...............................................................................	$	290	$	360	$	307	$	354
Business and corporate banking..................................................................................	30		96		49		96
Other commercial.............................................................................................................	29		35		30		36
Total commercial..............................................................................................................	349		491		386		486
Consumer loans:
Residential mortgages⁽¹⁾.................................................................................................	890		669		906		648
Credit cards......................................................................................................................	12		18		13		19
Total consumer................................................................................................................	902		687		919		667
Total average balance of TDR Loans.......................................................................................	$	1,251	$	1,178	$	1,305	$	1,153
Interest income recognized on TDR Loans
Commercial loans:
Construction and other real estate...............................................................................	$	3	$	2	$	5	$	4
Business and corporate banking..................................................................................	-		-		-		-
Other commercial.............................................................................................................	1		2		2		3
Total commercial..............................................................................................................	4		4		7		7
Consumer loans:
Residential mortgages....................................................................................................	8		7		17		13
Credit cards......................................................................................................................	-		-		-		-
Total consumer................................................................................................................	8		7		17		13
Total interest income recognized on TDR Loans...................................................................	$	12	$	11	$	24	$	20

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

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(in millions)
Commercial loans:
Construction and other real estate.....................................................................................	$	-	$	-	$	-	$	-
Business and corporate banking........................................................................................	-		-		-		-
Other commercial..................................................................................................................	-		-		-		-
Total commercial...................................................................................................................	-		-		-		-
Consumer loans:
Residential mortgages..........................................................................................................	11		7		24		13
Credit cards............................................................................................................................	-		-		-		-
Total consumer.....................................................................................................................	11		7		24		13
Total..............................................................................................................................................	$	11	$	7	$	24	$	13

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

	Amount with Impairment Reserves		Amount without Impairment Reserves		Total Impaired Commercial Loans^(1)(2)(3)		Impairment Reserve
	(in millions)
At June 30, 2013
Construction and other real estate........................................................	$	224	$	241	$	465	$	26
Business and corporate banking...........................................................	48		20		68		12
Global banking.........................................................................................	-		18		18		-
Other commercial.....................................................................................	10		54		64		-
Total...........................................................................................................	$	282	$	333	$	615	$	38
At December 31, 2012
Construction and other real estate........................................................	$	192	$	305	$	497	$	86
Business and corporate banking...........................................................	57		49		106		10
Global banking.........................................................................................	-		18		18		-
Other commercial.....................................................................................	1		75		76		-
Total...........................................................................................................	$	250	$	447	$	697	$	96

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

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

	June 30, 2013		December 31, 2012
	(in millions)
Construction and other real estate...............................................................................................................	$	435	$	343
Business and corporate banking....................................................................................................................	27		86
Other commercial........................................................................................................................................	28		31
Total...........................................................................................................................................................	$	490	$	460

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

	June 30, 2013		December 31, 2012
	(in millions)
Construction and other real estate...............................................................................................................	$	481	$	552
Business and corporate banking....................................................................................................................	109		157
Global banking.............................................................................................................................................	18		18
Other commercial........................................................................................................................................	67		79
Total...........................................................................................................................................................	$	675	$	806

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
					(in millions)
Average balance of impaired commercial loans:
Construction and other real estate..................................................................................	$	353	$	624	$	401	$	660
Business and corporate banking.....................................................................................	58		127		74		127
Global banking....................................................................................................................	18		66		18		90
Other commercial................................................................................................................	69		88		71		89
Total average balance of impaired commercial loans...................................................	$	498	$	905	$	564	$	966
Interest income recognized on impaired commercial loans:
Construction and other real estate..................................................................................	$	1	$	1	$	2	$	3
Business and corporate banking.....................................................................................	-		1		-		2
Global banking....................................................................................................................	-		-		-		-
Other commercial................................................................................................................	1		1		1		1
Total interest income recognized on impaired commercial loans................................	$	2	$	3	$	3	$	6

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

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

	Special Mention		Substandard		Doubtful		Total
	(in millions)
At June 30, 2013
Construction and other real estate........................................................	$	455	$	494	$	23	$	972
Business and corporate banking...........................................................	372		147		10		529
Global banking.........................................................................................	72		124		-		196
Other commercial.....................................................................................	10		53		3		66
Total...........................................................................................................	$	909	$	818	$	36	$	1,763
At December 31, 2012
Construction and other real estate........................................................	$	627	$	677	$	105	$	1,409
Business and corporate banking...........................................................	369		115		10		494
Global banking.........................................................................................	93		50		-		143
Other commercial.....................................................................................	36		74		2		112
Total...........................................................................................................	$	1,125	$	916	$	117	$	2,158

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

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At June 30, 2013
Commercial:
Construction and other real estate.....................................	$	8,349	$	179	$	1	$	8,529
Business and corporate banking........................................	12,341		44		6		12,391
Global banking.......................................................................	23,321		18		-		23,339
Other commercial...................................................................	2,999		5		1		3,005
Total commercial..........................................................................	$	47,010	$	246	$	8	$	47,264
At December 31, 2012
Commercial:
Construction and other real estate.....................................	$	8,064	$	385	$	8	$	8,457
Business and corporate banking........................................	12,533		47		28		12,608
Global banking.......................................................................	19,991		18		-		20,009
Other commercial...................................................................	3,062		13		1		3,076
Total commercial..........................................................................	$	43,650	$	463	$	37	$	44,150

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

	Investment Grade⁽¹⁾		Non-Investment Grade		Total
	(in millions)
At June 30, 2013
Construction and other real estate...........................................................................................	$	5,010	$	3,519	$	8,529
Business and corporate banking..............................................................................................	5,912		6,479		12,391
Global banking............................................................................................................................	19,927		3,412		23,339
Other commercial........................................................................................................................	1,198		1,807		3,005
Total commercial..................................................................................................................	$	32,047	$	15,217	$	47,264
At December 31, 2012
Construction and other real estate...........................................................................................	$	4,727	$	3,730	$	8,457
Business and corporate banking..............................................................................................	6,012		6,596		12,608
Global banking............................................................................................................................	16,206		3,803		20,009
Other commercial........................................................................................................................	1,253		1,823		3,076
Total commercial..................................................................................................................	$	28,198	$	15,952	$	44,150

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

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

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

	June 30, 2013				December 31, 2012
	Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgage, excluding home equity mortgages⁽¹⁾..................	$	1,170	7.26	%	$	1,233	7.78	%
Home equity mortgages..............................................................................	77		3.55		75		3.23
Total residential mortgages........................................................................	1,247		6.82		1,308		7.20
Credit cards...................................................................................................	15		1.75		21		2.58
Other consumer............................................................................................	26		4.08		30		4.52
Total consumer...................................................................................................	$	1,288	6.51	%	$	1,359	6.92	%

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

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

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At June 30, 2013
Consumer:
Residential mortgage, excluding home equity mortgages....	$	14,824	$	1,013	$	-	$	15,837
Home equity mortgages.............................................................	2,083		89		-		2,172
Total residential mortgages.................................................	16,907		1,102		-		18,009
Credit cards..................................................................................	847		-		11		858
Other consumer...........................................................................	548		5		21		574
Total consumer..................................................................................	$	18,302	$	1,107	$	32	$	19,441
At December 31, 2012
Consumer:
Residential mortgage, excluding home equity mortgages....	$	14,333	$	1,038	$	-	$	15,371
Home equity mortgages.............................................................	2,238		86		-		2,324
Total residential mortgages.................................................	16,571		1,124		-		17,695
Credit cards..................................................................................	800		-		15		815
Other consumer...........................................................................	565		5		28		598
Total consumer..................................................................................	$	17,936	$	1,129	$	43	$	19,108

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

Concentration of Credit Risk 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:

• High loan-to-value ("LTV") loans - Certain residential mortgages on primary residences with LTV ratios equal to or exceeding 90 percent at the time of origination and no mortgage insurance.

• 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 high LTV, interest-only and ARM loans in our loan portfolios, including certain loans held for sale, at June 30, 2013 and December 31, 2012, respectively. Each category is not mutually exclusive and loans may appear in more than one category below.

	June 30, 2013		December 31, 2012
	(in billions)
Residential mortgage loans with high LTV and no mortgage insurance⁽¹⁾...............................................	$	.8	$	.9
Interest-only residential mortgage loans.......................................................................................................	3.8		4.0
ARM loans⁽²⁾......................................................................................................................................................	10.6		10.4

⁽¹⁾Residential mortgage loans with high LTV and no mortgage insurance includes both fixed rate and adjustable rate mortgages. Excludes $17 million and $20 million of subprime residential mortgage loans held for sale at June 30, 2013 and December 31, 2012, respectively.

⁽²⁾ARM loan balances above exclude $19 million and $19 million of subprime residential mortgage loans held for sale at June 30, 2013 and December 31, 2012, respectively. In 2013 and 2014, approximately $140 million and $304 million, respectively, of the ARM loans will experience their first interest rate reset.

Concentrations of first and second liens within the outstanding residential mortgage loan portfolio are summarized in the following table. Amounts in the table exclude residential mortgage loans held for sale of $275 million and $472 million at June 30, 2013 and December 31, 2012, respectively.

	June 30, 2013		December 31, 2012
	(in millions)
Closed end:
First lien........................................................................................................................................................	$	15,837	$	15,371
Second lien..................................................................................................................................................	159		186
Revolving:
Second lien..................................................................................................................................................	2,013		2,138
Total....................................................................................................................................................................	$	18,009	$	17,695

6. Allowance for Credit Losses

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in millions)
Balance at beginning of period.............................................................................................	$	568		$	603		$	647		$	743
Provision for credit losses.....................................................................................................	67			89			88			89
Charge-offs...............................................................................................................................	(48		)	(91		)	(158		)	(253		)
Recoveries................................................................................................................................	18			18			28			40
Balance at end of period.........................................................................................................	$	605		$	619		$	605		$	619

The following table summarizes the changes in the allowance for credit losses by product and the related loan balance by product during the three and six months ended June 30, 2013 and 2012:

	Commercial												Consumer
	Construction and Other Real Estate			Business and Corporate Banking			Global Banking			Other Comm'l			Residential Mortgage, Excl Home Equity Mortgages			Home Equity Mortgages			Credit Card			Other Consumer			Total
	(in millions)
Three Months Ended June 30, 2013
Allowance for credit losses - beginning of period.......................	$	116		$	96		$	40		$	17		$	192		$	50		$	42		$	15		$	568
Provision charged to income.........	(14		)	15			29			(4		)	14			13			13			1			67
Charge offs...............................	(1		)	(9		)	-			-			(13		)	(11		)	(11		)	(3		)	(48		)
Recoveries................................	9			1			-			4			3			-			1			-			18
Net (charge offs) recoveries..........	8			(8		)	-			4			(10		)	(11		)	(10		)	(3		)	(30		)
Allowance for credit losses - end of period.......................................	$	110		$	103		$	69		$	17		$	196		$	52		$	45		$	13		$	605

Three Months Ended June 30, 2012
Allowance for credit losses - beginning of period.......................	$	205		$	76		$	25		$	20		$	182		$	43		$	35		$	17		$	603
Provision charged to income.........	(5		)	15			19			(7		)	24			34			9			-			89
Charge offs...............................	(2		)	(13		)	-			-			(23		)	(30		)	(16		)	(7		)	(91		)
Recoveries................................	-			2			-			5			5			-			3			3			18
Net (charge offs) recoveries..........	(2		)	(11		)	-			5			(18		)	(30		)	(13		)	(4		)	(73		)
Allowance for credit losses - end of period.......................................	$	198		$	80		$	44		$	18		$	188		$	47		$	31		$	13		$	619

Six Months Ended June 30, 2013
Allowance for credit losses - beginning of period.......................	$	162		$	97		$	41		$	17		$	210		$	45		$	55		$	20		$	647
Provision charged to income.........	(5		)	17			28			(4		)	11			30			11			-			88
Charge offs...............................	(59		)	(15		)	-			-			(29		)	(23		)	(23		)	(9		)	(158		)
Recoveries................................	12			4			-			4			4			-			2			2			28
Net (charge offs) recoveries..........	(47		)	(11		)	-			4			(25		)	(23		)	(21		)	(7		)	(130		)
Allowance for credit losses - end of period.......................................	$	110		$	103		$	69		$	17		$	196		$	52		$	45		$	13		$	605
Ending balance: collectively evaluated for impairment..............	$	84		$	91		$	69		$	17		$	122		$	49		$	41		$	13		$	486
Ending balance: individually evaluated for impairment..............	26			12			-			-			74			3			4			-			119
Total allowance for credit losses...	$	110		$	103		$	69		$	17		$	196		$	52		$	45		$	13		$	605

Loans:
Collectively evaluated for impairment...................................	$	8,064		$	12,323		$	23,321		$	2,941		$	14,057		$	2,151		$	847		$	574		$	64,278
Individually evaluated for impairment⁽¹⁾................................	465			68			18			64			212			21			11			-			859
Loans carried at lower of amortized cost or fair value less cost to sell....................................	-			-			-			-			1,568			-			-			-			1,568
Total loans...................................	$	8,529		$	12,391		$	23,339		$	3,005		$	15,837		$	2,172		$	858		$	574		$	66,705

Six Months Ended June 30, 2012
Allowance for credit losses - beginning of period.......................	$	212		$	78		$	131		$	21		$	192		$	52		$	39		$	18		$	743
Provision charged to income.........	(25		)	21			(3		)	(9		)	39			42			20			4			89
Charge offs...............................	(3		)	(23		)	(84		)	-			(49		)	(47		)	(33		)	(14		)	(253		)
Recoveries................................	14			4			-			6			6			-			5			5			40
Net (charge offs) recoveries..........	11			(19		)	(84		)	6			(43		)	(47		)	(28		)	(9		)	(213		)
Allowance for credit losses - end of period.......................................	$	198		$	80		$	44		$	18		$	188		$	47		$	31		$	13		$	619
Ending balance: collectively evaluated for impairment..............	$	87		$	73		$	31		$	17		$	95		$	43		$	25		$	13		$	384
Ending balance: individually evaluated for impairment..............	111			7			13			1			93			4			6			-			235
Total allowance for credit losses...	$	198		$	80		$	44		$	18		$	188		$	47		$	31		$	13		$	619

Loans:
Collectively evaluated for impairment...................................	$	7,386		$	11,141		$	14,928		$	3,055		$	13,243		$	2,441		$	765		$	651		$	53,610
Individually evaluated for impairment⁽¹⁾................................	591			115			114			87			660			14			18			-			1,599
Loans carried at lower of amortized cost or fair value less cost to sell	-			-			-			-			855			-			-			-			855
Total loans...................................	$	7,977		$	11,256		$	15,042		$	3,142		$	14,758		$	2,455		$	783		$	651		$	56,064

⁽¹⁾For consumer loans, these amounts represent TDR Loans for which we evaluate reserves using a discounted cash flow methodology. Each loan is individually identified as a TDR Loan and then grouped together with other TDR Loans with similar characteristics. The discounted cash flow analysis is then applied to these groups of TDR Loans. Loans individually evaluated for impairment exclude TDR loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell which totaled $657 million and $510 million at June 30, 2013 and 2012, respectively.

7. Loans Held for Sale

Loans held for sale consisted of the following:

	June 30, 2013		December 31, 2012
	(in millions)
Commercial loans.............................................................................................................................	$	20	$	481
Consumer loans:
Residential mortgages..............................................................................................................	275		472
Other consumer.........................................................................................................................	64		65
Total consumer.................................................................................................................................	339		537
Total loans held for sale..................................................................................................................	$	359	$	1,018

We originate commercial loans in connection with our participation in a number of leveraged acquisition finance syndicates. A substantial majority of these loans were originated with the intent of selling them to unaffiliated third parties and are classified as commercial loans held for sale at June 30, 2013 and December 31, 2012. The fair value of commercial loans held for sale under this program was $3 million and $465 million at June 30, 2013 and December 31, 2012, respectively. We have elected to designate all of the leveraged acquisition finance syndicated loans classified as held for sale at fair value under fair value option. See Note 11, "Fair Value Option," for additional information.

Commercial loans held for sale also includes commercial real estate loans totaling $17 million and $16 million at June 30, 2013 and December 31, 2012, respectively.

Residential mortgage loans held for sale include first mortgage loans which historically have been originated and held for sale primarily to various government sponsored enterprises. Gains and losses from the sale of residential mortgage loans are reflected as a component of residential mortgage banking revenue in the accompanying consolidated statement of income. Upon conversion of our mortgage processing and servicing operations to PHH Mortgage in the second quarter of 2013, we no longer retain the servicing rights in relation to new mortgage loans and new agency eligible loan originations are sold servicing released directly to PHH Mortgage beginning with May 2013 applications. Also included in residential mortgage loans held for sale are subprime residential mortgage loans with a fair value of $54 million and $52 million at June 30, 2013 and December 31, 2012, respectively, which were acquired from unaffiliated third parties and from HSBC Finance with the intent of securitizing or selling the loans to third parties.

Excluding the commercial loans designated under fair value option discussed above, loans held for sale are recorded at the lower of amortized cost or fair value. While the initial carrying amount of loans held for sale continued to exceed fair value at June 30, 2013, we experienced a decrease in the valuation allowance for consumer loans held for sale during 2013 due primarily to loan sales. The valuation allowance on consumer loans held for sale was $95 million and $114 million at June 30, 2013 and December 31, 2012, respectively.

Loans held for sale have historically been subject to market risk, liquidity risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions, as well as the interest rate and credit environment. Interest rate risk for residential mortgage loans held for sale is partially mitigated through an economic hedging program to offset changes in the fair value of the mortgage loans held for sale attributable to changes in market interest rates. Trading related revenue associated with this economic hedging program, which is included in net interest income and residential mortgage banking revenue in the consolidated statement of income, were gains of $4 million and $4 million during the three and six months ended June 30, 2013, respectively, compared with losses of $3 million and gains of $4 million during the three and six months ended June 30, 2012, respectively. With the conversion of our mortgage processing and servicing operations to PHH Mortgage in the second quarter of 2013, PHH Mortgage is obligated to purchase the loans from us as of the earlier of when the customer locks the mortgage loan pricing or when the mortgage loan application is approved beginning with May 2013 applications. As a result, we retain none of the risk of market changes in mortgage rates and, therefore, an economic hedging program for these loans is no longer required.

8. Intangible Assets

Intangible assets consisted of the following:

	June 30, 2013		December 31, 2012
	(in millions)
Mortgage servicing rights..............................................................................................................	$	237	$	179
Purchased credit card relationships..............................................................................................	57		60
Favorable lease agreements...........................................................................................................	5		8
Total other intangible assets..........................................................................................................	$	299	$	247

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

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

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

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

	June 30, 2013		December 31, 2012
Annualized constant prepayment rate ("CPR")..........................................................................	13.4	%	22.4	%
Constant discount rate....................................................................................................................	12.9	%	11.3	%
Weighted average life.....................................................................................................................	4.7		3.4

Residential MSRs activity is summarized in the following table:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in millions)
Fair value of MSRs:
Beginning balance...........................................................................................................	$	190		$	228		$	168		$	220
Additions related to loan sales......................................................................................	5			6			11			14
Changes in fair value due to:
Change in valuation inputs or assumptions used in the valuation models.......	43			(31		)	69			(15		)
Realization of cash flows...........................................................................................	(13		)	(16		)	(23		)	(32		)
Ending balance........................................................................................................................	$	225		$	187		$	225		$	187

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

	June 30, 2013		December 31, 2012
	(in millions)
Outstanding principal balances at period end............................................................................	$	29,446	$	32,041
Custodial balances maintained and included in noninterest bearing deposits at period end.....................................................................................................................................................	$	-	$	810

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

During the second quarter of 2013, we completed the conversion of our mortgage processing and servicing operations to PHH Mortgage under our previously announced strategic relationship agreement with PHH Mortgage to manage our mortgage processing and servicing operations. Under the terms of the agreement, PHH Mortgage now provides us with mortgage origination processing services as well as sub-servicing of our portfolio of owned and serviced mortgages totaling $46.8 billion as of June 30, 2013. Although we continue to own both the mortgages on our balance sheet and the mortgage servicing rights associated with the serviced loans at the time of conversion, we now sell our agency eligible originations beginning with May 2013 applications to PHH Mortgage on a servicing released basis which will result in no new mortgage servicing rights being recognized going forward. As a result we no longer maintain custodial balances. No significant one-time restructuring costs have been or are expected to be incurred as a result of this transaction. We plan to continue originating mortgages for our customers with particular emphasis on Premier relationships.

Servicing fees collected are included in residential mortgage banking revenue and totaled $21 million and $42 million during the three and six months ended June 30, 2013, respectively, compared with $22 million and $47 million during the three and six months ended June 30, 2012, respectively.

Commercial mortgage servicing rights Commercial MSRs, which are accounted for using the lower of amortized cost or fair value method, totaled $12 million and $11 million at June 30, 2013 and December 31, 2012, respectively.

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

9. Goodwill

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

Based on the results of our interim goodwill impairment testing in December 2012 and March 2013 and historically narrow differences between fair value and book value in our Global Banking and Markets reporting unit, we performed an interim review of goodwill impairment for this reporting unit during the second quarter of 2013. As a result of this testing, the fair value of this reporting unit continued to exceed its carrying value, including goodwill. At June 30, 2013, the book value of our Global Banking and Markets reporting unit including allocated goodwill of $612 million, was 97 percent of fair value. Our goodwill impairment testing is, however, highly sensitive to certain assumptions and estimates used. As our testing results continue to indicate that there is only a marginal excess of fair value over book value for our Global Banking and Markets reporting unit, we will continue to monitor this reporting unit and perform interim impairment testing in future periods as very small changes in projections could result in either partial or full goodwill impairment of this reporting unit. We continue to perform periodic analyses of the risks and strategies of all our business and product offerings. If deterioration in economic conditions occurs or changes in the strategy or performance of our businesses or product offerings occur, interim impairment tests for reporting units in addition to Global Banking and Markets could be required in 2013.

10. Derivative Financial Instruments

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

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

	June 30, 2013				December 31, 2012
	Derivative assets		Derivative liabilities		Derivative assets		Derivative liabilities
	(in millions)
Derivatives accounted for as fair value hedges ⁽¹⁾
OTC-cleared ⁽²⁾..................................................................................	$	48	$	5	$	-	$	15
Bilateral OTC ⁽²⁾................................................................................	136		349		10		860
Interest rate contracts......................................................................	184		354		10		875

Derivatives accounted for as cash flow hedges ⁽¹⁾
Interest rate contracts - bilateral OTC ⁽²⁾......................................	116		124		47		236
Trading derivatives not accounted for as hedges ⁽³⁾
Exchange-traded ⁽²⁾............................................................................	72		83		99		82
OTC-cleared ⁽²⁾..................................................................................	18,411		-		17,204		16,663
Bilateral OTC ⁽²⁾................................................................................	37,923		56,648		53,562		53,705
Interest rate contracts......................................................................	56,406		56,731		70,865		70,450

Exchange-traded ⁽²⁾............................................................................	5		4		4		25
Bilateral OTC ⁽²⁾................................................................................	16,125		15,539		13,795		13,576
Foreign exchange contracts.............................................................	16,130		15,543		13,799		13,601

Equity contract - bilateral OTC ⁽²⁾...................................................	1,332		1,334		1,287		1,291

Exchange-traded ⁽²⁾............................................................................	767		148		135		19
Bilateral OTC ⁽²⁾................................................................................	2,874		1,909		656		719
Precious metals contracts................................................................	3,641		2,057		791		738

OTC-cleared ⁽²⁾..................................................................................	584		-		511		437
Bilateral OTC ⁽²⁾................................................................................	5,308		5,926		6,617		6,910
Credit contracts................................................................................	5,892		5,926		7,128		7,347

Other derivatives not accounted for as hedges⁽¹⁾
Interest rate contracts - bilateral OTC ⁽²⁾......................................	602		93		901		97

Foreign exchange contracts - bilateral OTC ⁽²⁾............................	22		54		52		17

Equity contracts - bilateral OTC ⁽²⁾.................................................	506		224		472		126

Precious metals contracts - bilateral OTC ⁽²⁾................................	8		51		-		-

Credit contracts - bilateral OTC ⁽²⁾.................................................	13		10		1		4

Total derivatives	84,852		82,501		95,353		94,782

Less: Gross amounts of receivable / payable subject to enforcable master netting agreements ^{(4) (6)}..........................................................	69,353		69,353		78,244		78,244
Less: Gross amounts of cash collateral received / posted subject to enforcable master netting agreements ^{(5) (6)}..................................	5,047		1,937		5,123		1,336
Net amounts of derivative assets / liabilities presented in the balance sheet........................................................................................	10,452		11,211		11,986		15,202

Less: Gross amounts of financial instrument collateral received / posted subject to enforcable master netting agreements but not offset in the consolidated balance sheet	1,209		3,435		627		4,887
Net amounts of derivative assets / liabilities....................................	$	9,243	$	7,776	$	11,359	$	10,315

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

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

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

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

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

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

See Note 19, "Guarantee Arrangements, Pledged Assets and Collateral" for further information on offsetting related to resale and repurchase agreements and securities borrowing and lending arrangements.

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

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

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

For reporting purposes, changes in fair value of a derivative designated in a qualifying fair value hedge, net of changes in the fair value of the hedged asset or liability attributable to the hedged risk, are recorded in current period earnings. We recognized net gains of $17 million and $12 million during the three and six months ended June 30, 2013, respectively, compared with net losses of $30 million and $20 million during the three and six months ended June 30, 2012, respectively, which are reported in other income in the consolidated statement of income which represents the ineffective portion of all fair value hedges. The interest accrual related to the derivative contract is recognized in interest income.

The changes in the fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying amount of the hedged item (basis adjustment). If the hedging relationship is terminated and the hedged item continues to exist, the basis adjustment is amortized over the remaining life of the hedged item. We recorded basis adjustments for active fair value hedges which increased the carrying amount of our debt by $1 million during the six months ended June 30, 2013, respectively, compared with a decrease in the carrying amount of our debt by $1 million and $6 million during the three and six months ended June 30, 2012, respectively. We amortized $3 million and $7 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships during the three and six months ended June 30, 2013, respectively, compared with $3 million and $6 million during the three and six months ended June 30, 2012, respectively. The total accumulated unamortized basis adjustment amounted to an increase in the carrying amount of our debt of $41 million and $49 million as of June 30, 2013 and December 31, 2012, respectively. Basis adjustments for active fair value hedges of available-for-sale securities increased the carrying amount of the securities by $445 million and $600 million during the three and six months ended June 30, 2013, respectively, compared with an increase in the carrying amount of the securities by $481 million and $187 million during the three and six months ended June 30, 2012. Total accumulated unamortized basis adjustments for active fair value hedges of available-for-sale securities amounted to an increase in carrying amount of $154 million and $836 million as of June 30, 2013 and December 31, 2012, respectively.

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

	Gain (Loss) on Derivative						Gain (Loss) on Hedged Items
	Interest Income (Expense)			Other Income			Interest Income (Expense)			Other Income
	(in millions)
Three Months Ended June 30, 2013
Interest rate contracts/AFS Securities.....................................	$	(55	)	$	397		$	111		$	(380	)
Interest rate contracts/subordinated debt...............................	4			-			(15		)	-
Total...............................................................................................	$	(51	)	$	397		$	96		$	(380	)

Three Months Ended June 30, 2012
Interest rate contracts/AFS Securities.....................................	$	(39	)	$	(582	)	$	162		$	552
Interest rate contracts/subordinated debt...............................	(13		)	1			(15		)	(1		)
Total...............................................................................................	$	(52	)	$	(581	)	$	147		$	551

Six Months Ended June 30, 2013
Interest rate contracts/AFS Securities.....................................	$	(111	)	$	567		$	225		$	(554	)
Interest rate contracts/subordinated debt...............................	8			(1		)	(30		)	1
Total...............................................................................................	$	(103	)	$	566		$	195		$	(553	)

Six Months Ended June 30, 2012
Interest rate contracts/AFS Securities.....................................	$	(84	)	$	(285	)	$	341		$	265
Interest rate contracts/subordinated debt...............................	(27		)	6			(30		)	(6		)
Total...............................................................................................	$	(111	)	$	(279	)	$	311		$	259

Cash Flow Hedges We own or issue floating rate financial instruments and enter into forecasted transactions that give rise to variability in future cash flows. As a part of our risk management strategy, we use interest rate swaps, currency swaps and futures contracts to mitigate risk associated with variability in the cash flows. Changes in fair value of a derivative instrument associated with the effective portion of a qualifying cash flow hedge are recognized initially in other comprehensive income. When the cash flows for which the derivative is hedging materialize and are recorded in income or expense, the associated gain or loss from the hedging derivative previously recorded in accumulated other comprehensive income is reclassified into earnings in the same accounting period in which the designated forecasted transaction or hedged item affects earnings. If a cash flow hedge of a forecasted transaction is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in accumulated other comprehensive income (loss) unless it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period as documented at the inception of the hedge, at which time the cumulative gain or loss is released into earnings. As of June 30, 2013 and December 31, 2012, active cash flow hedge relationships extend or mature through July 2036. During the three and six months ended June 30, 2013, $3 million and $7 million, respectively, of losses related to terminated and/or re-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income compared with $4 million and $8 million during the three and six months ended June 30, 2012, respectively. During the next twelve months, we expect to amortize $10 million of remaining losses to earnings resulting from these terminated and/or de-designated cash flow hedges. The interest accrual related to the derivative contract is recognized in interest income.

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

	Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)					Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Gain (Loss) Reclassed From AOCI into Income (Effective Portion)						Location of Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Gain (Loss) Recognized in Income on the Derivative (Ineffective Portion)
	2013		2012				2013			2012				2013		2012
	(in millions)
Three Months Ended June 30,
Interest rate contracts.	$	84	$	(68	)	Interest income (expense)	$	(3	)	$	(4	)	Other income	$	1	$	-

Six Months Ended June 30,
Interest rate contracts.	$	119	$	(10	)	Interest income (expense)	$	(7	)	$	(8	)	Other income	$	-	$	-

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

We have elected the fair value option for certain fixed rate long-term debt issuances as well as hybrid instruments which include all structured notes and structured deposits and have entered into certain derivative contracts related to these debt issuances and hybrid instruments carried at fair value. These derivative contracts are non-qualifying hedges but are considered economic hedges. We have also entered into credit default swaps which are designated as economic hedges against the credit risks within our loan portfolio. In the event of an impairment loss occurring in a loan that is economically hedged, the impairment loss is recognized as provision for credit losses while the gain on the credit default swap is recorded as other income. In addition, we also from time to time have designated certain forward purchase or sale of to-be-announced ("TBA") securities to economically hedge mortgage servicing rights. Changes in the fair value of TBA positions, which are considered derivatives, are recorded in residential mortgage banking revenue. Derivative instruments designated as economic hedges that do not qualify for hedge accounting are recorded at fair value through profit and loss. Realized and unrealized gains and losses are recognized in gain (loss) on instruments designated at fair value and related derivatives, other income or residential mortgage banking revenue while the derivative asset or liability positions are reflected as other assets or other liabilities

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

		Amount of Gain (Loss) Recognized in Income on Derivatives
	Location of Gain (Loss)	Three Months Ended June 30,						Six Months Ended June 30,
	Recognized in Income on Derivatives	2013			2012			2013			2012
		(in millions)
Interest rate contracts.........................	Trading revenue	$	(468	)	$	(2	)	$	(382	)	$	16
Interest rate contracts.........................	Residential mortgage banking revenue	(34		)	38			(41		)	21
Foreign exchange contracts...............	Trading revenue	716			246			578			645
Equity contracts...................................	Trading revenue	4			42			2			60
Precious metals contracts...................	Trading revenue	19			16			61			52
Credit contracts....................................	Trading revenue	(69		)	(450		)	78			(678		)
Total.......................................................		$	168		$	(110	)	$	296		$	116

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

		Amount of Gain (Loss) Recognized in Income on Derivatives
	Location of Gain (Loss)	Three Months Ended June 30,						Six Months Ended June 30,
	Recognized in Income on Derivatives	2013			2012			2013			2012
	(in millions)
Interest rate contracts.........................	Gain (loss) on instruments designated at fair value and related derivatives	$	(176	)	$	195		$	(238	)	$	105
Interest rate contracts.........................	Residential mortgage banking revenue	5			(2		)	4			5
Foreign exchange contracts...............	Gain (loss) on instruments designated at fair value and related derivatives	(24		)	36			(55		)	50
Equity contracts...................................	Gain (loss) on instruments designated at fair value and related derivatives	(75		)	(118		)	240			246
Precious metals contracts...................	Gain (loss) on instruments designated at fair value and related derivatives	(42		)	-			(42		)	-
Credit contracts....................................	Gain (loss) on instruments designated at fair value and related derivatives	1			1			1			2
Credit contracts....................................	Other income	3			(2		)	3			(5		)
Total.......................................................		$	(308	)	$	110		$	(87	)	$	403

Credit-Risk Related Contingent Features We enter into total return swap, interest rate swap, cross-currency swap and credit default swap contracts, amongst others which contain provisions that require us to maintain a specific credit rating from each of the major credit rating agencies. Sometimes the derivative instrument transactions are a part of broader structured product transactions. If HSBC Bank USA's credit ratings were to fall below the current ratings, the counterparties to our derivative instruments could demand us to post additional collateral. The amount of additional collateral required to be posted will depend on whether HSBC Bank USA is downgraded by one or more notches and whether the downgrade is in relation to long-term or short-term ratings. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of June 30, 2013, is $7.1 billion for which we have posted collateral of $5.6 billion. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of December 31, 2012, is $8.7 billion for which we have posted collateral of $7.9 billion. Substantially all of the collateral posted is in the form of securities available-for-sale. See Note 19, "Guarantee Arrangements, Pledged Assets and Collateral," for further details.

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

Moody's	Long-Term Ratings
Short-Term Ratings	A1		A2		A3
	(in millions)
P-1.................................................................................................................................................	$	-	$	1	$	182
P-2.................................................................................................................................................	1		28		182

S&P	Long-Term Ratings
Short-Term Ratings	AA-		A+		A
	(in millions)
A-1+..............................................................................................................................................	$	-	$	27	$	27
A-1................................................................................................................................................	16		16		197

We would be required to post $17 million of additional collateral on total return swaps and certain other transactions if HSBC Bank USA is downgraded by S&P and Moody's by two notches on our long term rating accompanied by one notch downgrade in our short term rating.

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

	June 30, 2013		December 31, 2012
	(in billions)
Interest rate:
Futures and forwards...................................................................................................................................	$	209.9	$	313.9
Swaps..............................................................................................................................................................	3,400.3		2,842.6
Options written..............................................................................................................................................	19.1		43.3
Options purchased.......................................................................................................................................	22.3		44.2
	3,651.6		3,244.0
Foreign Exchange:
Swaps, futures and forwards.......................................................................................................................	830.8		743.7
Options written..............................................................................................................................................	79.7		54.9
Options purchased.......................................................................................................................................	80.2		55.5
Spot.................................................................................................................................................................	69.9		56.3
	1,060.6		910.4
Commodities, equities and precious metals:
Swaps, futures and forwards.......................................................................................................................	49.9		48.1
Options written..............................................................................................................................................	21.8		21.0
Options purchased.......................................................................................................................................	22.2		21.4
	93.9		90.5
Credit derivatives.................................................................................................................................................	419.2		484.9
Total.......................................................................................................................................................................	$	5,225.3	$	4,729.8

11. Fair Value Option

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

Loans We elected to apply FVO to all commercial leveraged acquisition finance loans held for sale and related unfunded commitments. The election allows us to account for these loans and commitments at fair value which is consistent with the manner in which the instruments are managed. During the first quarter of 2013, we completed the sale of substantially all of our remaining leveraged acquisition finance syndicated loans which we had been holding since the financial crisis. As of June 30, 2013, commercial leveraged acquisition finance loans held for sale and related unfunded commitments of $3 million carried at fair value had an aggregate unpaid principal balance of $3 million. As of December 31, 2012, commercial leveraged acquisition finance loans held for sale and related unfunded commitments of $465 million carried at fair value had an aggregate unpaid principal balance of $486 million.

These loans are included in loans held for sale in the consolidated balance sheet. Interest from these loans is recorded as interest income in the consolidated statement of income. Because a substantial majority of the loans elected for the fair value option are floating rate assets, changes in their fair value are primarily attributable to changes in loan-specific credit risk factors. The components of gain (loss) related to loans designated at fair value are summarized in the table below. As of June 30, 2013 and December 31, 2012, no loans for which the fair value option has been elected are 90 days or more past due or on nonaccrual status.

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

The fair value of fixed-rate debt accounted for under FVO at June 30, 2013 totaled $1.8 billion and had an aggregate unpaid principal balance of $1.8 billion. The fair value of fixed-rate debt accounted for under FVO at December 31, 2012 totaled $2.0 billion and had an aggregate unpaid principal balance of $1.8 billion. Interest on the fixed-rate debt accounted for under FVO is recorded as interest expense in the consolidated statement of income. The components of gain (loss) related to long-term debt designated at fair value are summarized in the table below.

Hybrid Instruments We elected to apply fair value option accounting to all of our hybrid instruments, inclusive of structured notes and structured deposits, issued after January 1, 2006. As of June 30, 2013, interest bearing deposits in domestic offices included $8.0 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $7.8 billion. As of December 31, 2012, interest bearing deposits in domestic offices included $8.7 billion of structured deposits accounted for under FVO which had an unpaid principal balance of $8.4 billion. Long-term debt at June 30, 2013 included structured notes of $4.8 billion accounted for under FVO which had an unpaid principal balance of $4.7 billion. Long-term debt at December 31, 2012 included structured notes of $5.3 billion accounted for under FVO which had an unpaid principal balance of $5.0 billion. Interest on this debt is recorded as interest expense in the consolidated statement of income. The components of gain (loss) related to hybrid instruments designated at fair value which reflect the instruments described above are summarized in the table below.

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

	Loans			Long-Term Debt			Hybrid Instruments			Total
	(in millions)
Three Months Ended June 30, 2013
Interest rate and other components⁽¹⁾......................................................	$	-		$	120		$	204		$	324
Credit risk component.................................................................................	-			53			54			107
Total mark-to-market on financial instruments designated at fair value..............................................................................................................	-			173			258			431
Net realized loss on financial instruments...............................................	-			-			-			-
Mark-to-market on the related derivatives...............................................	-			(128		)	(204		)	(332		)
Net realized gain on the related long-term debt derivatives..................	-			16			-			16
Gain (loss) on instruments designated at fair value and related derivatives....................................................................................................	$	-		$	61		$	54		$	115

Three Months Ended June 30, 2012
Interest rate and other components⁽¹⁾......................................................	$	-		$	(123	)	$	74		$	(49	)
Credit risk component.................................................................................	2			131			(56		)	77
Total mark-to-market on financial instruments designated at fair value..............................................................................................................	2			8			18			28
Net realized loss on financial instruments...............................................	-			-			-			-
Mark-to-market on the related derivatives...............................................	-			142			(44		)	98
Net realized gain on the related long-term debt derivatives..................	-			15			-			15
Gain (loss) on instruments designated at fair value and related derivatives....................................................................................................	$	2		$	165		$	(26	)	$	141

Six Months Ended June 30, 2013
Interest rate and other components⁽¹⁾......................................................	$	-		$	183		$	(112	)	$	71
Credit risk component.................................................................................	21			11			87			119
Total mark-to-market on financial instruments designated at fair value..............................................................................................................	21			194			(25		)	190
Net realized loss on financial instruments...............................................	(8		)	-			-			(8		)
Mark-to-market on the related derivatives...............................................	-			(190		)	64			(126		)
Net realized gain on the related long-term debt derivatives..................	-			32			-			32
Gain (loss) on instruments designated at fair value and related derivatives....................................................................................................	$	13		$	36		$	39		$	88

Six Months Ended June 30, 2012
Interest rate and other components⁽¹⁾......................................................	$	1		$	(40	)	$	(355	)	$	(394	)
Credit risk component.................................................................................	34			(90		)	(23		)	(79		)
Total mark-to-market on financial instruments designated at fair value..............................................................................................................	35			(130		)	(378		)	(473		)
Net realized loss on financial instruments...............................................	(1		)	-			-			(1		)
Mark-to-market on the related derivatives...............................................	-			27			345			372
Net realized gain on the related long-term debt derivatives..................	-			31			-			31
Gain (loss) on instruments designated at fair value and related derivatives....................................................................................................	$	34		$	(72	)	$	(33	)	$	(71	)

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

12. Income Taxes

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

	2013					2012
	(dollars are in millions)
Three Months Ended June 30, 2013
Tax expense at the U.S. federal statutory income tax rate..................................	$	80		35.0	%	$	(84	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit...................................................	13			5.7		16			6.6
Non-deductible expense accrual related to certain regulatory matters⁽¹⁾..	-			-		245			101.2
Non-deductible goodwill related to branch sale⁽¹⁾........................................	-			-		106			43.8
Other non-deductible / non-taxable items⁽²⁾..................................................	(12		)	(5.2	)	(3		)	(1.2	)
Items affecting prior periods⁽³⁾.........................................................................	(12		)	(5.2	)	33			13.6
Uncertain tax adjustments⁽⁴⁾.............................................................................	4			1.7		49			20.2
Impact of foreign operations............................................................................	1			.4		35			14.5
Low income housing tax credits......................................................................	(22		)	(9.7	)	(31		)	(12.8	)
Other....................................................................................................................	(3		)	(1.3	)	(15		)	(5.9	)
Total income tax expense........................................................................................	$	49		21.4	%	$	351		145.0	%

Six Months Ended June 30, 2013
Tax expense at the U.S. federal statutory income tax rate..................................	$	181		35.0	%	$	(50	)	(35.0	)%
Increase (decrease) in rate resulting from:
State and local taxes, net of federal benefit...................................................	30			5.8		22			15.3
Adjustment of tax rate used to value deferred taxes....................................	-			-		(10		)	(6.9	)
Non-deductible expense accrual related to certain regulatory matters⁽¹⁾..	-			-		245			170.1
Non-deductible goodwill related to branch sale⁽¹⁾........................................	-			-		106			73.6
Other non-deductible / non-taxable items⁽²⁾..................................................	(9		)	(1.7	)	(8		)	(5.6	)
Items affecting prior periods⁽³⁾.........................................................................	(22		)	(4.3	)	33			22.9
Uncertain tax adjustments⁽⁴⁾.............................................................................	18			3.5		65			45.1
Impact of foreign operations............................................................................	4			.8		21			14.6
Low income housing tax credits......................................................................	(43		)	(8.3	)	(42		)	(29.2	)
Other....................................................................................................................	(6		)	(1.1	)	(13		)	(8.6	)
Total income tax expense........................................................................................	$	153		29.7	%	$	369		256.3	%

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

⁽²⁾Mainly relates to a change in the assessment of the deductibility of certain amounts accrued for certain regulatory matters.

⁽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.

It is reasonably possible that there could be a change in the amount of our unrecognized tax benefits within the next 12 months due to settlements or statutory expirations in various tax jurisdictions. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $332 million and $314 million at June 30, 2013 and December 31, 2012, respectively.

It is our policy to recognize accrued interest related to unrecognized tax positions in interest expense in the consolidated statement of income (loss) and to recognize penalties, if any, related to unrecognized tax positions as a component of other operating expenses in the consolidated statement of income (loss). We had accruals for the payment of interest associated with uncertain tax positions of $182 million and $159 million at June 30, 2013 and December 31, 2012, respectively. We have no penalty accruals recorded as of June 30, 2013.

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

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

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

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

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

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

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

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

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

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

HSBC USA Inc. Income Taxes We recognize deferred tax assets and liabilities for the future tax consequences related to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits and state net operating losses. Our net deferred tax assets, including deferred tax liabilities and valuation allowances, totaled $1.4 billion and $905 million as of June 30, 2013 and December 31, 2012, respectively.

The Internal Revenue Service is currently auditing our income tax returns for the period 2006 through 2009 with an anticipated completion in the second half of 2013. We remain subject to state and local income tax examinations for years 2004 and forward. We are currently under audit by various state and local tax jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and the closing of statutes of limitations. Such adjustments are reflected in the tax provision. As a result of a 2011 state court decision related to a state tax uncertainty, we do not believe that we can uphold the more likely than not conclusion taken on one of these uncertain tax positions. At June 30, 2013, total tax reserves are $270 million (net of federal tax benefit) along with related accrued interest expense of $150 million in relation to the estimated exposure on this matter.

13. Accumulated Other Comprehensive Income

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

Three Months Ended June 30,	2013			2012
	(in millions)
Unrealized gains (losses) on securities available-for-sale:
Balance at beginning of period.........................................................................................................................	$	842		$	756
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $(398) million and $203 million, respectively................................................................................................................................	(571		)	286
Reclassification adjustment for gains realized in net income (loss), net of tax of $(9) million and $(27) million, respectively ⁽¹⁾..........................................................................................................	(14		)	(38		)
Total other comprehensive loss for period..............................................................................................	(585		)	248
Balance at end of period....................................................................................................................................	257			1,004
Unrealized losses on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period.........................................................................................................................	-			-
Adjustment to add other-than-temporary impairment due to the consolidation of VIE, net of tax of $(48) million..............................................................................................................................................	(67		)	-
Balance at end of period....................................................................................................................................	(67		)	-
Unrealized gains (losses) on derivatives classified as cash flow hedges:
Balance at beginning of period.........................................................................................................................	(178		)	(192		)
Other comprehensive income (loss) for period:
Net gains (losses) arising during period, net of tax of $35 million and $(29) million, respectively.............................................................................................................................................	49			(39		)
Reclassification adjustment for losses realized in net income (loss), net of tax of $1 million and $2 million, respectively ⁽²⁾...............................................................................................................	2			2
Total other comprehensive income (loss) for period..............................................................................	51			(37		)
Balance at end of period....................................................................................................................................	(127		)	(229		)
Pension and postretirement benefit liability:
Balance at beginning and end of period.........................................................................................................	(6		)	(11		)
Total accumulated other comprehensive income at end of period.............................................................	$	57		$	764

Six Months Ended June 30,	2013			2012
	(in millions)
Unrealized gains (losses) on securities available-for-sale:
Balance at beginning of period.........................................................................................................................	$	992		$	883
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $(455) million and $127 million, respectively................................................................................................................................	(649		)	177
Reclassification adjustment for gains realized in net income (loss), net of tax of $(60) million and $(39) million, respectively ⁽¹⁾..........................................................................................................	(86		)	(56		)
Total other comprehensive income (loss) for period..............................................................................	(735		)	121
Balance at end of period....................................................................................................................................	257			1,004
Unrealized losses on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period.........................................................................................................................	-			-
Adjustment to add other-than-temporary impairment due to the consolidation of VIE, net of tax of $(48) million..............................................................................................................................................	(67		)	-
Balance at end of period....................................................................................................................................	(67		)	-
Unrealized gains (losses) on derivatives classified as cash flow hedges:
Balance at beginning of period.........................................................................................................................	(201		)	(229		)
Other comprehensive income (loss) for period:
Net gains (losses) arising during period, net of tax of $49 million and $(5) million, respectively...................................................................................................................................................................	70			(5		)
Reclassification adjustment for losses realized in net income (loss), net of tax of $3 million and $3 million, respectively ⁽²⁾...............................................................................................................	4			5
Total other comprehensive income for period.........................................................................................	74			-
Balance at end of period....................................................................................................................................	(127		)	(229		)
Pension and postretirement benefit liability:
Balance at beginning of period..................................................................................................................	(6		)	(12		)
Other comprehensive income for period:
Reclassification adjustment of prior service costs and transition obligations in net income, net of tax of less than $1 million...........................................................................................................	-			1
Total other comprehensive income for period.........................................................................................	-			1
Balance at end of period....................................................................................................................................	(6		)	(11		)
Total accumulated other comprehensive income at end of period.............................................................	$	57		$	764

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

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

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

14. Pension and Other Postretirement Benefits

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
							(in millions)
Service cost - benefits earned during the period...............................................................	$	1		$	4		$	2		$	7
Interest cost on projected benefit obligation......................................................................	17			18			34			35
Expected return on assets......................................................................................................	(21		)	(23		)	(41		)	(44		)
Amortization of prior service cost (benefit).........................................................................	-			(2		)	-			(3		)
Recognized losses...................................................................................................................	13			8			26			19
Pension expense......................................................................................................................	$	10		$	5		$	21		$	14

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

The net postretirement benefit cost included the following components:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
					(in millions)
Interest cost..............................................................................................................................	$	-	$	1	$	1	$	2
Amortization of transition obligation...................................................................................	-		-		-		1
Net periodic postretirement benefit cost..............................................................................	$	-	$	1	$	1	$	3

15. Related Party Transactions

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

	June 30, 2013		December 31, 2012
	(in millions)
Assets:
Cash and due from banks............................................................................................................	$	173	$	114
Interest bearing deposits with banks........................................................................................	923		714
Securities purchased under agreements to resell....................................................................	-		-
Trading assets⁽¹⁾...........................................................................................................................	18,533		21,370
Loans..............................................................................................................................................	6,967		4,514
Other...............................................................................................................................................	945		858
Total assets...................................................................................................................................	$	27,541	$	27,570
Liabilities:
Deposits.........................................................................................................................................	$	14,333	$	13,863
Trading liabilities⁽¹⁾.......................................................................................................................	21,374		23,910
Short-term borrowings.................................................................................................................	3,513		2,721
Long-term debt..............................................................................................................................	3,991		3,990
Other...............................................................................................................................................	631		459
Total liabilities...............................................................................................................................	$	43,842	$	44,943

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
							(in millions)
Income/(Expense):
Interest income...........................................................................................................................	$	83		$	14		$	105		$	27
Interest expense..........................................................................................................................	(19		)	(23		)	(39		)	(47		)
Net interest income (loss).........................................................................................................	$	64		$	(9	)	$	66		$	(20	)
Servicing and other fees from HSBC affiliate:
Fees and commissions:
HSBC Finance.................................................................................................................	$	26		$	17		$	47		$	30
HSBC Markets (USA) Inc. ("HMUS")........................................................................	4			5			9			10
Other HSBC affiliates.....................................................................................................	14			14			30			42
Other HSBC affiliates income.............................................................................................	15			10			27			20
Total affiliate income..................................................................................................................	$	59		$	46		$	113		$	102
Residential mortgage banking revenue...................................................................................	$	-		$	1		$	-		$	3
Support services from HSBC affiliates:
HSBC Finance......................................................................................................................	$	(5	)	$	(7	)	$	(9	)	$	(17	)
HMUS....................................................................................................................................	(54		)	(79		)	(106		)	(161		)
HSBC Technology & Services (USA) ("HTSU")...........................................................	(242		)	(240		)	(475		)	(474		)
Other HSBC affiliates..........................................................................................................	(61		)	(60		)	(96		)	(119		)
Total support services from HSBC affiliates..........................................................................	$	(362	)	$	(386	)	$	(686	)	$	(771	)
Stock based compensation expense with HSBC...................................................................	$	(13	)	$	(8	)	$	(22	)	$	(20	)

Transactions Conducted with HSBC Finance Corporation

• In July 2004, we sold the account relationships associated with $970 million of credit card receivables to HSBC Finance and on a daily basis, we purchased new originations on these credit card receivables. As discussed in Note 8, "Intangible Assets," on March 29, 2012 we re-purchased these account relationships from HSBC Finance for $108 million and as a result, we stopped purchasing new originations on these credit card accounts from HSBC Finance. We purchased $492 million of credit card receivables from HSBC Finance during the three months ended March 31, 2012. HSBC Finance continued to service these loans for us for a fee through April 30, 2012. Effective with the close of the sale of our GM and UP credit card receivables and our private label credit card and closed-end receivables on May 1, 2012, these loans are now serviced by Capital One for a fee. Premiums previously paid are amortized to interest income over the estimated life of the receivables purchased. We paid HSBC Finance fees for servicing these loans of $2 million and $7 million during the three and six months ended June 30, 2012.

• In 2003 and 2004, we purchased approximately $3.7 billion of residential mortgage loans from HSBC Finance. HSBC Finance continues to service these loans for us for a fee. At June 30, 2013 and December 31, 2012, HSBC Finance was servicing $1.1 billion and $1.2 billion, respectively, of residential mortgage loans for us. We paid HSBC Finance fees for servicing these loans of $1 million and $2 million during the three and six months ended June 30, 2013, respectively, compared with $1 million and $2 million during the three and six months ended June 30, 2012, respectively.

• In the fourth quarter of 2009, an initiative was begun to streamline the servicing of real estate secured receivables across North America. As a result, certain functions that we had previously performed for our mortgage customers were being performed by HSBC Finance for all North America mortgage customers, including our mortgage customers. Additionally, we began performing certain functions for all North America mortgage customers where these functions had been previously provided separately by each entity. During 2011, we began a process to separate these functions so that each entity will be servicing its own mortgage customers when the process is completed. During the three months ended June 30, 2013 and 2012, we paid $1 million and $1 million, respectively, for services we received from HSBC Finance and received less than a million and $1 million, respectively, for services we provided to HSBC Finance. During the six months ended June 30, 2013 and 2012, we paid $3 million and $3 million, respectively, for services we received from HSBC Finance and received less than a million and $3 million, respectively, for services we provided to HSBC Finance.

• In July 2010, certain employees in the real estate receivable default servicing department of HSBC Finance were transferred to the mortgage loan servicing department of a subsidiary of HSBC Bank USA and subsequently to HSBC Bank USA. These employees continue to service defaulted real estate secured receivables for HSBC Finance and we receive a fee for providing these services. During the three and six months ended June 30, 2013, we received servicing revenue from HSBC Finance of $15 million and $31 million, respectively, compared with $14 million and $28 million during the year-ago periods.

• We extended a $1.5 billion uncommitted secured credit facility to certain subsidiaries of HSBC Finance in December 2008. The current credit facility matures in November 2013. Any draws on this credit facility by HSBC Finance require regulatory approval. There were no balances outstanding at June 30, 2013 and December 31, 2012.

• During the fourth quarter of 2011, we extended an unsecured $3.0 billion 364 day uncommitted revolving credit agreement to HSBC Finance which allowed for borrowings with maturities of up to 15 years. During the second quarter of 2012, an amendment was executed to increase this uncommitted revolving credit agreement to $4.0 billion. As of June 30, 2013 and December 31, 2012, $2.0 billion was outstanding under this credit agreement with $512 million maturing in September 2017 and $1.5 billion maturing in January 2018.

• In May 2012, we extended a $2.0 billion committed revolving credit facility to HSBC Finance which expires in May 2017. As of June 30, 2013 and December 31, 2012 there were no amounts outstanding under this credit facility.

Transactions Conducted with HSBC Finance Corporation Involving Discontinued Operations As it relates to our discontinued credit card and private label operations, in January 2009, we purchased the GM and UP Portfolios from HSBC Finance, with an outstanding principal balance of $12.4 billion at the time of sale, at a total net premium of $113 million. Additionally, in December 2004, we purchased the private label credit card receivable portfolio as well as private label commercial and closed end loans from HSBC Finance. HSBC Finance retained the customer account relationships for both the GM and UP receivables and the private label credit card receivables and by agreement we purchased on a daily basis substantially all new originations from these account relationships from HSBC Finance. Premiums paid for these receivables are amortized to interest income over the estimated life of the receivables purchased and are included as a component of Income from Discontinued Operations. HSBC Finance serviced these credit card loans for us for a fee through April 30, 2012. Fees paid for servicing these loan portfolios, which are included as a component of Income from discontinued operations, totaled $48 million and $199 million during the three and six months ended June 30, 2012, respectively. Information regarding these loans is summarized in the table below.

	Private Label		Credit Card
	Cards	Commercial and Closed End Loans	General Motors	Union Privilege	Other	Total
	(in billions)
Total loans purchased on a daily basis from HSBC Finance during:
Three Months Ended June 30, 2012.................................	1.1	-	.9	.3	.2	2.5
Six Months Ended June 30, 2012......................................	4.4	-	3.9	1.0	.6	9.9

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

Transactions Conducted with HSBC Markets (USA) Inc. ("HMUS") and Subsidiaries

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

• We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $3.8 billion at June 30, 2013 and December 31, 2012. At June 30, 2013 and December 31, 2012, $1.3 billion and $310 million, respectively, was outstanding on these loans and lines. Interest income on these loans and lines totaled $1 million and $2 million during the three and six months ended June 30, 2013, respectively, compared with $1 million and $2 million during the three and six months ended June 30, 2012, respectively.

Other Transactions with HSBC Affiliates

• HNAH extended a $1.0 billion senior debt to us in August 2009. This is a five year floating rate debt which matures in August 2014. In addition, in April 2011, we borrowed an additional $3.0 billion from HNAH. This senior debt matures in three equal installments of $1.0 billion in April 2015, 2016 and 2017. The debt bears interest at 90 day USD Libor plus a spread, with each maturity at a different spread. Interest expense on this debt totaled $14 million and $28 million during the three and six months ended June 30, 2013, respectively, compared with $17 million and $33 million during the three and six months ended June 30, 2012, respectively.

• In addition to purchases of U.S. Treasury and U.S. Government Agency securities, we purchased both foreign-denominated and USD denominated marketable securities from certain affiliates including HSI, HSBC Asia-Pacific, HSBC Mexico, HSBC London, HSBC Brazil, HSBC Chile and HSBC Canada. Marketable securities outstanding from these purchases are reflected in trading assets and totaled $12 million and $14 million at June 30, 2013 and December 31, 2012, respectively.

• We have extended uncommitted lines of credit to HSBC Bank Brasil in the amount of $1.5 billion and $1.0 billion at June 30, 2013 and December 31, 2012, respectively, of which $1.0 billion was outstanding at both June 30, 2013 and December 31, 2012.

• We have extended an uncommitted line of credit to HSBC Panama in the amount of $752 million at June 30, 2013 and December 31, 2012 of which $292 million and $372 million was outstanding at June 30, 2013 and December 31, 2012, respectively.

• We have a committed unused line of credit with HSBC Investment (Bahamas) Limited of $900 million at June 30, 2013 and December 31, 2012.

• We have a committed unused line of credit with HSBC Holdings plc of $500 million at June 30, 2013 and December 31, 2012.

• We have an uncommitted unused line of credit with HSBC North America Inc. ("HNAI") of $150 million at June 30, 2013 and December 31, 2012.

• We have extended loans and lines of credit to various other HSBC affiliates totaling $460 million at June 30, 2013 and December 31, 2012. At June 30, 2013 and December 31, 2012, there were no amounts outstanding under these loans or lines of credit.

• In addition to loans and lines extended to affiliates discussed above, from time to time we may extend loans to affiliates which are generally short term in nature. At June 30, 2013 and December 31, 2012, there were $2.2 billion and $812 million of short term loans outstanding primarily related to metals activities.

• Historically, we have provided support to several HSBC affiliate sponsored asset-backed commercial paper ("ABCP") conduits by purchasing A-1/P-1 rated commercial paper issued by them. At June 30, 2013 and December 31, 2012, no ABCP issued by such conduits was held. Pursuant to a global restructure of HSBC sponsored ABCP conduits, certain assets previously originated and funded by Bryant Park, an ABCP conduit organized by HUSI, have been refinanced by Regency, another ABCP conduit organized and consolidated by our affiliate. HUSI is committed to provide liquidity facilities to backstop the liquidity risk in Regency in relation to assets originated in the U.S. region. The notional amount of the liquidity facilities provided by HUSI to Regency was approximately $3.1 billion as of June 30, 2013.

• We routinely enter into derivative transactions with HSBC Finance and other HSBC affiliates as part of a global HSBC strategy to offset interest rate or other market risks associated with debt issues and derivative contracts with unaffiliated third parties. The notional value of derivative contracts related to these contracts was approximately $1,263.3 billion and $1,066.5 billion at June 30, 2013 and December 31, 2012, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities) related to the contracts was approximately $836 million and $691 million at June 30, 2013 and December 31, 2012, respectively. Our Global Banking and Markets business accounts for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.

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

• Our domestic employees participate in a defined benefit pension plan sponsored by HSBC North America. Additional information regarding pensions is provided in Note 14 "Pension and Other Post retirement Benefits."

• Employees participate in one or more stock compensation plans sponsored by HSBC. Our share of the expense of these plans on a pre-tax basis was $13 million and $22 million during the three and six months ended June 30, 2013, respectively, compared with $8 million and $20 million during the three and six months ended June 30, 2012, respectively.

• We use HSBC Global Resourcing (UK) Ltd., an HSBC affiliate located outside of the United States, to provide various support services to our operations including among other areas customer service, systems, collection and accounting functions. The expenses related to these services of $3 million and $8 million during the three and six months ended June 30, 2013, respectively, compared with $6 million and $13 million during the three and six months ended June 30, 2012, respectively, are included as a component of Support services from HSBC affiliates in the table above. Through February 2011, the expenses for these services for all HSBC North America operations were billed directly to HTSU who then billed these services to the appropriate HSBC affiliate who benefited from the services. Beginning in March 2011, HSBC Global Resourcing (UK) Ltd. began billing us directly for the services we receive from them.

• We did not pay any dividends to our parent company, HNAI, on our common stock during the three and six months ended June 30, 2013 and 2012.

16. Business Segments

We have four distinct business segments that we utilize for management reporting and analysis purposes, which are aligned with HSBC's global businesses and business strategy. 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 ("CMB") has historically held investments in low income housing tax credits. The financial benefit from these investments is obtained through lower taxes. Since business segment returns are measured on a pre-tax basis, a revenue share has historically been in place in the form of a funding credit to provide CMB with an exact and equal offset booked to the Other segment. Beginning in 2013, this practice has been eliminated and the low income housing tax credit investments and related financial impact are being recorded entirely in the Other segment. We have reclassified prior period results in both the CMB and Other segments to conform to the revised current year presentation.

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

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

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

Net Interest Income

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

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

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

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

Other Operating Income (Total Other Revenues)

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

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

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

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

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

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

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

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

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

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

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

Loan Impairment Charges (Provision for Credit Losses)

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

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

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

For loans collectively evaluated for impairment under US GAAP, bank industry practice adopted in the fourth quarter of 2012 generally results in a loss emergence period for these loans using a roll rate migration analysis which results in 12 months of losses in our allowance for credit losses. Under IFRSs, we concluded that 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 which was also adopted in the fourth quarter of 2012. In the second quarter of 2013, we updated our review under IFRS to reflect the period of time after a loss event a loan remains current before delinquency is observed which 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 loans collectively evaluated for impairment using a roll rate migration analysis of 12 months.

Operating Expenses

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

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

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

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

Assets

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

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

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

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

VIEs - The requirements for consolidation of variable interest entities ("VIEs") under U.S. GAAP are based on both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses, or the right to receive benefits that could potentially be significant to the VIE. As a result, under U.S. GAAP we were determined to be the primary beneficiary of and consolidated a commercial paper conduit effective January 1, 2010. However in the first quarter of 2011, changes involving liquidity asset purchase agreements were made that caused us to no longer be considered the primary beneficiary and this commercial paper conduit was deconsolidated at March 31, 2011. Under IFRSs, this conduit was historically not consolidated. Additional changes to the commercial paper conduit structure were made in 2013 and beginning in May 2013 we began to consolidate this entity for both US GAAP and IFRSs. See Note 18, "Variable Interest Entities" for further discussion.

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

	IFRS Consolidated Amounts
	RBWM			CMB			GBM			PB			Other			Adjustments/ Reconciling Items			Total			IFRS Adjustments⁽⁴⁾			IFRS Reclassi- fications⁽⁵⁾			U.S. GAAP Consolidated Totals
	(in millions)
Three Months Ended June 30, 2013
Net interest income⁽¹⁾................	$	206		$	172		$	125		$	49		$	(14	)	$	(3	)	$	535		$	(21	)	$	4		$	518
Other operating income...................	82			77			295			30			60			3			547			20			(1		)	566
Total operating income...................	288			249			420			79			46			-			1,082			(1		)	3			1,084
Loan impairment charges⁽³⁾................	21			1			6			-			-			-			28			19			20			67
	267			248			414			79			46			-			1,054			(20		)	(17		)	1,017
Operating expenses⁽²⁾..............	300			171			250			67			44			-			832			(27		)	(17		)	788
Profit before income tax expense	$	(33	)	$	77		$	164		$	12		$	2		$	-		$	222		$	7		$	-		$	229

Three Months Ended June 30, 2012
Net interest income⁽¹⁾................	$	197		$	160		$	167		$	47		$	(7	)	$	(1	)	$	563		$	(36	)	$	8		$	535
Other operating income...................	262			267			165			28			165			1			888			(32		)	23			879
Total operating income...................	459			427			332			75			158			-			1,451			(68		)	31			1,414
Loan impairment charges⁽³⁾................	61			8			23			(3		)	-			-			89			7			(7		)	89
	398			419			309			78			158			-			1,362			(75		)	38			1,325
Operating expenses⁽²⁾..............	321			168			236			63			745			-			1,533			(4		)	38			1,567
Profit before income tax expense	$	77		$	251		$	73		$	15		$	(587	)	$	-		$	(171	)	$	(71	)	$	-		$	(242	)

Six Months Ended June 30, 2013
Net interest income⁽¹⁾................	$	421		$	342		$	234		$	94		$	(28	)	$	(7	)	$	1,056		$	(38	)	$	5		$	1,023
Other operating income...................	189			142			677			58			35			7			1,108			54			(4		)	1,158
Total operating income...................	610			484			911			152			7			-			2,164			16			1			2,181
Loan impairment charges⁽³⁾................	53			15			9			1			-			-			78			(4		)	14			88
	557			469			902			151			7			-			2,086			20			(13		)	2,093
Operating expenses⁽²⁾..............	591			333			480			127			86			-			1,617			(27		)	(13		)	1,577
Profit before income tax expense	$	(34	)	$	136		$	422		$	24		$	(79	)	$	-		$	469		$	47		$	-		$	516
Balances at end of period:
Total assets............	$	19,563		$	20,799		$	200,591		$	7,499		$	1,088		$	-		$	249,540		$	(57,199	)	$	45		$	192,386
Total loans, net......	16,508			19,693			21,374			5,874			-			-			63,449			3,144			(493		)	66,100
Goodwill.................	581			358			480			325			-			-			1,744			484			-			2,228
Total deposits........	31,855			21,382			47,969			12,152			-			-			113,358			(5,047		)	3,424			111,735

Six Months Ended June 30, 2012
Net interest income⁽¹⁾................	$	444		$	330		$	310		$	92		$	(18	)	$	(7	)	$	1,151		$	(51	)	$	22		$	1,122
Other operating income...................	359			335			491			57			(70		)	7			1,179			36			48			1,263
Total operating income...................	803			665			801			149			(88		)	-			2,330			(15		)	70			2,385
Loan impairment charges⁽³⁾................	102			(9		)	(8		)	(5		)	-			-			80			4			5			89
	701			674			809			154			(88		)	-			2,250			(19		)	65			2,296
Operating expenses⁽²⁾..............	642			332			495			121			785			-			2,375			-			65			2,440
Profit before income tax expense	$	59		$	342		$	314		$	33		$	(873	)	$	-		$	(125	)	$	(19	)	$	-		$	(144	)
Balances at end of period:
Total assets............	$	25,654		$	22,691		$	219,724		$	6,860		$	622		$	-		$	275,551		$	(75,139	)	$	15		$	200,427
Total loans, net......	16,312			18,080			33,386			5,081			-			-			72,859			(1,995		)	(15,419		)	55,445
Goodwill.................	581			358			480			325			-			-			1,744			484			-			2,228
Total deposits........	36,770			21,125			42,071			12,727			-			-			112,693			(6,229		)	16,763			123,227

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

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

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

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

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

17. Retained Earnings and Regulatory Capital Requirements

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

	June 30, 2013							December 31, 2012
	Capital Amount		Well-Capitalized Minimum Ratio⁽¹⁾			Actual Ratio		Capital Amount		Well-Capitalized Minimum Ratio⁽¹⁾			Actual Ratio
	(dollars are in millions)
Total capital ratio:
HSBC USA Inc...........................	$	20,708	10.00	%		17.42	%	$	20,764	10.00	%		19.52	%
HSBC Bank USA.......................	21,556		10.00			19.22		21,464		10.00			21.07
Tier 1 capital ratio:
HSBC USA Inc...........................	14,774		6.00			12.43		14,480		6.00			13.61
HSBC Bank USA.......................	15,894		6.00			14.17		15,482		6.00			15.20
Tier 1 common ratio:
HSBC USA Inc...........................	12,666		5.00		⁽²⁾	10.65		12,373		5.00		⁽²⁾	11.63
HSBC Bank USA.......................	15,894		5.00			14.17		15,482		5.00			15.20
Tier 1 leverage ratio:
HSBC USA Inc...........................	14,774		3.00		⁽³⁾	8.09		14,480		3.00		⁽³⁾	7.70
HSBC Bank USA.......................	15,894		5.00			9.03		15,482		5.00			8.43
Risk weighted assets:
HSBC USA Inc...........................	118,895							106,395
HSBC Bank USA.......................	112,161							101,865

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

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

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

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

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

Regulatory guidelines impose certain restrictions that may limit the inclusion of deferred tax assets in the computation of regulatory capital. We closely monitor the deferred tax assets for potential limitations or exclusions. At June 30, 2013 and December 31, 2012, deferred tax assets of $557 million and $622 million, respectively, were excluded in the computation of regulatory capital.

18. Variable Interest Entities

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

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

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

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

	June 30, 2013				December 31, 2012
	Consolidated Assets		Consolidated Liabilities		Consolidated Assets		Consolidated Liabilities
	(in millions)
Asset-backed commercial paper conduit:
Interest bearing deposits with banks...............................................	$	8	$	-	$	-	$	-
Held-to-maturity securities................................................................	218		-		-		-
Other assets.........................................................................................	49		-		-		-
Short-term borrowings........................................................................	-		400		-		-
Other liabilities.....................................................................................	-		3		-		-
Subtotal...................................................................................................	$	275	$	403	$	-	$	-
Low income housing limited liability partnership:
Interest bearing deposits with banks...............................................	$	213	$	-	$	216	$	-
Other assets.........................................................................................	495		-		533		-
Long term debt.....................................................................................	-		92		-		92
Other liabilities.....................................................................................	-		119		-		152
Subtotal...................................................................................................	$	708	$	211	$	749	$	244
Total.............................................................................................................	$	983	$	614	$	749	$	244

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

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

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

	Variable Interests Held Classified as Assets		Variable Interests Held Classified as Liabilities		Total Assets in Unconsolidated VIEs		Maximum Exposure to Loss
	(in millions)
June 30, 2013
Asset-backed commercial paper conduits.....................	$	-	$	-	$	16,198	$	3,438
Structured note vehicles...................................................	1,799		71		6,400		6,228
Total.....................................................................................	$	1,799	$	71	$	22,598	$	9,666
December 31, 2012
Asset-backed commercial paper conduits.....................	$	-	$	-	$	16,104	$	2,212
Structured note vehicles...................................................	2,117		154		7,055		6,893
Total.....................................................................................	$	2,117	$	154	$	23,159	$	9,105

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

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

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

Each seller of assets to an ABCP conduit typically provides credit enhancements in the form of asset overcollateralization and, therefore, bears the risk of first loss related to the specific assets transferred. We do not transfer our own assets to the conduits. We do not provide the majority of the liquidity facilities to any of these ABCP conduits. We have no ownership interests in, perform no administrative duties for, and do not service any of the assets held by the conduits. We are not the primary beneficiary and do not consolidate any of the ABCP conduits to which we provide liquidity facilities. Credit risk related to the liquidity facilities provided is managed by subjecting these facilities to our normal underwriting and risk management processes. The $3.4 billion maximum exposure to loss presented in the table above represents the maximum amount of loans and asset purchases we could be required to fund under the liquidity facilities. The maximum loss exposure is estimated assuming the facilities are fully drawn and the underlying collateralized assets are in default with zero recovery value.

Structured note vehicles Our involvement in structured note vehicles includes derivatives such as interest rate and currency swaps and investments in the vehicles' debt instruments. With respect to several of these VIEs, we hold variable interests in the form of total return swaps entered into in connection with the transfer of certain assets to the VIEs. In these transactions, we transferred financial assets from our trading portfolio to the VIEs and entered into total return swaps under which we receive the total return on the transferred assets and pay a market rate of return. The transfers of assets in these transactions do not qualify as sales under the applicable accounting literature and are accounted for as secured borrowings. Accordingly, the transferred assets continue to be recognized as trading assets on our balance sheet and the funds received are recorded as liabilities in long-term debt. As of June 30, 2013, we recorded approximately $31 million of trading assets and $34 million of trading liabilities on our balance sheet as a result of "failed sale" accounting treatment for certain transfers of financial assets. As of December 31, 2012, we recorded approximately $140 million of trading assets and $147 million of trading liabilities on our balance sheet as a result of "failed sale" accounting treatment for certain transfers of financial assets. The financial assets and financial liabilities were not legally ours and we have no control over the financial assets which are restricted solely to satisfy the liability.

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

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

Beneficial interests issued by third-party sponsored securitization entities We hold certain beneficial interests such as mortgage-backed securities issued by third party sponsored securitization entities which may be considered VIEs. The investments are transacted at arm's-length and decisions to invest are based on a credit analysis of the underlying collateral assets or the issuer. We are a passive investor in these issuers and do not have the power to direct the activities of these issuers. As such, we do not consolidate these securitization entities. Additionally, we do not have other involvements in servicing or managing the collateral assets or provide financial or liquidity support to these issuers which potentially give rise to risk of loss exposure. These investments are an integral part of the disclosure in Note 4 "Securities" and Note 20 "Fair Value Measurements" and, therefore, are not disclosed in this note to avoid redundancy.

19. Guarantee Arrangements, Pledged Assets and Collateral

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

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

	June 30, 2013					December 31, 2012
	Carrying Value			Notional/Maximum Exposure to Loss		Carrying Value			Notional/Maximum Exposure to Loss
	(in millions)
Credit derivatives⁽¹⁾⁽⁴⁾........................................................................................	$	(1,052	)	$	206,309	$	(76	)	$	237,548
Financial standby letters of credit, net of participations⁽²⁾⁽³⁾......................	-			5,073		-			5,554
Performance (non-financial) guarantees⁽³⁾.....................................................	-			3,081		-			2,878
Liquidity asset purchase agreements⁽³⁾..........................................................	-			3,438		-			2,212
Total.....................................................................................................................	$	(1,052	)	$	217,901	$	(76	)	$	248,192

⁽¹⁾Includes $39.4 billion and $44.2 billion of notional issued for the benefit of HSBC affiliates at June 30, 2013 and December 31, 2012, respectively.

⁽²⁾Includes $846 million and $808 million issued for the benefit of HSBC affiliates at June 30, 2013 and December 31, 2012, respectively.

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

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

Credit-Risk Related Guarantees

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

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

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

	June 30, 2013						December 31, 2012
	Carrying (Fair) Value			Notional			Carrying (Fair) Value			Notional
	(in millions)
Sell-protection credit derivative positions........................................	$	(1,052	)	$	206,309		$	(76	)	$	237,548
Buy-protection credit derivative positions.......................................	1,136			212,873			120			247,384
Net position⁽¹⁾........................................................................................	$	84		$	(6,564	)	$	44		$	(9,836	)

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

Standby letters of credit A standby letter of credit is issued to a third party for the benefit of a customer and is a guarantee that the customer will perform or satisfy certain obligations under a contract. It irrevocably obligates us to pay a specified amount to the third party beneficiary if the customer fails to perform the contractual obligation. We issue two types of standby letters of credit: performance and financial. A performance standby letter of credit is issued where the customer is required to perform some nonfinancial contractual obligation, such as the performance of a specific act, whereas a financial standby letter of credit is issued where the customer's contractual obligation is of a financial nature, such as the repayment of a loan or debt instrument. As of June 30, 2013, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5.1 billion and $3.1 billion, respectively. As of December 31, 2012, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5.6 billion and $2.9 billion, respectively.

The issuance of a standby letter of credit is subject to our credit approval process and collateral requirements. We charge fees for issuing letters of credit commensurate with the customer's credit evaluation and the nature of any collateral. Included in other liabilities are deferred fees on standby letters of credit, which represent the value of the stand-ready obligation to perform under these guarantees, amounting to $45 million and $46 million at June 30, 2013 and December 31, 2012, respectively. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of $17 million and $19 million at June 30, 2013 and December 31, 2012, respectively.

Below is a summary of the credit ratings of credit risk related guarantees including the credit ratings of counterparties against which we sold credit protection and financial standby letters of credit as of June 30, 2013 as an indicative proxy of payment risk:

	Average Life (in years)	Credit Ratings of the Obligors or the Transactions
Notional/Contractual Amounts	Average Life (in years)	Investment Grade		Non-Investment Grade		Total
	(dollars are in millions)
Sell-protection Credit Derivatives⁽¹⁾
Single name CDS.........................................................................	2.4	$	121,617	$	24,259	$	145,876
Structured CDS...........................................................................	2.0	23,337		2,997		26,334
Index credit derivatives..............................................................	3.5	21,573		529		22,102
Total return swaps......................................................................	8.1	9,979		2,018		11,997
Subtotal...............................................................................................		176,506		29,803		206,309
Standby Letters of Credit⁽²⁾..............................................................	1.2	6,608		1,546		8,154
Total....................................................................................................		$	183,114	$	31,349	$	214,463

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

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

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

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

Mortgage Loan Repurchase Obligations

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

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

To date, a majority of the repurchase demands we have received primarily relate to prime loans sourced during 2004 through 2008 from the legacy broker channel which we exited in late 2008. Loans sold to GSEs and other third parties originated in 2004 through 2008 subject to representations and warranties for which we may be liable had an outstanding principal balance of approximately $13.3 billion and $15.1 billion at June 30, 2013 and December 31, 2012, respectively, including $8.5 billion and $9.6 billion, respectively, of loans sourced from our legacy broker channel.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(in millions)
Pre- 2004................................................................................................................................	$	1	$	2	$	3	$	3
2004........................................................................................................................................	2		7		11		11
2005........................................................................................................................................	3		9		7		14
2006........................................................................................................................................	11		29		26		45
2007........................................................................................................................................	25		76		61		120
2008........................................................................................................................................	13		52		35		78
Post 2008...............................................................................................................................	5		6		10		10
Total repurchase demands received⁽¹⁾.............................................................................	$	60	$	181	$	153	$	281

⁽¹⁾Includes repurchase demands on loans sourced from our legacy broker channel of $44 million and $151 million for the three months ended June 30, 2013 and 2012, respectively, and $120 million and $233 million for the six months ended June 30, 2013 and 2012, respectively.

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

	June 30, 2013		December 31, 2012
	(in millions)
GSEs...................................................................................................................................................................	$	50	$	86
Others................................................................................................................................................................	3		3
Total⁽¹⁾ ..............................................................................................................................................................	$	53	$	89

⁽¹⁾Includes repurchase demands on loans sourced from our legacy broker channel of $40 million and $65 million at June 30, 2013 and December 31, 2012, respectively.

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

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

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

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in millions)
Balance at beginning of period.........................................................................................	$	211		$	223		$	219		$	237
Increase in liability recorded through earnings..............................................................	23			32			36			53
Realized losses.....................................................................................................................	(17		)	(33		)	(38		)	(68		)
Balance at end of period.....................................................................................................	$	217		$	222		$	217		$	222

Our reserve for potential repurchase liability exposures relates primarily to previously originated mortgages through broker channels. Our mortgage repurchase liability of $217 million at June 30, 2013 represents our best estimate of the loss that has been incurred including interest, resulting from various representations and warranties in the contractual provisions of our mortgage loan sales. Because the level of mortgage loan repurchase losses are dependent upon economic factors, investor demand strategies and other external risk factors such as housing market trends that may change, the level of the liability for mortgage loan repurchase losses requires significant judgment. We have seen recent changes in investor demand trends and continue to evaluate our methods of determining the best estimate of loss based on these recent trends. As these estimates are influenced by factors outside our control, there is uncertainty inherent in these estimates making it reasonably possible that they could change. The range of reasonably possible losses in excess of our recorded repurchase liability is between zero and $130 million at June 30, 2013. This estimated range of reasonably possible losses was determined based upon modifying the assumptions utilized in our best estimate of probable losses to reflect what we believe to be reasonably possible adverse assumptions.

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

Liquidity asset purchase agreements We provide liquidity facilities to a number of multi-seller and single-seller asset-backed commercial paper conduits sponsored by affiliates and third parties. The conduits finance the purchase of individual assets by issuing commercial paper to third party investors. Each liquidity facility is transaction specific and has a maximum limit. Pursuant to the liquidity agreements, we are obligated, subject to certain limitations, to purchase the eligible assets from the conduit at an amount not to exceed the face value of the commercial paper in the event the conduit is unable to refinance its commercial paper. A liquidity asset purchase agreement is essentially a conditional written put option issued to the conduit where the exercise price is the face value of the commercial paper. As of June 30, 2013 and December 31, 2012, we have issued $3.4 billion and $2.2 billion, respectively, of liquidity facilities to provide liquidity support to the commercial paper issued by various conduits See Note 18, "Variable Interest Entities," for further information.

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

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

	June 30, 2013		December 31, 2012
	(in millions)
Interest bearing deposits with banks............................................................................................................	$	572	$	673
Trading assets⁽¹⁾...............................................................................................................................................	3,656		2,346
Securities available-for-sale⁽²⁾.........................................................................................................................	20,183		17,236
Securities held-to-maturity..............................................................................................................................	621		456
Loans⁽³⁾ ..............................................................................................................................................................	1,766		2,142
Other assets⁽⁴⁾...................................................................................................................................................	2,235		2,265
Total....................................................................................................................................................................	$	29,033	$	25,118

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

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

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

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

Debt securities pledged as collateral that can be sold or repledged by the secured party continue to be reported on the consolidated balance sheet. The fair value of securities available-for-sale that can be sold or repledged was $8.4 billion and $6.5 billion at June 30, 2013 and December 31, 2012, respectively. The fair value of trading assets that can be sold or repledged was $3.6 billion and $2.2 billion at June 30, 2013 and December 31, 2012, respectively.

The fair value of collateral we accepted but not reported on the consolidated balance sheet that can be sold or repledged was $9.2 billion and $5.7 billion at June 30, 2013 and December 31, 2012, respectively. This collateral was obtained under security resale agreements. Of this collateral, $8.2 billion and $1.3 billion has been sold or repledged as collateral under repurchase agreements or to cover short sales at June 30, 2013 and December 31, 2012, respectively.

Securitization Activity In addition to the repurchase risk described above, we have also been involved as a sponsor/seller of loans used to facilitate whole loan securitizations underwritten by our affiliate, HSI. In this regard, we began acquiring residential mortgage loans beginning in 2005 which were warehoused on our balance sheet with the intent of selling them to HSI to facilitate HSI's whole loan securitization program which was discontinued in the second half of 2007. During 2005-2007, we purchased and sold $24 billion of such loans to HSI which were subsequently securitized and sold by HSI to third parties. See "Mortgage Securitization Activity and Litigation" in Note 21, "Litigation and Regulatory Matters" for additional discussion of related exposure.

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

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

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

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

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

					Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts Recognized		Gross Amounts Offset in the Balance Sheet⁽¹⁾	Net Amounts Presented in the Balance Sheet	Financial Instruments ⁽²⁾	Cash Collateral Received / Pledged	Net Amount ⁽³⁾
	(in millions)
As of June 30, 2013:
Assets:
Securities purchased under agreements to resell....................................	$	9,210	7,811	1,399	1,393	-	$	6
Liabilities:
Securities sold under repurchase agreements....	$	20,256	7,811	12,445	12,445	-	$	-

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

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

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

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

20. Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

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

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

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

A valuation committee, chaired by the Head of Business Finance of Global Banking and Markets, meets monthly to review, monitor and discuss significant valuation matters arising from credit and market risks. The committee is responsible for establishing valuation policies and procedures, approving the internal valuation techniques and models developed by the Quantitative Risk and

Valuation Group ("QRVG"), reviewing and approving valuation adjustments pertaining to, among other things, unobservable inputs, market liquidity, selection of valuation model and counterparty credit risk. Significant valuation risks identified in business activities are corroborated and addressed by the committee members and, where applicable, are escalated to the Chief Financial Officer of HUSI and the Audit Committee of the Board of Directors.

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

The following factors are considered in determining fair values:

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

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

▪ consistency among different pricing sources;

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

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

▪ the source of the fair value information; and

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

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

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

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

June 30, 2013	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets.............................................................	$	31,526	$	31,526	$	1,311	$	29,820	$	395
Securities purchased under resale agreements...........................	1,399		1,399		-		1,399		-
Non-derivative trading assets........................................................	18,447		18,447		1,530		14,772		2,145
Derivatives........................................................................................	10,452		10,452		104		10,226		122
Securities...........................................................................................	54,511		54,572		29,573		24,999		-
Commercial loans, net of allowance for credit losses.................	46,965		47,838		-		-		47,838
Commercial loans designated under fair value option and held for sale...............................................................................................	3		3		-		3		-
Commercial loans held for sale.......................................................	17		17		-		17		-
Consumer loans, net of allowance for credit losses...................	19,135		16,054		-		-		16,054
Consumer loans held for sale:
Residential mortgages................................................................	275		276		-		-		276
Other consumer...........................................................................	64		64		-		-		64
Financial liabilities:
Short-term financial liabilities.........................................................	$	21,922	$	21,922	$	-	$	21,922	$	-
Deposits:
Without fixed maturities............................................................	100,648		100,648		-		100,648		-
Fixed maturities...........................................................................	3,137		3,160		-		3,160		-
Deposits designated under fair value option..............................	7,950		7,950		-		5,288		2,662
Non-derivative trading liabilities...................................................	5,036		5,036		236		4,800		-
Derivatives........................................................................................	11,211		11,211		32		11,079		100
Long-term debt.................................................................................	14,308		14,649		-		14,649		-
Long-term debt designated under fair value option...................	6,626		6,626		-		6,168		458

December 31, 2012	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets.............................................................	$	15,074	$	15,074	$	1,359	$	13,279	$	436
Securities purchased under resale agreements...........................	3,149		3,149		-		3,149		-
Non-derivative trading assets........................................................	25,491		25,491		2,484		20,061		2,946
Derivatives........................................................................................	11,986		11,986		30		11,785		171
Securities...........................................................................................	69,336		69,547		43,421		26,126		-
Commercial loans, net of allowance for credit losses.................	43,833		45,153		-		-		45,153
Commercial loans designated under fair value option and held for sale...............................................................................................	465		465		-		465		-
Commercial loans held for sale.......................................................	16		16		-		16		-
Consumer loans, net of allowance for credit losses...................	18,778		15,173		-		-		15,173
Consumer loans held for sale:
Residential mortgages................................................................	472		485		-		-		485
Other consumer...........................................................................	65		65		-		-		65
Financial liabilities:
Short-term financial liabilities.........................................................	$	15,421	$	15,421	$	-	$	15,421	$	-
Deposits:
Without fixed maturities............................................................	104,414		104,414		-		104,414		-
Fixed maturities...........................................................................	4,565		4,574		-		4,574		-
Deposits designated under fair value option..............................	8,692		8,692		-		6,056		2,636
Non-derivative trading liabilities...................................................	5,974		5,974		207		5,767		-
Derivatives........................................................................................	15,202		15,202		21		15,054		127
Long-term debt.................................................................................	14,465		15,163		-		15,163		-
Long-term debt designated under fair value option...................	7,280		7,280		-		6,851		429

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

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

	Fair Value Measurements on a Recurring Basis
June 30, 2013	Level 1		Level 2		Level 3		Gross Balance		Netting⁽¹⁾			Net Balance
	(in millions)
Assets:
Trading Securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises.....................................................................................	$	1,530	$	197	$	-	$	1,727	$	-		$	1,727
Collateralized debt obligations........................................................	-		75		227		302		-			302
Asset-backed securities:
Residential mortgages...............................................................	-		167		-		167		-			167
Corporate and other domestic debt securities..................................	-		2		1,498		1,500		-			1,500
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		681		285		966		-			966
Government.............................................................................	-		4,229		135		4,364		-			4,364
Equity securities.............................................................................	-		24		-		24		-			24
Precious metals trading..................................................................	-		9,397		-		9,397		-			9,397
Derivatives⁽²⁾:
Interest rate contracts....................................................................	74		57,233		1		57,308		-			57,308
Foreign exchange contracts............................................................	5		15,972		175		16,152		-			16,152
Equity contracts.............................................................................	-		1,698		140		1,838		-			1,838
Precious metals contracts...............................................................	768		2,881		-		3,649		-			3,649
Credit contracts.............................................................................	-		5,236		669		5,905		-			5,905
Derivatives netting........................................................................	-		-		-		-		(74,400		)	(74,400		)
Total derivatives................................................................................	847		83,020		985		84,852		(74,400		)	10,452
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises.....................................................................................	29,533		16,797		-		46,330		-			46,330
Obligations of U.S. states and political subdivisions........................	-		869		-		869		-			869
Asset-backed securities:
Residential mortgages...............................................................	-		1		-		1		-			1
Commercial mortgages.............................................................	-		166		-		166		-			166
Home equity.............................................................................	-		245		-		245		-			245
Other........................................................................................	-		104		-		104		-			104
Corporate and other domestic debt securities..................................	-		24		-		24		-			24
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		891		-		891		-			891
Government-backed..................................................................	40		4,023		-		4,063		-			4,063
Equity securities.............................................................................	-		165		-		165		-			165
Loans⁽³⁾..............................................................................................	-		3		-		3		-			3
Mortgage servicing rights⁽⁴⁾................................................................	-		-		225		225		-			225
Total assets............................................................................	$	31,950	$	121,080	$	3,355	$	156,385	$	(74,400	)	$	81,985
Liabilities:
Deposits in domestic offices⁽⁵⁾............................................................	$	-	$	5,288	$	2,662	$	7,950	$	-		$	7,950
Trading liabilities, excluding derivatives.............................................	236		4,800		-		5,036		-			5,036
Derivatives⁽²⁾:
Interest rate contracts....................................................................	83		57,217		2		57,302		-			57,302
Foreign exchange contracts............................................................	4		15,522		71		15,597		-			15,597
Equity contracts.............................................................................	-		1,335		223		1,558		-			1,558
Precious metals contracts...............................................................	148		1,960		-		2,108		-			2,108
Credit contracts.............................................................................	-		5,492		444		5,936		-			5,936
Derivatives netting........................................................................	-		-		-		-		(71,290		)	(71,290		)
Total derivatives................................................................................	235		81,526		740		82,501		(71,290		)	11,211
Long-term debt⁽⁶⁾...............................................................................	-		6,168		458		6,626		-			6,626
Total liabilities	$	471	$	97,782	$	3,860	$	102,113	$	(71,290	)	$	30,823

	Fair Value Measurements on a Recurring Basis
December 31, 2012	Level 1		Level 2		Level 3		Gross Balance		Netting⁽¹⁾			Net Balance
	(in millions)
Assets:
Trading Securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises.....................................................................................	$	2,484	$	369	$	-	$	2,853	$	-		$	2,853
Collateralized debt obligations........................................................	-		-		466		466		-			466
Asset-backed securities:
Residential mortgages...............................................................	-		221		-		221		-			221
Corporate and other domestic debt securities..................................	-		1,035		1,861		2,896		-			2,896
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		468		299		767		-			767
Government.............................................................................	-		5,609		311		5,920		-			5,920
Equity securities.............................................................................	-		27		9		36		-			36
Precious metals trading..................................................................	-		12,332		-		12,332		-			12,332
Derivatives⁽²⁾:
Interest rate contracts....................................................................	98		71,717		8		71,823		-			71,823
Foreign exchange contracts............................................................	4		13,831		16		13,851		-			13,851
Equity contracts.............................................................................	-		1,593		166		1,759		-			1,759
Precious metals contracts...............................................................	135		649		7		791		-			791
Credit contracts.............................................................................	-		5,961		1,168		7,129		-			7,129
Derivatives netting........................................................................	-		-		-		-		(83,367		)	(83,367		)
Total derivatives................................................................................	237		93,751		1,365		95,353		(83,367		)	11,986
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises.....................................................................................	43,379		17,316		-		60,695		-			60,695
Obligations of U.S. states and political subdivisions........................	-		912		-		912		-			912
Asset-backed securities:
Residential mortgages...............................................................	-		1		-		1		-			1
Commercial mortgages.............................................................	-		214		-		214		-			214
Home equity.............................................................................	-		258		-		258		-			258
Other........................................................................................	-		84		-		84		-			84
Corporate and other domestic debt securities..................................	-		26		-		26		-			26
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		831		-		831		-			831
Government-backed..................................................................	42		4,480		-		4,522		-			4,522
Equity securities.............................................................................	-		173		-		173		-			173
Loans⁽³⁾..............................................................................................	-		465		-		465		-			465
Mortgage servicing rights⁽⁴⁾................................................................	-		-		168		168		-			168
Total assets............................................................................	$	46,142	$	138,572	$	4,479	$	189,193	$	(83,367	)	$	105,826
Liabilities:
Deposits in domestic offices⁽⁵⁾............................................................	$	-	$	6,056	$	2,636	$	8,692	$	-		$	8,692
Trading liabilities, excluding derivatives.............................................	207		5,767		-		5,974		-			5,974
Derivatives⁽²⁾:
Interest rate contracts....................................................................	90		71,567		1		71,658		-			71,658
Foreign exchange contracts............................................................	25		13,582		11		13,618		-			13,618
Equity contracts.............................................................................	-		1,244		173		1,417		-			1,417
Precious metals contracts...............................................................	19		712		7		738		-			738
Credit contracts.............................................................................	-		6,754		597		7,351		-			7,351
Derivatives netting........................................................................	-		-		-		-		(79,580		)	(79,580		)
Total derivatives................................................................................	134		93,859		789		94,782		(79,580		)	15,202
Long-term debt⁽⁶⁾...............................................................................	-		6,851		429		7,280		-			7,280
Total liabilities	$	341	$	112,533	$	3,854	$	116,728	$	(79,580	)	$	37,148

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

⁽²⁾Includes trading derivative assets of $9.0 billion and $10.5 billion and trading derivative liabilities of $10.3 billion and $13.8 billion as of June 30, 2013 and December 31, 2012, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives.

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

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

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

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

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

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

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

	Apr. 1, 2013			Total Gains and (Losses) Included in⁽¹⁾						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Jun. 30, 2013			Current Period Unrealized Gains (Losses)
	Apr. 1, 2013			Trading Revenue (Loss)			Other Revenue			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Jun. 30, 2013			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations.......................	$	481		$	83		$	-		$	216	$	-		$	(553	)	$	-		$	-		$	227		$	56
Corporate and other domestic debt securities.	1,524			21			-			16		-			(63		)	-			-			1,498			21
Corporate debt securities issued by foreign entities...........	294			(9		)	-			-		-			-			-			-			285			(9		)
Government debt securities issued by foreign entities.......................	143			(7		)	-			-		-			(1		)	-			-			135			(9		)
Equity securities.........	11			(7		)	-			-		-			(4		)	-			-			-			(7		)
Derivatives⁽²⁾:
Interest rate contracts........	6			(1		)	(6		)	-		-			-			-			-			(1		)	(7		)
Foreign exchange contracts........	134			(18		)	-			-		-			(6		)	(6		)	-			104			(28		)
Equity contracts........	34			(81		)	-			-		-			(27		)	6			(15		)	(83		)	(92		)
Credit contracts........	364			(105		)	-			-		-			(34		)	-			-			225			(82		)
Mortgage servicing rights⁽⁴⁾.	190			-			30			-		5			-			-			-			225			30
Total assets........	$	3,181		$	(124	)	$	24		$	232	$	5		$	(688	)	$	-		$	(15	)	$	2,615		$	(127	)
Liabilities:
Deposits in domestic offices..	$	(2,876	)	$	154		$	-		$	-	$	(81	)	$	110		$	(177	)	$	208		(2,662		)	$	175
Long-term debt...	(618		)	15			-			-		(59		)	68			-			136			(458		)	18
Total liabilities...	$	(3,494	)	$	169		$	-		$	-	$	(140	)	$	178		$	(177	)	$	344		$	(3,120	)	$	193

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

(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations.......................	$	466		$	118		$	-		$	237	$	-		$	(594	)	$	-		$	-		$	227		$	87
Corporate and other domestic debt securities.	1,861			28			-			31		-			(422		)	-			-			1,498			24
Corporate debt securities issued by foreign entities...........	299			(14		)	-			-		-			-			-			-			285			(14		)
Government debt securities issued by foreign entities.......................	311			15			-			-		-			(191		)	-			-			135			10
Equity securities.........	9			(5		)	-			-		-			(4		)	-			-			-			(5		)
Derivatives⁽²⁾:
Interest rate contracts........	7			(1		)	(7		)	-		-			-			-			-			(1		)	(8		)
Foreign exchange contracts........	5			(4		)	-			-		-			116			(13		)	-			104			106
Equity contracts........	(7		)	(20		)	-			-		-			(48		)	13			(21		)	(83		)	(73		)
Credit contracts........	571			(155		)	-			-		-			(145		)	(46		)	-			225			(274		)
Mortgage servicing rights⁽⁴⁾.	168			-			46			-		11			-			-			-			225			51
Total assets........	$	3,690		$	(38	)	$	39		$	268	$	11		$	(1,288	)	$	(46	)	$	(21	)	$	2,615		$	(96	)
Liabilities:
Deposits in domestic offices..	$	(2,636	)	$	113		$	-		$	-	$	(485	)	$	219		$	(160	)	$	287		(2,662		)	$	149
Long-term debt...	(429		)	(16		)	-			-		(270		)	119			-			138			(458		)	7
Total liabilities...	$	(3,065	)	$	97		$	-		$	-	$	(755	)	$	338		$	(160	)	$	425		$	(3,120	)	$	156

	Apr. 1, 2012			Total Gains and (Losses) Included in⁽¹⁾						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2012			Current Period Unrealized Gains (Losses)
	Apr. 1, 2012			Trading Revenue (Loss)			Other Revenue			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3		Jun. 30, 2012			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations....	$	661		$	18		$	-		$	24	$	-		$	(45	)	$	-		$	-	$	658		$	16
Corporate and other domestic debt securities.......	1,753			(2		)	-			19		-			(171		)	-			-		1,599			(6		)
Corporate debt securities issued by foreign entities..........	294			25			-			389		-			(20		)	-			-		688			25
Equity securities.......	13			(1		)	-			-		-			-			-			-		12			(1		)
Derivatives⁽²⁾:
Interest rate contracts.......	9			-			3			-		-			-			-			-		12			3
Foreign exchange contracts.......	(5		)	(18		)	-			-		(5		)	2			-			1		(25		)	(17		)
Equity contracts.......	(53		)	13			-			-		-			(10		)	(1		)	5		(46		)	(1		)
Credit contracts.......	984			(13		)	-			-		-			(50		)	-			-		921			(22		)
Mortgage servicing rights⁽⁴⁾.........................	228			-			(47		)	-		6			-			-			-		187			(46		)
Total assets.......	$	3,884		$	22		$	(44	)	$	432	$	1		$	(294	)	$	(1	)	$	6	$	4,006		$	(49	)
Liabilities:
Deposits in domestic offices	$	(2,964	)	$	(21	)	$	-		$	-	$	(269	)	$	79		$	(46	)	$	313	(2,908		)	$	(14	)
Long-term debt.	(160		)	10			-			-		(132		)	1			(7		)	1		(287		)	5
Total liabilities..	$	(3,124	)	$	(11	)	$	-		$	-	$	(401	)	$	80		$	(53	)	$	314	$	(3,195	)	$	(9	)

	Jan. 1, 2012			Total Gains and (Losses) Included in⁽¹⁾						Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Jun. 30, 2012			Current Period Unrealized Gains (Losses)
	Jan. 1, 2012			Trading Revenue (Loss)			Other Revenue			Purch- ases		Issu- ances			Settle- ments			Transfers Into Level 3			Transfers Out of Level 3			Jun. 30, 2012			Current Period Unrealized Gains (Losses)
	(in millions)
Assets:
Trading assets, excluding derivatives:
Collateralized debt obligations.	$	703		$	57		$	-		$	25	$	-		$	(127	)	$	-		$	-		$	658		$	49
Corporate and other domestic debt securities....	1,679			18			-			101		-			(199		)	-			-			1,599			8
Corporate debt securities issued by foreign entities..............	253			66			-			389		-			(20		)	-			-			688			66
Equity securities	13			(1		)	-			-		-			-			-			-			12			(1		)
Derivatives⁽²⁾:
Interest rate contracts...........	9			-			3			-		-			-			-			-			12			3
Foreign exchange contracts...........	(1		)	(19		)	-			-		(5		)	2			(3		)	1			(25		)	(19		)
Equity contracts	(83		)	63			-			-		-			(29		)	(1		)	4			(46		)	22
Credit contracts.	1,353			(388		)	-			-		-			(44		)	-			-			921			(355		)
Loans⁽³⁾.................	11			-			-			-		-			-			-			(11		)	-			(12		)
Mortgage servicing rights⁽⁴⁾..................	220			-			(47		)	-		14			-			-			-			187			(47		)
Total assets...........	$	4,157		$	(204	)	$	(44	)	$	515	$	9		$	(417	)	$	(4	)	$	(6	)	$	4,006		$	(286	)
Liabilities:
Deposits in domestic offices....	$	(2,867	)	$	(77	)	$	-		$	-	$	(556	)	$	160		$	(43	)	$	475		(2,908		)	$	(50	)
Long-term debt.....	(86		)	9			-			-		(221		)	5			(7		)	13			(287		)	4
Total liabilities......	$	(2,953	)	$	(68	)	$	-		$	-	$	(777	)	$	165		$	(50	)	$	488		$	(3,195	)	$	(46	)

⁽¹⁾Includes realized and unrealized gains and losses.

⁽²⁾Level 3 net derivatives included derivative assets of $1.0 billion and derivative liabilities of $740 million as of June 30, 2013 and derivative assets of $2.4 billion and derivative liabilities of $2.2 billion as of June 30, 2012.

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

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

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

As of June 30, 2013
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations.........	227		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	-% - 5%
				Conditional default rates	5% - 10%
				Loss severity rates	70% -95%
Corporate and other domestic debt securities.........................................	1,498		Discounted cash flows	Spread volatility on collateral assets	1% - 4%
				Correlation between insurance claim shortfall and collateral value	80%
Corporate and government debt securities issued by foreign entities..	420		Discounted cash flows	Correlations of default among a portfolio of credit names of embedded credit derivatives	46% - 47%
Interest rate derivative contracts....	(1	)	Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	8% - 100%
Foreign exchange derivative contracts⁽¹⁾......................................	104		Option pricing model	Implied volatility of currency pairs	1% - 40%
Equity derivative contracts⁽¹⁾..........	(83	)	Option pricing model	Equity / Equity Index volatility	12% - 49%
				Equity / Equity and Equity / Index correlation	51% - 60%
Credit derivative contracts..............	225		Option pricing model	Correlation of defaults of a portfolio of reference credit names	47% - 53%
				Issuer by issuer correlation of defaults	83% - 95%
Mortgage servicing rights................	225		Option adjusted discounted cash flows	Constant prepayment rates	6% - 26%
				Option adjusted spread	8% - 19%
				Estimated annualized costs to service	$91 - $256 per account
Deposits in domestic offices (structured deposits) ⁽¹⁾⁽²⁾.................	(2,662	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	1% - 40%
				Equity / Equity Index volatility	12% - 49%
				Equity / Equity and Equity / Index correlation	51% - 60%
Long-term debt (structured notes) ⁽¹⁾⁽²⁾.................................................	(458	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	1% - 40%
				Equity / Equity Index volatility	12% - 49%
				Equity / Equity and Equity / Index correlation	51% - 60%

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

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

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

This information is provided by RNS

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