HSBC USA Inc 2Q 2014 Form 10-Q - Part 1

RNS Number : 1230O

HSBC Holdings PLC

04 August 2014

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, 2014

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

For the transition period from to

Commission file number 1-7436

HSBC USA Inc.

(Exact name of registrant as specified in its charter)

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

(212) 525-5000

Registrant's telephone number, including area code

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

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

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

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

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

As of July 31, 2014, 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.
Part I		Page
Item 1.	Financial Statements (Unaudited):
	Consolidated Statement of Income..........................................................................................................................
	Consolidated Statement of Comprehensive Income (Loss).................................................................................
	Consolidated Balance Sheet.....................................................................................................................................
	Consolidated Statement of Changes in Shareholders' Equity.............................................................................
	Consolidated Statement of Cash Flows..................................................................................................................
	Notes to the Consolidated Financial Statements..................................................................................................
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations:........................
	Forward-Looking Statements...................................................................................................................................
	Executive Overview....................................................................................................................................................
	Basis of Reporting......................................................................................................................................................
	Balance Sheet Review................................................................................................................................................
	Results of Operations................................................................................................................................................
	Segment Results - IFRSs Basis................................................................................................................................
	Credit Quality..............................................................................................................................................................
	Liquidity and Capital Resources..............................................................................................................................
	Off-Balance Sheet Arrangements.............................................................................................................................
	Fair Value.....................................................................................................................................................................
	Risk Management.......................................................................................................................................................
	Consolidated Average Balances and Interest Rates.............................................................................................
Item 3.	Quantitative and Qualitative Disclosures about Market Risk..............................................................................
Item 4.	Controls and Procedures............................................................................................................................................
Part II
Item 1.	Legal Proceedings.......................................................................................................................................................
Item 5.	Other Information........................................................................................................................................................
Item 6.	Exhibits..........................................................................................................................................................................
Index.........................................................................................................................................................................................................
Signatures...............................................................................................................................................................................................

PART I

Item 1. Financial Statements (Unaudited)

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
	(in millions)
Interest income:
Loans.................................................................................................................................	$	471		$	478	$	935		$	942
Securities...........................................................................................................................	194			225		401			453
Trading assets..................................................................................................................	65			27		113			51
Short-term investments...................................................................................................	20			16		36			30
Other..................................................................................................................................	12			11		22			21
Total interest income...........................................................................................................	762			757		1,507			1,497
Interest expense:
Deposits............................................................................................................................	36			56		71			99
Short-term borrowings....................................................................................................	14			8		23			17
Long-term debt.................................................................................................................	152			166		322			333
Other..................................................................................................................................	(113		)	9		(101		)	25
Total interest expense..........................................................................................................	89			239		315			474
Net interest income...............................................................................................................	673			518		1,192			1,023
Provision for credit losses...................................................................................................	85			67		101			88
Net interest income after provision for credit losses.....................................................	588			451		1,091			935
Other revenues:
Credit card fees.................................................................................................................	13			21		27			34
Other fees and commissions..........................................................................................	182			176		355			346
Trust income.....................................................................................................................	32			31		63			63
Trading revenue...............................................................................................................	15			127		148			271
Net other-than-temporary impairment losses⁽¹⁾...........................................................	(5		)	-		(7		)	-
Other securities gains (losses), net...............................................................................	(7		)	23		15			154
Servicing and other fees from HSBC affiliates.............................................................	51			59		98			113
Residential mortgage banking revenue........................................................................	22			9		70			55
Gain (loss) on instruments designated at fair value and related derivatives..........	(44		)	95		(16		)	88
Other income.....................................................................................................................	2			25		8			34
Total other revenues............................................................................................................	261			566		761			1,158
Operating expenses:
Salaries and employee benefits......................................................................................	223			247		438			499
Support services from HSBC affiliates..........................................................................	385			362		739			686
Occupancy expense, net.................................................................................................	52			57		109			116
Other expenses.................................................................................................................	216			100		340			233
Total operating expenses....................................................................................................	876			766		1,626			1,534
Income (loss) before income tax..........................................................................................	(27		)	251		226			559
Income tax expense (benefit)...............................................................................................	(206		)	71		(57		)	196
Net income.............................................................................................................................	$	179		$	180	$	283		$	363

⁽¹⁾During the three and six months ended June 30, 2014, other-than-temporary impairment ("OTTI") losses on securities held-to-maturity totaling $5 million and $7 million, respectively, were recognized in other revenues. There were no losses in the non-credit component of such impaired securities reflected in accumulated other comprehensive income ("AOCI"), net of tax during the periods. During the three and six months ended June 30, 2013, there were no OTTI losses on securities recognized in other revenues and no OTTI loss on securities were recognized in the non-credit component in AOCI, net of tax.

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,
	2014			2013			2014			2013
	(in millions)
Net income..............................................................................................................................	$	179		$	180		$	283		$	363
Net change in unrealized gains (losses), net of tax:
Securities available-for-sale..........................................................................................	175			(585		)	305			(735		)
Other-than-temporarily impaired debt securities held-to-maturity.........................	2			-			3			-
Derivatives designated as cash flow hedges.............................................................	(15		)	51			(35		)	74
Total other comprehensive income (loss).........................................................................	162			(534		)	273			(661		)
Comprehensive income (loss).............................................................................................	$	341		$	(354	)	$	556		$	(298	)

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

CONSOLIDATED BALANCE SHEET (UNAUDITED)
	June 30, 2014		December 31, 2013
	(in millions, except share data)
Assets⁽¹⁾
Cash and due from banks.....................................................................................................................................	$	2,325	$	961
Interest bearing deposits with banks...................................................................................................................	23,946		19,614
Federal funds sold and securities purchased under agreements to resell.............................................................	2,311		2,119
Trading assets......................................................................................................................................................	25,156		28,894
Securities available-for-sale..................................................................................................................................	44,778		54,906
Securities held-to-maturity (fair value of $1.4 billion and $1.5 billion at June 30, 2014 and December 31, 2013, respectively)..........................................................................................................................................	1,205		1,358
Loans...................................................................................................................................................................	72,198		67,695
Less - allowance for credit losses........................................................................................................................	624		606
Loans, net.......................................................................................................................................................	71,574		67,089
Loans held for sale (includes $159 million and $58 million designated under fair value option at June 30, 2014 and December 31, 2013, respectively)............................................................................................................	500		230
Properties and equipment, net.............................................................................................................................	250		269
Intangible assets, net............................................................................................................................................	240		295
Goodwill..............................................................................................................................................................	1,612		1,612
Other assets.........................................................................................................................................................	8,321		8,140
Total assets...........................................................................................................................................................	$	182,218	$	185,487
Liabilities⁽¹⁾
Debt:
Deposits in domestic offices:
Noninterest bearing...................................................................................................................................	$	32,220	$	29,707
Interest bearing (includes $7.7 billion designated under fair value option at both June 30, 2014 and December 31, 2013, respectively)........................................................................................................	65,734		62,903
Deposits in foreign offices:
Noninterest bearing...................................................................................................................................	1,440		1,364
Interest bearing..........................................................................................................................................	16,127		18,634
Total deposits.................................................................................................................................................	115,521		112,608
Short-term borrowings...................................................................................................................................	12,906		19,135
Long-term debt (includes $8.3 billion and $7.6 billion designated under fair value option at June 30, 2014 and December 31, 2013, respectively).......................................................................................................	24,604		22,847
Total debt.............................................................................................................................................................	153,031		154,590
Trading liabilities.................................................................................................................................................	8,815		10,875
Interest, taxes and other liabilities.......................................................................................................................	3,388		3,558
Total liabilities....................................................................................................................................................	165,234		169,023
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, 2014 and December 31, 2013)..............................................................................................................	-		-
Additional paid-in capital.........................................................................................................................	14,106		14,106
Retained earnings......................................................................................................................................	1,199		952
Accumulated other comprehensive income (loss).....................................................................................	114		(159		)
Total common shareholder's equity.....................................................................................................................	15,419		14,899
Total shareholders' equity...................................................................................................................................	16,984		16,464
Total liabilities and shareholders' equity...........................................................................................................	$	182,218	$	185,487

⁽¹⁾The following table summarizes assets and liabilities related to our consolidated variable interest entities ("VIEs") as of June 30, 2014 and December 31, 2013 which are consolidated on our balance sheet. Assets and liabilities exclude intercompany balances that eliminate in consolidation. See Note 16, "Variable Interest Entities," for additional information.

	June 30, 2014		December 31, 2013
	(in millions)
Assets
Interest bearing deposits with banks...........................................................................................................	$	3	$	5
Securities held-to-maturity.........................................................................................................................	157		200
Other assets...............................................................................................................................................	458		502
Total assets................................................................................................................................................	$	618	$	707
Liabilities
Long-term debt..........................................................................................................................................	92		92
Interest, taxes and other liabilities.............................................................................................................	71		93
Total liabilities...........................................................................................................................................	$	163	$	185

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,	2014			2013
	(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.............................................................................................................................	14,106			14,123
Other...................................................................................................................................................................	-			(33		)
Balance at end of period......................................................................................................................................	14,106			14,090
Retained earnings
Balance at beginning of period.............................................................................................................................	952			1,363
Net income..........................................................................................................................................................	283			363
Cash dividends declared on preferred stock........................................................................................................	(36		)	(36		)
Balance at end of period......................................................................................................................................	1,199			1,690
Accumulated other comprehensive income (loss)
Balance at beginning of period.............................................................................................................................	(159		)	785
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...................................................................................................	273			(661		)
Balance at end of period......................................................................................................................................	114			57
Total common shareholder's equity....................................................................................................................	$	15,419		$	15,837
Total shareholders' equity...................................................................................................................................	$	16,984		$	17,402

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

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,	2014			2013
	(in millions)
Cash flows from operating activities
Net income..................................................................................................................................................................	$	283		$	363
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..............................................................................................................................	56			175
Provision for credit losses.....................................................................................................................................	101			88
Net realized gains on securities available-for-sale..................................................................................................	(15		)	(146		)
Realized (gains) losses on securities held-to-maturity..........................................................................................	7			(8		)
Net change in other assets and liabilities...............................................................................................................	(538		)	154
Net change in loans held for sale:
Originations of loans........................................................................................................................................	(654		)	(1,043		)
Sales and collection of loans held for sale.........................................................................................................	537			1,246
Net change in trading assets and liabilities.............................................................................................................	1,678			4,064
Lower of amortized cost or fair value adjustments on loans held for sale.............................................................	-			9
Loss (gain) on instruments designated at fair value and related derivatives..........................................................	16			(88		)
Net cash provided by (used in) operating activities...................................................................................................	1,471			4,814
Cash flows from investing activities
Net change in interest bearing deposits with banks....................................................................................................	(4,332		)	(16,522		)
Net change in federal funds sold and securities purchased under agreements to resell...............................................	(192		)	1,750
Securities available-for-sale:
Purchases of securities available-for-sale...............................................................................................................	(6,512		)	(13,876		)
Proceeds from sales of securities available-for-sale...............................................................................................	15,999			22,216
Proceeds from maturities of securities available-for-sale.......................................................................................	1,541			4,745
Securities held-to-maturity:
Proceeds from sales of securities held-to-maturity...............................................................................................	-			79
Proceeds from maturities of securities held-to-maturity.......................................................................................	153			233
Change in loans:
Originations, net of collections..............................................................................................................................	(5,441		)	(3,616		)
Loans sold to third parties.....................................................................................................................................	692			490
Net cash used for acquisitions of properties and equipment......................................................................................	(10		)	(15		)
Other, net....................................................................................................................................................................	10			(15		)
Net cash provided by (used in) investing activities....................................................................................................	1,908			(4,531		)
Cash flows from financing activities
Net change in deposits................................................................................................................................................	2,755			(5,894		)
Debt:
Net change in short-term borrowings....................................................................................................................	(6,229		)	6,046
Issuance of long-term debt.....................................................................................................................................	3,887			2,875
Repayment of long-term debt................................................................................................................................	(2,392		)	(3,289		)
Other increases (decreases) in capital surplus............................................................................................................	-			(33		)
Dividends paid............................................................................................................................................................	(36		)	(36		)
Net cash provided by (used in) financing activities....................................................................................................	(2,015		)	(331		)
Net change in cash and due from banks......................................................................................................................	1,364			(48		)
Cash and due from banks at beginning of period........................................................................................................	961			1,359
Cash and due from banks at end of period................................................................................................................	$	2,325		$	1,311

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. Organization and Presentation

HSBC USA Inc. ("HSBC USA"), incorporated under the laws of Maryland, is a New York State based bank holding company and an indirect wholly-owned subsidiary of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect wholly-owned subsidiary of HSBC Holdings plc ("HSBC" and, together with its subsidiaries, "HSBC Group"). The accompanying unaudited interim consolidated financial statements of HSBC USA 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. 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, 2013 (the "2013 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. Interim results should not be considered indicative of results in future periods.

On January 1, 2014, we adopted new accounting guidance on the presentation of Low Income Housing Tax Credit ("LIHTC") investments and related tax benefits. See Note 20, "New Accounting Pronouncements," for further details and related impacts.

During the second quarter of 2014, we concluded certain state and local tax audits resulting in the settlement of significant uncertain tax positions covering a number of years. As a result, we released tax reserves previously maintained in relation to the periods and issues under review which resulted in an income tax benefit of $183 million during the quarter. In addition, we released our accrued interest associated with the tax reserves released which resulted in a $120 million benefit to interest expense during the quarter.

2. Trading Assets and Liabilities

Trading assets and liabilities consisted of the following.

	June 30, 2014		December 31, 2013
	(in millions)
Trading assets:
U.S. Treasury......................................................................................................................................................	$	2,717	$	1,344
U.S. Government agency issued or guaranteed............................................................................................	20		19
U.S. Government sponsored enterprises⁽¹⁾....................................................................................................	115		159
Obligations of U.S. states and political subdivisions..................................................................................	27		25
Asset backed securities....................................................................................................................................	494		481
Corporate and foreign bonds...........................................................................................................................	6,931		9,099
Other securities..................................................................................................................................................	21		25
Precious metals...................................................................................................................................................	10,477		11,751
Derivatives..........................................................................................................................................................	4,354		5,991
	$	25,156	$	28,894
Trading liabilities:
Securities sold, not yet purchased..................................................................................................................	$	771	$	308
Payables for precious metals............................................................................................................................	3,037		3,826
Derivatives..........................................................................................................................................................	5,007		6,741
	$	8,815	$	10,875

⁽¹⁾Includes mortgage backed securities of $88 million and $133 million issued or guaranteed by the Federal National Mortgage Association ("FNMA") and

$27 million and $26 million issued or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") at June 30, 2014 and December 31, 2013, respectively.

At June 30, 2014 and December 31, 2013, the fair value of derivatives included in trading assets has been reduced by $3,128 million and $3,870 million, respectively, relating to amounts recognized for the obligation to return cash collateral received under master netting agreements with derivative counterparties.

At June 30, 2014 and December 31, 2013, the fair value of derivatives included in trading liabilities has been reduced by $2,277 million and $2,116 million, respectively, relating to amounts recognized for the right to reclaim cash collateral paid under master netting agreements with derivative counterparties.

See Note 9, "Derivative Financial Instruments," for further information on our trading derivatives and related collateral.

3. Securities

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

June 30, 2014	Amortized Cost		Non-Credit Loss Component of OTTI Securities			Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury....................................................................................	$	19,506	$	-		$	392	$	(31	)	$	19,867
U.S. Government sponsored enterprises:⁽¹⁾
Mortgage-backed securities......................................................	182		-			-		(5		)	177
Collateralized mortgage obligations.........................................	39		-			-		-			39
Direct agency obligations..........................................................	4,114		-			243		(11		)	4,346
U.S. Government agency issued or guaranteed:
Mortgage-backed securities......................................................	9,904		-			192		(212		)	9,884
Collateralized mortgage obligations.........................................	4,871		-			13		(97		)	4,787
Obligations of U.S. states and political subdivisions.................	728		-			12		(10		)	730
Asset backed securities collateralized by:
Residential mortgages................................................................	1		-			-		-			1
Commercial mortgages...............................................................	85		-			1		-			86
Home equity.................................................................................	104		-			-		(10		)	94
Other.............................................................................................	105		-			-		(11		)	94
Foreign debt securities⁽²⁾.................................................................	4,503		-			12		(8		)	4,507
Equity securities...............................................................................	165		-			3		(2		)	166
Total available-for-sale securities.......................................................	$	44,307	$	-		$	868	$	(397	)	$	44,778
Securities held-to-maturity:
U.S. Government sponsored enterprises:⁽³⁾
Mortgage-backed securities......................................................	$	763	$	-		$	81	$	-		$	844
U.S. Government agency issued or guaranteed:
Mortgage-backed securities......................................................	47		-			8		-			55
Collateralized mortgage obligations.........................................	194		-			23		-			217
Obligations of U.S. states and political subdivisions.................	26		-			1		-			27
Asset-backed securities collateralized by residential mortgages..........................................................................................	18		-			1		-			19
Asset-backed securities and other debt securities held by a consolidated VIE⁽⁴⁾...........................................................................	255		(98		)	53		-			210
Total held-to-maturity securities....................................................	$	1,303	$	(98	)	$	167	$	-		$	1,372

December 31, 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....................................................................................	$	27,716	$	-		$	391	$	(113	)	$	27,994
U.S. Government sponsored enterprises:⁽¹⁾
Mortgage-backed securities.....................................................	159		-			-		(14		)	145
Collateralized mortgage obligations.........................................	41		-			-		(1		)	40
Direct agency obligations.........................................................	4,115		-			225		(16		)	4,324
U.S. Government agency issued or guaranteed:
Mortgage-backed securities.....................................................	10,304		-			40		(342		)	10,002
Collateralized mortgage obligations.........................................	6,584		-			17		(154		)	6,447
Obligations of U.S. states and political subdivisions................	755		-			12		(25		)	742
Asset backed securities collateralized by:
Residential mortgages................................................................	1		-			-		-			1
Commercial mortgages...............................................................	125		-			1		-			126
Home equity................................................................................	263		-			-		(36		)	227
Other.............................................................................................	100		-			-		(6		)	94
Foreign debt securities⁽²⁾................................................................	4,607		-			10		(15		)	4,602
Equity securities...............................................................................	165		-			2		(5		)	162
Total available-for-sale securities.......................................................	$	54,935	$	-		$	698	$	(727	)	$	54,906
Securities held-to-maturity:
U.S. Government sponsored enterprises:⁽³⁾
Mortgage-backed securities.....................................................	$	845	$	-		$	88	$	-		$	933
U.S. Government agency issued or guaranteed:
Mortgage-backed securities.....................................................	52		-			8		-			60
Collateralized mortgage obligations.........................................	214		-			24		-			238
Obligations of U.S. states and political subdivisions................	29		-			1		-			30
Asset-backed securities collateralized by residential mortgages..........................................................................................	18		-			1		-			19
Asset-backed securities and other debt securities held by a consolidated VIE⁽⁴⁾...........................................................................	304		(104		)	19		-			219
Total held-to-maturity securities.........................................................	$	1,462	$	(104	)	$	141	$	-		$	1,499

⁽¹⁾Includes securities at amortized cost of $189 million and $167 million issued or guaranteed by FNMA at June 30, 2014 and December 31, 2013, respectively, and $32 million and $33 million issued or guaranteed by FHLMC at June 30, 2014 and December 31, 2013, respectively.

⁽²⁾At June 30, 2014 and December 31, 2013, foreign debt securities consisted of $1,140 million and $1,101 million, respectively, of securities fully backed by foreign governments. The remainder of foreign debt securities represents public sector entity, bank or corporate debt.

⁽³⁾Includes securities at amortized cost of $357 million and $398 million issued or guaranteed by FNMA at June 30, 2014 and December 31, 2013, respectively, and $406 million and $447 million issued and guaranteed by FHLMC at June 30, 2014 and December 31, 2013, respectively.

⁽⁴⁾Relates to securities held by Bryant Park Funding LLC ("Bryant Park"), a variable interest entity which was consolidated in the second quarter of 2013. See Note 16, "Variable Interest Entities" for additional information.

The following table summarizes gross unrealized losses and related fair values as of June 30, 2014 and December 31, 2013 classified as to the length of time the losses have existed:

	One Year or Less						Greater Than One Year
June 30, 2014	Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury.................................................	4	$	(1	)	$	741	8	$	(30	)	$	2,128
U.S. Government sponsored enterprises...	18	(1		)	41		30	(15		)	612
U.S. Government agency issued or guaranteed..................................................	40	(224		)	2,317		48	(85		)	2,224
Obligations of U.S. states and political subdivisions...............................................	14	(1		)	90		36	(9		)	336
Asset backed securities...............................	3	(11		)	115		7	(10		)	100
Foreign debt securities.................................	-	-			-		6	(8		)	2,470
Equity securities............................................	1	(2		)	157		-	-			-
Securities available-for-sale..............................	80	$	(240	)	$	3,461	135	$	(157	)	$	7,870
Securities held-to-maturity:
U.S. Government sponsored enterprises...	13	$	-		$	-	49	$	-		$	-
U.S. Government agency issued or guaranteed..................................................	78	-			-		826	-			2
Obligations of U.S. states and political subdivisions...............................................	1	-			1		4	-			2
Securities held-to-maturity...........................	92	$	-		$	1	879	$	-		$	4

	One Year or Less						Greater Than One Year
December 31, 2013	Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities	Gross Unrealized Losses			Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury..................................................	22	$	(82	)	$	16,958	6	$	(31	)	$	630
U.S. Government sponsored enterprises...	23	(12		)	400		20	(19		)	356
U.S. Government agency issued or guaranteed..................................................	170	(494		)	10,243		5	(2		)	23
Obligations of U.S. states and political subdivisions...............................................	42	(19		)	330		5	(6		)	65
Asset backed securities................................	3	(6		)	115		10	(36		)	237
Foreign debt securities.................................	1	-			50		7	(15		)	2,916
Equity securities.............................................	1	(5		)	154		-	-			-
Securities available-for-sale...............................	262	$	(618	)	$	28,250	53	$	(109	)	$	4,227
Securities held-to-maturity:
U.S. Government sponsored enterprises...	13	$	-		$	-	48	$	-		$	-
U.S. Government agency issued or guaranteed..................................................	79	-			-		859	-			2
Obligations of U.S. states and political subdivisions...............................................	7	-			4		2	-			1
Securities held-to-maturity................................	99	$	-		$	4	909	$	-		$	3

Net unrealized gains and losses increased within the available-for-sale portfolio in the six months ended June 30, 2014 due to sales of U.S. government agency mortgage-backed securities and other asset-backed securities that were in a net unrealized loss position at December 31, 2013 and a decrease in yields on U.S. Government agency securities and U.S. Treasury securities during the period.

We have reviewed the securities for which there is an unrealized loss for other-than-temporary impairment in accordance with our accounting policies, discussed further below. As a result of consolidating Bryant Park during the second quarter of 2013, we had held-to-maturity asset backed securities that were previously determined to be other-than-temporarily impaired which totaled $157 million and $200 million at June 30, 2014 and December 31, 2013, respectively. We do not consider any other debt securities to be other-than-temporarily impaired at June 30, 2014 as we expect to recover their amortized cost basis and we neither intend nor expect to be required to sell these securities prior to recovery, even if that equates to holding securities until their individual maturities. However, additional other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.

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

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

For all securities held in the available-for-sale or held-to-maturity portfolios for which unrealized losses attributed to factors other than credit have existed for a period of time, we do not have the intention to sell and believe we will not be required to sell the securities for contractual, regulatory or liquidity reasons as of the reporting date. Our assessment for credit loss was concentrated on private label asset-backed securities. Substantially all of the private label asset-backed securities are supported by residential mortgages, home equity loans or commercial mortgages. Our assessment for credit loss was concentrated on this particular asset class because of the following inherent risk factors:

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

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

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

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

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

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

• The severity and duration of unrealized loss.

For a complete description of the factors considered when analyzing debt securities for impairment, see Note 5, "Securities" in our 2013 Form 10-K. There have been no material changes in our process for assessing impairment during 2014.

During the three and six months ended June 30, 2014, none of our debt securities were determined to have initial other-than-temporary impairment while the debt securities held by Bryant Park were determined to have changes to their previous other-than-temporary impairment estimates related to the credit component. The additional credit losses associated with the impaired debt securities, which reflects the excess of amortized cost over the present value of expected future cash flows, were $5 million and $7 million during the three and six months ended June 30, 2014, respectively, and were recorded as a component of net other-than-temporary impairment losses in the accompanying consolidated statement of income.

During the three and six months ended June 30, 2013, 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, as such, there were no other-than-temporary impairment losses recognized related to credit loss.

At June 30, 2014 and December 31, 2013, the excess of discounted future cash flows over fair value, representing the non-credit component of the unrealized loss associated with all other-than-temporary impaired securities which is recognized in accumulated other comprehensive income (loss), was $98 million and $104 million, respectively.

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, 2014		Six Months Ended June 30, 2014
	(in millions)
Credit losses at the beginning of the period..........................................................................	$	63	$	61
Increase in credit losses for which an other-than-temporary impairment was previously recognized..........................................................................................................	5		7
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).............................................................................................	$	68	$	68

At June 30, 2014, we held 18 individual asset-backed securities in the available-for-sale portfolio, of which 5 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $188 million of the total aggregate fair value of asset-backed securities of $275 million at June 30, 2014. The gross unrealized losses on these monoline wrapped securities were $21 million at June 30, 2014. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of June 30, 2014 and, therefore, we only considered the financial guarantee of monoline insurers on securities for purposes of evaluating other-than-temporary impairment on securities with a fair value of $93 million. No security wrapped by a below investment grade monoline insurance company was deemed to be other-than-temporarily impaired at June 30, 2014.

At December 31, 2013, we held 22 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 $321 million of the total aggregate fair value of asset-backed securities of $448 million at December 31, 2013. The gross unrealized losses on these monoline wrapped securities were $42 million at December 31, 2013. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of December 31, 2013 and, therefore, we only considered the financial guarantee of monoline insurers on securities with a fair value of $98 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, 2013.

As discussed above, certain asset-backed securities in the available-for-sale portfolio have an embedded financial guarantee provided by monoline insurers. Because the financial guarantee is not a separate and distinct contract from the asset-backed security, they are considered as a single unit of account for fair value measurement and impairment assessment purposes. The monoline insurers are regulated by the insurance commissioners of the relevant states and certain monoline insurers that write the financial guarantee contracts are public companies. We did not consider the value of the monoline wrap of any non-investment grade monoline insurer at June 30, 2014 and December 31, 2013. 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,
	2014			2013			2014			2013
	(in millions)
Gross realized gains...............................................................................................................	$	25		$	83		$	68		$	207
Gross realized losses..............................................................................................................	(32		)	(60		)	(53		)	(61		)
Net realized gains...................................................................................................................	$	(7	)	$	23		$	15		$	146

During the three and six months ended June 30, 2014, we recognized losses of $5 million and $7 million, respectively, due to other-than-temporary impairment credit losses on securities held-to-maturity, as discussed above. During the first quarter of 2013, we sold six asset-backed securities out of our held-to-maturity portfolio with a total carrying value of $71 million and recognized a gain of $8 million. These sales were in response to the significant credit deterioration which had occurred on these securities which had been classified as substandard for regulatory reporting purposes and, therefore, these disposals did not affect our intent and ability to hold our remaining held-to-maturity portfolio until maturity.

Contractual Maturities and Yields The following table summarizes the amortized cost and fair values of securities available-for-sale and securities held-to-maturity at June 30, 2014 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, 2014, 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, 2014. 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...........................................	$	1,225	.34	%	$	14,017	.91	%	$	2,429	2.90	%	$	1,835	3.80	%
U.S. Government sponsored enterprises............................................	-		-		1,108		2.62		2,450		3.27		777		3.74
U.S. Government agency issued or guaranteed............................................	-		-		12		4.23		107		2.65		14,656		2.36
Obligations of U.S. states and political subdivisions.........................................	-		-		110		3.66		302		3.32		316		3.52
Asset backed securities.........................	-		-		-		-		7		.39		288		3.56
Foreign debt securities...........................	554		3.10		3,949		1.94		-		-		-		-
Total amortized cost.....................................	$	1,779	1.20	%	$	19,196	1.24	%	$	5,295	3.09	%	$	17,872	2.61	%
Total fair value...............................................	$	1,781			$	19,299			$	5,587			$	17,945
Held-to-maturity:
U.S. Government sponsored enterprises............................................	$	-	-	%	$	-	-	%	$	2	7.77	%	$	761	6.14	%
U.S. Government agency issued or guaranteed............................................	-		-		1		7.62		2		7.75		238		6.49
Obligations of U.S. states and political subdivisions.........................................	5		5.28		8		4.40		6		3.94		7		5.04
Asset backed securities.........................	-		-		-		-		-		-		18		6.21
Asset backed securities issued by consolidated VIE.....................................	-		-		-		-		64		.33		93		.33
Total amortized cost.....................................	$	5	5.28	%	$	9	4.79	%	$	74	1.05	%	$	1,117	5.72	%
Total fair value...............................................	$	5			$	11			$	78			$	1,278

Investments in Federal Home Loan Bank stock and Federal Reserve Bank stock of $130 million and $483 million, respectively, were included in other assets at June 30, 2014. Investments in Federal Home Loan Bank stock and Federal Reserve Bank stock of $139 million and $483 million, respectively, were included in other assets at and December 31, 2013.

4. Loans

Loans consisted of the following:

	June 30, 2014		December 31, 2013
	(in millions)
Commercial loans:
Construction and other real estate.............................................................................................................	$	9,682	$	9,034
Business and corporate banking................................................................................................................	15,956		14,446
Global banking⁽¹⁾............................................................................................................................................	24,268		21,625
Other commercial...........................................................................................................................................	3,127		3,389
Total commercial............................................................................................................................................	53,033		48,494
Consumer loans:
Residential mortgages..................................................................................................................................	16,097		15,826
Home equity mortgages...............................................................................................................................	1,914		2,011
Credit cards....................................................................................................................................................	681		854
Other consumer.............................................................................................................................................	473		510
Total consumer..............................................................................................................................................	19,165		19,201
Total loans...........................................................................................................................................................	$	72,198	$	67,695

⁽¹⁾Represents large multinational firms including globally focused U.S. corporate and financial institutions and U.S. dollar lending to multinational banking customers managed by HSBC on a global basis. Also includes loans to HSBC affiliates which totaled $5,080 million and $5,328 million at June 30, 2014 and December 31, 2013, respectively. See Note 13, "Related Party Transactions" for additional information regarding loans to HSBC affiliates.

Net deferred origination fees totaled $6 million and $23 million at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014 and December 31, 2013, we had a net unamortized premium on our loans of $14 million and $16 million, respectively.

Age Analysis of Past Due Loans The following table summarizes the past due status of our loans at June 30, 2014 and December 31, 2013. 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 is 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, 2014	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........................................	$	7	$	14	$	21	$	9,661	$	9,682
Business and corporate banking...........................................	7		27		34		15,922		15,956
Global banking..........................................................................	-		-		-		24,268		24,268
Other commercial......................................................................	27		-		27		3,100		3,127
Total commercial............................................................................	41		41		82		52,951		53,033
Consumer loans:
Residential mortgages.............................................................	400		935		1,335		14,762		16,097
Home equity mortgages..........................................................	18		54		72		1,842		1,914
Credit cards...............................................................................	10		11		21		660		681
Other consumer........................................................................	10		10		20		453		473
Total consumer..............................................................................	438		1,010		1,448		17,717		19,165
Total loans......................................................................................	$	479	$	1,051	$	1,530	$	70,668	$	72,198

	Past Due				Total Past Due 30 Days or More
At December 31, 2013	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........................................	$	6	$	58	$	64	$	8,970	$	9,034
Business and corporate banking...........................................	48		36		84		14,362		14,446
Global banking..........................................................................	8		3		11		21,614		21,625
Other commercial......................................................................	27		9		36		3,353		3,389
Total commercial.......................................................................	89		106		195		48,299		48,494
Consumer loans:
Residential mortgages.............................................................	443		1,037		1,480		14,346		15,826
Home equity mortgages..........................................................	28		59		87		1,924		2,011
Credit cards...............................................................................	16		14		30		824		854
Other consumer........................................................................	12		13		25		485		510
Total consumer.........................................................................	499		1,123		1,622		17,579		19,201
Total loans......................................................................................	$	588	$	1,229	$	1,817	$	65,878	$	67,695

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

Nonaccrual Loans Nonaccrual loans totaled $1,107 million and $1,305 million at June 30, 2014 and December 31, 2013, respectively. For an analysis of reserves for credit losses, see Note 5, "Allowance for Credit Losses." Nonaccrual loans and accruing receivables 90 days or more delinquent consisted of the following:

	June 30, 2014		December 31, 2013
	(in millions)
Nonaccrual loans:
Commercial:
Real Estate:
Construction and land loans.......................................................................................................	$	17	$	44
Other real estate.............................................................................................................................	47		122
Business and corporate banking......................................................................................................	28		21
Global banking....................................................................................................................................	-		65
Other commercial................................................................................................................................	2		2
Total commercial.......................................................................................................................................	94		254
Consumer:
Residential mortgages........................................................................................................................	879		949
Home equity mortgages.....................................................................................................................	69		77
Total residential mortgages^(1)(2)(3)................................................................................................	948		1,026
Total consumer loans.........................................................................................................................	948		1,026
Nonaccrual loans held for sale............................................................................................................	65		25
Total nonaccruing loans...................................................................................................................................	1,107		1,305
Accruing loans contractually past due 90 days or more:
Commercial:
Business and corporate banking......................................................................................................	7		5
Other commercial................................................................................................................................	1		1
Total commercial.................................................................................................................................	8		6
Consumer:
Credit card receivables.......................................................................................................................	11		14
Other consumer...................................................................................................................................	11		14
Total consumer loans.........................................................................................................................	22		28
Total accruing loans contractually past due 90 days or more...................................................................	30		34
Total nonperforming loans...............................................................................................................................	$	1,137	$	1,339

⁽¹⁾At June 30, 2014 and December 31, 2013, residential mortgage loan nonaccrual balances include $849 million and $866 million, respectively, of loans

that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽²⁾ Nonaccrual residential mortgages includes all receivables which are 90 or more days contractually delinquent as well as loans discharged under Chapter 7

bankruptcy and not re-affirmed and second lien loans where the first lien loan that we own or service is 90 or more days contractually delinquent.

⁽³⁾ Residential mortgage nonaccrual loans for all periods does not include guaranteed loans purchased from the Government National Mortgage Association

("GNMA"). Repayment of these loans are predominantly insured by the Federal Housing Administration and as such, these loans have different risk characteristics from the rest of our customer loan portfolio.

The following table provides additional information on our nonaccrual loans:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in millions)
Interest income that would have been recorded if the nonaccrual loans had been current in accordance with contractual terms during the period........................................	$	22	$	30	$	46	$	61
Interest income that was recorded on nonaccrual loans and included in interest income during the period......................................................................................	6		8		14		11

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 or 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 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 2012, there have been no commercial loans that met this criteria and were removed from TDR Loan classification.

The following table presents information about receivables which were modified during the three and six months ended June 30, 2014 and 2013 and as a result of this action became classified as TDR Loans:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in millions)
Commercial loans:
Construction and other real estate	$	-	$	32	$	-	$	32
Business and corporate banking......................................................................................	11		5		11		9
Other commercial	-		-		10		-
Total commercial..................................................................................................................	11		37		21		41
Consumer loans:
Residential mortgages........................................................................................................	47		49		81		92
Credit cards..........................................................................................................................	1		1		3		1
Total consumer....................................................................................................................	48		50		84		93
Total............................................................................................................................................	$	59	$	87	$	105	$	134

The weighted-average contractual rate reduction for consumer loans which became classified as TDR Loans during the three and six months ended June 30, 2014 was 1.52 percent and 1.51 percent, respectively, compared with 2.07 percent and 2.06 percent during the three and six months ended June 30, 2013, respectively. The weighted-average contractual rate reduction for commercial loans was not significant in either the number of loans or rate.

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

	June 30, 2014		December 31, 2013
	(in millions)
TDR Loans⁽¹⁾⁽²⁾:
Commercial loans:
Construction and other real estate...........................................................................................................	$	205	$	292
Business and corporate banking..............................................................................................................	28		21
Global banking............................................................................................................................................	-		51
Other commercial........................................................................................................................................	-		25
Total commercial.........................................................................................................................................	233		389
Consumer loans:
Residential mortgages⁽³⁾............................................................................................................................	959		973
Credit cards..................................................................................................................................................	8		8
Total consumer............................................................................................................................................	967		981
Total TDR Loans⁽⁴⁾.............................................................................................................................................	$	1,200	$	1,370

	June 30, 2014		December 31, 2013
	(in millions)
Allowance for credit losses for TDR Loans⁽⁵⁾:
Commercial loans:
Construction and other real estate...........................................................................................................	$	2	$	16
Business and corporate banking..............................................................................................................	5		1
Total commercial.........................................................................................................................................	7		17
Consumer loans:
Residential mortgages................................................................................................................................	58		68
Credit cards..................................................................................................................................................	2		2
Total consumer............................................................................................................................................	60		70
Total allowance for credit losses for TDR Loans...........................................................................................	$	67	$	87

⁽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 TDR Loans which totaled $33 million and $92 million at June 30, 2014 and December 31, 2013, 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, 2014		December 31, 2013
	(in millions)
Commercial loans:
Construction and other real estate...................................................................................................	$	219	$	309
Business and corporate banking.......................................................................................................	68		60
Global banking.................................................................................................................................	-		51
Other commercial...........................................................................................................................	-		28
Total commercial............................................................................................................................	287		448
Consumer loans:
Residential mortgages......................................................................................................................	1,145		1,153
Credit cards.....................................................................................................................................	8		8
Total consumer...............................................................................................................................	1,153		1,161
Total..................................................................................................................................................	$	1,440	$	1,609

⁽³⁾Includes $725 million and $706 million at June 30, 2014 and December 31, 2013, respectively, of loans that are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽⁴⁾Includes $343 million and $458 million at June 30, 2014 and December 31, 2013, respectively, of loans which are classified as nonaccrual.

⁽⁵⁾Included in the allowance for credit losses.

The following table presents information about average TDR Loans and interest income recognized on TDR Loans:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in millions)
Average balance of TDR Loans
Commercial loans:
Construction and other real estate............................................................................	$	220	$	290	$	244	$	307
Business and corporate banking...............................................................................	23		30		22		49
Global banking.............................................................................................................	-		-		17		-
Other commercial.........................................................................................................	5		29		12		30
Total commercial..........................................................................................................	248		349		295		386
Consumer loans:
Residential mortgages.................................................................................................	948		890		947		906
Credit cards...................................................................................................................	8		12		8		13
Total consumer.............................................................................................................	956		902		955		919
Total average balance of TDR Loans..................................................................................	$	1,204	$	1,251	$	1,250	$	1,305
Interest income recognized on TDR Loans
Commercial loans:
Construction and other real estate............................................................................	$	2	$	3	$	8	$	5
Other commercial.........................................................................................................	-		1		-		2
Total commercial..........................................................................................................	2		4		8		7
Consumer loans:
Residential mortgages.................................................................................................	9		8		18		17
Total consumer.............................................................................................................	9		8		18		17
Total interest income recognized on TDR Loans..............................................................	$	11	$	12	$	26	$	24

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, 2014 and 2013:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in millions)
Commercial loans:
Construction and other real estate.................................................................................	$	-	$	-	$	12	$	-
Total commercial................................................................................................................	-		-		12		-
Consumer loans:
Residential mortgages......................................................................................................	9		11		17		24
Total consumer..................................................................................................................	9		11		17		24
Total..........................................................................................................................................	$	9	$	11	$	29	$	24

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

	Amount with Impairment Reserves		Amount without Impairment Reserves		Total Impaired Commercial Loans⁽¹⁾⁽²⁾		Impairment Reserve
	(in millions)
At June 30, 2014
Construction and other real estate.........................................................	$	19	$	194	$	213	$	4
Business and corporate banking............................................................	32		11		43		8
Global banking...........................................................................................	-		-		-		-
Other commercial.......................................................................................	2		8		10		2
Total............................................................................................................	$	53	$	213	$	266	$	14
At December 31, 2013
Construction and other real estate.........................................................	$	122	$	211	$	333	$	32
Business and corporate banking............................................................	28		12		40		3
Global banking...........................................................................................	14		51		65		5
Other commercial.......................................................................................	1		42		43		-
Total............................................................................................................	$	165	$	316	$	481	$	40

⁽¹⁾Includes impaired commercial loans that are also considered TDR Loans which totaled $233 million and $389 million at June 30, 2014 and December 31, 2013, respectively.

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

	June 30, 2014		December 31, 2013
	(in millions)
Construction and other real estate..............................................................................................................	$	232	$	380
Business and corporate banking...................................................................................................................	93		91
Global banking............................................................................................................................................	-		123
Other commercial.......................................................................................................................................	10		47
Total..........................................................................................................................................................	$	335	$	641

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,
	2014		2013		2014		2013
					(in millions)
Average balance of impaired commercial loans:
Construction and other real estate.................................................................................	$	237	$	353	$	269	$	401
Business and corporate banking....................................................................................	36		58		37		74
Global banking...................................................................................................................	-		18		22		18
Other commercial...............................................................................................................	15		69		24		71
Total average balance of impaired commercial loans...................................................	$	288	$	498	$	352	$	564
Interest income recognized on impaired commercial loans:
Construction and other real estate.................................................................................	$	2	$	4	$	8	$	7
Other commercial...............................................................................................................	-		2		-		3
Total interest income recognized on impaired commercial loans...............................	$	2	$	6	$	8	$	10

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

Criticized asset classifications Criticized loan classifications are based on the risk rating standards of our primary regulator. Problem loans are assigned various criticized facility grades. We also assign obligor grades which are used under our allowance for credit losses methodology. The following facility grades are deemed to be criticized:

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

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

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

The following table summarizes criticized assets for commercial loans:

	Special Mention		Substandard		Doubtful		Total
	(in millions)
At June 30, 2014
Construction and other real estate.........................................................	$	287	$	298	$	8	$	593
Business and corporate banking............................................................	715		153		4		872
Global banking...........................................................................................	70		161		-		231
Other commercial.......................................................................................	37		21		1		59
Total............................................................................................................	$	1,109	$	633	$	13	$	1,755
At December 31, 2013
Construction and other real estate.........................................................	$	351	$	346	$	30	$	727
Business and corporate banking............................................................	557		156		2		715
Global banking...........................................................................................	367		112		5		484
Other commercial.......................................................................................	79		33		-		112
Total............................................................................................................	$	1,354	$	647	$	37	$	2,038

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

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At June 30, 2014
Commercial:
Construction and other real estate.......................................	$	9,618	$	64	$	-	$	9,682
Business and corporate banking..........................................	15,921		28		7		15,956
Global banking.........................................................................	24,268		-		-		24,268
Other commercial.....................................................................	3,124		2		1		3,127
Total commercial...........................................................................	$	52,931	$	94	$	8	$	53,033
At December 31, 2013
Commercial:
Construction and other real estate.......................................	$	8,868	$	166	$	-	$	9,034
Business and corporate banking..........................................	14,420		21		5		14,446
Global banking.........................................................................	21,560		65		-		21,625
Other commercial.....................................................................	3,386		2		1		3,389
Total commercial...........................................................................	$	48,234	$	254	$	6	$	48,494

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, 2014
Construction and other real estate.............................................................................................	$	7,159	$	2,523	$	9,682
Business and corporate banking................................................................................................	7,845		8,111		15,956
Global banking..............................................................................................................................	21,140		3,128		24,268
Other commercial..........................................................................................................................	1,608		1,519		3,127
Total commercial......................................................................................................................	$	37,752	$	15,281	$	53,033
At December 31, 2013
Construction and other real estate.............................................................................................	$	6,069	$	2,965	$	9,034
Business and corporate banking................................................................................................	7,279		7,167		14,446
Global banking..............................................................................................................................	18,636		2,989		21,625
Other commercial..........................................................................................................................	1,583		1,806		3,389
Total commercial......................................................................................................................	$	33,567	$	14,927	$	48,494

⁽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, 2014				December 31, 2013
	Delinquent Loans		Delinquency Ratio		Delinquent Loans		Delinquency Ratio
	(dollars are in millions)
Consumer:
Residential mortgages..................................................................................	$	1,086	6.73	%	$	1,208	7.59	%
Home equity mortgages...............................................................................	59		3.08		68		3.38
Total residential mortgages⁽¹⁾....................................................................	1,145		6.34		1,276		7.11
Credit cards....................................................................................................	15		2.20		21		2.46
Other consumer.............................................................................................	15		2.78		19		3.32
Total consumer....................................................................................................	$	1,175	6.10	%	$	1,316	6.80	%

⁽¹⁾At June 30, 2014 and December 31, 2013, residential mortgage loan delinquency includes $983 million and $1,074 million, respectively, of loans that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

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

	Performing Loans		Nonaccrual Loans		Accruing Loans Contractually Past Due 90 days or More		Total
	(in millions)
At June 30, 2014
Consumer:
Residential mortgages..................................................................	$	15,218	$	879	$	-	$	16,097
Home equity mortgages...............................................................	1,845		69		-		1,914
Total residential mortgages....................................................	17,063		948		-		18,011
Credit cards....................................................................................	670		-		11		681
Other consumer.............................................................................	462		-		11		473
Total consumer...................................................................................	$	18,195	$	948	$	22	$	19,165
At December 31, 2013
Consumer:
Residential mortgages..................................................................	$	14,877	$	949	$	-	$	15,826
Home equity mortgages...............................................................	1,934		77		-		2,011
Total residential mortgages....................................................	16,811		1,026		-		17,837
Credit cards....................................................................................	840		-		14		854
Other consumer.............................................................................	496		-		14		510
Total consumer...................................................................................	$	18,147	$	1,026	$	28	$	19,201

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

Concentration of Credit Risk At June 30, 2014 and December 31, 2013, our loan portfolio included interest-only residential mortgage loans totaling $3,645 million and $3,643 million, respectively. An interest-only residential mortgage loan allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period. However, subsequent events affecting a customer's financial position could affect the ability of customers to repay the loan in the future when the principal payments are required which increases the credit risk of this loan type.

5. Allowance for Credit Losses

The following table summarizes the changes in the allowance for credit losses by product and the related loan balance by product during the three and six months ended June 30, 2014 and 2013:

	Commercial												Consumer
	Construction and Other Real Estate			Business and Corporate Banking			Global Banking			Other Comm'l			Residential Mortgages			Home Equity Mortgages			Credit Card			Other Consumer			Total
	(in millions)
Three Months Ended June 30, 2014
Allowance for credit losses - beginning of period.....................	$	93		$	129		$	67		$	19		$	156		$	52		$	45		$	13		$	574
Provision charged (credited) to income............................................	6			56			29			(9		)	7			(8		)	4			-			85
Charge offs...................................	(5		)	(6		)	-			-			(19		)	(3		)	(12		)	(3		)	(48		)
Recoveries....................................	-			1			-			3			5			1			2			1			13
Net (charge offs) recoveries............	(5		)	(5		)	-			3			(14		)	(2		)	(10		)	(2		)	(35		)
Allowance for credit losses - end of period.........................................	$	94		$	180		$	96		$	13		$	149		$	42		$	39		$	11		$	624

Three Months Ended June 30, 2013
Allowance for credit losses - beginning of period.........................	$	116		$	96		$	40		$	17		$	192		$	50		$	42		$	15		$	568
Provision charged (credited) 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

Six Months Ended June 30, 2014
Allowance for credit losses - beginning of period.....................	$	108		$	112		$	68		$	20		$	186		$	49		$	50		$	13		$	606
Provision charged (credited) to income............................................	8			75			36			(13		)	(9		)	(6		)	9			1			101
Charge offs...................................	(24		)	(11		)	(8		)	-			(36		)	(8		)	(23		)	(5		)	(115		)
Recoveries....................................	2			4			-			6			8			7			3			2			32
Net (charge offs) recoveries............	(22		)	(7		)	(8		)	6			(28		)	(1		)	(20		)	(3		)	(83		)
Allowance for credit losses - end of period.........................................	$	94		$	180		$	96		$	13		$	149		$	42		$	39		$	11		$	624
Ending balance: collectively evaluated for impairment............	$	90		$	172		$	96		$	11		$	93		$	40		$	37		$	11		$	550
Ending balance: individually evaluated for impairment............	4			8			-			2			56			2			2			-			74
Total allowance for credit losses......	$	94		$	180		$	96		$	13		$	149		$	42		$	39		$	11		$	624

Loans:
Collectively evaluated for impairment.....................................	$	9,469		$	15,913		$	24,268		$	3,117		$	14,290		$	1,895		$	673		$	473		$	70,098
Individually evaluated for impairment⁽¹⁾..................................	213			43			-			10			215			19			8			-			508
Loans carried at lower of amortized cost or fair value less cost to sell.....	-			-			-			-			1,592			-			-			-			1,592
Total loans......................................	$	9,682		$	15,956		$	24,268		$	3,127		$	16,097		$	1,914		$	681		$	473		$	72,198

Six Months Ended June 30, 2013
Allowance for credit losses - beginning of period.....................	$	162		$	97		$	41		$	17		$	210		$	45		$	55		$	20		$	647
Provision charged (credited) 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

⁽¹⁾For consumer loans and certain small business 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 $725 million and $657 million at June 30, 2014 and 2013, respectively.

6. Loans Held for Sale

Loans held for sale consisted of the following:

	June 30, 2014		December 31, 2013
	(in millions)
Commercial loans................................................................................................................................................	$	396	$	76
Consumer loans:
Residential mortgages..................................................................................................................................	38		91
Other consumer.............................................................................................................................................	66		63
Total consumer....................................................................................................................................................	104		154
Total loans held for sale.....................................................................................................................................	$	500	$	230

We originate commercial loans in connection with our participation in a number of syndicated credit facilities. Syndicated loans that are originated with the intent of selling them to unaffiliated third parties are classified as commercial loans held for sale. The fair value of commercial loans held for sale under this program was $159 million and $58 million at June 30, 2014 and December 31, 2013, respectively. We have elected to designate all commercial syndicated loans classified as held for sale at fair value under the fair value option. See Note 10, "Fair Value Option," for additional information.

Commercial loans held for sale also includes $43 million of global banking loans at June 30, 2014, which were transferred to held for sale during the first half of 2014, as well as commercial real estate loans totaling $194 million and $18 million at June 30, 2014 and December 31, 2013, respectively.

We sell all our agency eligible loan originations servicing released directly to PHH Mortgage Corporation ("PHH Mortgage"). Also included in residential mortgage loans held for sale are subprime residential mortgage loans with a fair value of $23 million and $46 million at June 30, 2014 and December 31, 2013, respectively, which were acquired from unaffiliated third parties and from HSBC Finance Corporation ("HSBC Finance") with the intent of securitizing or selling the loans to third parties. 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.

Loans held for sale are subject to market risk, liquidity risk and interest rate risk, in that their value will fluctuate as a result of changes in market conditions, as well as the credit environment. PHH Mortgage is obligated to purchase agency eligible loans from us as of the earlier of when the customer locks the mortgage loan pricing or when the mortgage loan application is approved. As such, we retain none of the risk of market changes in mortgage rates for these loans.

Other consumer loans held for sale includes certain student loans which we no longer originate.

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 consumer loans held for sale continued to exceed fair value at June 30, 2014, we experienced a decrease in the valuation allowance for consumer loans held for sale during the six months ended June 30, 2014 due primarily to loan sales. The valuation allowance on consumer loans held for sale was $46 million and $77 million at June 30, 2014 and December 31, 2013, respectively. The valuation allowance on commercial loans held for sale was $7 million at June 30, 2014 compared with no allowance at December 31, 2013.

7. Intangible Assets

Intangible assets consisted of the following:

	June 30, 2014		December 31, 2013
	(in millions)
Mortgage servicing rights:
Residential......................................................................................................................................................	$	186	$	227
Commercial.....................................................................................................................................................	2		10
Total mortgage servicing rights........................................................................................................................	$	188	$	237
Purchased credit card relationships.................................................................................................................	50		54
Favorable lease agreements..............................................................................................................................	2		4
Total intangible assets.......................................................................................................................................	$	240	$	295

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

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

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

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

	June 30, 2014		December 31, 2013
Annualized constant prepayment rate ("CPR").............................................................................................	13.8	%	11.3	%
Constant discount rate......................................................................................................................................	13.3		12.7
Weighted average life (in years)......................................................................................................................	4.6		5.3

The following table summarizes residential MSRs activity:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in millions)
Fair value of MSRs:
Beginning balance........................................................................................................	$	205		$	190		$	227		$	168
Additions related to loan sales...................................................................................	-			5			-			11
Changes in fair value due to:
Change in valuation model inputs or assumptions............................................	(12		)	43			(24		)	69
Customer payments.................................................................................................	(7		)	(13		)	(17		)	(23		)
Ending balance...................................................................................................................	$	186		$	225		$	186		$	225

The outstanding principal balance of serviced for others mortgages, which are not included in the consolidated balance sheet, totaled $25,041 million and $26,951 million at June 30, 2014 and December 31, 2013, respectively.

Servicing fees collected are included in residential mortgage banking revenue and totaled $17 million and $35 million during the three and six months ended June 30, 2014, respectively, compared with $21 million and $42 million during the three and six months ended June 30, 2013, respectively.

During the second quarter of 2013, we completed the conversion of our mortgage processing and servicing operations to PHH Mortgage. Under the terms of the agreement, PHH Mortgage provides us with mortgage origination processing services as well as the sub-servicing of our portfolio of owned and serviced for others mortgages with an outstanding principal balance of $42,375 million and $44,039 million at June 30, 2014 and December 31, 2013, respectively. Although we continue to own both the mortgages on our balance sheet and the mortgage servicing rights associated with the serviced loans at the time of conversion, we now sell our agency eligible originations beginning with May 2013 applications to PHH Mortgage on a servicing released basis which results in no new mortgage servicing rights being recognized.

Commercial mortgage servicing rights Commercial MSRs represent servicing rights associated with commercial mortgage loans originated and sold to FNMA and FHLMC and are accounted for using the lower of amortized cost or fair value method. During the fourth quarter of 2013, we decided to sell $8 million of our commercial MSRs and, as a result, we considered these assets held for sale at June 30, 2014 and is reflected in other assets on the consolidated balance sheet. As the estimated sales price of these MSRs was in excess of its carrying amount, these MSRs continue to be carried at amortized cost. In July 2014, we completed the sale of these MSRs to a third party for $22 million, which will result in the recognition of a gain of $16 million in the third quarter of 2014.

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 Financial Corporation at a fair value of $108 million. Approximately $43 million of this value was associated with the credit card receivables sold to First Niagara Bank, National Association. The remaining $65 million was included in intangible assets and is being amortized over the estimated useful life of the credit card relationships which is ten years.

8. Goodwill

During the first half of 2014, there were no events or changes in circumstances to indicate that it is more likely than not that the fair values of any of our reporting units have reduced below their respective carrying amounts.

9. 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, 2014				December 31, 2013
	Derivative assets		Derivative liabilities		Derivative assets		Derivative liabilities
	(in millions)
Derivatives accounted for as fair value hedges⁽¹⁾
OTC-cleared⁽²⁾.....................................................................................................	$	20	$	132	$	75	$	20
Bilateral OTC⁽²⁾...................................................................................................	60		254		203		192
Interest rate contracts........................................................................................	80		386		278		212

Derivatives accounted for as cash flow hedges⁽¹⁾
Bilateral OTC⁽²⁾...................................................................................................	1		18		-		3
Foreign exchange contracts...............................................................................	1		18		-		3

OTC-cleared⁽²⁾.....................................................................................................	14		-		16		-
Bilateral OTC⁽²⁾...................................................................................................	5		111		16		62
Interest rate contracts........................................................................................	19		111		32		62

Total derivatives accounted for as hedges...........................................................	100		515		310		277

Trading derivatives not accounted for as hedges⁽³⁾
Exchange-traded⁽²⁾...............................................................................................	96		37		82		32
OTC-cleared⁽²⁾.....................................................................................................	21,454		22,595		24,218		25,468
Bilateral OTC⁽²⁾...................................................................................................	30,814		30,486		31,097		30,451
Interest rate contracts........................................................................................	52,364		53,118		55,397		55,951

Exchange-traded⁽²⁾...............................................................................................	29		-		7		16
Bilateral OTC⁽²⁾...................................................................................................	12,745		11,586		15,422		14,565
Foreign exchange contracts...............................................................................	12,774		11,586		15,429		14,581

Equity contract - bilateral OTC⁽²⁾......................................................................	1,421		1,418		1,413		1,412

Exchange-traded⁽²⁾...............................................................................................	3		138		181		6
Bilateral OTC⁽²⁾...................................................................................................	643		637		1,402		815
Precious metals contracts..................................................................................	646		775		1,583		821

OTC-cleared⁽²⁾.....................................................................................................	516		540		576		604
Bilateral OTC⁽²⁾...................................................................................................	3,283		3,369		4,079		4,104
Credit contracts..................................................................................................	3,799		3,909		4,655		4,708

Other derivatives not accounted for as hedges⁽¹⁾

Interest rate contracts - bilateral OTC⁽²⁾.........................................................	604		74		470		91

Foreign exchange contracts - bilateral OTC⁽²⁾...............................................	1		18		-		44

Equity contracts - bilateral OTC⁽²⁾....................................................................	806		102		789		148

Precious metals contracts - bilateral OTC⁽²⁾...................................................	-		19		-		36

Credit contracts - bilateral OTC⁽²⁾....................................................................	17		12		9		11

Total derivatives	72,532		71,546		80,055		78,080

Less: Gross amounts of receivable / payable subject to enforceable master netting agreements⁽⁴⁾⁽⁶⁾.........................................................................................	63,522		63,522		68,616		68,616
Less: Gross amounts of cash collateral received / posted subject to enforceable master netting agreements⁽⁵⁾⁽⁶⁾.......................................................	3,128		2,277		3,870		2,116
Net amounts of derivative assets / liabilities presented in the balance sheet.................................................................................................................................	5,882		5,747		7,569		7,348

Less: Gross amounts of financial instrument collateral received / posted subject to enforceable master netting agreements but not offset in the consolidated balance sheet	1,247		2,160		1,641		3,094
Net amounts of derivative assets / liabilities.....................................................	$	4,635	$	3,587	$	5,928	$	4,254

⁽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 17, "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 (U.S. dollar and non-U.S. dollar denominated) assets and liabilities fluctuates in response to changes in interest rates or foreign currency exchange rates. We utilize interest rate swaps, forward and futures contracts and foreign currency swaps to minimize the effect on earnings caused by interest rate and foreign currency volatility.

The changes in the fair value of the hedged item designated in a qualifying hedge are captured as an adjustment to the carrying amount of the hedged item (basis adjustment). If the hedging relationship is terminated and the hedged item continues to exist, the basis adjustment is amortized over the remaining life of the hedged item. We recorded basis adjustments for active fair value hedges which decreased the carrying amount of our debt by less than $1 million and $1 million during the three and six months ended June 30, 2014, compared with an increase in the carrying amount of our debt of less than $1 million and $1 million during the three and six months ended June 30, 2013, respectively. We amortized $2 million and $5 million of basis adjustments related to terminated and/or re-designated fair value hedge relationships during the three and six months ended June 30, 2014 , respectively, compared with $3 million and $7 million during the three and six months ended June 30, 2013, respectively. The total accumulated unamortized basis adjustment amounted to an increase in the carrying amount of our debt of $27 million and $33 million as of June 30, 2014 and December 31, 2013, respectively. Basis adjustments for active fair value hedges of available-for-sale ("AFS") securities increased the carrying amount of the securities by $162 million and $338 million during the three and six months ended June 30, 2014, respectively, compared with decreases in the carrying amount of the securities of $445 million and $600 million during the three and six months ended June 30, 2013, respectively. Total accumulated unamortized basis adjustments for active fair value hedges of available-for-sale securities amounted to an increase in carrying amount of $281 million as of June 30, 2014 compared with a decrease of $84 million as of December 31, 2013, 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						Net Ineffective Gain (Loss) Recognized
	Interest Income (Expense)			Other Income			Interest Income (Expense)			Other Income			Other Income
	(in millions)
Three Months Ended June 30, 2014
Interest rate contracts/AFS Securities..............	$	(64	)	$	(188	)	$	96		$	189		$	1
Interest rate contracts/subordinated debt.......	2			-			(1		)	-			-
Total.......................................................................	$	(62	)	$	(188	)	$	95		$	189		$	1

Three Months Ended June 30, 2013
Interest rate contracts/AFS Securities..............	$	(55	)	$	397		$	111		$	(380	)	$	17
Interest rate contracts/subordinated debt.......	4			-			(15		)	-			-
Total.......................................................................	$	(51	)	$	397		$	96		$	(380	)	$	17

Six Months Ended June 30, 2014
Interest rate contracts/AFS Securities..............	$	(127	)	$	(407	)	$	198		$	401		$	(6	)
Interest rate contracts/subordinated debt.......	6			(1		)	(16		)	1			-
Total.......................................................................	$	(121	)	$	(408	)	$	182		$	402		$	(6	)

Six Months Ended June 30, 2013
Interest rate contracts/AFS Securities..............	$	(111	)	$	567		$	225		$	(554	)	$	13
Interest rate contracts/subordinated debt.......	8			(1		)	(30		)	1			-
Total.......................................................................	$	(103	)	$	566		$	195		$	(553	)	$	13

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 (loss) 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, 2014 and December 31, 2013, active cash flow hedge relationships extend or mature through July 2036. During the three and six months ended June 30, 2014, $2 million and $3 million of losses related to terminated and/or de-designated cash flow hedge relationships were amortized to earnings from accumulated other comprehensive income (loss) compared with losses of $3 million and $7 million during the three and six months ended June 30, 2013. During the next twelve months, we expect to amortize $9 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 accumulated other comprehensive income (loss) ("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)
	2014			2013			2014			2013				2014		2013
	(in millions)
Three Months Ended June 30,
Foreign exchange contracts....	$	-		$	-	Interest income (expense)	$	-		$	-		Other income	$	-	$	-
Interest rate contracts..............	(25		)	84		Interest income (expense)	(2		)	(3		)	Other income	-		1
Total............................................	$	(25	)	$	84		$	(2	)	$	(3	)		$	-	$	1

Six Months Ended June 30,
Foreign exchange contracts....	$	1		$	-	Interest income (expense)	$	-		$	-		Other income	$	-	$	-
Interest rate contracts..............	(61		)	119		Interest income (expense)	(3		)	(7		)	Other income	-		-
Total............................................	$	(60	)	$	119		$	(3	)	$	(7	)		$	-	$	-

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:

	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
		(in millions)
Interest rate contracts..................................	Trading revenue	$	(89	)	$	(468	)	$	(32	)	$	(382	)
Interest rate contracts..................................	Residential mortgage banking revenue	22			(34		)	37			(41		)
Foreign exchange contracts........................	Trading revenue	58			736			83			578
Equity contracts............................................	Trading revenue	-			4			-			2
Precious metals contracts............................	Trading revenue	10			19			18			61
Credit contracts.............................................	Trading revenue	(108		)	(69		)	(115		)	78
Total................................................................		$	(107	)	$	188		$	(9	)	$	296

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:

	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
								(in millions)
Interest rate contracts...........................	Gain (loss) on instruments designated at fair value and related derivatives	$	111		$	(176	)	$	227		$	(238	)
Interest rate contracts...........................	Residential mortgage banking revenue	-			4			-			4
Foreign exchange contracts.................	Gain (loss) on instruments designated at fair value and related derivatives	9			(44		)	13			(55		)
Equity contracts.....................................	Gain (loss) on instruments designated at fair value and related derivatives	258			(75		)	339			240
Precious metals contracts.....................	Gain (loss) on instruments designated at fair value and related derivatives	8			(42		)	24			(42		)
Credit contracts......................................	Gain (loss) on instruments designated at fair value and related derivatives	-			1			1			1
Credit contracts......................................	Other income	(7		)	3			(11		)	3
Total.........................................................		$	379		$	(329	)	$	593		$	(87	)

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, National Association's ("HSBC Bank USA") 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 were in a liability position as of June 30, 2014, was $4,701 million for which we have posted collateral of $3,837 million. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position as of December 31, 2013, was $5,614 million for which we have posted collateral of $5,059 million. Substantially all of the collateral posted is in the form of cash or securities available-for-sale. See Note 17, "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 Standard & Poor's ("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....................................................................................................................................................	$	-	$	53	$	182
P-2....................................................................................................................................................	1		53		182

S&P	Long-Term Ratings
Short-Term Ratings	AA-		A+		A
	(in millions)
A-1+.................................................................................................................................................	$	-	$	-	$	52
A-1...................................................................................................................................................	4		4		56

We would be required to post $5 million of additional collateral on total return swaps 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, 2014		December 31, 2013
	(in millions)
Interest rate:
Futures and forwards................................................................................................................	$	115,127	$	175,468
Swaps...........................................................................................................................................	3,694,301		3,645,085
Options written...........................................................................................................................	46,040		85,021
Options purchased....................................................................................................................	61,121		87,735
	3,916,589		3,993,309
Foreign Exchange:
Swaps, futures and forwards....................................................................................................	843,970		804,278
Options written...........................................................................................................................	121,210		82,817
Options purchased....................................................................................................................	122,574		84,835
Spot..............................................................................................................................................	59,786		52,193
	1,147,540		1,024,123
Commodities, equities and precious metals:
Swaps, futures and forwards....................................................................................................	47,815		41,123
Options written...........................................................................................................................	12,156		21,531
Options purchased....................................................................................................................	10,266		21,723
	70,237		84,377
Credit derivatives............................................................................................................................	303,034		355,286
Total...................................................................................................................................................	$	5,437,400	$	5,457,095

10. 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 syndicated loans held for sale, 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 certain commercial syndicated loans which are originated with the intent to sell and are included as loans held for sale in the consolidated balance sheet. The election allows us to account for these loans at fair value which is consistent with the manner in which the instruments are managed. 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, 2014 and December 31, 2013, 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. The own debt issuances elected under FVO are traded in secondary markets and, as such, the fair value is determined based on observed prices for the specific instruments. The observed market price of these instruments reflects the effect of changes to our own credit spreads and interest rates. 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 issued, inclusive of structured notes and structured deposits. The valuation of the hybrid instruments is predominantly driven by the derivative features embedded within the instruments. Cash flows of the hybrid instruments are discounted at an appropriate rate for the applicable duration of the instrument adjusted for our own credit spreads. The credit spreads applied to structured notes are determined with reference to our own debt issuance rates observed in the primary and secondary markets, internal funding rates, and structured note rates in recent executions while the credit spreads applied to structured deposits are determined using market rates currently offered on comparable deposits with similar characteristics and maturities. 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.

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

	Fair Value		Unpaid Principal Balance
	(in millions)
At June 30, 2014
Commercial syndicated loans..................................................................................................	$	159	$	159
Fixed rate long-term debt.........................................................................................................	2,063		1,750
Hybrid instruments:
Structured deposits.............................................................................................................	7,714		7,472
Structured notes..................................................................................................................	6,200		5,787
At December 31, 2013
Commercial syndicated loans..................................................................................................	$	58	$	59
Fixed rate long-term debt.........................................................................................................	1,893		1,750
Hybrid instruments:
Structured deposits.............................................................................................................	7,740		7,539
Structured notes..................................................................................................................	5,693		5,377

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

	Loans			Long-Term Debt			Hybrid Instruments			Total
	(in millions)
Three Months Ended June 30, 2014
Interest rate and other components⁽¹⁾........................................................	$	-		$	(61	)	$	(330	)	$	(391	)
Credit risk component⁽²⁾⁽³⁾............................................................................	-			(46		)	7			(39		)
Total mark-to-market on financial instruments designated at fair value.....................................................................................................................	-			(107		)	(323		)	(430		)
Mark-to-market on the related derivatives................................................	-			50			319			369
Net realized gain on the related long-term debt derivatives...................	-			17			-			17
Gain (loss) on instruments designated at fair value and related derivatives..................................................................................................	$	-		$	(40	)	$	(4	)	$	(44	)

Three Months Ended June 30, 2013
Interest rate and other components⁽¹⁾........................................................	$	-		$	120		$	204		$	324
Credit risk component⁽²⁾⁽³⁾............................................................................	-			53			54			107
Total mark-to-market on financial instruments designated at fair value.........................................................................................................................	-			173			258			431
Mark-to-market on the related derivatives................................................	-			(128		)	(224		)	(352		)
Net realized gain on the related long-term debt derivatives...................	-			16			-			16
Gain (loss) on instruments designated at fair value and related derivatives......................................................................................................	$	-		$	61		$	34		$	95

Six Months Ended June 30, 2014
Interest rate and other components⁽¹⁾........................................................	$	-		$	(143	)	$	(483	)	$	(626	)
Credit risk component⁽²⁾⁽³⁾............................................................................	-			(27		)	33			6
Total mark-to-market on financial instruments designated at fair value.....................................................................................................................	-			(170		)	(450		)	(620		)
Net realized loss on financial instruments.................................................	-			-			-			-
Mark-to-market on the related derivatives................................................	-			120			450			570
Net realized gain on the related long-term debt derivatives...................	-			34			-			34
Gain (loss) on instruments designated at fair value and related derivatives..................................................................................................	$	-		$	(16	)	$	-		$	(16	)

Six Months Ended June 30, 2013
Interest rate and other components⁽¹⁾........................................................	$	-		$	183		$	(112	)	$	71
Credit risk component⁽²⁾⁽³⁾............................................................................	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

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

⁽²⁾During the three and six months ended June 30, 2014, the losses in the credit risk component for long-term debt are attributable to the tightening of our own credit spreads while the gains during the three and six months ended June 30, 2013 are attributable to the widening of our own credit spreads.

⁽³⁾During the three months ended June 30, 2014, the gains in the credit risk component for hybrid instruments reflect the widening of credit spreads on structured deposits partially offset by the tightening of credit spreads on structured notes. During the six months ended June 30, 2014, the gains in the credit risk component for hybrid instruments are attributable primarily to the widening of credit spreads on structured notes. During the three and six months ended June 30, 2013, the gains in the credit risk component for hybrid instruments are attributable primarily to the widening of credit spreads on structured notes.

11. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) 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,	2014			2013
	(in millions)
Unrealized gains (losses) on securities available-for-sale:
Balance at beginning of period..................................................................................................................................	$	112		$	842
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $110 million and $(398) million, respectively................................................................................................................................................	171			(571		)
Reclassification adjustment for (gains) losses realized in net income, net of tax of $3 million and $(9) million, respectively⁽¹⁾........................................................................................................................	4			(14		)
Total other comprehensive income (loss) for period............................................................................................	175			(585		)
Balance at end of period............................................................................................................................................	287			257
Unrealized losses on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period..................................................................................................................................	(59		)	-
Adjustment to add other-than-temporary impairment due to the consolidation of VIE, net of tax of $(48) million.............................................................................................................................................................	-			(67		)
Other comprehensive income for period:
Reclassification adjustment related to the accretion of unrealized other-than-temporary impairment, net of tax of $1 million⁽²⁾.........................................................................................................................................	2			-
Total other comprehensive income for period.....................................................................................................	2			-
Balance at end of period............................................................................................................................................	(57		)	(67		)
Unrealized gains (losses) on derivatives designated as cash flow hedges:
Balance at beginning of period..................................................................................................................................	(103		)	(178		)
Other comprehensive income (loss) for period:
Net gains (losses) arising during period, net of tax of $(10) million and $35 million, respectively..................	(16		)	49
Reclassification adjustment for losses realized in net income, net of tax of $1 million and $1 million, respectively⁽³⁾.............................................................................................................................................	1			2
Total other comprehensive income (loss) for period............................................................................................	(15		)	51
Balance at end of period............................................................................................................................................	(118		)	(127		)
Pension and postretirement benefit liability:
Balance at beginning and end of period......................................................................................................................	2			(6		)
Total accumulated other comprehensive income at end of period...................................................................	$	114		$	57

Six Months Ended June 30,	2014			2013
	(in millions)
Unrealized gains (losses) on securities available-for-sale:
Balance at beginning of period..................................................................................................................................	$	(18	)	$	992
Other comprehensive income (loss) for period:
Net unrealized gains (losses) arising during period, net of tax of $202 million and $(455) million, respectively...	315			(649		)
Reclassification adjustment for gains realized in net income, net of tax of $(6) million and $(60) million, respectively⁽¹⁾..................................................................................................................................................	(10		)	(86		)
Total other comprehensive income (loss) for period..............................................................................................	305			(735		)
Balance at end of period............................................................................................................................................	287			257
Unrealized losses on other-than-temporarily impaired debt securities held-to-maturity:
Balance at beginning of period..................................................................................................................................	(60		)	-
Adjustment to add other-than-temporary impairment due to the consolidation of a VIE, net of tax of $(48) million...............................................................................................................................................................	-			(67		)
Other comprehensive income for period:
Reclassification adjustment related to the accretion of unrealized other-than-temporary impairment, net of tax of $3 million⁽²⁾.....................................................................................................................................................	3			-
Total other comprehensive income for period........................................................................................................	3			-
Balance at end of period............................................................................................................................................	(57		)	(67		)
Unrealized gains (losses) on derivatives designated as cash flow hedges:
Balance at beginning of period..................................................................................................................................	(83		)	(201		)
Other comprehensive income (loss) for period:
Net gains (losses) arising during period, net of tax of $(23) million and $49 million, respectively........................	(37		)	70
Reclassification adjustment for losses realized in net income, net of tax of $1 million and $3 million, respectively⁽³⁾..................................................................................................................................................	2			4
Total other comprehensive income (loss) for period..............................................................................................	(35		)	74
Balance at end of period............................................................................................................................................	(118		)	(127		)
Pension and postretirement benefit liability:
Balance at beginning and end of period......................................................................................................................	2			(6		)
Total accumulated other comprehensive income at end of period...................................................................	$	114		$	57

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

⁽²⁾Amount reclassified to the carrying value of the debt securities is included in securities held-to-maturity in our consolidated balance sheet.

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

12. Pension and Other Postretirement Benefits

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in millions)
Service cost - benefits earned during the period............................................................	$	1		$	1		$	2		$	2
Interest cost on projected benefit obligation...................................................................	18			17			36			34
Expected return on assets...................................................................................................	(21		)	(21		)	(42		)	(41		)
Recognized losses................................................................................................................	9			13			19			26
Pension expense...................................................................................................................	$	7		$	10		$	15		$	21

Pension expense was lower during the three and six months ended June 30, 2014 mainly due to lower recognized losses. During the first quarter of 2014, an additional contribution of $74 million was made to the Plan.

Postretirement Plans Other Than Pensions The components of net periodic benefit cost for our postretirement plans other than pension are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in millions)
Interest cost...........................................................................................................................	$	1	$	-	$	1	$	1
Net periodic postretirement benefit cost...........................................................................	$	1	$	-	$	1	$	1

13. 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, servicing arrangements, information technology, centralized support 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 Federal Deposit Insurance Corporation ("FDIC") insured banks) are legally required to be secured by eligible collateral. The following tables and discussions below present the more significant related party balances and the income (expense) generated by related party transactions:

	June 30, 2014		December 31, 2013
	(in millions)
Assets:
Cash and due from banks...........................................................................................................................	$	1,347	$	102
Interest bearing deposits with banks ⁽¹⁾...................................................................................................	1,226		631
Trading assets ⁽²⁾.........................................................................................................................................	15,993		17,082
Loans.............................................................................................................................................................	5,080		5,328
Other ⁽³⁾..........................................................................................................................................................	1,168		1,219
Total assets...................................................................................................................................................	$	24,814	$	24,362
Liabilities:
Deposits........................................................................................................................................................	$	18,676	$	16,936
Trading liabilities ⁽²⁾.....................................................................................................................................	17,543		19,463
Short-term borrowings................................................................................................................................	1,748		1,514
Long-term debt.............................................................................................................................................	3,983		3,987
Other ⁽³⁾..........................................................................................................................................................	511		573
Total liabilities..............................................................................................................................................	$	42,461	$	42,473

⁽¹⁾Includes interest bearing deposits with HSBC Mexico S.A. of $1,100 million and $500 million at June 30, 2014 and December 31, 2013, respectively.

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in millions)
Income/(Expense):
Interest income.......................................................................................................................	$	86		$	83		$	123		$	105
Interest expense......................................................................................................................	(19		)	(19		)	(37		)	(39		)
Net interest income................................................................................................................	$	67		$	64		$	86		$	66
Servicing and other fees from HSBC affiliate:
Fees and commissions:
HSBC Finance Corporation........................................................................................	$	23		$	26		$	38		$	47
HSBC Markets (USA) Inc. ("HMUS")......................................................................	1			4			5			9
Other HSBC affiliates..................................................................................................	12			14			31			30
Other HSBC affiliates income..........................................................................................	15			15			24			27
Total affiliate income..............................................................................................................	$	51		$	59		$	98		$	113
Support services from HSBC affiliates:
HSBC Finance Corporation.............................................................................................	$	(3	)	$	(5	)	$	(6	)	$	(9	)
HMUS.................................................................................................................................	(51		)	(54		)	(104		)	(106		)
HSBC Technology & Services (USA) ("HTSU").........................................................	(271		)	(242		)	(524		)	(475		)
Other HSBC affiliates........................................................................................................	(60		)	(61		)	(105		)	(96		)
Total support services from HSBC affiliates......................................................................	$	(385	)	$	(362	)	$	(739	)	$	(686	)
Stock based compensation expense with HSBC ⁽¹⁾...........................................................	$	(10	)	$	(13	)	$	(18	)	$	(22	)

⁽¹⁾Employees may participate in one or more stock compensation plans sponsored by HSBC. These expenses are included in Salaries and employee benefits in our consolidated statement of income. Employees also may participate in a defined benefit pension plan and other postretirement plans sponsored by HSBC North America which are discussed in Note 12, "Pension and Other Postretirement Benefits."

Funding Arrangements with HSBC Affiliates:

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

We have the following funding arrangements available with HSBC affiliates, although there were no outstanding balances at either June 30, 2014 and December 31, 2013:

• $1,000 million committed line of credit with HSBC Investment (Bahamas) Limited;

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

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

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

Lending and Derivative Related Arrangements Extended to HSBC Affiliates:

At June 30, 2014 and December 31, 2013, we have the following loan balances outstanding with HSBC affiliates:

	June 30, 2014		December 31, 2013
	(in millions)
HSBC Finance Corporation.............................................................................................................................	$	3,014	$	3,015
HSBC Markets (USA) Inc. ("HMUS") and subsidiaries.............................................................................	720		199
HSBC Bank Brasil S.A......................................................................................................................................	1,100		1,000
Other short-term affiliate lending....................................................................................................................	246		1,114
Total assets........................................................................................................................................................	$	5,080	$	5,328

HSBC Finance Corporation - We have extended a $5.0 billion, 364 day uncommitted unsecured revolving credit agreement to HSBC Finance which allows for borrowings with maturities of up to 15 years. At both June 30, 2014 and December 31, 2013, $3.0 billion was outstanding under this credit agreement with $512 million maturing in September 2017, $1.5 billion maturing in January 2018 and $1.0 billion maturing in September 2018. We have also extended a committed revolving credit facility to HSBC Finance of $1.0 billion which did not have any outstanding balance at either June 30, 2014 or December 31, 2013. This credit facility expires in May 2017.

HMUS and subsidiaries - We have extended loans and lines, some of them uncommitted, to HMUS and its subsidiaries in the amount of $6.7 billion and $3.8 billion at June 30, 2014 and December 31, 2013, respectively, of which $720 million and $199 million, respectively, was outstanding. The outstanding balances mature at various stages between 2014 and 2017.

HSBC Bank Brasil S.A. - We have extended uncommitted lines of credit to HSBC Bank Brasil in the amount of $1.1 billion and $1.5 billion at June 30, 2014 and December 31, 2013, respectively, of which $1.1 billion and $1.0 billion, respectively, was outstanding. The outstanding balances mature at various stages between 2014 and 2016.

We have extended lines of credit to various other HSBC affiliates totaling $2.3 billion which did not have any outstanding balances at either June 30, 2014 and December 31, 2013.

Other short-term affiliate lending - In addition to loans and lines extended to affiliates discussed above, from time to time we may extend loans to affiliates which are generally short term in nature. At June 30, 2014 and December 31, 2013, there were $246 million and $1,114 million, respectively, of these loans outstanding.

HUSI is also committed to provide liquidity facilities to backstop the liquidity risk in Regency, an asset-backed commercial paper conduit consolidated by our affiliate, in relation to assets originated in the U.S. region. The notional amount of the liquidity facilities provided by HUSI to Regency was approximately $2.4 billion as of June 30, 2014, which is less than half of Regency's total liquidity facilities.

As part of a global HSBC strategy to offset interest rate or other market risks associated with debt issues and derivative contracts with unaffiliated third parties, we routinely enter into derivative transactions with HSBC Finance and other HSBC affiliates. The notional value of derivative contracts related to these contracts was approximately $1,138.7 billion and $1,210.6 billion at June 30, 2014 and December 31, 2013, respectively. The net credit exposure (defined as the net fair value of derivative assets and liabilities) related to the contracts was approximately $953 million and $845 million at June 30, 2014 and December 31, 2013, respectively. Our Global Banking and Markets business accounts for these transactions on a mark to market basis, with the change in value of contracts with HSBC affiliates substantially offset by the change in value of related contracts entered into with unaffiliated third parties.

Services Provided Between HSBC Affiliates:

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

• Servicing activities for residential mortgage loans across North America are performed both by us and HSBC Finance. As a result, we receive servicing fees from HSBC Finance for services performed on their behalf and pay servicing fees to HSBC Finance for services performed on our behalf. The fees we receive from HSBC Finance are reported in Servicing and other fees from HSBC affiliates. Fees we pay to HSBC Finance are reported in Support services from HSBC affiliates. This includes fees paid for the servicing of residential mortgage loans (with a carrying amount of $907 million and $983 million at June 30, 2014 and December 31, 2013, respectively) that we purchased from HSBC Finance in 2003 and 2004.

• HSBC North America's technology and certain centralized support services including human resources, corporate affairs, risk management, legal, compliance, tax, finance and other shared services that are centralized within HTSU. HTSU also provides certain item processing and statement processing activities to us. The fees we pay HTSU for the centralized support services and processing activities are included in Support services from HSBC affiliates. We also receive fees from HTSU for providing certain administrative services to them. The fees we receive from HTSU are included in Servicing and other fees from HSBC affiliates. In certain cases, for facilities used by HTSU, we may guarantee their performance under the lease agreements.

• We use HSBC Global Resourcing (UK) Ltd., an HSBC affiliate located outside of the United States, to provide various support services to our operations including among other areas, customer service, systems, collection and accounting functions. The expenses related to these services are included in Support services from HSBC affiliates.

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

Other Transactions with HSBC Affiliates

We also received revenue from our affiliates for rent on certain office space, which has been recorded as a component of support services from HSBC affiliates. Rental revenue from our affiliates totaled $13 million and $27 million during the three and six months ended June 30, 2014, respectively, compared with $13 million and $25 million during the three and six months ended June 30, 2013, respectively.

14. Business Segments

We have four distinct business segments that we utilize for management reporting and analysis purposes, which are aligned with HSBC's global businesses and business strategy. There have been no changes in the basis of our segmentation or measurement of segment profit as compared with the presentation in our 2013 Form 10-K.

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

A summary of the significant differences between U.S. GAAP and IFRSs as they impact our results are presented in Note 25, "Business Segments," in our 2013 Form 10-K. There have been no significant changes since December 31, 2013 in the differences between U.S. GAAP and IFRSs impacting our results.

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

	IFRSs Consolidated Amounts
	RBWM	CMB	GB&M	PB	Other	Adjustments/ Reconciling Items	Total	IFRSs Adjustments⁽⁴⁾	IFRSs Reclassi- fications⁽⁵⁾	U.S. GAAP Consolidated Totals
	(in millions)
Three Months Ended June 30, 2014

Net interest income⁽¹⁾.	$	212		$	202	$	109		$	56		$	78		$	(4	)	$	653	$	(16	)	$	36		$	673
Other operating income.......................	104			64		151			25			(38		)	4			310		(6		)	(43		)	261
Total operating income.......................	316			266		260			81			40			-			963		(22		)	(7		)	934
Loan impairment charges⁽³⁾....................	21			83		40			-			-			-			144		(52		)	(7		)	85
	295			183		220			81			40			-			819		30			-			849
Operating expenses⁽²⁾.	298			174		239			61			28			-			800		76			-			876
Profit (loss) before income tax expense...	$	(3	)	$	9	$	(19	)	$	20		$	12		$	-		$	19	$	(46	)	$	-		$	(27	)

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			68			3			555		12			(1		)	566
Total operating income.......................	288			249		420			79			54			-			1,090		(9		)	3			1,084
Loan impairment charges⁽³⁾....................	21			1		6			-			-			-			28		19			20			67
	267			248		414			79			54			-			1,062		(28		)	(17		)	1,017
Operating expenses⁽²⁾.	300			171		250			67			22			-			810		(27		)	(17		)	766
Profit (loss) before income tax expense...	$	(33	)	$	77	$	164		$	12		$	32		$	-		$	252	$	(1	)	$	-		$	251

Six Months Ended June 30, 2014
Net interest income⁽¹⁾.	$	410		$	389	$	206		$	105		$	65		$	(9	)	$	1,166	$	(31	)	$	57		$	1,192
Other operating income.......................	217			132		445			50			(13		)	9			840		(10		)	(69		)	761
Total operating income.......................	627			521		651			155			52			-			2,006		(41		)	(12		)	1,953
Loan impairment charges⁽³⁾....................	23			90		55			(5		)	-			-			163		(48		)	(14		)	101
	604			431		596			160			52			-			1,843		7			2			1,852
Operating expenses⁽²⁾.	577			332		478			116			53			-			1,556		68			2			1,626
Profit (loss) before income tax expense...	$	27		$	99	$	118		$	44		$	(1	)	$	-		$	287	$	(61	)	$	-		$	226
Balances at end of period:
Total assets................	$	19,169		$	26,467	$	175,330		$	8,232		$	826		$	-		$	230,024	$	(47,570	)	$	(236	)	$	182,218
Total loans, net..........	16,315			25,239		19,957			6,069			-			-			67,580		1,693			2,301			71,574
Goodwill.....................	581			358		-			325			-			-			1,264		348			-			1,612
Total deposits............	29,138			22,135		31,935			11,822			-			-			95,030		(3,128		)	23,619			115,521

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			51			7			1,124		38			(4		)	1,158
Total operating income.......................	610			484		911			152			23			-			2,180		-			1			2,181
Loan impairment charges⁽³⁾....................	53			15		9			1			-			-			78		(4		)	14			88
	557			469		902			151			23			-			2,102		4			(13		)	2,093
Operating expenses⁽²⁾.	591			333		480			127			43			-			1,574		(27		)	(13		)	1,534
Profit (loss) before income tax expense...	$	(34	)	$	136	$	422		$	24		$	(20	)	$	-		$	528	$	31		$	-		$	559
Balances at end of period:
Total assets................	$	19,563		$	20,799	$	197,729		$	7,499		$	1,088		$	-		$	246,678	$	(57,199	)	$	45		$	189,524
Total loans, net..........	16,508			19,693		19,975			5,874			-			-			62,050		3,144			906			66,100
Goodwill.....................	581			358		480			325			-			-			1,744		484			-			2,228
Total deposits............	31,855			21,382		35,524			12,152			-			-			100,913		(5,047		)	15,869			111,735

⁽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.

15. Retained Earnings and Regulatory Capital Requirements

Bank dividends are a major source of funds used for payment by us of shareholder dividends and, along with interest earned on investments, cover our operating expenses which consist primarily of interest on outstanding debt. Any significant dividend from HSBC Bank USA would require the approval of the Office of the Comptroller of the Currency (the "OCC"). Approval is also required if the total of all dividends HSBC Bank USA declares in any year exceeds the cumulative net profits for that year, combined with the profits for the two preceding years reduced by dividends attributable to those years. Under a separate restriction, payment of dividends is prohibited in amounts greater than undivided profits then on hand, after deducting actual losses and bad debts. Bad debts are debts due and unpaid for a period of six months unless well secured, as defined, and in the process of collection.

The following table summarizes the capital amounts and ratios of HSBC USA and HSBC Bank USA, calculated in accordance with banking regulations in effect as of June 30, 2014 and December 31, 2013:

	June 30, 2014						December 31, 2013
	Capital Amount		Well-Capitalized Minimum Ratio⁽¹⁾⁽²⁾		Actual Ratio		Capital Amount		Well-Capitalized Minimum Ratio⁽¹⁾			Actual Ratio⁽³⁾
	(dollars are in millions)
Total capital ratio:
HSBC USA.................................	$	21,009	10.00	%	16.01	%	$	20,242	10.00	%		16.36	%
HSBC Bank USA.......................	22,603		10.00	%	18.03		21,324		10.00			18.03
Tier 1 capital ratio:
HSBC USA.................................	15,167		6.00		11.56		14,409		6.00			11.65
HSBC Bank USA.......................	17,011		8.00		13.57		15,763		6.00			13.33
Common equity Tier 1 ratio⁽⁴⁾:
HSBC USA.................................	13,679		4.50		10.42		12,301		5.00		⁽⁵⁾	9.94
HSBC Bank USA.......................	17,011		6.50		13.57		15,763		5.00			13.33
Tier 1 leverage ratio:
HSBC USA.................................	15,167		4.00		8.28		14,409		3.00		⁽⁶⁾	7.90
HSBC Bank USA.......................	17,011		5.00		9.71		15,763		5.00			9.06
Risk weighted assets:
HSBC USA.................................	131,231						123,737
HSBC Bank USA.......................	125,359						118,285

⁽¹⁾HSBC USA 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⁾As previously discussed, the minimum regulatory ratios for a depository institution to be well-capitalized will increase in 2015 under Basel III, and the new ratios are shown above. The total capital and Tier 1 capital ratios shown above for HSBC USA are the well-capitalized ratios for a bank holding company. There are no common equity Tier 1 or Tier 1 leverage ratio components in the definition of a well-capitalized bank holding company and the ratios shown are the required minimum ratios beginning in 2015.

⁽³⁾At December 31, 2013, capital ratios were reported according to Basel I rules and reflect the impact of the U.S. market risk final rule (known in the industry as Basel 2.5).

⁽⁴⁾Basel III introduces the common equity Tier 1 ratio. For December 31, 2013, the ratios presented are the Tier 1 common ratio calculated under Basel I.

⁽⁵⁾There was no Tier 1 common ratio component in the definition of a well-capitalized bank holding company under Basel I. The ratio shown is the required minimum Tier 1 common ratio, calculated under Basel I, 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.

⁽⁶⁾There was no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company under Basel I. The ratio shown is the minimum required ratio.

In 2013, U.S. regulators issued a final rule implementing the Basel III capital framework in the U.S. which, for banking organizations such as HSBC North America and HSBC Bank USA, took effect January 1, 2014 with certain provisions being phased in over time through the beginning of 2019. As a result, beginning in 2014, capital ratios are reported in accordance with the Basel III transition rules within the final rule.

We did not receive any cash capital contributions from our immediate parent, HNAI during the first six months of 2014. We did not make any capital contributions to our subsidiary, HSBC Bank USA, during the six months ended June 30, 2014.

16. 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, 2014 and December 31, 2013 which are consolidated on our balance sheets. Assets and liabilities exclude intercompany balances that eliminate in consolidation.

	June 30, 2014				December 31, 2013
	Consolidated Assets		Consolidated Liabilities		Consolidated Assets		Consolidated Liabilities
	(in millions)
Asset-backed commercial paper conduit:
Interest bearing deposits with banks..................................................	3		-		5		-
Held-to-maturity securities...................................................................	157		-		200		-
Other assets............................................................................................	40		-		45		-
Other liabilities........................................................................................	-		-		-		3
Subtotal......................................................................................................	200		-		250		3
Low income housing limited liability partnership:
Other assets............................................................................................	418		-		457		-
Long-term debt.......................................................................................	-		92		-		92
Other liabilities........................................................................................	-		71		-		90
Subtotal......................................................................................................	$	418	$	163	$	457	$	182
Total...............................................................................................................	$	618	$	163	$	707	$	185

Asset-backed conduit During 2013, HSBC decided to restructure certain of its asset-backed commercial paper conduit programs to have only one asset-backed commercial paper conduit providing securitized financing to HSBC clients globally. As part of this initiative, our commercial paper conduit otherwise known as Bryant Park is no longer transacting new business and certain existing Bryant Park customer transactions have been refinanced by an existing commercial paper conduit currently consolidated by HSBC Bank plc. Bryant Park continues to exist but only to fund select legacy assets it currently holds. Upon completion of the restructure in 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 are not consolidated because we are not the primary beneficiary. The following table provides additional information on these unconsolidated VIEs, including the variable interests held by us and our maximum exposure to loss arising from our involvements in these VIEs, as of June 30, 2014 and December 31, 2013:

	Variable Interests Held Classified as Assets		Variable Interests Held Classified as Liabilities		Total Assets in Unconsolidated VIEs		Maximum Exposure to Loss
	(in millions)
At June 30, 2014
Asset-backed commercial paper conduits......................	$	42	$	-	$	12,407	$	2,354
Structured note vehicles....................................................	2,830		8		6,085		5,929
Total......................................................................................	$	2,872	$	8	$	18,492	$	8,283
At December 31, 2013
Asset-backed commercial paper conduits......................	$	417	$	-	$	17,044	$	2,560
Structured note vehicles....................................................	2,272		55		6,190		5,888
Total......................................................................................	$	2,689	$	55	$	23,234	$	8,448

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 Regency, a multi-seller ABCP conduit consolidated by our affiliate. Customers sell financial assets, such as trade receivables, to Regency, which funds the purchases by issuing short-term highly-rated commercial paper collateralized by the assets acquired. We, along with other financial institutions, provide liquidity facilities to Regency in the form of lines of credit or asset purchase commitments. These liquidity facilities 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. 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 Regency. We also do not provide the majority of the liquidity facilities to Regency. We have no ownership interests in, perform no administrative duties for, and do not service any of the assets held by Regency. We are not the primary beneficiary and do not consolidate Regency. Credit risk related to the liquidity facilities provided is managed by subjecting these facilities to our normal underwriting and risk management processes. The $2,354 million 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 under which we receive the total return on certain assets held by the VIE and pay a market rate of return.

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 3, "Securities," and Note 18, "Fair Value Measurements," and, therefore, are not disclosed in this note to avoid redundancy.

17. 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, 2014 and December 31, 2013. Following the table is a description of the various arrangements.

	June 30, 2014				December 31, 2013
	Carrying Value		Notional/Maximum Exposure to Loss		Carrying Value		Notional/Maximum Exposure to Loss
	(in millions)
Credit derivatives⁽¹⁾⁽⁴⁾.....................................................................................	$	1,047	$	149,540	$	545	$	180,380
Financial standby letters of credit, net of participations⁽²⁾⁽³⁾....................	-		5,491		-		5,237
Performance (non-financial) guarantees⁽³⁾..................................................	-		2,904		-		3,172
Liquidity asset purchase agreements⁽³⁾.......................................................	-		2,354		-		2,560
Total..................................................................................................................	$	1,047	$	160,289	$	545	$	191,349

⁽¹⁾Includes $36,920 million and $34,856 million of notional issued for the benefit of HSBC affiliates at June 30, 2014 and December 31, 2013, respectively.

⁽²⁾Includes $842 million and $865 million issued for the benefit of HSBC affiliates at June 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013:

	June 30, 2014						December 31, 2013
	Carrying (Fair) Value			Notional			Carrying (Fair) Value			Notional
	(in millions)
Sell-protection credit derivative positions.............................................	$	1,047		$	149,540		$	545		$	180,380
Buy-protection credit derivative positions............................................	(1,056		)	153,494			(505		)	174,906
Net position⁽¹⁾.............................................................................................	$	(9	)	$	(3,954	)	$	40		$	5,474

⁽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, 2014, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5,491 million and $2,904 million, respectively. As of December 31, 2013, the total amount of outstanding financial standby letters of credit (net of participations) and performance guarantees were $5,237 million and $3,172 million, 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 $41 million and $46 million at June 30, 2014 and December 31, 2013, respectively. Also included in other liabilities is an allowance for credit losses on unfunded standby letters of credit of $19 million and $18 million at June 30, 2014 and December 31, 2013, respectively.

The following table summarizes the credit ratings of credit risk related guarantees including the credit ratings of counterparties against which we sold credit protection and financial standby letters of credit as of June 30, 2014 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 credit default swaps ("CDS")................................	2.5	$	96,763	$	18,760	$	115,523
Structured CDS..............................................................................	2.1	11,139		1,565		12,704
Index credit derivatives.................................................................	2.8	17,148		194		17,342
Total return swaps.........................................................................	3.3	3,553		418		3,971
Subtotal................................................................................................		128,603		20,937		149,540
Standby Letters of Credit⁽²⁾...............................................................	1.1	6,222		2,173		8,395
Total......................................................................................................		$	134,825	$	23,110	$	157,935

⁽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 had been primarily to government sponsored entities ("GSEs") and, as a result of the settlements discussed in further detail below, the repurchase exposure associated with these sales has been substantially resolved. In addition, with the conversion of our mortgage processing and servicing operations to PHH Mortgage in the second quarter of 2013, new agency eligible originations beginning with May 2013 applications are sold directly to PHH Mortgage and PHH Mortgage is responsible for origination representations and warranties for all loans purchased.

During the fourth quarter of 2013, we entered into a settlement with FNMA for $83 million which settled our liability for substantially all loans sold to FNMA between January 1, 2000 and June 26, 2012. The settlement resulted in a release of $15 million in repurchase reserves previously provided for this exposure. During the first quarter of 2014, we entered into a similar settlement with the FHLMC for $25 million, reflected in realized losses in the liability rollforward below, which settled our liability for substantially all loans sold to FHLMC from January 1, 2000 through 2013. As a result of the settlement and a re-assessment of the residual exposure, we released $34 million in repurchase reserves. We continue to maintain repurchase reserves for FNMA and FHLMC exposure associated with residual risk not covered by the settlement agreements.

The following table provides information about outstanding repurchase demands received from GSEs and other third parties at June 30, 2014 and December 31, 2013:

	June 30, 2014		December 31, 2013
	(in millions)
GSEs......................................................................................................................................................................	$	3	$	41
Others....................................................................................................................................................................	-		3
Total⁽¹⁾ ..................................................................................................................................................................	$	3	$	44

⁽¹⁾Includes repurchase demands on loans sourced from our legacy broker channel of $1 million and $26 million at June 30, 2014 and December 31, 2013, respectively.

In estimating our repurchase liability arising from breaches of representations and warranties, we consider historical losses on residual risks not covered by settlement agreements adjusted for any risk factors not captured in the historical losses.

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, 2014 and 2013 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,
	2014			2013			2014			2013
	(in millions)
Balance at beginning of period............................................................................................	$	36		$	211		$	99		$	219
Increase (decrease) in liability recorded through earnings..............................................	-			23			(34		)	36
Realized losses........................................................................................................................	(2		)	(17		)	(31		)	(38		)
Balance at end of period........................................................................................................	$	34		$	217		$	34		$	217

Our remaining mortgage repurchase liability of $34 million at June 30, 2014 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 adjusted for settlements reached with counterparties. Because the level of mortgage loan repurchase losses is dependent upon economic factors, investor demand strategies and other external risk factors such as housing market trends that may change, the level of the liability for mortgage loan repurchase losses requires significant judgment. We have seen recent changes in investor demand trends and continue to evaluate our methods of determining the best estimate of loss based on these recent trends. As these estimates are influenced by factors outside our control, there is uncertainty inherent in these estimates making it reasonably possible that they could change. The range of reasonably possible losses in excess of our recorded repurchase liability is between zero and $30 million at June 30, 2014. 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 Regency, a multi-seller ABCP conduit consolidated by our affiliate. Regency finances 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 advance funds in an amount not to exceed the face value of the commercial paper in the event Regency is unable or unwilling to refinance its commercial paper. A liquidity asset purchase agreement is economically 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, 2014 and December 31, 2013, we had issued $2,354 million and $2,560 million, respectively, of liquidity facilities to provide liquidity support to ABCP conduits. See Note 16, "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 derivatives contracts. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, members of a clearinghouse may be required to contribute to a guaranty fund to backstop members' obligations to the clearinghouse. As a member, we may be required to pay a proportionate share of the financial obligations of another member who defaults on its obligations to the exchange or the clearinghouse. Our guarantee obligations would arise only if the exchange or clearinghouse had exhausted its resources. Any potential contingent liability under these membership agreements cannot be estimated.

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

	June 30, 2014		December 31, 2013
	(in millions)
Interest bearing deposits with banks...............................................................................................................	$	324	$	355
Trading assets⁽¹⁾..................................................................................................................................................	3,051		1,296
Securities available-for-sale⁽²⁾............................................................................................................................	15,307		21,346
Securities held-to-maturity.................................................................................................................................	327		362
Loans⁽³⁾ ................................................................................................................................................................	3,732		3,969
Other assets⁽⁴⁾......................................................................................................................................................	2,904		2,904
Total.......................................................................................................................................................................	$	25,645	$	30,232

⁽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, trust 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 $5,342 million and $10,950 million at June 30, 2014 and December 31, 2013, respectively. The fair value of trading assets that can be sold or repledged was $3,051 million and $1,296 million at June 30, 2014 and December 31, 2013, respectively.

The fair value of collateral we accepted but not reported on the consolidated balance sheet that can be sold or repledged was $7,345 million and $4,187 million at June 30, 2014 and December 31, 2013, respectively. This collateral was obtained under security resale agreements. Of this collateral, $3,522 million and $2,771 million has been sold or repledged as collateral under repurchase agreements or to cover short sales at June 30, 2014 and December 31, 2013, 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 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 2007. During 2005-2007, we purchased and sold $24 billion of such loans to HSI which were subsequently securitized and sold by HSI to third parties. See "Mortgage Securitization Activity and Litigation" in Note 20, "Litigation and Regulatory Matters," for additional discussion of related exposure.

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

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

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

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

The following table provides information about repurchase agreements and resell agreements that are subject to offset as of June 30, 2014 and December 31, 2013:

					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, 2014:
Assets:
Securities purchased under agreements to resell............	$	7,745	5,434	2,311	2,311	-	$	-
Liabilities:
Securities sold under repurchase agreements......	$	11,915	5,434	6,481	6,481	-	$	-

As of December 31, 2013:
Assets:
Securities purchased under agreements to resell............	$	4,187	2,068	2,119	2,118	-	$	1
Liabilities:
Securities sold under repurchase agreements......	$	14,989	2,068	12,921	12,913	-	$	8

⁽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.

18. 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. Fair value measurement guidance clarifies that financial instruments do not have alternative use and, as such, the fair value of financial instruments should be determined using an "in-exchange" valuation premise. However, the fair value measurement literature provides a valuation exception and permits an entity to measure the fair value of a group of financial assets and financial liabilities with offsetting credit risks and/or market risks based on the exit price it would receive or pay to transfer the net risk exposure of a group of assets or liabilities if certain conditions are met. We elected to apply the measurement exception to a group of derivative instruments with offsetting credit risks and market risks, which primarily relate to interest rate, foreign currency, debt and equity price risk, and commodity price risk as of the reporting date.

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

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

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

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 or financial liability under consideration or, where applicable, the fair value of the net market risk exposure of a group of financial assets or financial liabilities. These adjustments relate primarily to Level 2 assets.

Model valuation adjustment - Where fair value measurements are determined using an internal valuation model based on observable and 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 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. Model valuation adjustments are not material and relate primarily to Level 2 instruments.

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

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

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

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

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

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

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

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

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

The following factors are considered in determining fair values:

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

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

▪ consistency among different pricing sources;

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

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

▪ the source of the fair value information; and

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

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

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

The following table summarizes the carrying value and estimated fair value of our financial instruments at June 30, 2014 and December 31, 2013:

June 30, 2014	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets..................................................................	$	26,335	$	26,335	$	2,325	$	23,946	$	64
Federal funds sold and securities purchased under resale agreements............................................................................................	2,311		2,311		-		2,311		-
Non-derivative trading assets............................................................	20,802		20,802		2,717		15,006		3,079
Derivatives............................................................................................	5,882		5,882		10		5,828		44
Securities...............................................................................................	46,081		46,150		27,924		18,226		-
Commercial loans, net of allowance for credit losses.....................	52,650		54,210		-		-		54,210
Commercial loans designated under fair value option and held for sale....................................................................................................	159		159		-		159		-
Commercial loans held for sale...........................................................	237		237		-		237		-
Consumer loans, net of allowance for credit losses........................	18,924		16,732		-		-		16,732
Consumer loans held for sale:
Residential mortgages....................................................................	38		38		-		14		24
Other consumer...............................................................................	66		66		-		-		66
Financial liabilities:
Short-term financial liabilities.............................................................	$	12,987	$	12,987	$	-	$	12,924	$	63
Deposits:
Without fixed maturities.................................................................	105,977		105,977		-		105,977		-
Fixed maturities................................................................................	1,830		1,834		-		1,834		-
Deposits designated under fair value option...................................	7,714		7,714		-		5,457		2,257
Non-derivative trading liabilities........................................................	3,808		3,808		656		3,152		-
Derivatives............................................................................................	5,747		5,747		14		5,715		18
Long-term debt.....................................................................................	16,341		17,022		-		17,022		-
Long-term debt designated under fair value option.......................	8,263		8,263		-		7,525		738

December 31, 2013	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in millions)
Financial assets:
Short-term financial assets..................................................................	$	20,626	$	20,626	$	961	$	19,614	$	51
Federal funds sold and securities purchased under resale agreements............................................................................................	2,119		2,119		-		2,119		-
Non-derivative trading assets............................................................	22,903		22,903		1,344		18,924		2,635
Derivatives............................................................................................	7,569		7,569		26		7,467		76
Securities...............................................................................................	56,368		56,405		39,553		16,852		-
Commercial loans, net of allowance for credit losses.....................	48,186		49,897		-		-		49,897
Commercial loans designated under fair value option and held for sale....................................................................................................	58		58		-		58		-
Commercial loans held for sale...........................................................	18		18		-		18		-
Consumer loans, net of allowance for credit losses........................	18,903		16,051		-		-		16,051
Consumer loans held for sale:
Residential mortgages....................................................................	91		92		-		36		56
Other consumer...............................................................................	63		63		-		-		63
Financial liabilities:
Short-term financial liabilities.............................................................	$	19,205	$	19,205	$	-	$	19,154	$	51
Deposits:
Without fixed maturities.................................................................	102,584		102,584		-		102,584		-
Fixed maturities................................................................................	2,284		2,289		-		2,289		-
Deposits designated under fair value option...................................	7,740		7,740		-		5,406		2,334
Non-derivative trading liabilities........................................................	4,134		4,134		308		3,826		-
Derivatives............................................................................................	7,348		7,348		5		7,294		49
Long-term debt.....................................................................................	15,261		15,729		-		15,729		-
Long-term debt designated under fair value option.......................	7,586		7,586		-		6,686		900

Loan values presented in the table above were determined using the Fair Value Framework for measuring fair value, which is based on our best estimate of the amount within a range of value we believe would be received in a sale as of the balance sheet date (i.e. exit price). The secondary market demand and estimated value for our residential mortgage loans has been heavily influenced by the challenging economic conditions during the past several years, including house price depreciation, elevated unemployment, changes in consumer behavior, changes in discount rates and the lack of financing options available to support the purchase of receivables. For certain consumer loans, investors incorporate numerous assumptions in predicting cash flows, such as future interest rates, higher charge-off levels, slower voluntary prepayment speeds, different default and loss curves and estimated collateral values than we, as the servicer of these loans, believe will ultimately be the case. The investor's valuation process reflects this difference in overall cost of capital assumptions as well as the potential volatility in the underlying cash flow assumptions, the combination of which may yield a significant pricing discount from our intrinsic value. The estimated fair values at June 30, 2014 and December 31, 2013 reflect these market conditions. The increase in the relative fair value of our residential mortgage loans during 2014 is largely due to improved conditions in the housing industry driven by increased property values and, to a lesser extent, lower required market yields and increased investor demand for these types of receivables.

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, 2014 and December 31, 2013, 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, 2014	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......................................................................................................	$	2,717	$	135	$	-	$	2,852	$	-		$	2,852
Obligations of U.S. States and political subdivisions........................	-		27		-		27		-			27
Collateralized debt obligations........................................................	-		-		260		260		-			260
Asset-backed securities:
Residential mortgages...............................................................	-		153		-		153		-			153
Student Loans...........................................................................	-		81		-		81		-			81
Corporate and other domestic debt securities..................................	-		-		2,819		2,819		-			2,819
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		77		-		77		-			77
Government-backed..................................................................	-		4,035		-		4,035		-			4,035
Equity securities.............................................................................	-		21		-		21		-			21
Precious metals trading..................................................................	-		10,477		-		10,477		-			10,477
Derivatives⁽²⁾:
Interest rate contracts....................................................................	97		52,969		1		53,067		-			53,067
Foreign exchange contracts............................................................	29		12,731		16		12,776		-			12,776
Equity contracts.............................................................................	-		2,062		165		2,227		-			2,227
Precious metals contracts...............................................................	2		644		-		646		-			646
Credit contracts.............................................................................	-		3,460		356		3,816		-			3,816
Derivatives netting........................................................................	-		-		-		-		(66,650		)	(66,650		)
Total derivatives...............................................................................	128		71,866		538		72,532		(66,650		)	5,882
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises......................................................................................................	27,914		11,186		-		39,100		-			39,100
Obligations of U.S. states and political subdivisions........................	-		730		-		730		-			730
Asset-backed securities:
Residential mortgages...............................................................	-		1		-		1		-			1
Commercial mortgages.............................................................	-		86		-		86		-			86
Home equity.............................................................................	-		94		-		94		-			94
Other........................................................................................	-		94		-		94		-			94
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		869		-		869		-			869
Government-backed..................................................................	10		3,628		-		3,638		-			3,638
Equity securities.............................................................................	-		166		-		166		-			166
Loans⁽³⁾.............................................................................................	-		159		-		159		-			159
Mortgage servicing rights⁽⁴⁾...............................................................	-		-		186		186		-			186
Total assets............................................................................	$	30,769	$	103,885	$	3,803	$	138,457	$	(66,650	)	$	71,807
Liabilities:
Deposits in domestic offices⁽⁵⁾...........................................................	$	-	$	5,457	$	2,257	$	7,714	$	-		$	7,714
Trading liabilities, excluding derivatives............................................	656		3,152		-		3,808		-			3,808
Derivatives⁽²⁾:
Interest rate contracts....................................................................	37		53,651		1		53,689		-			53,689
Foreign exchange contracts............................................................	-		11,606		16		11,622		-			11,622
Equity contracts.............................................................................	-		1,414		106		1,520		-			1,520
Precious metals contracts...............................................................	138		656		-		794		-			794
Credit contracts.............................................................................	-		3,822		99		3,921		-			3,921
Derivatives netting........................................................................	-		-		-		-		(65,799		)	(65,799		)
Total derivatives...............................................................................	175		71,149		222		71,546		(65,799		)	5,747
Long-term debt⁽⁶⁾..............................................................................	-		7,525		738		8,263		-			8,263
Total liabilities.......................................................................	$	831	$	87,283	$	3,217	$	91,331	$	(65,799	)	$	25,532

	Fair Value Measurements on a Recurring Basis
December 31, 2013	Level 1		Level 2		Level 3		Gross Balance		Netting⁽¹⁾			Net Balance
	(in millions)
Assets:
Trading Securities, excluding derivatives:
U.S. Treasury, U.S. Government agencies and sponsored enterprises......................................................................................................	$	1,344	$	178	$	-	$	1,522	$	-		$	1,522
Obligations of U. S. States and political subdivisions.......................	-		25		-		25		-			25
Collateralized debt obligations........................................................	-		-		254		254		-			254
Asset-backed securities:
Residential mortgages...............................................................	-		159		-		159		-			159
Student loans............................................................................	-		68		-		68		-			68
Corporate and other domestic debt securities..................................	-		-		2,260		2,260		-			2,260
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		495		-		495		-			495
Government-backed..................................................................	-		6,223		121		6,344		-			6,344
Equity securities.............................................................................	-		25		-		25		-			25
Precious metals trading..................................................................	-		11,751		-		11,751		-			11,751
Derivatives⁽²⁾:
Interest rate contracts....................................................................	81		56,095		1		56,177		-			56,177
Foreign exchange contracts............................................................	7		15,291		131		15,429		-			15,429
Equity contracts.............................................................................	-		2,042		160		2,202		-			2,202
Precious metals contracts...............................................................	182		1,400		1		1,583		-			1,583
Credit contracts.............................................................................	-		4,152		512		4,664		-			4,664
Derivatives netting........................................................................	-		-		-		-		(72,486		)	(72,486		)
Total derivatives...............................................................................	270		78,980		805		80,055		(72,486		)	7,569
Securities available-for-sale:
U.S. Treasury, U.S. Government agencies and sponsored enterprises......................................................................................................	39,513		9,439		-		48,952		-			48,952
Obligations of U.S. states and political subdivisions........................	-		742		-		742		-			742
Asset-backed securities:
Residential mortgages...............................................................	-		1		-		1		-			1
Commercial mortgages.............................................................	-		126		-		126		-			126
Home equity.............................................................................	-		227		-		227		-			227
Other........................................................................................	-		94		-		94		-			94
Corporate and other domestic debt securities..................................	-		-		-		-		-			-
Debt Securities issued by foreign entities:
Corporate.................................................................................	-		881		-		881		-			881
Government-backed..................................................................	40		3,681		-		3,721		-			3,721
Equity securities.............................................................................	-		162		-		162		-			162
Loans⁽³⁾.............................................................................................	-		58		-		58		-			58
Mortgage servicing rights⁽⁴⁾...............................................................	-		-		227		227		-			227
Total assets............................................................................	$	41,167	$	113,315	$	3,667	$	158,149	$	(72,486	)	$	85,663
Liabilities:
Deposits in domestic offices⁽⁵⁾...........................................................	$	-	$	5,406	$	2,334	$	7,740	$	-		$	7,740
Trading liabilities, excluding derivatives............................................	308		3,826		-		4,134		-			4,134
Derivatives⁽²⁾:
Interest rate contracts....................................................................	34		56,282		-		56,316		-			56,316
Foreign exchange contracts............................................................	16		14,576		36		14,628		-			14,628
Equity contracts.............................................................................	-		1,403		157		1,560		-			1,560
Precious metals contracts...............................................................	7		847		3		857		-			857
Credit contracts.............................................................................	-		4,398		321		4,719		-			4,719
Derivatives netting........................................................................	-		-		-		-		(70,732		)	(70,732		)
Total derivatives...............................................................................	57		77,506		517		78,080		(70,732		)	7,348
Long-term debt⁽⁶⁾..............................................................................	-		6,686		900		7,586		-			7,586
Total liabilities.......................................................................	$	365	$	93,424	$	3,751	$	97,540	$	(70,732	)	$	26,808

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

⁽²⁾Includes trading derivative assets of $4,354 million and $5,991 million and trading derivative liabilities of $5,007 million and $6,741 million as of June 30, 2014 and December 31, 2013, respectively, as well as derivatives held for hedging and commitments accounted for as derivatives.

⁽³⁾Includes certain commercial loans held for sale which we have elected to apply the fair value option. See Note 6, "Loans Held for Sale," for further information.

⁽⁴⁾See Note 7, "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 Measurements There were no transfers between Levels 1 and 2 during the three and six months ended June 30, 2014 and 2013.

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 and six months ended June 30, 2014 and 2013. 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,
2014

Total Gains and (Losses) Included in⁽¹⁾

Purch-
ases

Issu-
ances

Settle-

ments

Transfers
Into Level 3

Transfers
Out of Level 3

Jun. 30,
2014

Current
Period Unrealized Gains (Losses)

Trading
Revenue (Loss)

Other
Revenue

(in millions)

Assets:

Trading assets, excluding derivatives:

Collateralized debt obligations.......................	$	258		$	7		$	-		$	-	$	-		$	(5	)	$	-		$	-		$	260		$	7
Corporate and other domestic debt securities..	2,808			-			-			11		-			-			-			-			2,819			-
Corporate debt securities issued by foreign entities............	-			-			-			-		-			-			-			-			-			-
Government debt securities issued by foreign entities	117			3			-			-		-			(1		)	-			(119		)	-			-
Equity securities.........	-			-			-			-		-			-			-			-			-			-
Derivatives, net⁽²⁾:
Interest rate contracts.........	1			-			(1		)	-		-			-			-			-			-			-
Foreign exchange contracts.........	96			8			-			-		-			(6		)	-			(98		)	-			4
Equity contracts.........	24			66			-			-		-			(29		)	2			(4		)	59			41
Precious metals contracts.........	-			-			-			-		-			-			-			-			-			-
Credit contracts.......................	181			(41		)	-			-		-			3			-			114			257			(42		)
Mortgage servicing rights⁽⁴⁾	205			-			(12		)	-		-			(7		)	-			-			186			(12		)
Total assets........	$	3,690		$	43		$	(13	)	$	11	$	-		$	(45	)	$	2		$	(107	)	$	3,581		$	(2	)
Liabilities:
Deposits in domestic offices.	$	(2,244	)	$	(85	)	$	-		$	-	$	(135	)	$	130		$	(27	)	$	104		(2,257		)	$	(34	)
Long-term debt..	(732		)	4			-			-		(110		)	73			-			27			(738		)	(22		)
Total liabilities...	$	(2,976	)	$	(81	)	$	-		$	-	$	(245	)	$	203		$	(27	)	$	131		$	(2,995	)	$	(56	)

Jan. 1,

2014

Total Gains and (Losses) Included in⁽¹⁾

Purch-

ases

Issu-

ances

Settle-

ments

Transfers

Into

Level 3

Transfers

Out of

Level 3

Jun. 30,

2014

Current

Period

Unrealized

Gains

(Losses)

Trading

Revenue

(Loss)

Other

Revenue

(in millions)

Assets:

Trading assets, excluding derivatives:

Collateralized debt obligations	$	254		$	14		$	-		$	-	$	-		$	(8	)	$	-		$	-		$	260		$	14
Corporate and other domestic debt securities..	2,260			(5		)	-			564		-			-			-			-			2,819			(6		)
Corporate debt securities issued by foreign entities............	-			-			-			-		-			-			-			-			-			-
Government debt securities issued by foreign entities	121			5			-			-		-			(7		)	-			(119		)	-			-
Equity securities........................	-			-			-			-		-			-			-			-			-			-
Derivatives, net⁽²⁾:
Interest rate contracts.........	1			-			(1		)	-		-			-			-			-			-			(1		)
Foreign exchange contracts.........	95			10			-			-		-			(12		)	-			(93		)	-			5
Equity contracts.........	3			86			-			-		-			(36		)	6			-			59			49
Precious metals contracts.........	(2		)	2			-			-		-			-			-			-			-			-
Credit contracts........................	191			(55		)	-			-		-			7			-			114			257			(98		)
Mortgage servicing rights⁽⁴⁾	227			-			(24		)	-		-			(17		)	-			-			186			(24		)
Total assets........	$	3,150		$	57		$	(25	)	$	564	$	-		$	(73	)	$	6		$	(98	)	$	3,581		$	(61	)
Liabilities:
Deposits in domestic offices.	$	(2,334	)	$	(210	)	$	-		$	-	$	(160	)	$	298		$	(95	)	$	244		(2,257		)	$	(51	)
Long-term debt..	(900		)	97			-			-		(153		)	120			-			98			(738		)	(23		)
Total liabilities...	$	(3,234	)	$	(113	)	$	-		$	-	$	(313	)	$	418		$	(95	)	$	342		$	(2,995	)	$	(74	)

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)

Trading
Revenue (Loss)

Other
Revenue

(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, net⁽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	)	$	411		$	-		$	-	$	(81	)	$	110		$	(177	)	$	165		(2,448		)	$	432
Long-term debt..	(618		)	(242		)	-			-		(59		)	68			-			179			(672		)	(239		)
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)

Trading

Revenue

(Loss)

Other

Revenue

(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, net⁽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	)	$	370		$	-		$	-	$	(485	)	$	219		$	(160	)	$	244		(2,448		)	$	406
Long-term debt.......................	(429		)	(273		)	-			-		(270		)	119			-			181			(672		)	(250		)
Total liabilities	$	(3,065	)	$	97		$	-		$	-	$	(755	)	$	338		$	(160	)	$	425		$	(3,120	)	$	156

⁽¹⁾Includes realized and unrealized gains and losses.

⁽²⁾Level 3 net derivatives included derivative assets of $538 million and derivative liabilities of $222 million as of June 30, 2014 and derivative assets of $985 million and derivative liabilities of $740 million as of June 30, 2013.

⁽³⁾See Note 7, "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, 2014 and December 31, 2013:

June 30, 2014
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations.........	260		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	1% - 5%
				Conditional default rates	6% - 7%
				Loss severity rates	90% - 91%
Corporate and other domestic debt securities.........................................	2,819		Discounted cash flows	Spread volatility on collateral assets	1% - 3%
				Correlation between insurance claim shortfall and collateral value	80%
Interest rate derivative contracts.....	-		Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	5% - 97%
Foreign exchange derivative contracts⁽¹⁾......................................	-		Option pricing model	Implied volatility of currency pairs	8% - 14%
Equity derivative contracts⁽¹⁾...........	59		Option pricing model	Equity / Equity Index volatility	9% - 41%
				Equity / Equity and Equity / Index correlation	47% - 60%
Credit derivative contracts..............	257		Option pricing model	Correlation of defaults of a portfolio of reference credit names	49% - 56%
				Issuer by issuer correlation of defaults	83% - 95%
Mortgage servicing rights................	186		Option adjusted discounted cash flows	Constant prepayment rates	8% - 46%
				Option adjusted spread	8% - 19%
				Estimated annualized costs to service	$91 - $333 per account
Deposits in domestic offices (structured deposits)⁽¹⁾⁽²⁾...................	(2,257	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	8% - 14%
				Equity / Equity Index volatility	9% - 41%
				Equity / Equity and Equity / Index correlation	47% - 60%
Long-term debt (structured notes)⁽¹⁾⁽²⁾........................................	(738	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	8% - 14%
				Equity / Equity Index volatility	9% - 41%
				Equity / Equity and Equity / Index correlation	47% - 60%

December 31, 2013
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Collateralized debt obligations.........	254		Broker quotes or consensus pricing and, where applicable, discounted cash flows	Prepayment rates	0% - 5%
				Conditional default rates	5% - 7%
				Loss severity rates	90% - 100%
Corporate and other domestic debt securities.........................................	2,260		Discounted cash flows	Spread volatility on collateral assets	1% - 3%
				Correlation between insurance claim shortfall and collateral value	80%
Corporate and government debt securities issued by foreign entities...	121		Discounted cash flows	Correlations of default among a portfolio of credit names of embedded credit derivatives	36% - 63%
Interest rate derivative contracts.....	1		Market comparable adjusted for probability to fund	Probability to fund for rate lock commitments	10% - 99%
Foreign exchange derivative contracts⁽¹⁾......................................	95		Option pricing model	Implied volatility of currency pairs	11% - 16%
Equity derivative contracts⁽¹⁾...........	3		Option pricing model	Equity / Equity Index volatility	6% - 69%
				Equity / Equity and Equity / Index correlation	50% - 58%
Credit derivative contracts..............	191		Option pricing model	Correlation of defaults of a portfolio of reference credit names	46% - 54%
				Industry by industry correlation of defaults	83% - 95%
Mortgage servicing rights................	227		Option adjusted discounted cash flows	Constant prepayment rates	5% - 22%
				Option adjusted spread	8% - 19%
				Estimated annualized costs to service	$91 - $333 per account
Deposits in domestic offices (structured deposits)⁽¹⁾⁽²⁾...................	(2,334	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	11% - 16%
				Equity / Equity Index volatility	6% - 69%
				Equity / Equity and Equity / Index correlation	50% - 58%
Long-term debt (structured notes)⁽¹⁾⁽²⁾........................................	(900	)	Option adjusted discounted cash flows	Implied volatility of currency pairs	11% - 16%
				Equity / Equity Index volatility	6% - 69%
				Equity / Equity and Equity / Index correlation	50% - 58%

⁽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 exchange derivatives in the table.

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

Significant Unobservable Inputs for Recurring Fair Value Measurements

Collateralized Debt Obligations (CDOs)

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

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

▪ Loss Severity Rate - Included in our Level 3 CDOs portfolio are collateralized loan obligations (CLOs) and trust preferred securities which are about equally distributed. The loss severity rate for trust preferred securities as of June 30, 2014 is about 1.8 times that of CLOs.

Derivatives

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

▪ Implied volatility - The implied volatility is a significant pricing input for freestanding or embedded options including equity, foreign currency and interest rate options. The level of volatility is a function of the nature of the underlying risk, the level of strike price and the years to maturity of the option. Depending on the underlying risk and tenure, we determine the implied volatility based on observable input where information is available. However, substantially all of the implied volatilities are derived based on historical information. The implied volatility for different foreign currency pairs is between 8 percent and 14 percent while the implied volatility for equity/equity or equity/equity index is between 9 percent and 41 percent, respectively at June 30, 2014. Although implied foreign currency volatility and equity volatility appear to be widely distributed at the portfolio level, the deviation of implied volatility on a trade-by-trade basis is narrower. The average deviation of implied volatility for the foreign currency pair and at-the-money equity option are 3 percent and 5 percent, respectively at June 30, 2014.

▪ Correlations of a group of foreign currency or equity - Correlation measures the relative change in values among two or more variables (i.e., equity or foreign currency pair). Variables can be positively or negatively correlated. Correlation is a key input in determining the fair value of a derivative referenced to a basket of variables such as equities or foreign currencies. A majority of the correlations are not observable, but are derived based on historical data. The correlation between equity/equity and equity/equity index was between 47 percent and 60 percent at June 30, 2014.

Sensitivity of Level 3 Inputs to Fair Value Measurements

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

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

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

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

Significant Transfers Into and Out of Level 3 Measurements During the three and six months ended June 30, 2014, we transferred $104 million and $244 million, respectively, of deposits in domestic offices and $27 million and $98 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer to maturity and there is more observability in short term volatility. During the second quarter of 2014, we transferred $119 million of government debt securities issued by foreign governments from Level 3 to Level 2 due to the availability of inputs in the market including independent pricing service valuations. Additionally, during the three and six months ended June 30, 2014, we transferred $27 million and $95 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

During the three and six months ended June 30, 2013, we transferred $165 million and $244 million, respectively, of deposits in domestic offices and $179 million and $181 million, respectively, of long-term debt, which we have elected to carry at fair value, from Level 3 to Level 2 as a result of the embedded derivative no longer being unobservable as the derivative option is closer in maturity and there is more observability in short term volatility. Additionally, during the three and six months ended June 30, 2013, we transferred $177 million and $160 million, respectively, of deposits in domestic offices, which we have elected to carry at fair value, from Level 2 to Level 3 as a result of a change in the observability of underlying instruments that resulted in the embedded derivative being unobservable.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis Certain financial and non-financial assets are measured at fair value on a non-recurring basis and therefore, are not included in the tables above. These assets include (a) mortgage and commercial loans classified as held for sale reported at the lower of amortized cost or fair value and (b) impaired loans or assets that are written down to fair value based on the valuation of underlying collateral during the period. These instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances (e.g., impairment). The following table presents the fair value hierarchy level within which the fair value of the financial and non-financial assets has been recorded as of June 30, 2014 and December 31, 2013. The gains (losses) during the three and six months ended June 30, 2014 and 2013 are also included.

	Non-Recurring Fair Value Measurements as of June 30, 2014								Total Gains (Losses) For the Three Months Ended June 30, 2014			Total Gains (Losses) For the Six Months Ended June 30, 2014
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale⁽¹⁾.........................................................................	$	-	$	2	$	24	$	26	$	(2	)	$	1
Impaired commercial loans⁽²⁾.......................	-		-		24		24		(4		)	3
Consumer loans⁽³⁾.........................................	-		107		-		107		(9		)	(23		)
Real estate owned⁽⁴⁾.....................................	21		-		-		21		(3		)	(2		)
Commercial loans held for sale⁽⁵⁾................	-		43		-		43		(7		)	(7		)
Total assets at fair value on a non-recurring basis..............................................	$	21	$	152	$	48	$	221	$	(25	)	$	(28	)

	Non-Recurring Fair Value Measurements as of December 31, 2013								Total Gains (Losses) For the Three Months Ended June 30, 2013			Total Gains (Losses) For the Six Months Ended June 30, 2013
	Level 1		Level 2		Level 3		Total
	(in millions)
Residential mortgage loans held for sale⁽¹⁾.........................................................................	$	-	$	9	$	56	$	65	$	-		$	3
Impaired commercial loans⁽²⁾.......................	-		-		108		108		(1		)	(2		)
Consumer loans⁽³⁾.........................................	-		492		-		492		(23		)	(51		)
Real estate owned⁽⁴⁾.....................................	20		-		-		20		-			2
Total assets at fair value on a non-recurring basis..............................................	$	20	$	501	$	164	$	685	$	(24	)	$	(48	)

⁽¹⁾As of June 30, 2014 and December 31, 2013, the fair value of the loans held for sale was below cost. Certain residential mortgage loans held for sale have been classified as a Level 3 fair value measurement within the fair value hierarchy as the underlying real estate properties which determine fair value are illiquid assets as a result of market conditions and significant inputs in estimating fair value were unobservable. Additionally, the fair value of these properties is affected by, among other things, the location, the payment history and the completeness of the loan documentation.

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

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

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

⁽⁵⁾Represents certain commercial loans that have been transferred to the held for sale portfolio.

The following table presents quantitative information about non-recurring fair value measurements of assets and liabilities classified with Level 3 of the fair value hierarchy as of June 30, 2014 and December 31, 2013:

As of June 30, 2014
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale.............................	$	24	Valuation of third party appraisal on underlying collateral	Loss severity rates	0% - 100%
Impaired commercial loans................................................	24		Valuation of third party appraisal on underlying collateral	Loss severity rates	10% - 48%

As of December 31, 2013
Financial Instrument Type	Fair Value (in millions)		Valuation Technique(s)	Significant Unobservable Inputs	Range of Inputs
Residential mortgage loans held for sale..........................	$	56	Valuation of third party appraisal on underlying collateral	Loss severity rates	0% - 100%
Impaired commercial loans.............................................	108		Valuation of third party appraisal on underlying collateral	Loss severity rates	1% - 66%

Significant Unobservable Inputs for Non-Recurring Fair Value Measurements

Residential mortgage loans held for sale primarily represent subprime residential mortgage loans which were previously acquired with the intent of securitizing or selling them to third parties. The weighted average loss severity rate for these loans was approximately 70 percent at June 30, 2014. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

Impaired loans represent commercial loans. The weighted average severity rate for these loans was approximately 27 percent at June 30, 2014. These severity rates are primarily impacted by the value of the underlying collateral securing the loans.

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

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

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

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

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

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

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

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

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

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

Lending-related commitments - The fair value of commitments to extend credit, standby letters of credit and financial guarantees are not included in the table. The majority of the lending related commitments are not carried at fair value on a recurring basis nor are they actively traded. These instruments generate fees, which approximate those currently charged to originate similar commitments, which are recognized over the term of the commitment period. Deferred fees on commitments and standby letters of credit totaled $41 million and $46 million at June 30, 2014 and December 31, 2013, respectively.

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

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

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

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

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

The following tables provide additional information relating to asset-backed securities as well as certain collateralized debt obligations held as of June 30, 2014:

Trading asset-backed securities:

Rating of Securities:⁽¹⁾	Collateral Type:	Level 2		Level 3		Total
		(in millions)
AAA -A................................................	Residential mortgages - Alt A...........................	$	89	$	-	$	89
	Residential mortgages - Subprime...................	59		-		59
	Student loans......................................................	81		-		81
	Total AAA -A......................................................	229		-		229
BBB -B..................................................	Collateralized debt obligations.........................	-		260		260
CCC-Unrated........................................	Residential mortgages - Subprime...................	5		-		5
		$	234	$	260	$	494

Available-for-sale securities backed by collateral:

Rating of Securities:⁽¹⁾	Collateral Type:	Level 2		Level 3		Total
		(in millions)
AAA -A.................................................	Commercial mortgages......................................	$	86	$	-	$	86
	Home equity - Alt A..........................................	94		-		94
	Other	94		-		94
	Total AAA -A.....................................................	274		-		274
CCC -Unrated.......................................	Residential mortgages - Alt A..........................	1		-		1
		$	275	$	-	$	275

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

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

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

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

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

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

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

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

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

• Foreign Exchange ("FX") Derivatives - FX transactions, to the extent possible, use spot and forward FX rates which are quoted in the broker market. Where applicable, we also use implied volatility of currency pairs as inputs.

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

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

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

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

Real estate owned - Fair value is determined based on third party appraisals obtained at the time we take title to the property and, if less than the carrying amount of the loan, the carrying amount of the loan is adjusted to the fair value. The carrying amount of the property is further reduced, if necessary, at least every 45 days to reflect observable local market data, including local area sales data.

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

Structured notes - Structured notes are hybrid instruments containing embedded derivatives. Structured notes are elected to be measured at fair value in their entirety under fair value option accounting principles. The valuation of hybrid instruments is predominantly driven by the derivative features embedded within the instruments. The valuation of embedded derivatives may include significant unobservable inputs such as correlation of the referenced credit names or volatility of the embedded option.

Cash flows of the funded notes are discounted at the appropriate rate for the applicable duration of the instrument adjusted for our own credit spreads. The credit spreads so applied are determined with reference to our own debt issuance rates observed in the primary and secondary markets, internal funding rates, and the structured note rates in recent executions.

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

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

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

This information is provided by RNS

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